Netflix is a DVD rental company which has been founded by Marc Randolph and Reed Hastings in 1997. When Netflix was first launched, it started by offering DVDs on a fee per use basis. In 1999, it introduced monthly subscription service and in January 2007, Netflix started offering on-demand video streaming over the internet. Since then, Netflix has enjoyed huge success to the point that it has become one of the largest online providers of movie rentals in U.S. Netflix has been able to fend competition from Blockbuster and Wal-Mart. The company is enjoying a strong reputation as an innovator in the home movie industry and it has been growing at a significant rate. From the third quarter of 2009 to the third quarter of 2010, the number of subscribers has increase by 52% and before Netflix was launched in Canada in September 2010, the firm already had approximately 16.9 million subscribers. However, Netflix is now facing a whole new set of adversaries including Google, Apple, Hulu, Flixter, Redbox and Amazon. Given these facts, how long will Netflix be able to sustain this growth and what are the strategies that should be implemented by the company to keep on growing?
In order to identify the appropriate strategies that Netflix should implement to continue this growth, we need to consider the strengths, weaknesses, opportunities and threats of the firm.
* First-mover advantage * Low Overhead Cost – no stores * High Customer Satisfaction * World’s largest selection of DVDs * Reasonable Pricing * Good and Quick Service * Website * Networked Connection
| * Service not suitable for old people * Sometimes DVDs can take too much time before reaching customers * Lack of control over DVDs return time * The DVDs can arrive scratched or broken through the mailing process. * Low selection for streaming * Trouble providing enough copies of new, popular movies.
* Product Line Expansion * Internationalization * More selection for streaming and downloading DVDs. * Partnership with content providers and internet providers. * Creation of different rental plans. * Expansion in Video Games Rental
| * Preference of DVDs * Low barriers to entry - more competitors from big name companies (Apple and Amazon) in the movie industry. * Contractual Restriction on streaming. * Internet providers increase cost of streaming.
By looking at the SWOT analysis we can see that Netflix has more strengths than weaknesses and that there are more opportunities than threats.
Now let’s analyse external environment of the firm. We have decided to use Porter’s 5 Forces Model in order to better analyse the external environment of Netflix. Porter’s model of competitive forces assumes that there are five competitive forces that identify the competitive power in an industry. These five competitive forces are: 1.
Threat of substitute products
Threat of new entrants
Intense rivalry among existing players
Bargaining power of suppliers
Bargaining power of Buyers
Firstly, threats of substitute products do exist in the movie industry and it is relatively low. The main substitutes to streaming movies are brick-and-mortar rental stores, online rentals, pay per view TV and theatres. However the substitutes do not provide the instant gratification of downloading or streaming them whenever a customer desires. Furthermore, the streaming movies service provided by Netflix is more cost effective than these other substitutes because Netflix plans to allot its users a total amount of stream time. Secondly, threat of new entrants is low due to the significant amount of capital. Potential entrants face the large sunk costs of acquiring licenses (barrier to entry) to the movies they want to provide. Thirdly, due to a low concentration of...
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