In analyzing the SWOT, it is important to look at the marketplace conditions, (Duncan, 2005). Because there are more people with less cash, since the onslaught of the global recession several years ago, Netflix has reduced its price to address the customers who don’t have as much money. The ability of the company to add a line of products is limited because of the nature of the business, but it can offer different packages that are more affordable is a definite strength, and a reaction of a weakness in the economy, though that weakness is out of the company’s control and considered a threat. The company has learned to adjust to the demands of its product due to the weak economy.
Netflix has reached the public, which is a strength. It has done considerable marketing to put this product into the minds of the public. The price is another factor that is a strength of the company, as it gives Netflix a competitive advantage over many of the other companies that perhaps can’t afford to create a product at a price as low as Netflix. The brand’s image is also very strong, which is another strength, as well as the financial strength of Netflix and its services. Netflix is weaker than in previous years for the number of sales. However, the brand has a wide range of vehicles compared to the offerings of other companies.
Grand Strategy Matrix
Rapid Market Growth
Netflix is currently overpriced. While it has been dominating over its competitors, there is still too much uncertainty about its expansion to Europe. While the company is enticing, due to its popularity in North America, there is currently too much downside for anyone thinking of investing. The amount of video streaming devices that are free are taking away many potential customers, as these customers are gradually becoming more technologically savvy and they are learning new, free ways of finding content to watch. Despite the lure of many of these free bittorrent sites, Netflix is attracting a healthy chunk of viewers, and they are accounting for more than one billion hours of streams to about 30 million streaming accounts worldwide. While the competition against Netflix isn’t close to these numbers, there is still too much risk in buying a stock in the video streaming market, as this information could die out just like CDs once did.
Slow Market Growth
In the first quarter of 2011, rentals and sales of packaged Blu-rays and DVDs plummeted by about 20 per cent. The packaged disc sales also fell by about 20 per cent. The ex-CMO Leslie Kilgore left the company in January 2012, and the position was vacant until filled by Kelly Bennett, who is the former vice-president of interactive, worldwide marketing at Warner Bros. This long wait between CMOs is a cause of concern for many of the company’s shareholders, and people are wondering whether the company will be able to continue.
I believe Netflix isn’t doing as well because there is a growing number of locations where a person can stream a video, and quite often these locations are for free. Several major competitors have also come on board to offer services that are comparable to those offered at Netflix. To battle this, Netflix increased its price by 60 per cent in June 2011 and customers have left since the change, (Tomko, 2011).
Netflix was at its prime 7 years ago when it was distributing one million DVDs per day, but now many people are going online for video streaming and this is an area where Netflix has come across more competition.
Strong Competitive Position
While Amazon.com does pose a bit of a worry for investors thinking about buying Netflix, it shouldn’t be enough to deter people from buying the stock. Amazon does have a growing catalog of content, but it is still no match for the volume that is being produced by Netflix. The company is so far ahead of Amazon, that is producing about 20 times the traffic during the peak viewing time than Amazon is. So while Amazon isn’t a reason to not buy Netflix, investors should be wary of a potential loss of a market for the streaming. The stock would become much more attractive if illegal streaming laws were tightened up, (Godet, 2012).
Weak Competitive Position
While the company aims to be a leader in price, it is viewed as being the more expensive alternative to uploading content for free online. This became evident when the company’s profits fell in the third quarter of 2011, after the company increased its price by about 60 per cent. In July, 2011, the company learned that customer loyalty is a fragile thing. When it was known for its convenience and price up until the increase in price, the band had a loyal customer base. But that all changed with the price hike. While the increases in price were in order for the company to keep its mail-order and streaming service alive, the company claimed, many of the customers gathered on social networking sites to complain about the increase. This generated conversation among people about what alternatives there are for the service. Many customers either reduced their use of Netflix or they cancelled the service altogether. In a San Francisco Chronicle article, around 33 to 50 per cent of the subscribers said they would cancel the service, but the company wouldn’t say how many actually had cancelled, (Glagowski, 2011).
Some customers, however, have stayed with Netflix, saying the brand’s actions are in the best interest of the customers, and they feel that the product Netflix produces is of outstanding quality, which gives them good value for their money. The company’s decision to raise prices could have been necessary for survival, like the company said, but it is yet to be seen whether the brand will actually survive. While there are still those who value the company, customer loyalty is fragile, and it could take a while before the company is able to build its brand back up, (Glagowski, 2011).
Quantitative strategic Planning Matrix
Financial Component Guideline Company Competition Sector Comments
CURRENT PRICE $82.23 $46.56
MOVING AVERAGE 200 DAYS $80.07 $46.56
QUICK RATIO >1:1 0.56 0.68 0.50
CURRENT RATIO >2:1 1.40 0.9 1.50
INVENTORY TURNS Higher is
Industry 1.0 10.5 2.70
ACCOUNT PAYABLE Lower is usually
better $1,010,000,000 $144,064,000
considered healthy 7.17% 28.42%
ROA >5% 1.41% 10.96%
PROFITABILITY At least 5%,
are usually 1-2% 0.85% 6.84%
GROSS MARGIN Higher is better,
vary widely by
industry 26.79% 34.60% 51.00
OPERATING MARGIN Same 2.9% 13.7%
DEBT/EQUITY <2:1 0.5888 0.6399
EPS 50 better than 20 0.78 4.91
PE RATIO < 35; 20:1 105.2 9.4
PEG RATIO <1:2 97.60 0.60
P/S <3:1 1.30 0.64
BETA .7:1.0 0.69 0.77
This shows the company is underpriced for its shareholders, but it should be noted that the future of the business is largely unknown which makes this analysis not as useful as the aforementioned strategies.
A space matrix would suggest that the company should pursue an aggressive growth strategy in order to enter the world market. The downside to this is that many people could be instead utilizing the Internet for all of their streaming needs. In order to achieve aggressive growth in a positive way, Netflix needs to provide new TV shows a lot quicker than what it is currently doing. There are many online streaming services that offer TV shows the next day, or even hours after it is broadcast. However, with Netflix, there are TV shows and movies from as much as two years prior that still aren’t available on the service. The company has attempted over the last 13 years to learn about what the viewers want, but it has been largely unsuccessful in appealing to many of the crowds. The service essentially offers the most popular movies and many TV shows, but the TV shows aren’t always the ones that are most popular.
Once Netflix is able to uploaded more quickly, the company will appeal to a wider audience. At that point, it can begin to win back subscribers and then lower the heightened price that lost a large percentage of its audience. Netflix should create a survey for its customers to see what the company is lacking, and what it can give people so that they will keep coming back. This needs to be augmented by rapidly expanding throughout the world. The company is actually doing both of these things and are moving forward with plans at a relatively rapid pace, though it is having some problems in Europe with getting licensed. For this reason and others the expansion throughout Europe will have significant costs. There is a lot of legal attention that goes into this expansion and the company will need to spend a lot of time in this area. But several additional countries in Europe should come on board each year, and those within the European Union should be targeted first because they have similar laws for this type of activity. The idea of proving content faster will take significant upgrades and require high licensing costs.
However, the reward could be substantial, as people will be more willing to go with Netflix if they are meeting demand. The licensing process of using new videos should happen immediately for a successful outcome.
In reviewing the success of these strategies it will be important to see which shows are coming onto Netflix and how rapidly they are. The European expansion will become visible as each country comes on board, and this will increase the capital that Netflix has to add to its library and at a more rapid pace.
Godet, A. (2012, Oct. 10). Amazon to Launch SVOD Service in France. The Hollywood Reporter.
Tomko, M. (2011, Nov. 1). Ideas aplenty on how Netflix could win back customers. Medill