Issue 8: Strategy — A Strategic Analysis of Netflix
After having learned about strategy, and the strategy diamond Issue 1, we will now examine the frameworks for strategic analyses. Strategic analyses are useful for understanding the external and internal environment of a company.
Before developing your strategy (using the strategy diamond) it is important to strategically analyze both the external and internal environment.
As shown in Issue 4, The external/macro Environment can be analyzed using the P.E.S.T.L.E framework, while the industry analyses can be analyzed using the Porters five forces.
The External Environment — NETFLIX
The PESTEL analysis is an excellent tool for management to examine the macro-conditions in each of the 190 markets Netflix operates in. The politics, economies, social structures, technological conditions, and legal environments of the different countries is vital for Netflix’s business. This would enable them limit risk and leverage their internal strengths.
· Political Stability
· Copyright and content laws
· Piracy regulation
· Exchange rates — This is key as a high exchange rate can make Netflix out of reach for majority of the country’s population (i.e., a luxury purchase)
· Economic growth of the country impacts purchasing power = increase in disposable income leads to an increased spending on entertainment
· Liquidity — Ease to remit profit and revenue.
· Changing consumer preference, which is determine by social, cultural, and religious background.
· Demographic composition of the population e.g. different groups of the population have different TV needs: news, movies, documentaries, and series.
· Internet speed/capacity
· Rate of technological adoption e.g., mobile
· Improvement in compression techniques that optimize streaming quality with less data usage.
· Laws affecting energy usage/sustainability goals.
· Renewable energy/best practices
· Legal framework to enforce contracts.
· Employment laws
· Copyright laws
Industry Analysis — Netflix
Thread of Substitute Products — Moderate
· Many substitutes such as satellite/cable and traditional TV are declining.
· Threat of substitutes is diminishing hence moderate.
Threat of New Entrants — Moderate to High
· Low technology barrier to entry
· Netflix’s first mover advantage helped secure high demand content and most of the market.
· Capital to purchase content is a high barrier to entry.
Bargaining Power of Customers — High
· Low switching cost — easy for customers to switch to a competitor due to low cost for service and no annual contracts.
· Lots of alternatives
Bargaining power of Suppliers — High
· Content is the strongest asset and there is a high power of suppliers to choose between different streaming platforms.
· Majority of the content is not owned by Netflix.
Rivalry within the Industry — High
· Industry is dominated by a few large brands — high competition to capture audiences
· Low switching cost for customers, has intensified competition.
· High content fixed cost
Examining each competitive force, Netflix would need a strategy to mitigate each item.
Takeaway — Why is Strategic Analysis Important?
1. Your Business
A strategic analysis is important if you are running or plan to start a new business. Analyzing the external environment in the country you plan to operate in, and the industry you plan to play in, would go a long way to minimize your risk (of failure) and maximize your chances of success. Knowing your internal environment (company resources and capabilities) would enable you develop a sustainable competitive advantage.
A Personal Example: In 2014, while I was at Ford UK, we had just launched the 6th generation Ford Mustang GT which had a 5L V8 engine. 2 weeks later we had a company session on the future of the industry which highlighted electric and driverless cars.
Fast forward 8years later to today, Electric cars have gone mainstream with several countries fixing a deadline to phase out non-electric cars.
Interestingly, Ford has since released the Mustang MACH-E, an all-electric SUV.
2. Your Career
A strategic analysis can also be applied to you and your career. In one of my earliest articles, In Pursuit of Why, I argued that you need to -
Consider your career strategically: Once you have found your interest, you need to review YOU like a business: Are there many employers in your chosen role and industry ( market size) ? Is there a chance to gain transferable skills (economics of scale/scope)? How do you differentiate yourself from others(unique selling point)?
In addition to these Does your skillset match the market’s requirement? Where do you see your chosen industry going?
I heard on a recent podcast a career advice that said:
“Find the fastest train and get on it”
A Personal Example: In Pursuit of Why, I also talked about my experience studying engineering with the goal of working in the oil and gas industry. I returned to Nigeria to fulfill this goal and found that opportunities were ‘few and far’ between.
Since then, I’ve seen the global conversation and big foreign oil companies, shift their strategy towards clean energy and electric cars.
I have also seen certain African oil and gas countries resist this change, at the risk to their national budget, exchange rate and population, even though investment in their industry is driven by big foreign oil companies. Companies with a new ‘clean energy focused’ strategy.
In everything you do:
1. Understand your environment (external, industry, and internal)
2. ‘Find the fastest train and get on it.’
3. Gain transferrable and relevant skills.
To learn more about this newsletter and stay updated, subscribe below.
You can also email me at firstname.lastname@example.org.
Links and Resources