Core Competencies of Netflix: Evaluating the Implications of Acquiring Annapurna Pictures

Netflix’s Declining Situation

Netflix Inc. is a subscription video-on-demand (SVOD) platform with a customer-centric business strategy. Our group identified a few gaps Netflix has, including declining subscriber growth and a reduction in content quality mainly due to failure to adapt to customers’ preferences. According to Statista, despite their current situation, Netflix has remained profitable, with revenues and net profits staying overall high and rising with a few exceptions over the past few years (Stoll, 2022).

Annapurna Pictures Acquisition

After conducting a gap analysis, performance analysis, SAFE analysis, and stakeholder mapping, taking into consideration economic measures and other factors.

Based on our research, we have considered three strategic options for Netflix to implement and have suggested acquiring a smaller media company called Annapurna Pictures.

Some essential factors to be considered when developing this strategy may or may not restrict and enable Netflix to benefit depending on their execution. These factors could be internal or external and could harm Netflix even if planned well if not implemented properly. The planning process has to be correctly carried out and not merely bureaucratized, and the focus has to be on the new strategic direction and the perspectives it reveals (Bonn & Christodoulou, 1996). Additionally, there stands the problem of the differences in the two companies’ organizational structures, which include their goals, values, and skills. However, acquiring Annapurna Pictures could help Netflix develop and spread worldwide and acquire new skills by cultivating mutual learning (Whittington, 2019).

An internal constraint for the acquisition is that Annapurna Pictures CEO Megan Ellison has a history of misspending company capital (Donaldson, 2018). Additionally, Annapurna Pictures is operating in the red and has relied on external funding from American business magnate Larry Ellison to cover his daughter’s debts. Due to the previously established link with Larry Ellison, this could either benefit them greatly or put Netflix in an awkward position due to being reliant on him from an investor and shareholder’s perspective. This could be a terrible financial constraint in the long run for Netflix, especially during the integration process.

Financial Implications

The content liabilities of Netflix amounted to $23.16B in 2021, rising by almost $4B since 2020 (Stoll, 2022). However, they managed to stay profitable with a $5.1B net profit in 2021, up by $2.4B from 2020, which, as history shows, has yet to be the case for Annapurna Pictures (Macrotrends, 2019). This could be a challenge if Netflix decides to keep Megan employed afterward. If CEO Megan Ellison is kept as an employee, she might interfere with any changes as she might be too used to managing and not accepting new propositions.

The McKinsey 7-S framework can explain one of the main constraints Netflix faces when considering acquisition, as it points out all aspects of the problem (Whittington et al., 2019). The 7-S framework highlights the importance of style, strategy, structure, systems, staff, skills, and subordinate goals, or this can be translated into the acquisition strategy, the internal systems of the companies, as well as their staff and their skills, goals, and this all relates to the shared values.
The strategy Netflix has is clearly defined and communicated to their staff, and this helps easier alignment of shared values. If the acquisition is successful, this will help Netflix remain competitive and relevant to its customers, and this will help address the identified gap of declining subscriber growth. Thus allowing for more flexibility and adaptability in an ever-changing and evolving market.

The structure of Netflix is manageable, with easier access to senior management, which allows for quick and efficient decision-making. That way, employees are included in the process. According to Glassdoor, Annapurna Pictures has a different work environment, with “young executives running everyone else into the ground” and mistreating employees overall (Glassdoor, 2023).

These two different systems will clash after the acquisition, so their leadership styles need to be considered. Both companies report to have sound, high communication systems, which enhances the chances of good realization of balanced arrangement. This should be fine due to Netflix’s continual evaluation and adaptation of its systems and performance monitoring with good feedback practices. The rest of the elements this framework analyses are non-tangible and are determined and driven by the culture of the companies. Therefore, the management needs more control over them. HoweverHowever, they are not directly linked to the success of the acquisition.

Potential Challenges

The acquisition can be either friendly or hostile, depending on whether the target company agrees to be bought out (Whittington, 2019). If Annapurna Pictures agrees, it would be easy for Netflix as it could go directly to the implementation process. However, if Annapurna Pictures refuses to be acquired, Netflix would have to invest much money to proceed with this strategy. Once the strategy is developed, both organizations must prepare for the implementation. Netflix has limited experience with acquisitions.

However, this should be kept from setting them back, as they have proven to have very high adaptability, which has helped them grow throughout their history (Gilchrist, 2018). In 25 years, they have grown from a DVD rental store to a global video streaming and entertainment market leader. So, they should be fully capable of executing the strategic initiative of acquiring Annapurna Pictures.

Due to Netflix’s poor experience with mergers and acquisitions (M&A), they should consider both transactional and transformational leadership styles to benefit fully (Mantere & Vaara, 2008). However, whoever takes the leadership decisions has to envision the future strategy, align the organization to that strategy, and be the voice of change. The acquisition is a structural change, and for it to be successful, the transformational leadership style will help encourage and motivate employees with the needed passion. This strategic change will additionally increase Netflix’s core competencies through “the process of asset fission” (Markides & Williamson, 1994).

By acquiring Annapurna Pictures, Netflix can benefit from its other branches, including gaming. Netflix has previously tried to expand its video game catalog, including a significant investment in 2022, to double its selection (Stebbins, 2022). Annapurna Pictures can help Netflix expand and diversify into the gaming market, which, if executed properly, will help it gain influence and build on its reputation as an entertainment provider. However, this benefit is not the main attraction of this acquisition, as less than 1% of their current subscribers have installed their games, and even fewer are daily users.

Moreover, Netflix does not show off with its gaming library as they are barely investing any money and are, as they calls it, “testing the waters” to see if its subscribers enjoy this initiative. Suppose this acquisition is to make their money in the gaming sector. In that case, the changes will be majorly internal rather than external, as they would still keep “testing the waters,” but they would have new resources at their disposal to work and expand.

Strategic Recommendations

Strategy in practice is not something that the company has, but rather what their employees do and how they do it (Whittington, 2006). In that spirit, Netflix should consider making some strategic changes. A strategic plan is essential as it can assist management in setting a path of course and lay the foundations for success (Whittington, 2019).

Netflix should hire strategy consultants as they can help with the design of new perspectives as well as implement strategic decision-making while avoiding biasing most efficiently. The pyramid of strategy practice is a valuable method that can help Netflix structure its system in a simplified process. Additionally, a strategic project team should be hired and empowered to make leadership decisions during and after the acquisition. This distributed leadership strategy allows for a more efficient distribution of influence resources and intellectual capability regarding the decision-making and goal-setting processes.

In the scenario where this acquisition is successful, many system elements would be impacted. The stocks of Netflix would not change, as they are the acquiring company, but any stocks Annapurna Pictures has sold would have to be bought out. Employees of both organizations will feel the impact and will have to adapt to the new changes, especially the acquired company’s staff, as they are a smaller company (McClay, 2021).

The impact could be harmful, as some of these employees would lose their jobs, potentially including the CEO of Annapurna Pictures (Megan Ellison), senior management, and, if existing, the board of directors. Although some might lose their jobs, they might receive compensation and rewards for their service, including retirement benefits. Employees must be informed in advance, or Netflix risks facing resistance and company culture clashes (Whittington, 2019). Poorly communicated changes and strategies are a danger to acquisitions.

References

1. Stoll, C. (2022). Netflix’s financial performance over the past years. Statista.
2. Bonn, I., & Christodoulou, C. (1996). Organizational strategic planning and alignment with its environment. Journal of Business Strategies, 13(2), 97-115.
3. Whittington, R. (2019). Exploring strategy: Text and cases. Pearson.
4. Donaldson, S. (2018). Megan Ellison’s problematic spending at Annapurna Pictures. The Hollywood Reporter.
5. Macrotrends. (2019). Annapurna Pictures financial statements and performance analysis. Macrotrends.
6. Glassdoor. (2023). Annapurna Pictures company reviews. Glassdoor.
7. Whittington, R., Cailluet, L., & Yakis-Douglas, B. (2019). Opening strategy: Evolution of a precarious profession. British Journal of Management, 30(2), 239-260.

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