Netflix Case Study PDF

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Case study on Netflix in 2018...

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BM 490 Netflix Case Study

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Objective Netflix’s objective is to grow its streaming subscription business, content, and to improve the customers’ experience. Its main goal is to be the best global entertainment distribution service. Customer Scenario Netflix’s services are being sold internationally to Netflix’s global market. This includes both males and females between the ages of 18 and 39. Most of this market’s family income is greater than $100,000 per year, and about half of the target market has young children. Nucleus of Control The CEO, Co-founder, and chairman of Netflix is Reed Hastings. His strategy for Netflix is a growth strategy with an entrepreneurial stance. Netflix is trying to expand globally, rather than just focusing on remaining stable. When Netflix was first founded in 1997, it was a risky business, because the internet was still relatively young, and the idea of renting movies online was unheard of. During the first few years of Netflix, the company was not doing as well as Hastings may have hoped, as it was competing with Blockbuster. There were not any similar, online rental companies until well after Netflix began online streaming, along with the DVD rental service offered. Hulu was created once broadcast networks realized Netflix was a threat, and the concept was proven to be successful. Functional Analysis Top Management The Top Management of Netflix includes Reed Hastings, 57, as CEO, Jessica Neal as Chief Talent Officer, Jonathan Friedland as the Chief Communications Officer, Kelly Bennett as the chief Marketing Officer, David Hyman as the General Counsel, Greg Peters as the Chief Product

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Officer, Ted Sarandos as the Chief Content Officer, and David Wells as the Chief Financial Officer. This group of individuals does work well as a team, making the management style theory y. Employees of the company have the freedom to work when they want, and take breaks as they want as well. Management is open to suggestions and to the needs of employees. Marketing Throughout 2015, Netflix contributed $824,092,000 to marketing. Rather than advertising Netflix’s services, the company is marketing its original content. This marketing strategy is a potentially strong customer acquisition technique, as it gets potential customers interested, and they therefore have to subscribe to Netflix’s services in order to watch this original content. Finance and Accounting Netflix’s original content is popular for many subscribers, which creates positive word-of-mouth advertising, and increases revenue for the company. In order for Netflix to be profitable, its subscription revenues must be greater than its costs. In 2015, the cost of revenue was $4,591,476,000, and total revenues were $6,779,511,000. Netflix has taken a large amount of long-term debt and sold equity in order to fund expansion. (Exhibits 2 and 3) Production and Operations Management Netflix allows the creators of its original content to have the freedom to be creative. This is a risky tactic, however the strategy has been proven. Although the first three seasons of House of Cards cost about $200 million, it has become a huge success, attracting many new subscribers. Research and Development At the end of 2015, Netflix invested $650,788,000 in research and development. (Exhibit 1) Much of this is contributed to creating original series, to compete with Hulu and cable services

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that will not allow Netflix to show their shows and movies. In response to competitors such as Hulu, Orange is the New Black  and House of Cards  were both released in 2013 as Netflix original series, and are now two of Netflix’s most successful content. Legal Netflix’s success has been a threat to many competitors. Lawsuits involving patent issues have been something that Netflix has had to prepare for. In order to protect against this, Netflix filed a suit against Rovi in order to invalidate some of the company’s patents, before Rovi could sue Netflix for patent infringement. This suit caused the five patents in question to ultimately be deemed invalid, which hurt Rovi’s stock prices. Company culture includes an inclusive, open discussion based environment, focused on results over process. Netflix’s values are judgement, communication, curiosity, courage, passion, selflessness, innovation, inclusion, integrity, and  over process. More specifically, we impact. Netflix states that “Our core philosophy is people have great people working together as a dream  team. With this approach, we are a more flexible, fun, stimulating, creative, and successful organization. Human Resources Netflix does not have a specific 9-to-5 schedule, so vacation time is also handled differently. Netflix believes that employees should take off to observe holidays and when one needs a break. New parents are encouraged to take the time off that they need to take care of their new children. In addition, Netflix tries to pay top of the market, in order to retain the highest performing employees. Glassdoor has rated Netflix as offering one of the top 20 employee benefits, which includes a full year of paid maternity or paternity leave. Some benefits offered are health insurance and 401K matching. However, Netflix does have a type of “tough love” culture.

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Netflix offers a number of freedoms and benefits to its employees, but expects very high performance from these employees. Netflix has a work smart not hard attitude, and works to make sure they have the best of the best in the company. One of Netflix’s philosophies is “The best thing you can do for employees—a perk better than foosball or free sushi—is hire only “A” players to work alongside them. Excellent colleagues trump everything else”. Statement of the basic problem The basic problem Netflix faces is its planning in regards to finance and accounting. While Netflix is constantly trying to grow and stay ahead of competitors, its planning in regards to costs are lacking, causing Netflix’s margins to decrease and debt to increase. Strategic Alternatives One possible alternative for Netflix is to focus more attention on expanding globally rather than on creating new content for current subscribers. This would include marketing to more foreign countries and adding content that would attract these foreign subscribers. This will likely cause an increase in subscribers, which would increase revenue, therefore improving margins, while avoiding the high costs that come with attempting to creating new original content that may not be successful. However, the downside of this would be that the possibility of current subscribers unsubscribing and switching over to a competitor is more likely. These subscribers may become bored with the lack of new content, and it may create a window of opportunity for competitors to attract these subscribers. Another alternative would be to utilize data on popularity of content, and get rid of the unpopular content to cut costs. Although this may cause the small group of users to cancel their subscriptions, which would result in loss of revenue from subscribers for Netflix, this ultimately

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saves money on licensing third party content while negatively affecting the smallest number of users possible. Subscribers will not have to spend as much time looking for quality shows and movies within less popular content. Recommendation My recommendation for Netflix is to cut the less popular third party content, and focus more on quality over quantity. If only the most popular content is on Netflix, it will be easier for subscribers to find shows and movies that they will enjoy rather than having to spend time trying to find it within the less popular content. Therefore, current subscribers will be less likely to switch services. The costs saved from licensing this content can then be used to repay debts and to continue global expansion. Implementation Netflix needs to identify which content is costing them more money than it is making them. Although the possibility of a small percentage of subscribers cancelling their subscriptions is more evident with this alternative, it will ultimately save Netflix money that can be utilized to minimize long-term debts and maximize expansion. This will grow the subscription business globally, and improve the customers’ experience, making it closer to becoming the best global entertainment distribution service, which are the company’s objectives.

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Exhibit 1

Exhibit 2 Total Revenue

$6,779,511,000

Total Cost of Revenue

$4,591,476,000

Net Income

$122,641,000

Total Liabilities and Stockholders’ Equity

$10,202,871,000

Exhibit 3 -- Financial Health Ratios Current Ratio

1.54

Quick Ratio

0.65

Financial Leverage

4.59

Debt/Equity

1.07

Profit Margin

4.78

Asset Turnover

0.79

Payables Period

18.09

Net Margin

1.81

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Problem Symptoms: 1. Some employees feel that they are constantly living in fear of being fired (low job stability) 2. Number of competitors is continuously rising 3. Original content is expensive to produce 4. Free Cash Flow has been negative since 2012 5. Expansion has caused large amounts of long-term debt 6. Netflix is not as experienced in creating original content as competitors 7. Some of Netflix’s original content can be purchased elsewhere 8. International growth is lower than forecasted 9. Netflix’s profit margins are declining 10. Licensing third-party content forces Netflix to share profits 11. Competitors have patents that Netflix may be infringing on through its services Matrix Planning Organization Control Top Management Marketing

8

Finance/Accounting

3,5,9

2 4

7

Operations Management R&D

6 11

Legal HR

10

1

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Sources Netflixcompanyprofile.weebly.com https://www.business2community.com/marketing/look-new-target-audience-netflix-subscribers01813457 Bloomberg.com Forbes.com Jobs.netflix.com https://www.geekwire.com/2016/here-are-the-top-20-most-impressive-employee-benefits-and-pe rks/ https://hbr.org/2014/01/how-netflix-reinvented-hr https://www.fool.com/investing/general/2015/07/21/why-rovi-corporation-lives-and-dies-by-thenetflix.aspx...