Question 15: Service Transformation

There are any number of ways that an organization can transform its service. Identify 4-5 ways that your focal service organization could do so. Select 1 and provide a detailed description of why you think the organization should transform the service in the manner you suggest. Is this a competitive necessity for sustainability or an opportunity to gain market share, etc. What would be the 2-3 most significant barriers to overcome.

Netflix could transform its service in the following ways:

• Exclusively offer streaming content
• Move into the video game market
• Expand into the music market and offer streaming MP3 content
• Begin to offer in-store delivery machines (similar to RedBox)

I feel that Netflix could best transform its service by offering customers the option to stream every video available on the site either thru their computer or thru their television. By ensuring that all content is streamable, they would be able to differentiate their service even further and gain market share by attracting new customers. Netflix could offer this as a delivery option along with their current standard plans.

The main obstacle, in my opinion, would be restricting the number of videos a customer is able to watch during a given time period. Currently, Netflix offers 1, 2, 3, and 5-DVD at-a-time mail order plans. If a customer chooses to view all their content over the internet, Netflix would have to develop a way to regulate content based on the subscription service the customer pays for.

Additionally, Netflix would have to increase its server capacity to handle the additional storage space necessary to hold hundreds of thousands of hours of video content.

Question 13: International Expansion

Imagine that your focal service organization is going to expand into a country which has a very different culture from the home company. Identify that country and a few significant cultural differences between the home and expansion countries. For each difference listed, indicate how the service process may differ between countries.

For this question, I'm going to discuss a potential expansion into China.

Currently, Netflix only offers their mailing service in the United States. The first thing Netflix would need to do is build their infrastructure in China. That is, they would need to build the warehouses and sorting systems necessary to support DVD shipments and receipts as well as procure Region 6 DVDs.

There is a large amount of pirated DVDs in China, and this may be a tough challenge for Netflix to overcome. Pirated DVDs are very cheap in China ($2-$3), and some major US studios have released movies there at this lower price to combat bootleggers. While this would be an option for Netflix, they would greatly cut into their profit margins if they offered their mailing service at 25% of its current cost.

Netflix would probably have the highest chance of success in China if they expanded their streaming video selection to the country, and focused on adding new titles to this service. Additionally, Netflix would have to censor their movie offerings in China due to government restrictions on media and information.

Question 8: Capacity Management

1. Describe a place in your focal organization's service process where if capacity and demand were better matched, the service could operate with minimal waiting.

Typically when a popular movie is released on DVD, the wait times are quite long to receive the DVD. Additionally, Netflix sometimes has limited quantities of DVDs, which, if in high demand, can result in a long wait time, as seen here:

Netflix has done a number of things throughout the years to manage this issue of demand vs. capacity. They used a practice called "throttling" to essentially rate their subscribers and give preference to those who rent fewer DVDs per month. That is, a customer who rents an average of 5 DVDs per month would have priority over another customer who rents 15 DVDs per month if they both had a certain movie at the top of their queue. Netflix has said that throttling has been stopped after backlash from their customers.

2. Are there ways that demand and capacity could be kept more "in line" with one another?

Netflix currently lets its customers add movies to their queue prior to the actual release date, like this:

This can help them predict expected demand of a DVD before they actually have it, and allow them to adjust the number of DVDs for a particular title they make available.

Recently, Netflix has entered into an agreement with Warner Brothers that places a 30-day delay on DVD availability through Netflix for all new releases from the production studio. This was done primarily to protect the revenue generated by DVD sales during the first month for Warner Brothers, but I believe that Netflix can also benefit from this delay in DVD availability. During this time, Netflix will be able to make decisions about the quantity of a title to purchase based on the sales of that title to customers. This practice, if installed, would help Netflix better match capacity to demand.

Question 7: Information

1. In thinking about your focal firm, what information should your business track about each customer?

Netflix is easily able to monitor customer inputs and movie preferences for each customer through the "Queue" feature on their website. For those unfamiliar, a customer is able to log into their account and create a ranked list of DVDs they want to watch. When a DVD is returned, Netflix ships the highest ranked DVD on the customer's list, assuming it's available.

Netflix also encourages customers to review and rank the movies they've seen. This information allows them to make recommendations to their users about potential movies they would enjoy based on previous reviews.

2. Where and when in the production process is the info collected and recorded (and how)?

Information is collected via the Netflix website prior to the shipment of a DVD, and Netflix subscribers are able to constantly adjust and add movies into their queue.

3. Where and when might the information be used by a different /product/service provider to enhance the ability to provide or market the service?

Since the information collected about DVD preferences is customer generated, any other firm with a similar service to offer could offer a feature to allow their potential customers to rank a given number of things. Additionally, competitors could develop a more robust system to better predict videos a customer would be interested in watching.

Netflix is actually proactively addressing this with the Netflix Prize in 2009, and the 2008 Progress Prize. Both of these "competitions" were designed by Netflix to allow open development of an algorithm that would improve accuracy and suggestions related to customer rankings.

Question 6: Poka yoke

Think through what aspects of your focal firm's service might suffer to do inconsistency/quality issues associated with customer inputs.

1. What are likely sources of problems?

The main source of customer-caused problems at Netflix comes from the treatment of the DVDs that are mailed to their homes. However, I feel that a larger problem is the treatment of the envelopes by the US Post Office. Since most mail is sorted through a machine, there is a high chance of receiving a DVD that was scratched or even cracked during the delivery process. So for this question, I'm going to respond to the question with the USPS as the customer.

2. Design a poka yoke to help reduce the frequency or magnitude of problems.

Poka yoke method—foolproofing device. Checking systems, checklists, some form of reminder to try and improve the input quality.

While Netflix currently uses "sleeves" to protect the DVDs they send out, sometimes they do not provide enough protection. Personally, I've received DVDs from Netflix that were cracked, and while Netflix does a good job of remedying the situation (they send a replacement DVD to arrive the next day when you report the problem), it is still an inconvenience.

If Netflix felt this problem was highly detrimental to their business, whether it be in perceived service, or the costs associated with scrapping damaged content, they could design a solution that involved hard casings that housed the DVDs inside the existing Netflix envelopes to provide a greater amount of protection during the delivery process.

3. What aspect of your focal firm's service could be made more productive or produce higher quality outcomes if the customer was required to do something different? If firm decided to implement this change, what is the likelihood that the customer would accept it and do their part?

Implementing this change would obviously be costly to Netflix, but it would also immediately provide a higher level of service, in the form of a reduction in damaged DVDs. I'm not sure what kind of postage rates Netflix has negotiated with the USPS, but the addition of a hard casing to each envelope may increase the rate that Netflix is charged by the Post Office for delivery and return of the content. I'm sure the Post Office would reject the change if it did indeed increase their costs without being compensated for it. This would be another potential increase in costs for Netflix.

Question 5: Complexity vs. Divergence

Here are a couple of definitions related to business process design:

1. Complexity: number and intricacies of the steps in a process

2. Divergence: requirement of exercising judgment or discretion in a process

The way to spot complexity in a service blueprint is to count the number of steps. Complex procedures have many steps. Alternatively, divergence is seen in the nature of the steps. When there are multiple ways of handling steps there is high divergence.

1. Think about your focal company....in general, would it's service blueprint exhibit complexity, divergence, both, neither. Talk a little bit about where we might see either complexity or divergence (types of activities, why these are complex/divergent).

I feel that the actual process that Netflix uses to receive and distribute DVD's is not very complex, but also does not require a large amount of judgement or discretion in decision making by the employees. At the corporate level, however, Netflix gives its employees a great amount of freedom to try out new ideas and processes. In general, Netflix puts the decision making in its customer's hands since each individual has to make decisions about the order in which they wish to receive their DVD's, if they want to keep them, the order in which they return them, and how many they choose to view in a month.

2. If you had a choice between substituting divergence for complexity or vice versa, which would you do? Why? Under what circumstances?

I would mostly favor substituting divergence for complexity because it gives employees more room to make changes or "think outside of the box", rather than having an intricate step-by-step process to follow. Thinking back to some of the positions I've held in the past, I got more enjoyment and knowledge out of those positions that were not 100% defined and structured. Having the ability to tackle issues or daily tasks in a new manor kept the work enjoyable.

Question 4: Bank of America

To better prepare for our visit with MSU Federal Credit Union President Pat McFarlin and Vice President of Finance, Tiffany Ford, today's entry will focus on a financial institution instead of your focal organization.

1. Identify a product and/or service that you use from your financial institution (e.g., credit card, savings account, checking account, student loan, etc.) and describe the characteristics/benefits of the product/service.

I do the majority of my day-to-day banking with Bank of America, where I have a checking account, a savings account, and a credit card. The benefit of having all three of these services with one bank is the ease with which can transfer money and manage my accounts and balances.

2. How would you rate the financial service provider’s service?

Out of 10 I would rank Bank of America a 8. They've always been accommodating with disputes I've had on my credit card, and just this week I got a call because of suspicious activity on my account, which turned out to be fraud. They were quick to rectify the situation and were proactive in monitoring my account.

3. What is your level of customer satisfaction and why?

Again, out of 10 I would put my customer satisfaction level at a 7. I started my account with Bank of America when I was living in Charlotte, NC, where they are headquartered. It would be nice if there were more ATM's in the East Lansing area. Also, their website is very user-friendly. I do 90% of my banking online, so having a comprehensive site is very helpful.

4. Where do you think customer service / satisfaction fits in your financial service provider’s overall strategy? Why?

I think Bank of America strives to create a personal connection with its customers, or at least the feeling of a personal connection with them. It's much harder for a financial institution as large as they are to actually service each customer individually than it is for, say, a local credit union. By creating a feeling of personal service I think Bank of America is trying to make their customers comfortable banking with them and, as far as I can tell, it's working.

Question 3: Porter's Generic Strategies

1. Using the cost generic strategies matrix, where is your organization positioned? What evidence do you have to support this positioning?

Netflix competes on a Differentiation/Cost Leadership strategy as their target scope is broad and they offer a fairly unique service to their customers, but also appeal to frequent renters as a low cost alternative to a traditional video rental store. They have very efficient distribution channels as well as a reputation for innovation.

2. Add two to three other competitors to the matrix. For your organization or those competitors focusing on differentiation or focus, what are the specifics?

Amazon has a cost leadership strategy as they sell a wide variety of products at very competitive prices. Blockbuster employes a focus strategy to differentiate themselves from Netflix. Since they generate a large portion of their revenues from physical stores, they have a narrow market segment, but as I mentioned in my previous post, they have moved into online DVD rentals, so they are attempting to emulate Netflixs' unique service offering, but most likely would have not done so on their own.

3. How well is your organization positioned? How might your organization be at risk (or not be as well positioned)? Why?

Netflix is positioned well on Porter's matrix, utilizing both a low cost strategy to attract and retain "heavy users" of their service as well as a differentiation strategy for those customers who don't want to spend time going to an actual store to rent DVD's. Additionally, the rating system Netflix uses suggests other videos a customer may be interested based on the unique ratings of past movies they've seen.

Netflix may be at risk to lose the low cost aspect of their business with increasing pressure from Amazon as well as profit erosion caused by increasing postage rates.

Question 2: Service Process Matrix

On the Service Process Matrix, where the x-axis measures the degree of interaction and customization, and the y-axis measures the degree of labor intensity, Netflix lies in the upper left quadrant, named "Service Factory". They are however, very close to the center of the matrix on the y-axis as their business has a low amount of interaction with the customer, and at the same time, a high degree of customization.

Netflixs' top three competitors are: Blockbuster, Amazon.com, and Bestbuy. Blockbuster and Bestbuy, both businesses that are inherently more labor intensive since they have actual store front locations, lie in the bottom left, "Mass Service", quadrant of the service matrix. Amazon is in the same quadrant as Netflix, "Service Factory", since both are online-only retailers whose businesses are run from warehouses throughout the country.

Blockbuster is facing a great disadvantage when compared to Netlix since they have a lot of capital tied up in physical stores, and this fact is evident when comparing the market capitalization of both companies (Netflix: $2.8B, Blockbuster: $97M).

Amazons' position is much better since they are a larger company that offers many products and services and are not dependent on DVDs to generate revenue. Since they are a much larger company, they also have a considerably higher amount of cash on hand to invest in new projects ($2.7B vs. $140M at Netflix). Also, both Amazon and Blockbuster offer online services that are similar to Netflix whereby a user can create a list of DVD's they want to watch and both have the ability to stream video to a compatible device.

Lastly, Bestbuy is a movie and technology retailer, and offers an alternative to Netflix for customers who would prefer to purchase a DVD rather than just renting it. Since Bestbuy is a retailer, they also sell Netflix-ready equipment to allow users to stream videos from Netflix (and Amazon) directly to their televisions.

Question 1: Why Netflix?

I choose Netflix not just because they are a service-oriented company that is increasingly gaining traction both with subscribers and financial institutions but also because they have created a corporate culture that is driven by innovative ideas and business practices.

The service winners of Netflix center around the ease of use. There are different service winners for different customers. A subscriber doesn't need to drive to a physical store to select a DVD, instead they are able to create a queue online and the movies are delivered in the mail. Recently, Netflix has launched an Instant Queue feature that allows a subscriber to watch a limited amount of movies or shows on their computer or a Netflix-ready device (Xbox 360, PS3).

In terms of service qualifiers, Netflix subscribers need to have internet access to prioritize their queue and a mailing address. Without these, customers would be unable to request and receive DVD's.

Finally, Netflix would experience a loss of subscribers if the mailings took too long to reach the customer. Having realized this, Netflix works hard to ensure a one-day turnaround in receiving and sending out a new DVD to a customer. Additionally, there are over 50 Netflix distribution centers nationwide to ensure timeliness of delivery.