Harvard Case - Netflix, Inc., 2007
"Netflix, Inc., 2007" Harvard business case study is written by Phillip E. Pfeifer, Robert M. Conroy. It deals with the challenges in the field of Finance. The case study is 15 page(s) long and it was first published on : Dec 21, 2009
At Fern Fort University, we recommend that Netflix pursue a growth strategy focused on international expansion and content diversification. This strategy should leverage Netflix's existing technology and analytics expertise to create a global streaming platform with a diverse catalog of original and licensed content. This will require a significant investment in financial strategy, including debt management, capital budgeting, and risk management to navigate the complexities of international finance and emerging markets.
2. Background
Netflix, founded in 1997, began as a DVD-by-mail service, disrupting the traditional video rental industry. By 2007, Netflix had established itself as a leader in the US market, with over 10 million subscribers. However, the company faced increasing competition from traditional players like Blockbuster and new entrants like Hulu. The case study focuses on Reed Hastings, CEO of Netflix, who is considering various options to maintain the company's growth trajectory, including:
- Expanding into new markets: Netflix could leverage its existing infrastructure to enter new international markets, potentially increasing its subscriber base and revenue.
- Developing original content: Netflix could create its own original content to differentiate itself from competitors and attract new subscribers.
- Acquiring other companies: Netflix could acquire other companies to expand its reach or gain access to new technologies.
3. Analysis of the Case Study
Netflix's success in the US market was driven by its innovative business model, technology and analytics capabilities, and customer-centric approach. However, the company faced several challenges:
- Competition: The DVD rental market was becoming increasingly competitive, with traditional players like Blockbuster adapting their business models and new entrants like Hulu emerging.
- Profitability: Netflix's profitability was under pressure due to rising content costs and the need to invest in new technologies.
- Growth: Netflix needed to find new avenues for growth to maintain its momentum and stay ahead of the competition.
To address these challenges, Netflix needed to develop a growth strategy that leveraged its strengths and mitigated its weaknesses. A SWOT analysis can be helpful in understanding the company's strengths, weaknesses, opportunities, and threats:
Strengths:
- Strong brand recognition: Netflix had established a strong brand in the US market, known for its convenience, selection, and customer service.
- Technology and analytics: Netflix had developed advanced technology and analytics capabilities to personalize recommendations and optimize its operations.
- Customer base: Netflix had a large and loyal customer base in the US, providing a solid foundation for future growth.
Weaknesses:
- High content costs: Netflix's reliance on licensed content led to high costs, impacting profitability.
- Limited international presence: Netflix had a limited presence outside the US, limiting its growth potential.
- Competition: Netflix faced increasing competition from traditional players and new entrants.
Opportunities:
- International expansion: Netflix could expand into new international markets with high growth potential.
- Original content development: Netflix could create its own original content to differentiate itself and attract new subscribers.
- Technology advancements: Netflix could leverage new technologies to improve its services and enhance customer experience.
Threats:
- Increased competition: The competitive landscape was becoming increasingly complex, with new players entering the market and traditional players adapting their strategies.
- Economic downturn: An economic downturn could impact consumer spending and reduce demand for entertainment services.
- Regulatory changes: Changes in regulations could impact Netflix's operations and profitability.
4. Recommendations
To address the challenges and capitalize on the opportunities, Netflix should pursue the following recommendations:
- International Expansion: Netflix should prioritize expanding into new international markets with high growth potential, such as Latin America, Europe, and Asia. This will require a significant investment in international finance, including foreign investments, hedging, and risk management to mitigate currency fluctuations and political risks.
- Content Diversification: Netflix should focus on diversifying its content portfolio by developing original content and acquiring exclusive rights to popular shows and movies. This will require a financial strategy that balances investment in original content with the acquisition of licensed content.
- Technology and Analytics: Netflix should continue to invest in its technology and analytics capabilities to personalize recommendations, optimize its operations, and enhance customer experience. This will require a capital budgeting process to allocate resources effectively and ensure a return on investment.
- Strategic Partnerships: Netflix should explore strategic partnerships with local companies in international markets to gain access to distribution channels and expertise. This could involve joint ventures, mergers and acquisitions, or licensing agreements.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: Netflix's core competencies lie in its technology and analytics capabilities, which can be leveraged for international expansion and content diversification. These recommendations are consistent with Netflix's mission to provide a global platform for high-quality entertainment.
- External customers and internal clients: These recommendations are designed to meet the needs of both external customers and internal clients. By expanding internationally and offering a diverse catalog of content, Netflix can attract new subscribers and retain existing ones. By investing in technology and analytics, Netflix can improve its operations and enhance employee satisfaction.
- Competitors: These recommendations are designed to stay ahead of the competition by expanding into new markets, offering unique content, and leveraging technology to improve customer experience.
- Attractiveness - quantitative measures: While the case study does not provide specific financial data, it is clear that international expansion and content diversification will require significant investments. Netflix should conduct a thorough financial analysis, including break-even analysis, profitability ratios, and return on investment (ROI) calculations, to assess the attractiveness of these investments.
6. Conclusion
Netflix's success in the US market was due to its innovative business model, technology, and customer focus. However, the company faced increasing competition and needed to find new avenues for growth. By pursuing a growth strategy focused on international expansion and content diversification, Netflix can leverage its strengths and mitigate its weaknesses to become a global leader in the entertainment industry. This will require a significant investment in financial strategy, including debt management, capital budgeting, and risk management.
7. Discussion
Other alternatives not selected include:
- Focusing solely on the US market: This would limit Netflix's growth potential and expose it to increasing competition.
- Acquiring a major competitor: This would be a costly and risky strategy, with potential regulatory hurdles.
- Sticking with the DVD-by-mail model: This would not be sustainable in the long term, as the market is shifting towards streaming services.
The key assumptions of this recommendation are:
- Netflix can successfully enter new international markets.
- Netflix can develop and acquire high-quality content that appeals to a global audience.
- Netflix can manage its financial resources effectively to support its growth strategy.
8. Next Steps
To implement this recommendation, Netflix should take the following steps:
- Develop a detailed international expansion plan.
- Secure financing for its growth strategy.
- Build a team with expertise in international finance and content development.
- Launch its streaming service in new markets.
- Monitor its progress and make adjustments as needed.
By taking these steps, Netflix can position itself for continued growth and success in the global entertainment market.
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Case Description
The protagonist in this case is an analyst attempting to value Netflix, Inc., and check whether her recent buy recommendation at a price of $20.00 per share was still valid. Recent bad news had caused the price to drop and she needed to do her best to figure out what was the future for Netflix, and was it undervalued at $17 per share? Intended for MBA students, this case contains her discounted cash flow valuation and a set of assumptions (revenues per customer, retention rates, etc.) students can use to perform a valuation of the existing Netflix customer base as another approach toward judging the $17 stock price. There are two student spreadsheets available for this case (UV4342 and UV4343).
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