Netflix in 2012: Can It Recover from Its Strategy Missteps?

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Team Ferris

Helen Petrossi – Management Challenges and Strategic Issues

Alejandra Salazar – Strategic Analysis (PESTEL, VRIN, and Group Mapping)

Ana Canchola – Strategic Analysis (Five Forces, Driving Forces)

Ericka Guerra – Strategic Analysis (Competitive Analysis, Success Factors)

Griffin Nichols – Marketing Analysis (SWOT, Market Penetration, Emotional Appeal, Current Marketing, Word of Mouth)

Brian Chikuami – Financial Analysis (Revenue & Net Income, Balance Sheet, Financial Ratios, Comparative Data)

Netflix in 2012: Can It Recover from Its Strategy Missteps?

Netflix distributes contents through mail delivery of DVD’s or instant streaming of available titles to personal computers, mobile devices, and internet-connected home theater devices.

In an attempt to stay ahead of the competition, Netflix made a few strategic changes in the third quarter of 2011, which lead to a less than desirable market reaction. The lack of communication between management and their shareholders and customers, not anticipating the market’s reaction to the Strategic changes; as well as the unpredicted challenges that rose from their international expansion, are the few mistakes that were made by Netflix during this transition.

In order to better understand Netflix as a company, and the driving forces behind the decisions that they make, one must refer to the company’s Mission Statement, the Vision and the Core Values they employ. According to the Crafting & Executing Strategy textbook, the Mission Statement of a company describes the enterprise’s present business and purpose “Who we are, what we do, and why we are here”.  The Mission statement is a descriptive statement, designed to communicate the company’s identity in regards to the products and services they provide and the specific consumer needs which they are trying to gratify. Netflix, however, has never had a Mission Statement. In place of a published mission statement, Netflix has a Vision and nine Values, which together provide an insight about the Netflix mission. It is necessary to point out that the CEO of Netflix, Reed Hastings, communicated these attributes in a conference in October 2011, after the Netflix stock prices were compromised due to their decision to separate the two services. The Vision of a company depicts a company’s aspirations for its future strategic goals and long-term direction; along with justification for why it makes “good business sense” for the company. Here is Netflix’s Strategic Vision:

• Becoming the best global entertainment distribution service
• Licensing entertainment content around the world
• Creating markets that are accessible to filmmakers
• Helping content creators around the world to find a global audience

In order for a Strategic Vision to be effective it must be distinctive and specific. CEO, Reed Hastings, has managed to utilize certain effective elements in this Strategic Vision; such as making sure that it is graphic, focused, flexible, and forward looking. It is graphic by painting a clear picture of where the company is headed; it is focused by showing the managers that licensing entertainment content should be the focus of all their decisions. The flexibility in this Strategic Vision comes from the language that is used, which allows the company to adjust their direction if need be. The only criticism that can be given is the fact that an overly broad language has been used. Stating that Neflix wants to become the “best entertainment distribution service” is quiet farfetched. The word “entertainment” can relay as any number of entertainment sources; such as the theater, concerts, video games, the opera and etc, and Netflix has never been a provider of those services.  

Next, we examine the values that Netflix utilizes in their company’s decision making process. The core values of a company are “beliefs, traits, and behavioral norms” that management has established as the guidelines to pursuit its vision and mission. The Values that have been mentioned are: Judgment Productivity, Creativity, Intelligence, Honesty, Communication, Selflessness, Reliability, and Passion. While these are all great attributes to have and use, the management at Netflix failed to use one of the more important values while they were making major strategic changes; Communication. Not having a Mission Statement was the first missed communication step between upper management and the Netflix employees, as well as shareholders and customers. Next, the failure to communicate the decision to separate the DVD-by-Mail portion of the company from the Internet Steaming, lead to a significant loss of paying customers (-199,000 from July- December 2011) and it was the grounds for the fall in the company’s stock prices. Instead of releasing a statement to “damage control”, the CEO of the company should have communicated the changes that Netflix wanted to formulate, and the why. This way they could have analyzed the market feedback and the customer responses before making any drastic changes, which in turn would have maintain the dignity of the shareholder values.

The second management problem was that they did not anticipate the market’s reaction to the Strategic changes that were made.  While their intention was to stay ahead of the competition and to allocate more of their resources to become greater at the new state of the home-viewing-entertainment revolution, they failed to do enough research and forecasting. No surveys, situation stimulation analysis, or research was conducted to predict how the market would react to these drastic changes. Every company’s ultimate goal is to enlarge their shareholder’s stock value, yet the management at Netflix failed to place more importance on preserving their shareholder’s equity.

The final management problem arrived from unpredicted challenges that rose from their international expansion. As of 2010 Netflix was streaming in Canada, Ireland and the United Kingdom. In September 2011 they started streaming in 43 additional countries in the Latin America and the Caribbean. What they failed to understand was that every country and region varies in the challenges that it presents. They soon realized that it would take longer than the 2 years that they assumed it would take to start generating a positive contribution profit. They failed to realize the culture, regulatory and monetary difference that rose from Latin America. For Instance, not many people used credit cards in the Latin America, and most banks denied the Debit Online transactions, due to a high fraud risk. This delay, along with the problems Netflix faced in acquiring different content licenses in the Latin America, lead to them having to raise capital in order to absorb some of the losses from their international expansion. Netflix raised $200 Million dollars by selling common stock in November of 2011 and another $200 Million by selling Zero Coupon Convertible Senior Notes, Due by December 2018.  The international operation cost jumped from an anticipated $9.3 Million to $23.3 Million in the third quarter of 2011. This yet again contributed to the stock prices dropping to an all time low. The arrogance of the Netflix management, lead them to making many strategic mistakes. Their confidence caused them to become blindsided to the elasticity of the price of the services they provided. Their lack of communication left their customers and shareholders in the dark and disturbed. And lastly their lack of due-process before expanding further internationally, created a lot of debt, and loss of shareholder equity.