STEPHEN ODU: NETFLIX SOLUTION

•Questions:
•These questions are intended to help students focus on the key elements as they read the case.
▸ What are the main components of Netflix Business Model and how this component drives its operations?
Analyze the company's current situation from an operational perspective. Make a comparison analysis
between Netflix and Blockbuster strategy.
▸ Explain how Netflix's value chain changed after it focused its business on streaming in order to identify the
measures that contributed to creating value for the new service from an operational perspective (you could
use Michael Porter's value chain strategic analysis tool).
▸ Analyze Netflix's current challenges, propose operations management solutions, and prepare an action plan
for each of these challenges.
1.1 WHAT ARE THE MAIN COMPONENTS OF NETFLIX BSUINESS MODEL AND HOW THIS COMPONENT DRIVES ITS
OPERATION
A business model is a plan or framework that a company uses to generate revenue and make a profit. It outlines how the
company creates value for its customers, what products or services it offers, how it markets and sells those products or
services, and the methods it uses to deliver them. The business model also includes details on how the company manages costs
and resources to sustain its operations. In essence, it's a comprehensive blueprint for how a business operates and achieves its
financial goals (Osterwalder & Pigneur, 2010).

1. HOW THEY CREATE VALUE:

Recommendation System: Netflix's proprietary algorithm analyzes customer preferences to recommend personalized movie
selections, enhancing user experience and satisfaction.
Content Acquisition: Netflix secures distribution rights, particularly for independent films, increasing its content library and
appeal to a broader audience.

2. PRODUCT AND SERVICE OFFER:

Subscription Model: Initially offering a prepaid subscription for unlimited rentals, later transitioning to a model where
subscribers could keep three movies at a time with unlimited exchanges. This model provides flexibility and convenience to
customers.
3. HOW IT MARKETS AND SELLS:
Personalized Marketing: Utilizing data-driven insights from its recommendation system to promote a broad range of titles,
including lesser-known films, to subscribers.
Online Platform: Customers access Netflix's services primarily through its website, where they manage queues and view
recommendations.

4. METHOD USED IN DELIVERY

Distribution Centers: Netflix strategically establishes numerous distribution centers across the country to ensure fast delivery
and efficient service.
Logistics Optimization: Collaborating with USPS to streamline delivery and return processes, reducing turnaround times and
improving customer satisfaction.

5. HOW THEY MANAGE COST AND RESOURCES TO SUSTAIN OPERATIONS:

Cost Efficiency: Negotiating revenue-sharing agreements with major studios to optimize content acquisition costs while
maintaining customer satisfaction.
Operational Efficiency: Continuous improvement in distribution center operations through automation and efficient logistics
management, enabling Netflix to handle large volumes of DVDs daily.
These components collectively contribute to Netflix's ability to create value for its customers by offering a wide selection of films,
personalized recommendations, and convenient service, all while managing costs effectively to sustain its operations and growth.
1.2 OPERATIONAL ANALYSIS Of NETFLIX'S CURRENT SITUATION
From an operational perspective, Netflix has demonstrated a strong ability to adapt and innovate. Its early challenges with
delivery times were addressed through strategic expansion of distribution centers. The shift to a subscription model and the
development of a sophisticated recommendation system greatly enhanced customer satisfaction and retention. Technological
investments and strategic partnerships, particularly with USPS, improved operational efficiency. The move into content
production allowed Netflix to offer unique value to its subscribers, further strengthening its market position.
1. CONTENT ACQUISITION AND LICENSING:
Netflix's initial strategy focused heavily on acquiring and licensing content to build a vast library of films and shows. This
approach, spearheaded by Ted Sarandos, allowed Netflix to establish relationships with major studios and leverage revenue-
sharing agreements. This strategy not only ensured a steady stream of popular content but also enabled Netflix to offer a broad
selection, including lesser-known and independent films, thus catering to diverse customer preferences.
2. RECOMMENDATION SYSTEM:
Netflix's proprietary recommendation system, developed to enhance customer satisfaction, has been a cornerstone of its
operational strategy. By leveraging algorithms and customer data, Netflix can provide personalized recommendations, which
increases viewer engagement and retention. This system reduces the burden on editorial staff and ensures a more efficient and
scalable way to promote content.
3. DISTRIBUTION NETWORK:
Initially, Netflix faced challenges with delivery times due to operating from a single distribution center. However, recognizing the
importance of timely delivery, Netflix expanded its distribution network nationwide. By 2009, Netflix had 58 distribution centers,
allowing next-day delivery to most of its 10.6 million subscribers. This extensive network was crucial in competing with traditional
retail video stores by offering superior convenience.
4. CUSTOMER RETENTION AND CHURN MANAGEMENT:
Netflix’s shift to a subscription model with no late fees was a significant operational change aimed at improving customer
satisfaction and retention. The ability for customers to keep a queue of movies and receive unlimited rentals increased the
perceived value of the service. Additionally, Netflix’s decision to allow easy online cancellation was a customer-centric move that,
despite an initial spike in churn, likely contributed to higher long-term customer loyalty and return rates.
5. TECHNOLOGICAL INVESTMENTS:
Investments in technology have been central to Netflix’s operational strategy. The development of an efficient recommendation
algorithm and the automation of processes in distribution centers are examples of how Netflix leverages technology to enhance
operational efficiency. The ability to process 800 DVDs per hour per employee and ship over 1.6 million DVDs per day by 2009
highlights the effectiveness of these technological investments.
Adoption of Online Rental Services
Blockbuster: Reluctant to enter the online market, only launching Blockbuster Online in 2004, years after Netflix had established
itself. Their entry was reactionary, driven by the need to recapture lost market share.
Netflix: Pioneered the online rental service, continuously evolving its model from per-movie rentals to a subscription-based
system without late fees, providing better value to customers and leveraging longer delivery times as an advantage.
Pricing Strategies
Blockbuster: Initially maintained traditional rental pricing, later introducing a no-late-fee policy which significantly impacted their
revenue, costing them around $600 million annually in late fees.
Netflix: Transitioned early to a subscription model, offering unlimited rentals for a flat monthly fee, removing late fees entirely,
which resonated well with customers and encouraged retention.
Customer Retention and Satisfaction
Blockbuster: Attempted to retain customers through in-store promotions and integrating online and physical stores, but struggled
with significant operating losses despite these efforts.
Netflix: Focused heavily on customer satisfaction through personalized recommendations and ease of use, allowing customers to
easily unsubscribe and return, which helped in retaining customers in the long term.
Operational Efficiency and Distribution
Blockbuster: Leveraged its extensive physical store network to support online rentals but did not significantly innovate in
distribution.
Netflix: Invested heavily in a nationwide distribution network, enabling next-day delivery to most customers by 2009. Their
efficient operations allowed them to manage inventory effectively and meet diverse customer demands.
Content Acquisition and Catalog Management
Blockbuster: Relied on traditional purchasing models for DVDs and attempted to use their physical inventory to support online
rentals.
Netflix: Innovated with revenue-sharing agreements with studios, significantly expanding their catalog. They also developed a
recommendation system to promote lesser-known movies and efficiently manage inventory across the country.
Technological Integration and User Experience
Blockbuster: Made some efforts to integrate online and offline services but lagged in technological innovation.
Netflix: From the start, heavily invested in technology, with a sophisticated website and recommendation system that
personalized the user experience, leading to high customer satisfaction and loyalty.
Financial Performance and Market Adaptation
Blockbuster: Faced significant financial struggles, culminating into bankruptcy in 2010. Their late entry into the online market and
heavy reliance on traditional revenue streams like late fees proved detrimental.
Netflix: Achieved profitability by 2003 and continued to grow its subscriber base, innovating continuously to stay ahead of
competitors. Their adaptive strategies in pricing, technology, and content acquisition allowed them to become a dominant player
in the home entertainment market.
Netflix's strategy was marked by early adoption of the online model, continuous innovation, and a strong focus on customer
satisfaction through personalization and convenience. Blockbuster, on the other hand, reacted late to the changing market
dynamics, struggled to adapt its traditional business model to the online environment, and ultimately suffered financially due to
these strategic missteps. The contrast in their approaches highlights the importance of early adoption, innovation, and customer-
centric strategies in adapting to disruptive market changes.
2.1 VALUE CHAIN
The value chain is a concept used to describe the full range of activities that businesses go through to bring a product or service
from conception to delivery, and beyond. The goal of the value chain is to identify the sources of competitive advantage and to
understand the linkage between activities. By doing so, a firm can optimize and coordinate its activities to enhance efficiency and
differentiation, ultimately delivering greater value to customers and achieving superior performance (Hitt, Ireland, & Hoskisson,
2017). To understand how Netflix's value chain changed after focusing its business on streaming, we can use Michael Porter's
value chain strategic analysis tool. Porter's value chain framework divides a company's activities into primary (Inbound Logistics,
Operations, Outbound Logistics, Marketing and Sales, Service) and support activities (Procurement, Procurement, Human
Resource Management, Firm Infrastructure) that add value to the product or service (Porter, M. E, 1985). Applying this to Netflix's
shift from DVD rentals to streaming helps identify how its value chain evolved and what operational measures contributed to
creating value in the new service.
PRIMARY ACTIVITIES
1. Inbound Logistics
Before Streaming: Inbound logistics involved acquiring DVDs and managing physical inventory across various distribution
centers.
After Streaming: The focus shifted to acquiring digital content rights. This involved negotiating licensing agreements with
studios and content creators. The move to streaming eliminated the need for physical inventory, focusing instead on digital
content delivery infrastructure.
2. Operations
Before Streaming: Operations included handling physical DVDs, managing inventory, and shipping logistics.
After Streaming: Operations transformed to include the development and maintenance of a robust streaming platform. Netflix
invested in cloud computing infrastructure (AWS) to handle large-scale data streaming, ensuring high availability and reliability.
3. Outbound Logistics
Before Streaming: This involved shipping DVDs to customers and managing return logistics.
After Streaming: Outbound logistics shifted to delivering digital content over the internet. This required robust content delivery
networks (CDNs) and efficient data transmission protocols to ensure seamless streaming experiences.
4. Marketing and Sales
Before Streaming: Marketing efforts focused on attracting customers to the DVD rental service, emphasizing convenience and
selection.
After Streaming: Marketing emphasized the convenience of instant access to a vast library of movies and TV shows. The strategy
included promoting exclusive content (original series like "House of Cards") and leveraging personalized recommendations to
enhance customer engagement.
5. Service
Before Streaming: Customer service involved handling issues related to DVD delivery and returns.
After Streaming: Service focused on maintaining a high-quality user experience for streaming. This included technical support
for streaming issues, maintaining a user-friendly interface across multiple devices, and continuous improvement of the
recommendation system.
SUPPORT ACTIVITIES
1. Firm Infrastructure
Before Streaming: Infrastructure supported physical distribution centers and logistics.
After Streaming: Infrastructure investments shifted to IT systems, cloud services, and data analytics capabilities to support the
streaming service. Strategic decisions were aimed at global expansion and scaling the digital platform
2. Human Resource Management
Before Streaming: HR focused on hiring and training staff for physical logistics and customer service.
After Streaming: HR priorities shifted to recruiting and retaining talent in software engineering, data science, content
acquisition, and digital marketing. Emphasis was placed on building teams that could innovate and support the streaming
technology and original content production.
3. Technology Development
Before Streaming: Technology investments were centered around improving the DVD rental platform and logistics.
 After Streaming: Major investments were made in developing streaming technology, cloud infrastructure (AWS migration), and
the recommendation algorithm. Netflix also invested in creating a scalable platform that could support a growing international
user base and handle massive data traffic.
4. Procurement
Before Streaming: Procurement involved acquiring DVDs and related logistics materials.
After Streaming: Procurement focused on acquiring digital content rights and investing in technology infrastructure. Netflix
negotiated licensing deals with content providers and started producing original content, requiring substantial investment in
content procurement and production.
MEASURES CONTRIBUTING TO VALUE CREATION
1. Content Licensing and Original Content:
 Negotiated significant deals with studios (e.g., Starz, Paramount) and invested in original content like "House of Cards,"
differentiating Netflix from competitors and attracting subscribers and also retain subscribers.
2. Technology and Infrastructure:
 Migrated to AWS for scalable and reliable streaming infrastructure.
 Developed proprietary algorithms for personalized recommendations, enhancing user satisfaction and retention.
3. Global Expansion:
 Invested in a global content delivery network (CDN) to ensure high-quality streaming internationally.
 Adapted marketing strategies to appeal to diverse international markets.
4. User Experience:
 Developed intuitive user interfaces for various devices (TVs, game consoles, mobile devices).
 Implemented continuous improvements based on user feedback and data analytics to enhance streaming quality and
convenience.
5. Strategic Partnerships:
 Collaborated with device manufacturers (e.g., Roku, Xbox) to integrate Netflix into popular platforms, expanding reach and
accessibility.
By realigning its value chain to focus on digital content delivery and leveraging technology, Netflix created significant value for its
streaming service. This strategic shift allowed Netflix to innovate continuously, enhance customer experience, and maintain a
competitive edge in the rapidly evolving entertainment industry.
SCENE CHALLENGES STRATEGIC STRATEGIC ACTION PLAN
RIO OPERATION OBJECTIVE
APPROACH

Operational Conduct an operational audit to identify inefficiencies in both the DVD-

Efficiency by-mail and streaming services. Focus on cost reduction in DVD logistics
and warehouse operations.
COST Implement automation in DVD processing and improve logistics
partnerships to cut costs
Transition Gradually reduce investment in DVD infrastructure and increase
TRANS from DVD- investment in streaming technology.
ITION by-Mail to
Streaming SERVICES Customer Develop a clear communication strategy to explain the benefits of
Communicat streaming over DVDs to customers
ion
Offer incentives for customers to transition to streaming, such as
discounts or exclusive content.
Provide phased updates on the reduction of DVD services, ensuring
customers are not surprised by changes.
Content Strengthen relationships with content providers to negotiate better
Licensing licensing terms. Focus on acquiring exclusive streaming rights.
COST Form strategic alliances with smaller studios and independent filmmakers
to secure diverse content at lower costs.
MANA Managing Explore revenue-sharing models to reduce upfront costs and align
GEME Licensing incentives with content producers.
NT Costs and
SCEN CHALLENGES STRATEGIC STRATEGIC ACTION PLAN
ERIO OPERATION OBJECTIVE
APPROACH

Operational Implement lean management principles to increase operational

Agility efficiency and responsiveness.
TECHNOLOGY
Develop a culture of continuous improvement and innovation within the
organization.
Regularly review and adapt business strategies to stay ahead of market
trends and competitor moves.
COM Competing Data Enhance the recommendation algorithm to improve personalization and
PETIT with Deep- Analytics customer satisfaction.
ION Pocketed TECHNOLOGY
Rivals Use big data to predict trends and make data-driven content acquisition
decisions.
Invest in advanced analytics capabilities to gain deeper insights into
customer behavior and preferences.
Infrastructure Assess the feasibility of diversifying cloud infrastructure providers to
TECHNOLOGY Diversificatio mitigate risks associated with dependency on Amazon
n Begin transitioning parts of the streaming infrastructure to alternative
providers like Google Cloud or Microsoft Azure
Fully implement a multi-cloud strategy to ensure resilience and reduce
vulnerability to any single provider
REFERENCE:
Hastings, R., & Meyer, E. (2020). No rules rules: Netflix and the culture of reinvention. Penguin Press; Illustrated edition
(September 8, 2020).
Osterwalder, A., & Pigneur, Y. (2010). Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers.
John Wiley & Sons.
Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. Free Press.
Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2017). Strategic management: Competitiveness and globalization (12th ed.). Cengage
Learning.