1. In what ways is the Zara model counterintuitive? In what ways has Zara’s model made the firm a better performer than Gap and other competitors?
2. What do you believe are the most significant long-term threats to Netflix? How is Netflix trying to address these threats? What obstacles does the firm face in dealing with these threats?
3. Spend some time online researching services such as Netflix, Amazon Prime, Hulu, and other streaming movie sites. How do these services compare? What are the advantages and disadvantages of each of these different services?
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Case Study: Zara
Zara is a clothing retailer that uses a technology-enabled strategy to implement cutting edge marketing, production, and design techniques to establish a competitive advantage over other clothing retailers. Zara follows many business practices that seem counterintuitive on the surface. Instead of mass-producing one style, the company produces a limited number of each clothing item that it designs. In addition, Zara’s clothes are never marked down or put on sale but are always sold at the full price.
This might seem like a losing strategy. After all, most successful clothing companies mass produce large numbers of each clothing item that they design, and clothes are routinely sold at discount prices. But Zara manages to make this alternative production and marketing strategy work because the company utilizes information technology.
Case Study: Netflix
When movies and other entertainment originally became available on videos and were offered to customers for rent, transactions had to be handled in person. Customers had to visit a store with tapes in stock to select the videos they wanted, pay rental fees for borrowing the tapes, and then take the videos home to enjoy. When the customers were done with the videos, they had to return them to the store or pay a larger fee for failure to return the tapes.
This was the business model used by companies such as Blockbuster and other businesses that provided movies and other entertainment for customers to use at home. In later years, businesses recognized that with information technology, they could change this strategy, allowing customers to download movies and other entertainment via their computers or televisions.
This made it more convenient for customers by eliminating the need for them to handle these transactions by visiting a store. Renting movies and other entertainment electronically allowed customers to do this from the convenience of their home or other location. It also increased their choices as businesses could maintain a larger inventory electronically than they could maintain physically in stores.
Netflix is the most widely known DVD-by-mail and video streaming service. In recent years Netflix has transitioned from a DVD-by-mail service to primarily video streaming service. As Internet speeds increased, video streaming has emerged as both a viable and for most customers, preferable, business model.
The transition positioned Netflix to be able to aggressively expand its customer base and sponsor critically acclaimed original content, created exclusively for Netflix users. As a result, Netflix dominates the video streaming market. However, as this technology evolves, so does the competition, making it necessary for Netflix to continuously improve and expand its services.
COLLABORATIVE FILTERING
Netflix is a technology-based company with services primarily accessed via the Internet. Through its interface, Netflix collects information about individual users’ tastes and preferences in television shows and movies, and then uses a basic form of artificial intelligence called collaborative filtering to make recommendations of other television shows and movies that the user might enjoy.
In this manner, Netflix seeks to customize the viewing experience for each individual user. One way Netflix collects this information is to prompt a user to rate a show they have watched and how often they watch shows in that specific genre. Netflix also maintains a ‘taste profile’ for each user and encourages users to visit the ‘rate shows and movies’ page and the ‘taste preferences’ page in their account to obtain more information on their viewing preferences.
THE LONG TAIL
In the early days of Netflix, they utilized a strategy called ‘the long tail,’ which refers to an extremely large selection of content or products. Whereas a traditional video store could only stock a selection of approximately 3,000 DVD titles on its shelves, Netflix offered its customers over 125,000 unique DVD titles.
After transitioning to a primary video streaming service, however, Netflix adjusted their strategy to one we will refer to as ‘the long enough tail.’ Since licensing costs for streaming media are substantial, Netflix no longer focuses on carrying as many titles as possible but instead focuses on consistently having something for everyone.
ECONOMIES OF SCALE
Netflix also uses economies of scale to its advantage. Economies of scale refer to the process of reducing the costs of production by increasing output, making each individual product less expensive to produce. The number of subscribers to Netflix is currently more than twice that of their nearest competitor, Amazon Prime.
The firm with the most subscribers is likely to be able to pay far more for content than their smaller rivals. Economies of scale are achieved by firms that leverage the cost of an investment across increasing units of production.
If the entry price for getting into the national DVD-by-mail business is estimated at $300 million, but one firm has significantly more subscribers than another firm, which company will benefit from economies of scale? The one with the most subscribers.
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