Innovation_and_Economical_Growth

Innovation is a continuous process, one that never sleeps and continues to grow. Netflix is a company founded in 1997 by Reed Hastings, who conceived the idea from an overdue movie rental that was found in his closet. After paying the $40 late fee, Reed began considering alternative ways of providing home movie service that would better satisfy the customer. Through innovation, strategy and marketing Netflix, the company the Hastings founded, has been able to successfully flourish as the leading innovator in an online movie rental service industry. Home video rental was a fragmented industry largely populated with “mom-and-pop” retail outlets according to (Page 2 of the Netflix Case Study, NCS), of which Blockbuster Inc. was the leading retailer. Blockbuster consisted of 5,194 U.S. locations of which 4,225 locations were company owned, the reason for such a large number of retail locations was Blockbuster’s growth strategy. Blockbuster’s growth strategy consisted of geographical coverage, in 2006 according to the Netflix case study on page 2; Blockbuster management claimed that 70% of the U.S. population lived with in a 10-minute drive from one of their 5,194 locations. Although the stores carried 2,500 different movie titles, shelf space was reserved for hit movies and new releases for impulsive movie renters. Blockbuster also charged late fees for movies not returned on the designated date, which made up 10% of it revenue (600 million dollars). The reason was because if the rentals were delayed in being returned an increase of stockouts would occur. If stockouts would occur then there was a chance that the rental opportunity would decrease, as would the customer satisfaction. Netflix emerged at the beginning of the Internet retailing days concentrating their efforts on technology and convenience. Hastings, founder of Netflix, used three characteristics to identify what Netflix had to offer customers, 1. Value 2. Convenience 3. Selection. At the time DVD’s where a fairly new product, meaning that only 5% in 1999 of households owned a DVD player (according to Netflix case study page 4), and in one year U.S. households owning a DVD player jumped to 13%. Hasting’s envisioned this as the direction of the future in which Netflix needed to focus on. To promote Netflix Hastings used a market strategy that developed a cross-promotional program with manufactures and sellers of DVD’s. What this would do is when a consumer went and purchased a DVD player; the manufacturer would list Netflix as a source for acquiring DVD rentals. Still Netflix was not satisfied with the number of subscribers it had. So in an effort to gain more subscribers Netflix unlike Blockbuster switched to a prepaid subscription service that would offer better value by offering unlimited rentals, and would turn the longer delivery times into an advantage. This gave Netflix an enormous lead over its competitor because offering an unlimited amount of rentals per month with no due dates was a key insight; because they’re philosophy was that having a rented movie in their customers homes at all times was very beneficially to Netflix. Due to the increase in volume of movies rented Netflix had to come up with an easy solution of shipping the movies out to the customers on a daily basis. Netflix had built distribution centers throughout the U.S. to ensure that the movies would take within two days to reach the customer. This ensured that customer satisfaction and convenience was always at its maximum. Netflix always strived to satisfy the consumer, which is why they where constantly innovating and coming up with new strategies. One of Netflix’s key to success is with their inventory management with the implementation of the recommendation system. The use of the recommendation system ensured that the customer would never choose a movie that wasn’t in stock and offer a recommendation for movies in stock based on their preferences. Netflix used the recommendation system by asking users at the beginning of their subscription to answer a brief survey to get an understanding of the preference of movies the user might enjoy. The survey combined with customer reviews of each movie assisted in matching the appropriate movies with the particular customer. According to the Netflix case study on page 5, unlike traditional video rental outlets where new releases make up 70% of total revenue, new releases only made up 30% of total revenue for Netflix in 2006. The reason for new hits only making up 30% of the total revenue was that Netflix focused more providing recommendations for movies that where “lost” after the movie was no longer available in the movie theaters and offering a variety of independent films. If you refer to Exhibit 2 page 14 in the Netflix case study, you can see that in 1999 the total subscribers where 107,000 and in 2006 the number jumped to 6,316,000. That is a 600% increase in seven years making Netflix the leading online movie rental company in the industry. This did not come easy as mentioned in the previous paragraph, new hit movies only accounted for 30% of the total revenue. Mainly because initially Netflix did not have the adequate resources, if you refer to the financial statement in Exhibit 1 of the Netflix Case study, to obtain a sufficient amount of copies to keep up with the demand for these movies; which is why it lead them to be successful in promoting independent films under marketed films along with older “forgotten” films. A perfect example of a under marketed film, according to the Netflix Case Study, was Don Cheadle’s film Hotel Rwanda. The film was satisfactory at the box office but because of its topic, it was hard to market. Nonetheless with the help of the recommendation system it became the second most rented film on Netflix. According to the Case Study on page 8, Netflix was not all about fulfilling mainstream videos, they where providing large studios the ability to market their films that were difficult being marketed as mentioned in the earlier example. At the same time they where representing 60%-75% of earnings of lesser-known movies. These lesser-known movies where typically independent films, and Netflix with the customer at mind always wanted to offer more variety to its subscribers. This led to the development of Red Envelope Entertainment, a company owned by Netflix, which 90% of content acquisition of independent films where attained to bring more excellent independent films to DVD. As Netflix continued to evolve so did the movie rental industry. Video-On-Demand (VOD) was the “next big thing” according the Netflix Case Study on page 10. VOD was considered the marriage of pay-per-view programming combined with Internet downloading of entertainment. Netflix has been following the development of VOD since the company’s inception. According to the Case Study on page 12, Hastings stated in a 2003 interview, “Our hope is that we’ll eventually be able to download more movies. It’s why we named the business Netflix and not DVD by Mail,” which foreshadows the idea that Hastings had planned since the beginning that the business would one day head in that direction. In fact in the Case Study on page 12 it states that Hasting’s revealed in 2001 the companies plan to offer VOD services. Netflix was evolving and a pace that moved more rapidly then the technology that could back the VOD service. For Netflix to offer VOD so that it may profit successfully from it two obstacles had to be conquered; which where the connectivity between a user’s computer and television and limitations on current content. Of which where both out of Netflix scope of their core focus but VOD was ready to be implemented once the impediments where taken care of. This with out a doubt would affect Netflix positively because their core focus has always been variety and convenience at the touch of a button. Hasting’s prepared three alternatives for the development process of VOD. One was the licensing arrangement through which the company would offer its proprietary recommendation system to cable providers seeking to enhance their VOD offerings. Second was cable subscribers could, for an additional, use the Netflix website and benefit from its familiar recommendation system, ordering movies for instant viewing on their television. Thirdly Hasting’s thought of integrating streaming online video feature into their core virtues. Netflix is the leading innovator in the video rental industry. Through innovation such as offering a recommendation system, and innovating the queue it has been able to successfully become the leading competitor in its industry. Blockbuster did not see Netflix as a threat in the beginning but as technology grew Netflix slowly began to grow as well. Through its technological advances the innovation process brought about by Netflix led to the once successful rental giant, Blockbuster Inc., to no longer be able to compete with the now successful Netflix. As of 2011, according to Netflix.com, Netflix has “more than 20 million members in the United States and Canada, Netflix, Inc. [Nasdaq: NFLX] is the world's leading Internet subscription service for enjoying movies and TV shows. For $7.99 a month, Netflix members can instantly watch unlimited movies and TV episodes streamed over the Internet to PCs, Macs and TVs. Among the large and expanding base of devices streaming from Netflix are Microsoft's Xbox 360, Nintendo's Wii and Sony's PS3 consoles; an array of Blu-ray disc players, Internet-connected TVs, home theater systems, digital video recorders and Internet video players; Apple's iPhone, iPad and iPod touch, as well as Apple TV and Google TV. In all, more than 200 devices that stream from Netflix are available in the U.S. and a growing number are available in Canada.” It has created a vast number of partnerships, such as Lionsgate, Twentieth Century Fox, and Paramount Reach, to gain the resources it needs to bring the maximum amount of consumer satisfaction, variety. It can be concluded that through basic technological and innovated structures Netflix has been able to become the “Giant” it is today. Structure such as technology, innovation, differentiation, and service contributed to what started out as a small company to grow into the leading innovator of VOD and video rentals online. Two of the innovations that led Netflix to be as successful as they are today was the recommendation system and the queue. Without the pioneering company of Netflix who actually knows where the video rental industry would be.