Unit 1: Exploring Business (Part C/D)

Jan 23

Exemplar Coursework for BTEC Level 3 Business Studies: Unit 1 Exploring Business

Business Environments: A Report on the Environment Netflix Operates in

Netflix Internal Environment

Corporate Culture is the combination of beliefs and values held by the staff within the organisation which has an impact on the attitudes they have towards their role and the company. In 2009, Netflix released their ‘Netflix Culture Memo’ which outlines what they want to achieve in terms of their culture and why. By giving clear guidance on how to interact with colleagues and what the benefits are, staff should feel more confident in their interactions and understand how how they work with others contributes to the success of the organisation.

Corporate Social Responsibility (CSR) is the plan set out by an organisation to operate in an ethical way that reduces negative impact on their stakeholders. According to Thomasnet, Netflix have worked on improving their labour policies including unlimited vacation time and 52 weeks paid parental leave. This could have the benefit of improving morale and therefore productivity.

Netflix External Environment

The political environment refers to government intervention that affects business activity. This may include regulations that organisations have to adhere to in different industries, protectionist measures such as tariffs and quotas and support such as grants and subsidies. Netflix operates in over 190 different countries so have to continue to adapt their policies to adhere to the varied regulations of different governments.

“As Netflix expands globally, we understand that consumers and governments' expectations will rise. We expect to meet those expectations and work with policymakers to ensure that the old policies that applied to linear TV are not reflexively applied to streaming entertainment.” https://ir.netflix.net/ir-overview/long-term-view/default.aspx

When government regulation makes operating too challenging, an organisation may choose not to operate in a country. Due to the regulations in China, Netflix decided not to enter the market.

The economic environment refers to the economic factors that affect business activity. Economic factors include inflation, exchange rates and economic growth. As Netflix operate in multiple countries, they need to consider the fluctuating exchange rates and adapt their prices as currency values change.

The social environment refers to the attitudes, behaviors, tastes and preferences of people. Netflix have researched the difference tastes of consumers around the world and have made a commitment to creating content that bets meets the needs of their varied customers. By better meeting the specific needs of their customers, they are more likely to improve their brand image and customer retention. This is especially important now for Netflix as competition is increasing.

The technological environment refers to the development and availability of equipment, machinery, software and communications infrastructure that affects a business activity. According to digital initiative, Netflix has been so successful because they made the most of technological developments in their growth strategy. This includes using improving streaming capabilities and the rise in use of mobile technologies.

Environmental and ethical factors include the changing attitudes of people towards issues such as pollution, carbon footprint, waste and human rights in terms of business activity. According to Carbonbrief, although streaming does have an impact on the environment from the energy used by devices and servers, it is still low compared to other leisure activities.

The legal environment refers to the laws that businesses have to adhere to in different economies. For example, the data protection act makes it law in many countries for a business to protect the data they hold on customers. Netflix hold customer data such as email addresses and credit card details. In order to protect this from hackers, Netflix must install a good firewall.

Netflix Competitive Environment

Competition refers to rival organisations offering the same or similar products to customers. Netflix’s main competitors are Hulu, HBO, Prime Video, Disney + and Apple TV.

Competitive Advantage refers to features of an organisation that allow them to offer products and services that customers feel are better quality than rivals. This may include lower prices, reputation or product variety. According to BBC news, Netflix may maintain its competitive advantage due to the quality of their original series but are under pressure to maintain a diversity of shows due to increasing competition and shows like Friends moving to HBO.

Situational Analysis

A situational analysis is a systematic method of exploring the internal and external factors that have an impact on business activity. Various frameworks exist to support this including PESTEL analysis, SWOT analysis, 5Cs analysis and Porter’s Five Forces analysis. In order to offer a variety of techniques, I will conduct a SWOT analysis, 5Cs and Porter’s Five Forces.

SWOT Analysis

Strengths

According to Statista, Netflix has high and growing revenue which has increased from $1378m in 2015 to $6435m in 2020. This is good because it allows for reinvestment into high quality content which can improve brand image and customer retention. High revenue can also increase shareholder value an dividends which can increase future investment and growth.

Weaknesses

According to Newsweek, Netflix has gained a reputation of cancelling shows starring women, people of colour and people from the LGBTQ+ community. This reputation of discriminating may alienate potential markets and drive customers to the increasing competition in the online streaming market.

Opportunities

According to Netflix, there are opportunities to expand into non-English language markets. By creating content that more specifically meets the needs of consumers around the world, Netflix can increase sales and improved customer satisfaction can improve their brand image.

Threats

According to The Guardian, Netflix are facing increasing competition from streaming platforms such as Disney+ and AppleTV+ which has led to a slow down in the growth of new subscribers. This puts pressure on Netflix to differentiate from this new competition which may involve making improvements to content or reducing prices.

5Cs Analysis

Company

Netflix’s products include high quality TV Shows and Movies that cater for a diverse range of tastes and interests. Netflix have developed an algorithm to track customer viewing behaviour so they can make recommendations on content they may enjoy. This makes it more likely for customers to find content they enjoy on Netflix and have their needs met.

Competitors

There is rising competition in online streaming from organisations such as Disney+, HBO and Hulu. This puts pressure on Netflix to research the market to find opportunities to differentiate themselves.

Customers

Netflix have customers in over 190 countries who have varied preferences when it comes to streaming content. Netflix have therefore set aims to provide content for different languages and cultural tastes in their strategic plan.

Collaborators

According to bstrategyhub, Netflix relies on partnerships with other organisations to allow customers to access their content. This includes Smart TV companies and mobile phone companies allowing customers to download and run the Netflix app.

Climate

There has been backlash from some viewers regarding the content of some of Netflix’s shows. Anti smoking campaigners feel that the number of smoking characters is disproportionate and they have been found to have cancelled shows that contain minorities. Netflix are addressing this in their long term strategy by focusing on creating diversity in their future content.

Porter’s Five Forces

Competitive Rivalry

Competitive rivalry is increasing for Netflix with rival firms such as Prime Video, HBO, Disney+, AppleTV+ and Hulu offering similar online streaming content. Netflix has seen a slow down of new subscribers after years of growth.

Threat of New Entrants

The threat of new entrants is low compared to many other industries. Due to the high costs of production and media storage, it is necessary to have a very high amount of start up capital to enter.

Bargaining Power of Suppliers

The bargaining power of suppliers is increasing as more firms enter the market. Firms that own the rights to popular TV shows now have a wider range of streaming platforms to negotiate with. For example, Friends is moving from Netflix to HBO max.

Bargaining Power of Buyers

The bargaining power of buyers is increasing as they now have more choice of online streaming platforms. This means that they have more options of products to suit their needs. This puts pressure on Netflix to cater to varied needs which increases the pressure on market research and research and development.

Threat of Substitute Products

The threat of substitute products is increasing. There is a rise in very similar platforms offering similar products. It would be risky to enter into price competition in a market like this so Netflix should consider methods of non-price competition.

Overall, Netflix have a number of strengths including size, reputation, a strong corporate culture, a range of products and distribution to over 190 countries around the world. This is beneficial because all of this contributes to high barriers to entry which as explored in Porter’s Five Forces, reduces the threat of new entrants. However, the competitive environment is changing. Although there are high barriers to entry, this does not prevent firms who can afford it from entering. Entry of large firms such as HBO and AppleTV+ has made the streaming market more competitive, which has increased pressure on Netflix to make product improvements at a much faster rate than before. Customers have much more bargaining power as a result of having more choice available to them so Netflix must respond to their needs through providing content that meets their needs or they risk losing their competitive edge.

Market Structures

The market that Netflix operates in would likely be referred to as an oligopoly. An oligopoly is a market dominated by a small number of firms. The firms in the market have similar products and are likely to compete using non-price competition to avoid a price war. Oligopolies usually have high barriers to entry. In this case, barriers to entry include the high start up costs of technology needs, the need to create a bank of content and the relationships needed with suppliers of popular TV shows and movies.

Changes in the Environment

The market that Netflix operates in is becoming more competitive. In terms of supply and demand, the supply curve has shifted to the right. A right shift in supply increases the output and reduces the equilibrium price. This puts pressure on Netflix to lower their prices. However, in oligopoly markets, firms may avoid price competitions to avoid price wars and find methods of non-price competition such as changing product features. The cause of the shift in supply is likely to be due to the potential profitability demonstrated by Netflix’s early success and the availability of investment capital from existing large firms.

Prior to the increase in competition, online streaming may have been described as a monopoly. A monopoly is a market where there is one dominant supplier. In this market, Netflix would have faced less pressure to lower prices and innovate their products.

Netflix’s Response to Market Changes

As a result of changes in the environment in terms of the increase in competition which has changed market structure, Netflix has responded by making efforts to adapt the services they offer to their customers. They have avoided price competition which is in line with advisable behavior in an oligopoly market but have increased the range of their content. This includes Netflix Originals which is content they produce as well as popular TV Shows and movies from other providers. However, they have lost some of their shows to competitors such as Friends to HBO Max. They have invested into a lot of research into new markets are have plans to create content that better suits the needs of niche international customers. This may give them first mover advantage in these markets over their growing competition, however it is going to be time consuming and expensive for them.

Another change in the environment is that consumers are putting more pressure on TV and Movie production companies to be more ethical in terms of the content they provide. A pressure group raised concerns about the sexualisation of a young girl in a show called ‘Cuties’, Netflix responded with PR statements apologising for any offense caused. It is becoming increasingly important for Netflix to manage their negative press due to the growing availability of rivals that they could lose customers to. Another change in the environment is the growing use of social media. A large proportion of the population now use social media so to remain competitive, it is important for firms to increase their presence. Netflix have a strong presence on social media and regularly post memes of their shows.

The online streaming market is only going to become more competitive. More firms will enter the market and competitors will increase in size. As the market grows, Netflix may decide to focus on niche markets as it may become too expensive to compete with so many competitors in the mass market. For example, they have already began researching non-english language content, so they could focus on these markets, get first mover advantage and become a monopoly within the niche market.

Overall, Netflix is responding to market changes by various methods of non-price competition and will need to continue to adapt and innovate at a much faster rate than when the market was a monopoly.