2. Part 2: Environment Assessment
2.1
External Environmental Audit
2.1.1 General Environment
The movie industry has various distribution channels that can generate revenues. In
addition to the big screen, Hollywood movies are also sold or rented in the form of
DVDs, and are also broadcast through internet and cable television, on pay-perview, on hospitality setting such as hotels, restaurants, and airplanes (Chopra and
Veeraiyan, 2017). With the introduction of new technologies and the development of
electronic products, people now have more opportunities to watch movies.
Accordingly, home viewing will become a popular way to watch movies. Netflix’s
innovative ideas in the ever-changing home entertainment space made it possible to
sustain the business, thereby creating a competitive advantage. However, like other
market players in movie rental sector, Netflix also faces economic, political and legal,
technological and sociocultural issues. Any changes in these factors will
automatically have a significant impact on the operation of the movie rental
company.
From an economic perspective, the business that Netflix is engaged in mainly
depends on the household and individual’s disposable income. If the economic
growth rate is slow and has a negative impact on customer purchasing power, movie
rental company will first feel the impact of the decline in purchasing power of movie
rental services. Most of the company’s business depends on the appeal of the movie
to customers in the target market. As the average age of potential consumers
continue to grow and filming cost among the older demographic turn out to be less
popular, it may adversely affect the business performance.
In technological perspective, the trend of technology adoption is growing in
many countries. Given that the core operations of its business are based on internet,
as the industry shifts to online expenditure, Netflix must cope with continuous
development of the technology sector. The changes of technology in terms of video
on demand (VOD), imposes of competitors in this industry. Netflix market share is
facing challenges from new competitors, because of the lower barriers to entry in
terms of movie download or streaming content (Appendix 1).
2.1.2 Industry Environment
The five forces framework is an influential and straightforward tool that use outside-in
perspective to determine certain powers that meet specific business conditions
(Bruijl, 2018). This is useful for understanding the strength of the organization’s
current competitive position, and the strength of a position that an organization may
look to proceed into. The five forces of competition position model is used to analyze
Netflix industry environment (Appendix 2). The results are displayed on diagram 1.
Threat of New Entrants
Streaming services and downloadable movies are becoming more and more popular
as the delivery of video and movie content to the consumer is increasingly distributed
over the network. However, in a highly competitive industry like video entertainment,
unless the company can produce innovative and advanced media viewing formats,
the viability of the new company may not be great (Carroll, Menenberg & Kwok,
2009). A company that can create and promote new technologies for entertainment
viewing can enter the industry and quickly gain significant market share. Therefore,
the threat of new entrants is low to moderate.
Threat of Substitutes
There are several relatively interchangeable distribution channels such as VOD, payper-view, and online streaming. Technology has greatly helped increase the ways to
watch videos. Many consumers may subscribe to a combination of these services at
the same time, and there are minimal switching costs. Therefore, the threat of
substitutes is high to Netflix’s business model.
Intensity of Rivalry among competitors
The movie rental industry is highly competitive because there are many companies
in the industry, this includes Blockbuster, Movie Gallery, Hastings Entertainment.
Home entertainment covers a broad range of technology and distribution channels.
Netflix is directly competing with companies in many other industries, including cable
television networks, television broadcast movie, satellite companies’ VOD services.
Although Netflix faces low internal rivalry in its immediate industry, the company
faces a much more competitive and broader market (Carroll et al., 2009).
Bargaining Power of Suppliers
Many movies rental company acquires its video content through direct purchases,
revenue sharing agreements and license agreements. These agreements allow them
to rent DVD and streaming video content, and mainly obtained from studios,
networks and distributors (Carroll et al., 2009). Netflix relies entirely on the studio to
provide content to customers, if providers stop sharing their content, it may weaken
Netflix’s business model. Therefore, the bargaining power of suppliers can be
moderate to high.
Bargaining Power of Consumers
The competition in the movie rental industry is very fierce, because consumers
subscribe to multiple providers at the same time, and there is almost no cost for
them to compare prices between providers. However, if the price is much more
expensive than other providers, consumers only need to cancel their subscription
(Carroll et al., 2009). Due to the industry landscape facing, Netflix must be aware of
competitors’ prices and make every effort to keep their subscription fees low.
Therefore, the bargaining power of consumers is moderate.
Diagram 1: Porter’s Five Forces of Competition Position