Question

Since netflix was founded in 1997, it has been regarded as one of the most innovative and creative companies ever. At first, critics didn’t believe that consumers would want DVDs by mail, but netflix signed on 670,000 subscribers in three years.1 netflix has kept ahead of its competition by continuously in- novating in ways that positively impacted its bottom line and responded to customer needs. When customers expressed frustration about the pricing structure, netflix changed to a subscription-based service. Shortly after, netflix realized it was shipping mainly new mov- ies, meaning high costs of purchasing new inventory. To reduce costs, netflix developed a proprietary recommendations system. This system relies upon customer recommendations to make suggestions to others fitting similar profiles. The system picks the best movie for the customer but does not select new releases or movies with high demand. This reduced the percentage of new releases shipped to only 30 percent of total movies shipped, more fully utilizing netflix’s movie library. n the last several years, netflix has been a pioneer in the video-on-demand industry. it was one of the first to develop a player, in partnership with Roku, that streams movies and television shows directly to subscribers’ televisions.2 As more competitors like Amazon enter the market and licens- ing fees for online content continue to rise, netflix continues to innovate and differentiate itself by producing its own original programming.3 Of course, not all of their innovations have been positively received. in 2011, when they announced they would split their DVD and online subscription ser- vices, an estimated 80,000 subscribers dropped their netflix service. n. Wingfield & B. Stetler “how netflix lost 800,000 subscribers and good will” http://www.nytimes.com/2011/10/25/technology/net- flix-lost-800000-members-with-price-rise-and-split-plan.html?pagewanted=all (October 24, 2011). Only time will tell if these new innovations will be successful, netflix is not only one of the most admired tech companies4 but also one of the most innovative and creative tech companies as well. See the Looking Back feature for insights on how netflix is able to foster such creativity

Discuss the decision-making process of Netflix’s management in the context of and using a (a) Bounded rationality and (b) the heuristic model. For heuristics, consider factors such as:

Availability heuristic

Representativeness heuristic

Anchoring

Affect heuristic

(c) Also say how the principles of Occam’s razor may or may not apply.

Answer 1

Before discussing about the decision making process of the company, let’s use some strategic tools to illustrate the business of Netflix.

SWOT analysis of Netflix

• Strength
  • Netflix has quite a strong brand image and name in the market
  • The consumer coverage of the company is quite high
  • The unique content offered on Netflix is usually its USP and strength
• Weakness
  • The lack of rights to original content is one of the biggest weakness of Netflix
  • Environmental awareness generated by Netflix’s business is quite low and this has a bad impact on the company’s business
• Opportunities
  • Good market opportunity in developing countries like China and India
  • Technology evolution creates avenues for Netflix’s business
• Threats
  • Increasing competition in this market
  • Substitution rates are quite low
  • The online streaming platforms are subjected to digital piracy

To analyze the business performance further, let’s conduct the 5 Forces analysis and identify the competitive advantage factors for the company.

Porter’s 5 Forces Model for Netflix

• Industry Competition: Moderate

This media arena is a relatively new sector and several companies are entering the market to have a flavor of the online streaming service

• Bargaining Power of Buyers: High

Switching cost of buyers in this arena is quite high. The consumers can easily cancel Netflix’s subscription and opt for a new platform

• Bargaining power of suppliers: High

The suppliers in this case are the content proprietors. They have very high bargaining power while dealing with Netflix. Content suppliers can switch platforms over termination of their agreement

• Threat of substitutes: Moderate

The substitutes of Netflix are the traditional media platforms like satellite and cable TV, movie theatres and DVDs. The reluctant of baby boomers to adapt to new technology may make the threat of substitution, relatively high

• Threat of new entrants: Moderate

The online streaming segment is relatively new and mush is left for exploration. Many media companies are launching their online streaming app in the lines of Netflix

Competitive Advantage of Netflix maintained using the strengths and opportunities available to them:

• Netflix conducted a market research to analyze the strengths and weaknesses of its potential competitors
• Based on the market study, it inferred that consumer convenience is the key for success in this market
• They have been offering ways and means that facilitate consumer convenience
• Various initiatives were launched like no limit on rental time, no late fees as well as the company was delivering the DVDs to consumer’s doors
• To maintain its competitive edge, the company is evolving at the same pace as technology

Decision making of Netflix based on Bounded rationality model:

• Bounded rationality model capitalizes on the limitations available in the decision making process. Based on this model, we can see that Netflix has correctly identified its weaknesses and taken its business decisions accordingly. Netflix identified that catering customer demands about new movies can be costly for the company. So instead, it opted for the movies, which have considerably high rating. They are creating a recommendation list for consumers and thus facilitating the customer demand.

Decision making of Netflix based on Heuristic model:

• Heuristics are mental shortcuts taken by the companies to make decisions quickly. Heuristics shorten the decision making time, thus increasing the ability of decision makers to focus on other critical aspects. However, the decision making process based on heuristic model can be subjected to cognitive bias of the decision maker. When Netflix was facing high cost problem due to catering to the demand of consumers for new movies, instead of thinking about ways in which that cost can be reduced, Netflix opted for the heuristic of not giving the option of new movies. This shortcut was totally based on the availability heuristic of the movies, which Netflix owned and were easier to telecast.