EE204: Business Management for
Electrical Engineers and Computer Scientists

The Innovator's Dilemma

Read

1. Introduction: Why Good Companies Fail to Thrive in Fast-Moving Industries (HBS course materials)
2. Order of Magnitude Analysis [skim]
3. Netflix (HBS course materials)
4. Netflix 2011 blog postings and analyst report:
   • http://blog.netflix.com/2011/09/explanation-and-some-reflections.html
   • http://blog.netflix.com/2011/10/dvds-will-be-staying-at-netflixcom.html
   • http://news.cnet.com/8301-13506_3-57333842-17/netflix-is-broken-with-no-fix-in-sight-analyst-says/

Case Summary

Reed Hastings founded Netflix with a vision to provide a home movie service that would do a better job satisfying customers than the traditional retail rental model. But as it encouraged challenges it underwent several major strategy shifts, ultimately developing a business model and an operational strategy that were highly disruptive to retail video rental chains. The combination of a large national inventory, a recommendation system that drove viewership across the broad catalog, and a large customer base made Netflix a force to be reckoned with, especially as a distribution channel for lower-profile and independent films. Blockbuster, the nation's largest retail video rental firm, was initially slow to respond, but ultimately rolled out a hybrid retail/online response in the form of Blockbuster Online. Aggressive pricing pulled in subscribers, but at a price to both it and Netflix. But a new challenge was on the horizon: video-on-demand. How should Netflix respond?

Discussion Questions

1. Netflix in the Beginning (1997-2002):
   • What assumptions did Reed Hastings make that created the opportunity for Netflix at its inception?
   • On what basis did Netflix initially compete with Blockbuster?
   • What business is Netflix in at this stage?
   • How does Netflix fit the definition of a disriptive technology?
2. Netflix 2002-2007:
   • What parts of the original strategic activities of Netflix changed, and why?
   • Critique Blockbuster's strategic response to Netflix.
3. Netflix Streaming (2007-present):
   • What strategic assumptions is Hastings making regarding Video on Demand?
   • Did he miss any?
   • What is your analysis of the competitive forces and their implications?
4. Consider Hastings' blog postings and analysts' reports. What went wrong, and is Hastings' explanation accurate?
5. Moving forward from today, what strategy do you recommend for Netflix? Is it a fundamental change to the business Netflix is in? What risks and challenges do you foresee?

SCPD Students

See the SCPD Resource Page for general information on assignment submission, team building, expectations, and getting help. See the SCPD Grading Page for evaluation procedures for daily written assignments.

Written work should be submitted using SCPD Homework Processing procedures.

All times listed below are PDT (California time).

1. Complete the assigned readings and submit answers to the Discussion Questions in Writeup 1 (1 page) by 9am Thursday 4/12/2012.
2. The videotaped class meeting should be available via SCPD by 2pm, Thursday 4/12/2012.
3. Watch the video of the class meeting and meet with your team to discuss.
4. Submit Writeup 2 (1-2 pages) by 9am Tuesday 4/17/2012. This writeup should include the following:
   • A summary of the main points of the class discussion
   • Any points from the discussion that you found particularly enlightening or disagreed with
   • A discussion of how your initial responses did or did not align with the direction of the class discussion
   • A revised go-forward strategy for Netflix