Cao Cao's Strategy in a Modern Day Context

In light of the knowledge that many business strategies are derived from military strategies, I thought that I might take this opportunity to talk briefly about Cao Cao, who is one of my role models, a brilliant military leader and renowned for his ability to formulate and flexibly tweak innovative strategies based on careful, constant analysis about his opponents.

Cao Cao was born during the Han Dynasty as an adopted son of a eunuch. He began as a leader of a small garrison, one of many dispatched by the imperial court to fight off the Yellow Turban Rebellion. Cao Cao’s obvious strategic brilliance and leadership that led to victories inevitably shone through, and in a relatively short period of time, he had become a very prominent general in the Han imperial court. His influence in the court continued to grow to the point that the Emperor began to confide in Cao Cao about all matters concerning the state. Gradually, Cao Cao usurped the imperial court, and when he had accumulated sufficient power, he declared the end of the Han and founded his own kingdom, Wei. 

Before Cao Cao usurped the imperial court, however, he had to fight off many rival warlords. One of the most powerful of such rivals was Yuan Shao, who was Cao Cao’s childhood friend and at the time of their conflict, commanded a significantly larger territory and troops. The fates of the two friends were decided at the Battle of Guandu where Yuan Shao’s troops of 100,000 attacked Cao Cao’s 20,000.

Oftentimes, smaller businesses must think of innovative strategies in order to compete with large companies that dominate higher market share. Simply charging headfirst towards an opponent who is much stronger represents a sure-loss. Whether it be in the form of new products, new product designs, cost-cutting measures or better customer service, smaller businesses must find that niche where they can penetrate safely and build on from there. As such, smaller businesses must be extra proactive in their analysis of competitors and their surrounding environments.

Similarly, if Cao Cao had chosen to meet Yuan Shao’s much larger force heads-on, he would have risked total destruction. Instead, he and his advisors observed that much of the opponent’s morale relied on the might of two generals, Yan and Wen. Therefore, if these two generals could be defeated in front all the troops, then their morale would be shattered. In addition, Cao Cao discovered the location of Yuan Shao’s food store and came to the conclusion that the news of no more food, after witnessing the defeat of their two most trustworthy generals would tear Yuan Shao’s forces apart. The next day, Cao Cao sent out his strongest generals and challenged Yan and Wen to duels. With all the soldiers watching, Cao Cao’s generals killed both men. Simultaneously, Cao Cao launched a stealth attack on the food store. Horrified that their two generals had lost, Yuan Shao’s forces began to abandon their ranks and scatter when news began to spread that their food store was torched to the ground by Cao Cao.

When the battle was over, Yuan Shao barely escaped with 200 men, and died shortly after his retreat.

In a modern context, the victory outlines the importance of competition analysis. By understanding the driving forces of their industries, the strengths and weaknesses of their rivals, companies, whether large or small, can begin to formulate effective strategies to ensure survival, profitability and growth.

http://www.britannica.com/EBchecked/topic/607624/Cao-Cao

http://english.people.com.cn/90002/98669/99315/6855936.html

Whats Next for Blackberry....?

It is no new news the Research in motion/Blackberry has had a difficult couple of years. From a failed attempt to make a comeback into the smart phone industry to failed acquisitions from other firms. Recently, blackberry announced the appointment of a new interim CEO John Chen. Before his appointment, after a $1 billion invest Blackberry announced they were going to continue to exist as a private company and do it alone. This statement has led people and many analyst to ask what is next for Blackberry ? What would be their strategic direction?

A focus on APPS
The Lack of a vast store of apps is the biggest challenge to blackberry both on the consumer and the enterprise side. Blackberry enterprise customers have a specific anchor apps. many of these anchor apps are not available on the latest set of blackberry devices and on the blackberry 10 operating system. Many believe that an ideal strategy would be for Blackberry to accept defeat in the general consumer market and concerntrate on the enterprise customers by developing these specific anchor apps that are pertinent to their respective businesses. For example many enterprise customers use SAP, there are SAP apps on iPhone but none on the blackberry platform. Blackberry should focus more effort on developing platform apps for their enterprise customers.

Become a Platform Company 
Presently, the Smartphone device industry is probably one of the most competitive industries in technology. While back in 2007, Blackberry was an industry leader with more than 47% of market share, today Blackberry is all but out of the two horse race between Apple and Samsung. Blackberry currently has less than 7% market share of the overall smart phone industry.Although, Blackberry has been known to make good devices the real value may be in the software the runs the device and the ecosystem that supports the device.Blackberry already has the infrastructure that would allow it support enterprise mobile management. Blackberry can also take advantage of QNX as the Internet Of Things operating system and NOC to manage the Internet Of Things.
Honestly, although Blackberry is weakened, and all but dead. Their decision to continue to exist as a private company and go it alone may be a big advantage as they have the ability to now invest in more longterm projects whose returns may be higher in the the future and unlike a public company do not have to focus on making short term earns as the main priority.

What other focus strategies can Blackberry approach to get back to being a competitive company?

Reference

http://www.forbes.com/sites/maribellopez/2013/11/04/blackberry-whats-next/

Applying Blue Ocean in Pharma

The global pharmaceutical industry is estimated to reach an astounding $1.1 trillion by the year 2015. Increasing investments in the pharmaceutical industries of emerging countries and the growing popularity of generics are two factors pushing this growth and worldwide expansion.

However, even though the United States of America is a leading producer and user of pharmaceutical products, the nation is experiencing a slowdown. As opposed to the tens of hundreds of new molecular entities being researched upon, the U.S. Food and Drug Administration (FDA) only approved 300 new drugs, vaccines and biologics in the decade spanning 1995 to 2005. And therefore, beginning 2004, the FDA implemented creative initiatives to enhance innovation, reformed the drug approval process by including new indications for existing drugs and has managed to transform the entire process by which drugs are developed and evaluated in the last 20 years by introducing initiatives like the Critical Path Initiative to foster organic growth.

The major players in the U.S. pharmaceutical industry are multi-national conglomerates with a strong global footprint. In the U.S. per se, the industry players are competing in a complex and challenging environment. The market is being challenged by primarily two market drivers:

1. Stagnating growth and demand in the domestic market and,
2. Restructuring of the U.S. healthcare delivery system

While the U.S. pharmaceutical market is expected to grow from $300 billion market in 2009 to an estimated $350 billion by 2015, the growth rate is experiencing a slowdown and is estimated to be a dismal 0-3%. Patent cliffs for major blockbuster drugs, the increasing presence and demand for generics, pricing pressures, strict regulatory framework with lesser FDA approvals along with increased R&D risk, lower productivity and a slow pipeline development are negatively impacting the U.S. pharmaceutical industry.

Another major cause of concern is the rising cost of healthcare and the fact that expenditure on pharmaceutical products accounts for 8% of the entire healthcare costs.

To counter innovation challenges and the lengthy and costly clinical trial pathway required by the FDA to achieve market approval, the industry is strategically applying the blue ocean strategy in a unique manner wherein they are looking to meet the drug/therapy requirements of targeted and smaller groups by using better patient monitoring decision support tools instead of focusing on blockbuster drugs which aim at large patients groups which can consume the drug. Bigger pharmaceutical companies are moving towards clinical research outsourcing and functional service providers (FSPs) who fulfill specific roles in the drug development and approval process. FSP services cover a range of areas, including clinical monitoring, data management, biostatistics/statistical programming, pharmacovigilance, and regulatory strategy. Following the basics of the blue ocean strategy, they are focusing on how to create uncontested market space by reconstructing market boundaries, focusing on the big picture and reaching beyond existing demand.

Moreover, if we specifically look at the drug development strategies in place, the ‘one drug fit all’ concept is outdated and no longer applies to pharmaceutical products especially for burgeoning and specialized sectors like oncology and cardiovascular diseases where treatment is directed by genetic make-up and similar factors. Hence, the industry is focusing on developing personalized therapies and strategically occupying larger market shares of a healthcare pie whose slices keep getting thinner and thinner.

I am interested in the various decision support systems like Reverse Engineering and Forward Simulation models which can be used in this context and the fact that these strategy tools are being developed in start-ups who will form alliances to assist Big Pharma. I would like to see how this specialty industry develops and merges with the healthcare industry.

References:

Cognizant Report, The Future of Pharma: A U.S. Sector Review, 2011 (http://www.cognizant.com/InsightsWhitepapers/The-Future-of-Pharma-A-US-Sector-Review.pdf

Select USA - The Pharmaceutical Industry in the United States (http://selectusa.commerce.gov/industry-snapshots/pharmaceutical-industry-united-states) 

Yahoo Finance, Pharmaceutical Industry in the United States - 2013 Report (http://finance.yahoo.com/news/research-markets-pharmaceutical-industry-united-174400833.html)

IMS Biopharma Forecasts & Trends

(http://www.imshealth.com/portal/site/ims/menuitem.d248e29c86589c9c30e81c033208c22a/?vgnextoid=4b8c410b6c718210VgnVCM100000ed152ca2RCR

IMS Health report, “Restoring innovation as global pharma’s centre of growth”

Michael Kunst, Rafael Natanek, Loic Plantevin and George Eliades, “A new pharma launch paradigm: From one size fits all to a tailored product approach”, Bain & Company report, 2013

Increasing Complexity: A Business Challenge or Opportunity

The world is getting a more and more complex place to manage and do business. After the recession, number of factors like regulations and changing dynamics of global economics, for instance, have further increased the complexity in global business. According to Ron Ashkenas and Lisa Bodell (HBR Blog), agreeing on the fact that complexity is a problem is one thing, but doing something about complexity is quite another. For businesses and their managers, the increasing complexity is not just a problem but in fact, it is radically affecting and changing the rules of global business. The increasing complexity adds new costs and risks and challenges the profitability. However, adapting to this change by understanding and confronting this complexity managers can create exciting new opportunities for their businesses.

In 2010, KPMG did a massive survey to measure the causes and impacts of complexity on different businesses globally. According to the survey, the increasing complexity is a global challenge and is faced by all industries and sectors. However, the experience of complexity differs globally. On one hand, mature economies like America and Europe are facing the after effects of the recession, and on the other hand, emerging markets in Asia-Pacific are struggling to maintain stellar growth they were used to in last decade. Secondly, the information management is intriguingly a cause as well as solution of the increasing complexity.

One of the most important challenges of complexity is that it is not static. With time the causes for increasing complexity change. Initially, the onset of recession was a big reason, it was followed by added regulations, technology is rapidly evolving making it even more difficult to understand and adapt to increasing complexity, and finally corporations struggle to find right people to manage this complexity and create opportunities. Most organizations deal with complexity by trying to improve information management, reorganizing the business or changing approach to talent management. These strategies are however not highly successful. There is a need to institutionalize the study of complexity to identify most effective techniques for dealing with complexity and then implementing those strategies. More successful teams will be more agile and will strive to understand and respond to the changing market demand. Organizations can either embrace complexity and use it to spur innovation and change or they can tackle the challenges of complexity by keeping the business processes simple and straight-forward. Which strategy will be more effective will depend on the industry, sector, geography, and most importantly strengths and capabilities of the organization itself.

In its report, KPMG proposes the idea of stepping back from the operational side of the business and to think more strategically about the nature of the organization. A clear view of the purpose of the organization is critical for coherent thinking and decision-making. It is even more difficult for large and more diverse organizations. In such cases, it is important to identify critical bottlenecks that keeps the organization from creating opportunities in face of complexity (Sull and Eisenhardt, HBR September 2012). According to the KPMG report, organizations should always look for signals that show where operations can be improved.

It is not the nature of complexity company faced that will determine its success, it is the ability of the company to analyze the situation, identify the critical bottlenecks, find the most effective solution and implement the solution. Complexity is going to increase in future with increasingly sophisticated global trade. It will be critical to understand the opportunities presented by this change and turn these challenges into engines of growth. In the end, survival of the fittest is indeed true.

References:

• KPMG Report: Confronting Complexity (2011)
• Seven Strategies for Simplifying your organization, Ron Ashkenas. HBR Blogs
• Simple Rules for a Complex World, Donald Sull and Kathleen Eisenhardt. HBR September 2012

Without a Crystal Ball

Considering Clayton Christensen’s introduction to The Innovator’s Dilemma and our conversation in class last week on organizational coherence, it seems that a key challenge as we begin to  shift from analysis to strategy development is how to leverage the power of hindsight while simultaneously acknowledging its limitations. In “The Coherence Premium,” Leinwand and Mainardi use Pfizer as a case study of capability coherence, citing the company’s decision to focus on demonstrable health benefits (via claim-based marketing) and subsequent tailoring of its products  toward this end (e.g. selling its confectionary line) as vital to its success. On the flip side, Christensen discusses the fall of Sears from retail giant to flailing merchandiser, noting the company’s failure to harness disruptive technology (namely online retailing) as central to its demise. But it is far easier to look backward and analyze trends among those organizations that have succeed and those that have failed then to look ahead and accurately predict the future. As Rick Lester, the late CEO of TRG Arts reminds, "Data is nothing more than a rearview mirror, and what's in that rearview mirror is limited by the decisions that we've made. It can only predict the re-occurrence of things that have already happened."

So how do we shift our thinking forward to imagine the unknown and how best to anticipate it? How do we take the plunge using what we know from the past and the present to craft a sound strategy for the future? And in particular, when we identify disruptive technology in the marketplace, how do we best react, not able to know exactly the path that disruption will carve?

In an attempt to better understand the concept of disruptive technology, I began to think of the industries my professional experience has touched upon—digital printing, on-demand publishing, simulcasts, digital streaming. All of these have interrupted the “content delivery methods” standard to creative industries, be they corporate or nonprofit, artistic, entertainment, or educational. In his New York Times article on the future of the media industry, Eric Pfanner writes, “Predicting the outcome of a revolution is a fool’s game.” But he argues that at this moment, we do know certain things based on the technological developments that have rocked the media industry, namely that “the convergence of digital media and technology will accelerate.” Given that prediction, Pfanner argues that a chain of other developments are likely to occur, from globalization of the media business to advances in translation services. For today’s strategist, the question then becomes how to steer a media enterprise?

Developing a strategy to successfully harness such disruptive technology, needless to say, is difficult. Christensen warns, “If good management practice drives the failure of successful firms faced with disruptive technological change, then the usual answers to companies’ problems—planning better, working harder, becoming more customer-driven, and taking a longer-term perspective—all exacerbate the problem,” (10).  So what is a manager to do? This dilemma is, of course, the subject of his book. But perhaps the greater struggle for those new to the subject is reconciling the fact that we won’t know which of the strategies devised today are in fact “right” until the future arrives.

Sources:

Christensen, Clayton M. “Introduction: Why Good Companies Fail to Thrive in Fast-Moving Industries,” The Innovator’s Dilemma, 2006.

Leinwand, Paul and Cesare Mainardi. “The Coherence Premium,” Harvard Business Review, June 2010.

Pfanner, Eric. “Peering Into the Future of Media,” The New York Times, October 14, 2013. http://www.nytimes.com/2013/10/15/business/media/peering-into-the-future-of-media.html?_r=0

Schouten, Katherine. “The Age of Big Data,” Arts Management and Technology Laboratory, December 18, 2012. http://amt-lab.org/dialogues/2012/12/the-age-of-big-data

 

Managing Blue Ocean Strategy

Managing Blue Ocean Strategy

The concept of Blue Ocean strategies is to create a new market for yourself, that is devoid of competition and has sufficient demand, instead of trying to continually trying to survive with minimal profits in the cut throat red ocean.

Any market that is continually profitable, is bound to attract competition that will erode the profits of the organization that created the blue ocean and over time turn it into a red ocean.Therefore there are certain things an organization embarking on a blue ocean strategy need to take into consideration to ensure they retain at least most of the blue ocean if not all of it:

Differentiation - The differentiation should be sufficiently significant to match the organizations growth objectives. The level of differentiation and its demand would define the level of benefits from the blue ocean strategy

Barriers to entry - The blue ocean strategy while implementing the differentiated market offering should also ensure that sufficient barriers to entry are created for competition, to avoid competition as long as possible. The barriers to entry can vary from business to business, Southwest airlines creating the first movers advantage in utilizing secondary airports to create a massive network, or policy regulations or quality of product etc.


A Blue ocean strategy that does not create sufficient barriers to entry/ differentiation is bound to be flooded by competition sooner rather than later. If the company expects to be flooded by competition soon, it should create ways to get customer lock in, or extract maximum value as early as possible and plan to be cost leaders when the competition comes in. Like at present Amazon can afford to be cost leaders, after holding the blue oceans for a significant duration of time.

Funding the Blue Ocean - As is expected an organization with a blue ocean strategy is bound to be flooded by competition and should be prepared to be cost leaders while they embark on their next blue ocean creating strategy. The best way to fund the strategy is to be cost leaders in your previous blue ocean, and diverting profits to create the next blue ocean.

These cycles of blue ocean and red ocean may vary by industry and size of organization. Big organizations might have multiple blue and red ocean ventures simultaneously. While some might have only one big blue ocean strategy sufficiently differentiated for a long time.



References: http://hbr.org/2010/05/blue-ocean-vs-five-forces

From Coherent to Fluid Core Competencies

In one my previous posts, I talked about how conglomerates are returning in the form of technology giants like Google, and are incredibly profitable even though they do not buy in to the idea of “The Coherence Premium”. In this post, I am going to extend the idea by discussing about Facebook.

Facebook recently offered $3 billion for Snapchat, a mobile photo messaging service widely popular with teens and young adults. Snapchat is unique in that the text or photos sent disappear after a few seconds, and these can be sent to a select group in the network. Facebook has traditionally been popular for posts that are broadcast to a large audience, but the younger generation has often got into trouble because of this and is rather wary of posting material which may have any risqué connotations.

One of Facebook’s core competencies is to create this large network of friends using very intelligent algorithms to “suggest” people you may know. It has tried to create a “life album” kind of approach with its timeline and photos features. Its photos functionality became quite popular so it made sense when it bought Instagram, which is also about broadcasting pictures to a large audience. The Snapchat offer was not leveraging this core competency, but was about increased engagement within an audience which followed a different trend, even it is among a smaller number of eyeballs for any given post.

Facebook is slowly losing relevance with the younger crowd and it is essential for it to adapt to changing trends and audiences.  In “The Fluid Core”, author Haydn Shaughnessy, talks about the following guidelines for thinking beyond the core competency:

• A fluid core that is more important than sticking to the few coherent competencies.
• Radical adjacency of pursuing new products or markets which are adjacent to the existing ones.
• New service infrastructure in cloud and mobile to adapt to new innovation paradigms.
• Drivers and strategies for upcoming trends like BYOD.
• Externalization which can better utilize new labor systems in the long term.

And suddenly Facebook's move to acquire newer companies outside their core competencies makes much more sense. Wouldn’t Facebook, Google, and other such “innovative” technology companies, benefit more from guidelines on maintaining fluid core competencies than a rigid and coherent set of competencies?

New Black Friday Strategies

The day after Thanksgiving is arguably the most important sales day of the year to brick and mortar retailers. Even its nickname, Black Friday, signifies its importance: Black Friday is the day a store sells so much it moves out of the red (debt) and returns to the black (profit). Over the years the stakes for Black Friday have grown increasingly high. Not only have retailers had to fight with each other in early-morning, competitive price wars but also battle for the dollars of increasingly savvy customers and  fend of the looming threats from convenient online savings/shopping.

Historically, Black Friday retailers tended to go one of two ways:

1. The OMG Approach: provide an unbelievable price on a high demand item but lack enough supply to meet all of the customers need (For example, Best Buys sold the Wii at a great Black Friday price when it was first introduced but only had enough products for the first people in line).
2. Discount Blowout: provide significant, but not unbelievably amazing, discounts on many items throughout the store with supplies that will satisfy many of your customers (A common tactic of clothing retailers)

This year Walmart is taking on a new tactic. Walmart typically goes for the OMG/unbelievable price approach complete with extreme doorbuster deals, late-night lines wrapping around the store, and a Black Friday news story of a trampling incident or store brawl caused by a lack of supply of the high demand items. However, this year Walmart's sales strategists are trying something new.

In addition to greatly increasing their stock of hot ticket items (65% increase in TVs, doubling the number of tablets it held last Black Friday, etc.) [1], Walmart will guarantee the heavily discounted door buster prices to those customers in line by 6pm on Thanksgiving night. If the item happens to sell out before they can purchase it, these customer will receive a One Hour Guarantee Card that locks in the discounted price for them once the item is restocked.

Yet this strategy is not without criticism. The 6pm timeline will take shoppers away from their family dinners and thankful celebrations to the chaotic, sometimes hellish environment of Black Friday discount shopping. Some will argue that these creep ups of store openings infringe upon and take away from the real meaning for the holiday. Walmart's executives must ask themselves if this potential conservative backlash will threaten their consumer base to the point that the deep discounts and costs of additional store hours will make Black Friday sales less profitable.

[1] http://money.cnn.com/2013/11/12/pf/walmart-black-friday/

Week #6 U.S. Foreign Policy Strategy with China

Relevance

Continual growth and development of strategies are critical in U.S. foreign policy - they set the tone for future relations with other countries and determine whether or not the U.S. has a "Canada" (friendly, cooperative, respectful), "Mexico" (more transactional, respect may be one-sided), or a "Russia" (tension, rivalry mindset, professional contempt).

U.S. Planes and China's Claim on Airspace

This week without notification 2 U.S. bombers flew over islands in the East China Sea where China has claimed their airspace. China responds by sending in more carriers into the island region. Japan claims these islands are theirs but China disagrees. The speculation is that there may be large mineral deposits on these islands that China wants. Also, China and Japan have always had a shaky relationship.

Significance

Since its entrance into the modern world and its adoption of Chinese capitalism, China has transformed itself into an economic powerhouse. Despite poor societal freedom, corruption and weak supportive services to its people, the popularity of the Chinese government remain high due to its successful economic stewardship. One current focus of China is to claim as much territory as possible for shipping routes and airspace. This aggressive behavior has created tension with Japan, the Philippines, and other South Eastern countries. The U.S. has responded with stronger alliances, more military exercises, and greater military presence (e.g., more U.S. naval ships posted in Australia). The U.S. response is seen by China as imperialistic oversight and a step forward in trying to control/encircle China.

The unique differentiator in this scenario is how closely tied the U.S. economy is with China's economy. Mutual attrition is a prisoner's dilemma but it seems that these 2 countries plan to respond in this manner.

Question

How should the U.S. re-strategize it foreign policy with an ambitious China, one of our largest trading partners, so that we can minimize a Cold War mentality and make it into a win-win relationship?

The Survival of the Fittest

“It is not the strongest or the most intelligent who will survive but those who can best manage change.”

- Charles Darwin

Have you ever heard this famous saying? Today’s story is about company longevity and change to survive.

According to the article written by Gittleson, the average longevity of S&P 500 companies decreased from 67 years in 1920s into 15 years today. It is predicted that in 2020 three forth of S&P 500 companies will replace into companies that we have never heard. Does these fact and prediction show that a new company can only adapt to changes of the business environment? However, the situation in the world is different from the USA.

Where do you think that the oldest company that now runs in the world is? According to Economist, the company is Kongo Gumi in Japan that was founded in 587. It is more than 1,400 years old. Gittleson says that there are many long lifespan companies in Japan. In Japan, there are more than 20,000 companies that were founded more than 100 years ago and a few that were founded more than 1,000 years ago. Gittleson says about the reason of this long lifespan that since many of the companies are run by a family, they do not tend to merge with and perchance another company loosing their name. Gittleson mentions that that is because they focus on not profit but a central belief and credo that the companies have as their culture.

Rubber boots of Nokia (Souce: http://nokianjalkineet.fi/en/)

However, can a company survive just to protect a central belief and credo? Gittleson shows Nokia as the example of the survival way by changing a business domain. Nokia started as a paper company. Then it produced rubber boots. Nowadays, it is the world electronic maker. To change like Nokia, innovation is necessary. So research and development from the long-term point of view is needed. However, since investors require short-term profit, Research and development is needed to be a delicate balance between long-term and short-term points of view. According to the Gittleson’s article, DuPon implemented the new rule that it makes thirty percent of its profit from innovation that it develops in the last four years.

The article of Gittleson describes that the Japanese old companies can survive because they protect the culture and a family run business. However, I think that because of family business, they can invest research and development from long-term point of view without the hindrance of investors. Thus, they can adapt business environmental change and survive. I think that an old company has a potential ability to create innovation constantly. Do you think that an old company has such ability?

Reference

Economist. (2004, December 16). The business of survival. Retrieved from http://www.economist.com/node/3490684

Gittleson, K. (2012, January 19). Can a company live forever?. Retrieved from http://www.bbc.co.uk/news/business-16611040

How Netflix Achieves Tech Longevity

In the article, Lessons in Longevity, From IBM we learnt how IBM achieved “post-monopoly prosperity”. Let’s take a look at how Netflix, the company whose CEO is called “the Master of Adaptation” in a Forbes Article keeps reinventing itself. [1]

History:

Netflix was founded in the year 1997. Reed Hastings received a late fee of $40 for Apollo 13 and was convinced that the movie renting industry offered huge opportunities. [2] Netflix’s initial business model was renting DVD’s by mail. Like Blockbuster, it charged a predetermined renting fee per movie rented. Netflix couldn’t earn significant traction using this model and transitioned to a subscription model where users could pay a flat monthly fee and could rent as many movies as they wanted without incurring any late fees. Using this model, Netflix gained significant traction with the subscription-based model. [3]

Adapting to Video Streaming:

When the era of video streaming arrived, Netflix did a great job of transition to the video streaming model. Netflix launched video streaming in 2007. [4] In the period from 2007 to 2011, Netflix continued to see an increase in the revenue and the number of subscribers. As Netflix continued to gain popularity, the content owners demanded higher licensing fees.  

Netflix was struggling with customers who where transitioning from DVD-by-mail to online streaming. Consequently, in September 2011, Netflix planned split the movie renting and online streaming business. A new firm Qwikster would handle the DVD-by-mail service. [5] Initially customers paid $10 for the combined package. However, in order to stream videos and rent one DVD at a time, subscribers had to pay 60% higher fees. [6] This angered the customers and resulted in significant ill will for Netflix. Netflix lowered its prices again but the damage had been done and the Netflix stock hit its lowest point. [7]

In-House Production:

Netflix’s business model was very risky. It relies heavily on content providers and content owners raise their prices as Netflix builds a profit margin. Consequently, Netflix decided to start producing content in-house. Netflix aspires to be like HBO and have an exclusive library of its own shows. [8] Ted Sarandos, Netflix’s chief content owner said, “The goal is to become HBO faster than it can become us”. [6]

Netflix went on to produce shows such as House of Cards and The Ropes, which gained immense popularity. “Shows like House of Cards and Orange is the New Black earn heaps of praise from critics and inspire countless debates”. [9]

                                                  Netflix User Profiles  Source [10]

Customer Focus:

Netflix has developed algorithms that allow users to rate and movies and provide recommendations. These recommendations are partly based on user history and history of users with similar choices. Although this functionality is common today, Netflix was amongst the innovators of this functionality. Reed Hastings focuses on delighting the customer to gain customer loyalty. [3]

However, it is common for multiple viewers to use one account. This results in providing inaccurate recommendations to different users. In order to provide better suggestions to individual viewers, Netflix launched Netflix Profiles. It allows users to set up their profile and receive suitable suggestions. [10]

Conclusion:

Netflix not only uses its skills and technologies but also developed skills to pursue new opportunities. Netflix continuously reinvents and differentiates itself from the competition to succeed in the media streaming industry. Netflix earned $1.11 billion in the third quarter of 2013. Netflix has 40.29 million subscribers, out of which 38.01 million are paid subscribers. [11]

Netflix has just signed its biggest ever production deal with Marvel comics. How do you think this will turn out for Netflix in terms of adding subscribers?

References

[1] Cohan, Peter. "Netflix's Reed Hastings Is The Master Of Adaptation." Forbes. Forbes Magazine, 22 Oct. 2013. Web. 27 Nov. 2013. <http://www.forbes.com/sites/petercohan/2013/10/22/netflixs-reed-hastings-is-the-master-of-adaptation/>.

[2] "How Netflix Got Started." CNNMoney. Cable News Network, 28 Jan. 2009. Web. 25 Nov. 2013. <http://money.cnn.com/2009/01/27/news/newsmakers/hastings_netflix.fortune/>.

[3] Newman, Rick. "How Netflix (and Blockbuster) Killed Blockbuster." US News RSS. N.p., 23 Sept. 2010. Web. 27 Nov. 2013. <http://money.usnews.com/money/blogs/flowchart/2010/09/23/how-netflix-and-blockbuster-killed-blockbuster>.

[4] Anderson, Nate. "ArsTechnica." Ars Technica. N.p., 16 Jan. 2007. Web. 27 Nov. 2013. <http://arstechnica.com/uncategorized/2007/01/8627/>.

[5] INDIVIGLIO, DANIEL. "The Atlantic." The Atlantic. N.p., 11 Oct. 2011. Web. 27 Nov. 2013. <http://www.theatlantic.com/business/archive/2011/10/5-reasons-why-qwikster-is-now-deadster/246465/>.

[6] Cohan, Peter. "How Netflix Reinvented Itself." Forbes. Forbes Magazine, 23 Apr. 2013. Web. 26 Nov. 2013. <http://www.forbes.com/sites/petercohan/2013/04/23/how-netflix-reinvented-itself/>.

[7] "Netflix, Inc. History." History of Netflix, Inc. – FundingUniverse. N.p., n.d. Web. 27 Nov. 2013. <http://www.fundinguniverse.com/company-histories/netflix-inc-history/>.

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