Netflix’s external environment is examined in this Five Forces analysis of competitive forces and external factors based on Michael Porter’s model. The company provides streaming services and movies, series, and games. Online business operations facilitate Netflix’s international market reach but also position the company against multinational competitors in the industry. This Five Forces analysis of Netflix accounts for the multinational operating environment and the factors of the five forces, namely, competitive rivalry, customers’ power, suppliers’ power, threat of substitution, and threat of new entry. Netflix’s long-term success depends on its competitive advantages and strategies for overcoming competitive pressures illustrated in this Five Forces analysis.
This Five Forces analysis indicates that competitive advantages and effective competitive strategies ensure the achievement of business goals that realize Netflix’s mission statement and vision statement despite competitive challenges in the industry. The achievement of the company’s goals and performance targets are subject to the five forces, but carefully designed strategies can successfully promote Netflix’s business growth despite competition in the entertainment and content streaming industry.
Summary: Porter’s Five Forces Analysis of Netflix
The external factors linked to competitors, customers, suppliers, substitutes, and new entrants create a challenging competitive environment for entertainment content streaming services. This Five Forces analysis of Netflix illustrates the following intensities of the five forces:
- Competitive rivalry: Moderate
- Buyer power: Moderate
- Supplier power: Weak
- Substitution threat: Moderate
- New entry threat: Weak
Recommendations. This Five Forces analysis establishes the significance of competition and variables linked to subscribers in influencing Netflix’s competitiveness and strategic positioning. Although the industry has aggressive competitors, production capabilities and original content are competitive advantages that limit the impact of competition. The core competencies and competitive advantages detailed in the SWOT analysis of Netflix can provide support for strategic efforts to mitigate the effects of competitors, buyers, and suppliers assessed in this Five Forces analysis. For example, the company’s original movies and series help reduce its dependence on content suppliers or producers. It is recommended that Netflix further develop its content production capabilities to improve competitive advantages based on original content that attracts target customers. These competitive advantages mitigate the influence of media and entertainment competitors and limit the impact of customer/buyer power and the threat of substitutes.
Another recommendation is for Netflix’s diversification and product development strategies, which reduce the effects of the competitive challenges detailed in this Five Forces analysis. Netflix’s generic competitive strategy and intensive growth strategies include objectives for new products and business operations in addition to movies and series production and streaming. The company already offers games as part of its product development and diversification strategies. However, with the competition and buyer power in this Five Forces analysis case, it is recommended that Netflix continue developing more games to improve its position as a provider of gaming content that strengthens the popularity of its movies and series used as basis for such games.
Competition/Competitive Rivalry: Moderate
This component of Porter’s Five Forces analysis assesses the degree of competition and competitors’ impact on Netflix. The following external factors lead to the moderate force of competition on Netflix:
- Low differentiation of streaming services
- High differentiation of content producers
- Subscribers’ moderate switching costs
Most streaming services are similar in function and types of content available. In this Five Forces analysis of Netflix, such a competitive condition strengthens rivalry by making it easier for viewers to transfer between streaming services. However, high differentiation of content producers reduces competitive pressure by discouraging viewers from transferring to other service providers that may not have the same content. For example, some Netflix originals are not available from streaming and content-producing competitors, like Disney, Sony, NBCUniversal, as well as YouTube (Google (Alphabet)), Apple TV Plus, Amazon Prime Video, Facebook (Meta), and Microsoft Movies & TV (Films & TV). Netflix subscribers also experience moderate costs when switching to other streamers, such as additional membership or subscription fees and lack of access to some original content. As a result, many customers keep accounts with multiple streaming services. The strategic factors in this Five Forces analysis illustrate that competition is significant but limited because of original content that functions as a competitive advantage of Netflix.
Bargaining Power of Netflix’s Customers: Moderate
Customers’ influence on prices, profits, market share, and business performance is assessed in this component of the Five Forces analysis. The following external factors reinforce the moderate bargaining power of Netflix’s customers:
- Small size of individual subscribers
- Subscribers’ moderate switching costs
- Subscribers’ moderate price sensitivity
A subscriber’s payment is small and has insignificant individual impact on Netflix. In Porter’s Five Forces analysis model, this small size limits or reduces individual customers’ effect on the online company. Also, subscribers’ switching costs limit buyer power over Netflix. For example, switching may come with additional expenses and loss of access to the company’s original movies and series, which are a competitive advantage that discourages subscription cancellations. However, Netflix is subject to the price sensitivity of subscribers. The Five Forces analysis model considers this external factor as a contributor to customers’ bargaining power, as streaming competitors can use affordability as a competitive advantage. The external factor of price sensitivity is included in decisions for Netflix’s marketing mix (4Ps), particularly strategies for pricing the streaming service. Overall, these factors enable moderate customer power in this Five Forces analysis case.
Bargaining Power of Suppliers: Weak
This component of Porter’s Five Forces analysis refers to suppliers’ influence on the cost of supply or inputs and, thus, Netflix’s business costs, performance, and competitiveness. The following external factors lead to the limited and weak bargaining power of suppliers over Netflix:
- High differentiation of content producers
- Large number of content producers
- High switching costs for content producers/suppliers
Netflix’s most significant suppliers are content producers, such as local and multinational media and entertainment companies. Considering the uniqueness of each movie, series, or game, these suppliers have a high degree of differentiation. In this Five Forces analysis of Netflix, high differentiation is an external factor that increases the bargaining power of suppliers by making their content desirable and not easily replaced. However, the large number of content producers reduces their individual bargaining power. Furthermore, suppliers experience high switching costs in this Five Forces analysis case. For example, because of Netflix’s international market reach, many suppliers are unlikely to pull out of Netflix, although popular multinational entertainment producers can do so more easily. Netflix’s operations management ensures that the streaming service optimizes business performance while managing strategic concerns involving content producers and their weak bargaining power established in this Five Forces analysis.
Substitutes/Substitution Threat to Netflix: Moderate
The impact of substitution and the competitiveness of substitute products are assessed in this component of Porter’s Five Forces analysis model. The following external factors are responsible for the moderate threat of substitution affecting Netflix:
- Moderate costs of switching to substitutes
- Moderate availability of substitutes
- Subscribers’ moderate propensity to substitute
Substitutes for Netflix satisfy customers’ entertainment needs. In this Five Forces analysis case, substitutes include live shows and performances, free TV channels, and content on discs, tapes, and other media. Although these substitutes offer entertainment, customers are only moderately likely to switch to them because of various costs, like additional spending and inconvenience, in contrast to the affordability and convenience of accessing online content from Netflix. Also, many substitutes have limited availability with inflexible schedules or locations. This external factor limits the substitution threat in this Five Forces analysis case. Moreover, many customers are satisfied with Netflix’s online content and streaming services and are only moderately likely to use substitutes, such as during moments of boredom or when seeking different activities. Overall, this component of the Five Forces analysis of Netflix establishes the moderate threat of substitution.
Threat of New Entrants/New Entry: Weak
This component of Porter’s Five Forces analysis assesses the likelihood of new competitors and their impact on Netflix’s prices, profits, and business performance. The following external factors lead to new entrants’ weak threat to Netflix:
- Moderate cost of doing business
- High supply chain costs
- High cost of reaching critical mass for network effect
Netflix’s operations in the entertainment and content streaming industry involve moderate costs for developing and maintaining IT infrastructure. Also, developing original content is costly, while getting support and content from various media companies requires time and accompanying processing, business, and legal costs. These strategic factors reduce the threat of new entry in this Five Forces analysis of Netflix. Moreover, new entrants need to spend considerable time and capital before reaching critical mass, which is the point where they already have enough content and subscribers to easily attract more subscribers and content producers. This component of the Five Forces analysis establishes that new entrants pose a weak threat to Netflix.
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