Environmental Analysis
Social:
The brand reputation and its pride in complying with moral, social values and ethical business standards is one of the many social factors. The company is affected by the class structure, power structure, education level and education standard of society. The leisure interests of society influence Netflix as well. The inclination of the younger generation towards western values with a focus on fulfillment of materialistic desires helps this industry globally. The UK markets, for instance, have young viewers with a third less of those watching traditional television and moving into the online entertainment streaming options (Romm, 2017). The Smartphone trend is also turning out to be a positive influencer for this industry. In the US viewers are spending 24 minutes on their smart phones in 2015 on average, which grew to 40 minutes on average in 2016 (Darrow, 2017). 2017 in the US saw a major steep decline in the Cable Company’s sales (Lewis, 2016). The popularity of the several web series is also turning out to be a positive factor for the company. The sales of Companies in this industry also depend majorly on the attractiveness of the movies on the target market. The mean age of the target market of the Companies in this industry is getting older, and the expenditure on film for the older demographic is not much popular which can affect the business (Roettgers, 2017).
Political/Legal:
This industry is influenced by the laws on copyrights of the contents of movies, shows, and television programs. The company is dependent on these products for sales. The US markets have shifted majorly from traditional TV to streaming with the increased internet usage. However, this has led companies like AT&T to go to the Federal Commission for Communication to force stricter regulations on the Internet. It can lead to higher internet pricing which can become a threat to the internet-based business model Followed in this industry (Bond D. , 2017). The ruling on European Union on the class streaming services means that Companies in this industry would be needed to make 30% of its content as European based with about 26% tax levy making the costs to be transferred to the consumer by pricing high. The lack of presence in the most populated country of China due to permission issue is one limiting factor.
Economic:
The economic factors important for this industry include its price competitiveness against its rivals. The company business is majorly dependent on the disposable income of the individuals. It means that the slower economic growth affecting the purchasing power of the consumer would have an impact on the industry as well. Inflation rates and interest rates are another important factor. Changes in exchange rates also influence the revenues. The costs of domestic streaming, marketing and administrative costs all affect the company’s prospects.
Socio-Cultural:
The UK markets with young viewers following the trend of live streaming with the use of an expression like “Netflix and Chill” show the adaptation of the new video streaming industry in cultural aspects. The focus on charitable activities like giving away scholarships and aiding charities helping students who are financially challenged are some factors which have built the reputation of the brand. The contribution of personal funds to the Giving Pledge Charity by the CEO of the Netflix Company is one such action (Robinson & Murgia, 2017).
Technological:
The company, as based on technology itself, is continuously developing its technology. The market share of the companies is being challenged by their rivals as the barrier to entry is not so much higher regarding the streaming of the content. The changing technology calls for continuous investment in this segment for sustaining market share. High-speed internet requirement is another special factor. The application of these companies is to be updated as well to be compatible with all smart phones. The changes in the technology of payment and delivery process would affect it as well. The Down Rating system has helped the company in personalization, making it more relevant (Bradshaw, 2017). The company has developed new software by the name of Hermes, which will grade the translation on shows automatically, improving the translation efforts in the 190 countries if it is successful.
Environmental:
All over the world, companies are focusing their activities to be more sustainable with a lower carbon footprint. The tech companies have partnered with Greenpeace to reduce their carbon print. The access to data servers pressures the environment. The tech companies are required by the governments to pay their part of the environmental bill, which is more than $11 trillion by 2025 (Bond & Bradshaw, 2017).
Strengths and Weaknesses of Organization
Strengths
Marketing:
Netflix with its 209 million global subscribers (174.7 million US subscribers) and with a $2.53 billion advertising budgets, is spending way more on marketing than its competitors on content. The company has a daunting $8 billion budget for original content in 2018. The company has already spent around $1 billion in the six months on marketing in 2018. This budget is larger than the budget of Facebook, Apple and AMC Networks. The company has a knack of launching attention-grabbing campaigns. The lavish company campaign of For Your Consideration of Emmy resulted in the breaking of 17-year streak of HBO with 112 nominations in Emmy. The other rivals of Facebook and Apple are relatively late in the original video content with modest marketing campaigns. Apple had followed suit to spend $1 billion in the next year, and Facebook has also set aside $1 billion of original shows. The streaming main rival Amazon has spent $4.5 billion in the last year, while Hulu also spent $2.5 billion (Lynch, 2018).
Finance:
The financial strength of Netflix can be seen by comparing its position with industry, sector, and index. The financial strength in comparison with sector, industry and index of Netflix in terms of the quick ratio, working capital ratio, long-term debt to equity ratio and debt to equity ratio is better as shown in Appendix. The leverage ratio is also better in comparison while the interest coverage and debt coverage are quite lower in comparison. The five-year average of Netflix regarding its gross profit margin and net margin is higher than industry and sector but is lower than the S&P 500 index. The Pre-tax margin and operating margin have been lower than the sector and index but higher than the company. The last quarter results for these profitability ratios show higher than industry and sector performance but lower than the index as shown in Appendix.
Operations:
The company revenue contribution as shown in Appendix is divided among domestic streaming, domestic DVD and international streaming. The major revenue is generated from domestic streaming for about 61%, while 29% is yielded from 29% and 9% remaining from DVDs.
Human Resources
Human resources are especially the main strength of the company. The company attracts, manages and retains the resources in a simple and effective way. The culture of Netflix has made movements in the HR world. HR is built on seven foundations. The company only wants to hire fully formed adults who are not blindly loyal like children and form their decisions after looking at several factors. The company is open about letting go of the people who do not serve their purpose at the cost of rich severance packages. The company trusts their employees to act in the best interest of Netflix. The company is very straightforward regarding its managerial style. The company uses a keeper test on its employees to test if the manager wants to keep the employee if it is offered a job in another company or not. If not, then it does not belong to Netflix. The company also does not promote competition among employees rather it is more focused on the cooperation of the team. It uses top 30% and below 10% terms for teams (McCord, 2014).
Accounting:
The company accounting for the content and its earnings are done as per the standards to show the true financial position of the company. The company reports its financial periodically for its investors to provide details on its current financial position in real terms.
Research & Development:
The Netflix Prize is a competition which is conducted to spark competition among programmers and coders from companies and universities and freelancers for better service. The result is several published papers, startups, and ideas showing how crowdsourcing can be an effective corporate research strategy. The $1 million prize for the officially ended competition in 2008 for a better algorithm for the private recommendation was awarded to one company Bellkor and Ensemble on the decision of early submission while the actual result was tied with the finalist team (Greenberg, 2009). The winner, however, is Netflix who has been ranked 25th regarding Research Expenditure (Craft.Co, 2018).
E-Commerce:
The E-commerce expertise of Netflix is its biggest strength. The company proprietary Cinematch software for movie referral and match gives it’s a competitive strength (Sadq, 2013).
Weaknesses
Marketing:
The company is pouring a large sum of investment in marketing and content generation which, if not strategically used can become a debt for the company.
Finance:
The financial resources of Netflix are not as big as its competitors like Blockbuster. The company has also been financing its major investments with debt which is troublesome. The debt and leverage ratios of the company are way higher than its industry rivals.
Operations:
The company has not diversified into any other services. The company has also not diversified a lot geographically. The company’s lack of diversification as compared to its rivals who do not solely depend on one sector or industry threatens its prospects.
Human Resources:
The company can lose its talent to its rivals who are always on their toes to get the best talent in the market. The strategy of helping the employees get jobs in rival companies can backfire as well.
Accounting
The company has been investing aggressively in its content and marketing showing negative cash flows. However, its earnings are positive even with such huge negative cash flows. The capital expenditure of Netflix can be argued to be an operational expenditure. The earnings exclude the costs important to operations which acts as inflationary for the bottom-line. The stock is valued on the assumption of the future profits, which may have been misrepresented. Accounting has allowed showbiz companies to capitalize their production expenditures which have been utilized here (Alpert, 2018).
Research & Development:
Higher spending on Research does not necessarily mean higher innovation. As companies are increasing their allocated sums on the research, throwing money only is not the solution to the problem (Iqbal, 2017).
E-Commerce:
The company is based on e-commerce technology. Any lacking or lagging can threaten its existence.
Future Environment
Social:
Social factors like the disposable income are important for Netflix revenues. The lower the discretionary income, the lower the revenues of the firm would be. About 73 million US households have discretionary income. The discretionary income increased by 64% in 2007 from 2002. The countries with the highest disposable income should be the target of Netflix. Poland, Hungary, Denmark, Mexico, Switzerland, Korea, Germany, Sweden, Austria, European Union, etc. have the highest disposable income by a percentage of the population (OECD, 2016).
Political/Legal
Possible regulations and Copyright complexities act as a limitation and hurdle in the company operations. The company would be drastically affected by such changes in the environment. The labor Acts for countries would act as a factor for influencing the prices of the company. Similarly, any restriction on the internet would affect prices as well.
Economic:
Economic Recession would affect the consumption of Luxury Good. Foreign competitors would influence the company immensely. The Saturation of the Primary market would end all prospects for Netflix as it has not diversified in any other industry. The Plan for continued expansion is dependent on Globalization as well.
Socio-Cultural
The higher Internet Media Consumption is going to raise the revenues and vice versa immensely. The change in consumer trend would mean changes in revenues for the company. The different consumption patterns of different countries would also be challenging for the company to adapt.
Technological:
The changing technology can be disruptive for the online streaming industry. The jumping of large enterprises like Amazon, Disney, AT&T, Apple, Facebook, and Yahoo has shown that this can go either way. The Needed Infrastructure for effective service delivery is changing as well, making it challenging for the company.
Environmental:
The need for reduction in carbon footprint, and the awareness regarding the ethical standards of doing business, environmental sustainability has made the companies work on it. Charitable activities, collaboration with NGOs, and making operations sustainable are some of the actions which can aid cope with it.
Strategic Targets
Strategic Business Units
Netflix Human Resource Consulting:
Netflix human resources has been considered as one of the main competencies of the company. The company attracts, manages and retains the resource in a simple, straightforward and effective way. The company HR is built on seven fundamentals. The company only hires fully formed adults. The company is very straightforward regarding its managerial style. The company uses a keeper test on its employees to test if the manager wants to keep the employee if it is offered a job in another company or not. If not, then it does not belong to Netflix. The company is open about letting go of the people who do not serve their purpose at the cost of rich severance packages. The company trusts their employees to act in the best interest of Netflix. The company also does not promote competition among employees rather it is more focused on the cooperation of the team. It uses top 30% and below 10% terms for teams (McCord, 2014). Diversifying into this sector would help Netflix reduce its dependency on its online streaming business.
Netflix Theme Park and Resorts:
The company has entered into this business by exhibiting Stranger Things theme park. Science fiction is going to be brought to life in Universal Studios. It is one of the several ways the company can cash on its existing business (Rodriguez, 2018). The Diversification of Netflix into this sector would help Netflix reduce its dependency on its online streaming business.
The projected statement is based on the revenue contribution of.
| Business Segments | T10 |
| Domestic Streaming | 55.50% |
| International Streaming | 25.50% |
| Domestic DVD | 1.00% |
| Human Resource Consulting | 4.50% |
| Theme Park & Resorts | 4.50% |
References
Alpert, B. (2018, August 24). Netflix Earnings: Where Accounting Meets Showbiz. Retrieved from https://www.barrons.com/articles/netflix-earnings-where-accounting-meets-showbiz-1535152229
Bond, D. (2017, July 7). Traditional TV becomes turn-off for young viewers. Retrieved from https://www.ft.com/content/0aa8f2fc-6339-11e7-91a7-502f7ee26895
Bond, S., & Bradshaw, T. (2017, July 20). Netflix looks to become world’s entertainer as it hits milestone. Retrieved from https://www.ft.com/content/06b55bb8-6d0c-11e7-bfeb-33fe0c5b7eaa
Bradshaw, T. (2017, July 17). Netflix boosted as viewers outside the US tune in. Retrieved from https://www.ft.com/content/e8c742f2-6b34-11e7-b9c7-15af748b60d0
Craft.Co. (2018). What Industry Spends The Most On Research And Development? Retrieved from https://craft.co/reports/s-p-100-r-d
Darrow, B. (2017, January 13). Greenpeace Just Dropped This Video to Push Netflix on Energy Use. Retrieved from http://fortune.com/2017/01/13/greenpeace-netflix/
Greenberg, A. (2009, September 21). The Netflix R&D Game. Retrieved from https://www.forbes.com/2009/09/21/netflix-research-prize-technology-million-dollars.html#4cc0dbf34367
Iqbal, M. (2017, June 6). Higher R&D spending doesn’t mean greater innovation. https://www.theneweconomy.com/strategy
/money-cant-buy-innovation
Lewis, D. (2016, December 11). Will the internet of things sacrifice or save the environment? Guardian Business. Retrieved from https://www.theguardian.com/sustainable-business/2016/dec/12/will-the-internet-of-things-sacrifice-or-save-the-environment
Lynch, J. (2018, July 17). Netflix Is Spending More on Marketing This Year Than Some of Its Rivals Are on Content. Retrieved from https://www.adweek.com/creativity/netflix-is-spending-more-on-marketing-this-year-than-some-of-its-rivals-are-on-content/
McCord, P. (2014, February 4). How Netflix Reinvented HR. Retrieved from Harvard Business Review: https://hbr.org/2014/01/how-netflix-reinvented-hr
OECD. (2016). Household disposable income. Retrieved from https://data.oecd.org/hha/household-disposable-income.htm
Robinson, D., & Murgia, M. (2017, May 24). Controversial EU rules could make life trickier for tech groups. Retrieved from https://www.ft.com/content/e44b1d8a-409a-11e7-9d56-25f963e998b2
Rodriguez, A. (2018, April 5). Netflix is getting its first taste of the theme park business with “Stranger Things”. Retrieved from https://qz.com/1245689/netflixs-stranger-things-is-coming-to-universal-studios-this-fall/
Roettgers, J. (2017, March 18). How Netflix Wants to Rule the World: A Behind-the-Scenes Look at a Global TV Network. Retrieved from http://variety.com/2017/digital/news/netflix-lab-day-behind-the-scenes-1202011105/
Romm, T. (2017, Julu 26). Facebook, Google and others are in a lose-lose position with an upcoming congressional net neutrality hearing. https://www.recode.net/2017/7/26/16029192
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Sadq, Z. M. (2013). Analysising Netflix‟s Strategy. International Journal of Science and Research, 4(3), 2271-2273.
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