Netflix Case Analysis

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Netflix

Philip J. Brooks

Business Policy & Strategic Planning – BA 4910
Professor Dr. Jeffrey Walls
November 25, 2006

GENERAL ENVIRONMENTAL ANALYSIS
Netflix was founded in 1997 by Reed Hastings, founder and CEO. Prior to this, Hastings founded Pure Software in 1991 and led several acquisitions that allowed Pure Software to become one of the top 50 largest software companies in the world. In 1999, Hastings launched the online subscription service and led Netflix to a subscriber base of over 1 million in just three and a half years, something that took AOL six years to accomplish. Netflix’s business strategy was quite simple, because they had pioneered the online DVD rental industry when DVDs were rare and had developed a strong lead of customers, revenue, and brand recognition. In response to its ever growing competition, in June of 2003, Netflix won a patent that covered much of its business model and could be used to help stifle future competition or at least demand licensing fees for the service. Additionally, according to Mike Schuh of Foundation Capital, one of Netflix’s earliest financial backers, the barriers to entry in the online DVD rental market were very low, but the barriers to profitability were very high. Lastly, Netflix faced a greater challenge, in that the likelihood that DVDs would soon no longer be the medium of choice.

VISION
Since the strategic vision is a road map showing the route that the company intends to take in developing and strengthening its business, the Netflix vision was nothing short of this with founder Reed Hastings exclaiming that, “Our vision is to change the way people access and view the movies they love” (Hastings, 2003). To accomplish this vision, Hastings purports that the company has set a long-term goal to acquire 5 million subscribers in the U.S. and by then, they expect to generate $1 billion in revenue.

BUSINESS MODEL
The business model of Netflix is one of simplicity on one hand and complexity on the other. Netflix’s business model is very closely aligned with its business strategy in that it drives the objectives of the strategy home. The simplicity of this model is simply easy, convenient, no hassle access to the movies that you want. On the other hand, the complexity involves high technology in accomplishing this objective. Their customers sign-up for a subscription service based upon the maximum number of movies they would like to rent out at any given time in increments of two, three, five, or eight, with never any late fees and shipped free of charge. The key is that customers can keep the movies as long as they want to because they are not allowed to go over the maximum number of movies rented at any given time. Lastly, Netflix added to this convenience by allowing customers to send the movies back in a preprinted, postage-paid envelope. The complexity involved with this model involves innovative technology that allows the customer to browse and select movies easy. They use an innovative database by Oracle called CineMatch that organized Netflix’s movies into clusters of similar movies and analyzed how customers rated them after they rented them. Additionally, the e-commerce involved with this service is phenomenal, which also involves collecting data regarding user preferences to hone in on providing good custom service.

NETFLIX CORE CONCEPT
Netflix has a great mix of talent in that they seem to have put together an extremely good strategy and have added to it extremely good strategy execution, which makes this team exhibit good management. Netflix built into this strategy, a smooth supply chain distribution system to speed up mail times, which included 15 distribution centers across the country. This decentralized network of distribution centers allowed Netflix to send movies from the closest distribution center to each customer and then have customers ship DVD’s back to the closest distribution center. This took...
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