Chapter 14- Mergers and Acquisitions

This chapter deals with the mechanics involved in mergers and acquisitions. Mergers and acquisitions is a way for companies to expand and diversify as a method to increase revenues, reduce cost, and resulting in higher profits. According to the FTC, there are five categories of mergers and acquisitions and they are as follows.

·       Vertical merger- acquires either suppliers or additional customers

·       Horizontal merger- acquires former competitor

·       Product extension merger- acquires complementary products

·       Market extension merger- acquire new geographic markets

·       Conglomerate merger- all other types of acquisitions

Netflix has not been very active in mergers and acquisitions. They are more concerned about mergers and acquisitions that are happening between ISPs. They have lobbied against merging of Comcast and Time Warner Cable. Netflix believes that this is very close to a monopoly and they will be at the mercy of an ISP to charge whatever they want for Netflix’s bandwidth usage. Netflix requires very fast and consistent bandwidth for their service. Any disruption in speed can have consequences resulting in loss of subscribers. 

Chapter 13- Strategic Alliances

In this chapter the book deals with strategic alliances. These are alliances created to reduce costs and hopefully increase revenues and profits for both firms. There are three types of strategic alliances: equity, non-equity, and joint ventures. Netflix has been involved in a few different strategic alliances. They have formed a strategic alliance with Google for the sole purpose of defending net neutrality, making sure that they always have sufficient bandwidth for their respective companies which are very bandwidth intensive. Netflix has also entered into joint ventures when they produce content for their own subscribers. An example of this alliance is like the one between Disney and Netflix for the production of Marvel series. This alliance has resulted in enabling Netflix to be the first company to stream the new Star Wars movie in certain markets, i.e. Canada.

Chapter 12- Implementing Corporate Diversification

Chapter 12 deals with the importance with implementing corporate diversification. The main benefit derived from implementing by having a balanced, diversified board of directors. It allows investors to maximum their potential investments. Netflix follows the classic diversified group of directors by having the majority as outside of the company. These Directors, some who are major shareholders, along with industry leaders from other firms, help keep the confidence of the shareholders. Shareholders main focus is on maximizing to its fullest potential the growth of the firm and returns on investment. The main insider is the chairman of the board who is also the founder of Netflix, Reed Hastings.

Chapter 11- Diversification Strategies

According to the book there are many types of strategies to diversify. All these strategies mention in the book fall into three categories: limited, related, and unrelated diversification. Netflix would fall in the limited diversification as they have 70% or greater of their earnings coming from a single business. In Netflix case this means that their business is all within in the streaming media industry. There is little in the way for diversification except the strategies they have embarked in the past few years. The first one is producing their own content. The second one is making alliances with Internet providers to improve the quality of their streaming. And a third being, licensing agreements with major studios/producers. Netflix is always trying to keep it’s market leading subscriber based happy by finding things that will keep them loyal and happy. 

Chapter 10- Vertical Integration

Vertical integration is when the supply chain of a company is own and controlled by that company. Apple, Inc best demonstrates an example of vertical integration. They are a hardware company plus a software company plus a service company and at the end of the chain they are a retail company. They control their product from the beginning to the customer.

 Netflix in the beginning was a provider of steaming media. Various companies produced the content they provided and Netflix would pay a fee to stream them. In its recent history, Netflix has started to vertically integration by becoming also a producer of content. This has provided Netflix with an area that they have exclusive rights that cannot be lost. 

Chapter 9- Tacit Collusion: Cooperation to Reduce Competition

Collusion results when two or more companies get together to provide cooperation within their industry to reduce the competitive of firms not part of this collusion. Netflix has small areas which could be taken as collusion as to increase their competitiveness within industry. This can be demonstrated by a few of their agreements with other media providers. The one area is in content, where Netflix has made deals with Disney and some of Disney subsidiaries. The original programming Netflix has embarked on is in with full cooperation with Marvel studios, which is owned by Disney.  Netflix has also made deals with cable companies that will host or mirror their video library enabling customers to have greater access to 4k steaming technology. The first one in North America is a deal with Rogers’s media to provide 4k streaming to Rogers’ customers. This is done even though Rogers has a streaming service of their own.  

Chapter 8- Flexibility under Risk and Uncertainty

Flexibility in the business world is when a company can make changes quickly and without great expenditures to adapt to a changing environment. These changes can be technological as well as market changes and competition. Everything changes and recently very quickly. Netflix has been adept to either anticipating or reacting to changes within their industry.

There are many risk factors evaluating Netflix and the industry they are in. This is a very new industry, and even though Netflix is by far the most dominate player in it, there is still possibilities for risk. The biggest risk facing Netflix is if there is more than one major competitor entering the market. This market when fully matured will always be able to handle two major players. As long as, Netflix is one of the players, this risk is reduced. Content can be a major risk factor in this industry. It can become very expensive and difficult to pass along to a customer who is used to paying a very low rate to subscribe. The other problem with content is if it’s no longer available to Netflix, but is available to their competitor.

Chapter 7- Product Differentiation

Product differentiation is another business strategy to gain competitive advantage. This is achieved by offering something different in a product or service. The product or service will differentiation it self within the industry.

Netflix has always distinguished itself from their inception. They have always developed new technologies to further differentiation themselves from competitors that have entered the market place. This can be demonstrated by the brief history of Netflix.

Netflix was founded in 1997 to provide customers with home delivery service of movie rentals on DVDs. This grew into a subscription-based service, which allowed the customers to choose a level of service that determined how many DVDs could rent at one time. A few years later, Netflix added a streaming service to their subscription packages. They believed this was a way of reducing the costs associated with mail home delivery service. The growth of streaming media subscriptions grew so rapidly that they now offer the service to more than 53 million customers in 50 different countries. All content is streamed without commercials. Netflix provides instant streaming of movies and TV shows directly to customer’s TVs, computers, and other mobile devices. Some devices that can stream these movies and shows are gaming systems such as, Xbox, PlayStation, and Wii.  Viewing Recommendations are given based on viewing habits, as well as allowing for multiple profiles, making it possible for every family member to have their own profile. Today, Netflix does not only stream content from other producers, but is now producing their own original TV series and movies. Their latest product differentiation is they added 4K streaming to original programming and some featured films.

Chapter 6 - Cost Leadership

The strategy behind cost leadership is to have cost lower than your competition. This allows a firm a competitive advantage in the market place. There are different ways to achieve cost leadership. Economy of scales is one, that in the simplest of forms, the higher the form of production decreases the cost associated with it. Netflix has the largest subscriber based and content in the industry. This makes it very easy to have a competitive advantage in cost leadership.

The second area deals with experience differences and the learning curve. There is always an advantage to be gained when you have the most experience in a certain industry. Netflix is the originator of this industry and has had to come up with the majority of solutions to problems that have arisen when this industry was in its infancy. Other competitors now have to deal with these new experiences as they arise, while Netflix has solutions on-hand.

The third area is technological advantages. This is where a company has in place systems and technology that other competitors do not have. Netflix is the developer in most of the technologies dealing with streaming media. Their size and experience makes it very difficult for newer competitors to achieve the same technological advances as Netflix.

Netflix has cost leadership as a competitive advantage because they are the originator and longest company in the streaming media business. This coupled with the largest library and subscribers makes Netflix the cost leader in the industry. It will be very difficult for any competitor to pass them in the foreseeable future. 

Chapter 5- Evaluating Firm Strengths and Weaknesses: The Resource Based View

There are many parts that make up a successful strategy of the firm. Analyzing a firm such as Netflix, from a resource-based view, makes it clear that they have great competitive advantage. The assets (whether tangible or intangible) along with organizational assets, Netflix resources in these areas are quite valuable to their competitive strategy. This can be demonstrated by looking at their strengths and weaknesses below. 

Strengths

Brand Recognition- Netflix by being the originator of instant streaming movie service has become synonymous with the service. The word Netflix is now treated as a verb in the same way people uses the “Google” for search.

Accessibility- Of all the streaming services available today, Netflix has by far the best delivery system available. They are constantly making arrangements with various device manufactures to include an integrated Netflix application. This increases Netflix branding as manufactures also have included a Netflix button on remotes.

Subscribers- Netflix has the largest number of subscribers worldwide. This allows them to purchase content for various markets where they have entered. They are more than an American oriented service, but they also acquire content for around the world.

  

  

www.thewrap.com

Weaknesses

Cost of Content- The cost of content was relatively inexpensive, but now has risen considerably. Every time a content provider rises their prices could cause problems to Netflix bottom line.

Content Ownership- Netflix is not the owner for most of the content that is streamed. This puts them in a position to lose content at any time.

Subscription Prices- Subscription prices have remained the same over many years. There is a lot pressure to raise the price, but every increase has the potential to reduce its subscriber’s base.

 www.webpronews.com

Chapter 4- Evaluating Environmental Opportunities

In the previous chapter, the book deals with environmental threats facing a firm. In this chapter we are led to find a way to reduce, eliminate the threats, or to find other opportunities that may exist. From the previous chapter, one of porter’s structures is that of an emerging industry. Netflix is in this group. They are the originators of this industry and responsible for many of the technological innovations that have occurred. This is the reason they are in over 90% of the domestic market and similar numbers internationally. The two areas that Netflix has the greatest opportunities are in expansion and original content.

Expansion- Netflix has many opportunities to grow their service both domestically and internationally. In the US, with Internet packages getting faster and cheaper, this provides an opportunity for Netflix to offer newer services such as four k streaming. Internationally there is a large demand for US media along with local domestic content making Netflix the obvious choice to capture those markets. They have largest library of content in the world.

Original Content- Netflix has begun to bid on original content such as, “House of Cards”, “The Fall”, and others, which have received very positive critical reviews. This content is now responsible for adding subscribers to Netflix. The unique thing about this content is for the first time an entire season of a new program is released all at once, making the phenomena of binge watching.

Chapter 3- Evaluating Environmental Threats

In simplest terms an environmental threat is anyone or anything from the outside that tries to reduce your competitive advantage.

Examining Porters five competitive forces as how they apply to Netflix, it is very obvious that they are in a very favorable position.

Porters Five Competitive Forces

Industry competition

The movie and entertainment industry has many established companies. There is a lot of competition for the entertainment dollar. There are many ways for customers to get their choice of movies. They can go to the theater, rent DVDs (whether by mail, store, online, or kiosk), watch TV, and streaming on demand. There is very little to differential the products offered by the above services. It is strictly a method of delivery.

           

Threat of new entrants

There is a very small threat of new entrants of entering this market place. The cost is too high and financial requirements are too great to have all the products needed to provide this service. This industry is already populated with companies that have very high brand awareness. The main players in this industry are Amazon instant video, Hulu Plus, Redbox, iTunes, and Netflix. On top of high costs of getting available content, it would also be very expensive to make their service well known.

Power of Suppliers

Suppliers have all the power in theory. They are not required to sell their content to anyone. Every content provider still has a responsibility to maximize all available avenues of revenue from their library.

Power of Buyers

Buyers have a very high position of bargaining power. The more price-sensitive a customer is the more power they have. Customers require very little inconvenience or cost to switch from one service to another. This has caused price points across most services to be very similar. The only differential is content and technology.

Threat of substitutes

This is after all an entertainment industry. The threat of substitute products is very high. This can range from types of entertainment such as video games, web surfing, or mobile applications. Within the industry there are other potential substitutes such as turning to cable TV, free over the air TV and/or going out to a movie theater.

Chapter 2- Firm Performance and Competitive Advantage

A competitive advantage in simple terms is an advantage that a company has over other competitors. This advantage makes it possible to generate greater number of sales and customers. In theory competitive advantage should wane over a period of time, but in reality companies that have a large advantage at the beginning seem to be able to maintain this in the long run. Netflix is a great example of this in the streaming media market place.

Netflix was the originator of the subscription based streaming service back in 2007. Fast forward eight years and things have changed as other services have entered into the market. This market has been growing over the years; at the present time 40% of the US households subscribe to one or more streaming service. Netflix has all but 4% of this market. This translates to 36% of US households subscribe to Netflix. This is three times greater than the next closest service, which is Amazon Prime. See below for a comparison chart. As this market matures, there will be room for probably two major players, which at the present time appear to be Netflix and Amazon Prime. The other players in this market will be smaller and more specialized services that most streaming subscribers would treat as an add-on to their primary service. 

Netflix

The company I chose to follow and research is Netflix.