The Ongoing Deconstruction and Reinvention of Netflix and Amazon

Both Netflix and Amazon have been in the news recently. Netflix received lots of negative feedback and press for their decision to split up their business into two separate units, Qwikster which will continue the traditional DVD by mail service, and Netflix, which will now solely be a streaming video business. Amazon just unveiled their new Kindle Fire tablet for $199 and three new Kindles to leverage its industry leading position in electronic books and challenge Apple and Netflix in the digital music and video download industry. Despite some worries about how the $199 price for the Kindle Fire will impact Amazon’s profit margin, Amazon has generally gotten good press for this decision. Some analysts even claim that Amazon is the only company that can challenge Apple in the digital platform and content download market segment and rumors are flying that Netflix decision to split the digital and mail units is a prelude to Amazon buying the Netflix digital streaming business. Amazon has also started offering free video streaming of select titles for its Amazon Prime members who are paying $79 annual fee for free two day shipping.

The Darwin and the Demon article published by the Harvard Business Review provides the ideal framework for understanding and evaluating the decisions by Netflix and Amazon, in the rapidly evolving digital content and platform marketplace. In this article, the author Geoffrey Moore said that “failure to innovate equals failure to differentiate equals failure to garner the profits and revenues needed to attract capital investment.” There is no doubt that this statement is true in the rapidly evolving digital world, where technology and business models are constantly challenging internet companies to innovate or risk falling behind. At the same time, the author also provides a framework for deciding what kind of innovation aligns better with where a product is in its life cycle. In the simplest form, the idea is that disruptive, application and product innovations are key during the technology adoption life cycle, process, experiential and marketing innovations dominate during the main street phases, and business model and structural innovations are useful during market decline and product obsolescence. Lastly the author writes that “differentiation-creating innovation and productivity-creating deconstruction must be conducted in tandem”

In real life, most companies are not one product companies and hence would need to balance the need to innovate and create new product with the need to maintain legacy products and processes. This is clearly demonstrated in the case of Netflix. The DVD by mail business is clearly in the main street declining market development life cycle while the video streaming side of the business is in the main stream early part of the market development life cycle. Faced with a legacy product and a growing video streaming business, Netflix decided to radically restructure the company into two units, and prepare for the eventual spin-off of the legacy DVD by mail business into a game over scenario and milk the remaining free cash flow. At the same time, this free up resources for the Netflix video streaming business unit to continue to grow in the face of formidable competitions from Apple, Amazon and cable, phone and wireless service providers.

On the other hand, Amazon provides an amazing case study of how it has continued to modify and enhance its website platform to continue to expand into multiple areas. Starting from its historical root of selling books, cds and dvds, Amazon has expanded into a full fledged online retail outlet for almost all products, platform provider for small businesses, e-books, digital music, digital video, cloud computing and hosting, e-book readers and now tablets with the new Kindle Fire. In the process it has continue to innovate while managing to sell its legacy products – physical books, cds and dvds. No radical restructuring and announcement was necessary as it continued to add new innovative offerings to its products while maintaining its traditional business model as an online retailer. Internally, resources at Amazon must be directed at creating these new innovative offerings, but externally we hardly notice as it transitions from legacy products to new digital offerings.

The two case studies demonstrate that the transition from legacy to innovative products require the company to juggle resources internally so that the right innovation is directed at the right products. At the same time, radical external business model restructuring may or may not be necessary as demonstrated by Netflix and Amazon. My view is that Netflix had to pursue a more radical restructuring because it is much less diversified than Amazon and is essentially a one product video delivery company whereas Amazon can continue to add features and products while quietly allowing its legacy products to decline without impacting its overall performance.

At the same time, it is interesting to analyze the introduction of the Amazon Kindle Fire and other Kindles in this context. It is Amazon’s attempt to develop a new business model and platform for delivering digital content. As customers migrate away from desktops and laptops to tablets and smartphones, Amazon needed to innovate its platform from one solely based on its website, to a tablet and eventually smartphone based platform with apps that can direct users to purchase digital contents directly from Amazon. It cannot afford to allow Apple IPAD and Iphone to completely dominate the tablet and smartphone market without risking an impact on future online digital content sales and even its traditional online retail business. The Amazon Kindle Fire is a new process, experiential and marketing innovation that will help maintain Amazon’s leading online retailer position and allow Amazon to grow its online digital content business beyond e-books to digital music and video. No wonder speculations are rampant that Amazon will buy Netflix’s streaming movie video business!

Ethics in Marketing

The American Marketing Association (AMA) Statement of Ethics preamble contains this statement "As marketers, we recognize that we not only serve our organizations but also act as stewards of society in creating, facilitating and executing the transactions that are part of the greater economy. In this role, marketers are expected to embrace the highest professional ethical norms and the ethical values implied by our responsibility toward multiple stakeholders (e.g., customers, employees, investors, peers, channel members, regulators and the host community)."

The statement clearly demonstrates that as marketers, we do not only serve our own organization. but have a responsibility towards numerous other stakeholders listed above. In this regard, we need to treat these stakeholders using the ethical norms expected of marketers. The AMA further discusses the three ethical norms which consist of the following:
1) Do no harm
2) Foster trust in the marketing system
3) Embracing the ethical values of honesty, responsibility, fairness, respect, transparency and citizenship.

An example of a company making unethical marketing claims was seen in the case of Career Education Corporation, a for-profit university that was investigated by the Securities Exchange Commission (SEC) and the California State education oversight bureau for making fraudulent claims back in 2005. These include overstating the income of students who have graduated from its colleges and the number of them who found jobs. Other unethical marketing include overstating the career placement service available to students. In this case, the marketers did not fulfill its responsiblity to multiple stakeholders. The customers (students) were lured into debt with false promises of high potential future income. The employees were hurt when some campuses were closed down. The investors (stockholders) were hurt by the relevation and lost significant value in their investment. Its peer (other for profit universities) were hurt because they had to compete against false marketing by Career Education. Regulars (California bureau) had to get involved to investigate the claims. Lastly, the host community was hurt when mutliple Career Education campuses had to be closed down eventually due to poor profits. The action of Career Education resulted in harm to multiple stakeholders, lack of trust in marketing by for-profit universities and a failure to adhere to ethical values.

http://www.nytimes.com/2005/07/24/business/yourmoney/24gret.html?pagewanted=1&ref=careereducationcorporation

Click and Mortar - Do They Work Together Like Brick and Mortar?

Click and mortar businesses have a decision to make regarding whether to setup their online sales unit as an independent unit or to run the unit as a part of its regular business division. This decision can have a significant impact on the efficiency of the online unit and is also influence by the online and overall strategy that the firm is pursuing.

A case study to understand this decision can be found in the announcment in Jan, 2010 that Walmart is establishing a new global e-commerce unit, Global.com that is responsible for online growth in both new and existing markets. The decision was driven by the strategic initiative to create a single global e-commerce platform that could be used in every global market with minor adaptation. This initiative is part of Walmart's strategy of becoming the top online retailer and overtake Amazon.com in this space.

The establishment of a separate online global e-commerce unit, allows Walmart to focus on the rapidly growing online retail market without being influenced by the brick and mortar stores that still dominates its revenues and profits. Synergies are certainly possible between online and brick and mortar stores, as demonstrated through Walmart's site to store free delivery program and the ability of customers to return items bought online at physical stores.

The Walmart Global.com business unit that focuses solely on online sales allows it to expand in markets where Walmart does not have a physical retail presence. The global e-commerce platform allows Walmart to expand its online presence with some local adaptation regarding language, product offerings, fulfillment and delivery. The online platform can be setup without consideration of how it will work with physical stores in countries where Walmart has brick and mortar operations. This allow the ideal online retail platform that is not customized and compromised in order to cater to the local brick and mortar stores. This enhanced shopping experience is essential for Walmart in order for it to catch up with Amazon.com in the online retail space.

A separate unit also allows Walmart to more easily track and monitor the performance of its online business unit and provide more accountablity for the unit in driving its own revenue and profit growth.

The independent unit also allows Walmart to establish a global online brand that is consistent with its global strategy of growth in both existing and new markets and compete with the Amazon.com brand. Independence from the brick and mortar side of Walmart's retail business provide more flexibility and opportunities for pursuing building an online brand that is not necessarily tied to the brand image of Walmart stores.

The Art (Science) of Persuasion!

The Harvard Business Review article "Harnessing the Science of Persuation" by Robert B. Cialdini makes the argument that persuation is a skill that can be taught, learned and applied. He presents six different principles of persuation and how that can be applied to the fields of general management and organizational behavior.

The field of  marketing can be seen as the art or science of persuading consumers to consider your products and convincing them to eventually purchase it. As such, several of the same principles used for persuation in management can be easily adapted and applied to the field of marketing.

The principle of liking and the principle of social proof are both readily adapted for marketing purposes and offers essentially the same application. For a company trying to sell a product or service, the strategy when developed involves connecting potential customers to people they like or trust, while providing the context and means for them to market to each other in subtle ways. The advent of the internet and social networking also provides additional means for the company to build the context for this interaction and actually participate interactively in the communication process.

The two principles when combined together mean that people like to hang out with people they like both online and offline, and are more likely to follow each others recommendation on purchases rather than recommendations that come from strangers provided by the company.

Traditionally this is accomplished through word of mouth advertising. The advent of social media worldwide mean that people are in constant communication with each other. Experience has shown that people share their interest. product purchases, and recommendations freely with their friends through social media. The challenge for companies is to figure out a way to direct, promote and enhance the communcations that are positive for its own products. Many companies have already provided direct links to social networks for people to share product information and recommendations. This provide an easy way for someone to share products they are interested in with their friends. In addition, companies are also directly involved in social media sites and broadcast information via their twitter and facebook accounts to people who follow them. Another creative way for companies to provide the context for interaction is through online fanclubs and forums in social media sties for custemers who use and love its products. Promotional offers can encourage customers to join and post on the site. This allows a company to put together a group of people who like similar products and through their interactions with each other, help market and sell the company's products to their friends.

The direct implication is that word of mouth marketing has a much broader market reach than before and can also instantly reach a large number of people who can easily be persuaded. A company that harnesses this power will gain an advantage over competitors in marketing its product. At the same time, a negative recommendation can also reach a large audience quickly and companies need to monitor and manage the online communication regarding its product so that they can respond quickly to negative or incorrect information regarding its products.

The Use of the Case Study Method in Business Education

The use of the case study method for learning in business education was first pioneered by Harvard Business School in the 1920s. Since then, it has become the prevalent method for experiential learning in business courses.

Over the years I have read hundreds of cases and performed analysis on many of them. In the course of studying these cases, I have also found excellent cases and poorly written ones. The quality of the case construction impacts the amount of learning that a student can get from analyzing the case. In many cases, studying short brief cases that only provide limited public information often results in superficial analysis with limited opportunity to explore different solutions. A good case provide a wealth of information, relevant data, in depth interviews and analysis from management and employees at the company. Such cases provide a wealth of learning opportunity for students and allow the students to truly experience experiential learning.

In the article "Learning by the Case Method in Marketing" published by the Harvard business school, an interesting comparison is made between the use of case study in the fields of medical and business education. This comparision, although valid at some levels, also highlights a significant difference in the process of educating doctors versus business leaders. Medical students use case studies to learn about different scenarios and situations they will face, but are then required to undergo a rigorous 3-4 years residency period where experiential learning is the fundamental means of gaining experience and training. No such rigorous training system exist for business leaders other than the typical final graduation project or one term co-op type assignment available to business students. Most of the instructions for business leaders are done solely through the case study method. An argument can be made for raising the level of M.B.A. programs to that of a professional degree similar to law and medical degrees. Business leaders play an important role in private and public companies, as well as other important government and non-profit institutions in the world. Raising the level of professionalism in business degrees, with build in experiential learning experiences at institutions and companies, will help produce more ethical, competent and experienced professional business leaders for the future.

In a future post, I will share some more thoughts on how the case analysis process is currently used in business education and how it can be enhanced with more emphasis on other branches of the experiential tree.

Should both large companies and small businesses use internet marketing?

Marketing can be thought of as everything that is done to get a product into the hands of the customer, and getting them to pay for it. Using this definition, then every company should use Internet marketing if it helps to get its customer to select and purchase its product. In addition the cost of Internet marketing needs to be weighed against the benefits.

For large companies, there is little doubt that Internet marketing is essential in all four primary phases of the consumer decision journey: initial consideration; active evaluation, closure; and post-purchase. Depending on the products, the company can use Internet marketing to build brand awareness, improve brand image, understand customer needs, assist consumers in making comparison, provide information when requested, follow up survey and even to provide post sales support. B2C firms can also use the Internet to sell directly to the consumers, bypassing middlemen and retail outlets and provide an alternative distribution channel.

For small business, the use of the Internet marketing need to be evaluated more carefully in order to understand its effectiveness in reaching customers. Internet marketing has enabled many small businesses that sell product and services to reach an audience much larger than its local neighborhood and town. Through online sale via its own website or through third party websites like Amazon and Ebay, small businesses have been able to expand their geographic scope and reach customers in the rest of the country and even worldwide. At the same time, small businesses that provide good and services that must be consumed locally benefit less from Internet marketing. These include small businesses like local restaurants, laundromat, convenience store and salons. There is less potential for Internet marketing in these businesses other than to provide basic information, location, direction, basic communication, feedback and some promotion. For small businesses, there is more value to Internet marketing for the businesses that provide more differentiated products, for example local restaurants, than for businesses that provide generic products and services, like laundromat and convenience store. At the same time, with the fast growth in mobile advertising and location based marketing, there is additional potential for small businesses to creatively reach out to its customers through both marketer driven and buyer driven marketing. Services like Google mobile location based advertisment can provide a platform to advertise directly to customers when they are in the vicinity, while Zaarly.com provides a platform for small businesses to respond to request initiated by potential customers.

Engaging the Consumer at Multiple Touch Points

The article "The consumer decision journey" published in the McKinsey Quarterly presents the consumer decision making process as a circular journey rather than the traditional funnel approach. The consumer decision journey approach focuses attention on reaching the consumer at key moments or touch points, when marketing can most effectively influence the consumer's decision and choice. The traditional funnel approach uses push marketing to ensure that the marketer's brand is included in the initial set of brands under consideration, then continue to market to the consumer until the final choice is made.

The implication of this change is that the marketer must understand their own industry and which touch points provide the best opportunity to influence the consumer. Since two-thirds of touch points are now initiated by consumers when they "pull" information, the marketers need to make sure that they are available to interact with their consumers and provide the necessary product and marketing information whenever the consumers initiate the contact. The ability to influence the consumer purchase decision at each touch point varies greatly by industry. For example, for skin care and consumer electronics, the decision is often postponed until the consumer walks into the store. The consumer can still be influenced at this stage by the sales pitch, packaging or product characteristic, despite the research and evaluation already done ahead of time. On the other hand, for automobiles, the battle is waged at the initial-consideration stage and post-purchase phase rather than during the active-evaluation and moment-of-purchase phases.

Marketers must now engage the consumers at the right place and time, and tailor their communication message to each consumer based on the information they requested through consumer initiated touch points. This together with traditional brand building and post-purchase support help win new customers and build loyal buyers.

For internet marketing and e-commerce, the consumer decision journey approach provides the perfect convergence of consumer needs with the technology available through the internet in order to track and engage the consumer. The internet provides the means for marketer to know when the consumer is ready to purchase and actively engage and influence them at this critical decision point. On the other hand, traditional marketing and brand building can increase exposure to the product and brand, but provide more limited and lagging information as to when the consumer is ready to make a purchase. Customer's search, browsing, purchase and inquiry history can all be tracked and monitored so that targeted marketing and advertising can be pushed at the right moment. Information and technical expertise can also be provided at the right time when the consumer initiates a consumer-driven marketing activity. Through the internet, consumer recommendations and product evaluations are cheaper and easier for the marketers to gather and analyze, and used to better understand their customers and their preferences.

Kibu, We Hardly Knew Ye

Inside the cult of Kibu is an article published in an edition of Industry Standard back in 2000. I had never heard of Kibu until I first came across the company in a marketing class several years ago, then I promptly forgot about it until it popped up again in another marketing class. Now if an article appears twice in two different marketing class, there must be some marketing lessons we can take away from what happened to Kibu.

Without going into too much detail, Kibu is one of hundreds of dot.com companies that folded when the dot.com bubble burst in the later part of 2000. Kibu was founded on the concept of being a "digital hangout" for teen girls. Multiple channels on its website would be run by a "Face" and given names like Face of Fashion, Face of Advice and Face of Horoscopes. Like most of the dot.com companies during that time, Kibu was striving to drive traffic to its website, but had no business plan on how to generate revenue, let alone profit.

So what is marketing and what lessons can we learn from Kibu? Marketing can be thought of as everything that is done to get a product into the hands of the customer, and getting them to pay for it. One of the challenges during the dot.com boom was figuring out how to generate revenues and profits. For companies like Kibu that produces online contents instead of selling a physical product, the challenge is even more difficult because contents had always been free online. Even now more than 10 years later, the business strategy of charging for online contents have only achieved limited success in a few rare instances, while most content sites gravitate towards the online advertising business strategy for generating revenues.

The first mover advantage also proved to be non-existence for most of the dot.com companies since the idea and technology for online ad placement was not mature yet. In addition, other companies were not ready to devote significant portions of their advertising budget to online ads 10 years ago during the dot.com boom, even if the technology existed to place them.

Lastly, reading about Kibu made me think of the herd mentality that often drives human behavior. The herd mentality can also lead to irrational exuberance and bubbles as seen in the dot.com bubble and the recent financial crisis caused by the real estates bubble. In the field of marketing, the use of social media and instant communications provide the perfect vehicle to take advantage of this herd mentality. A quick search turned up two books already written about herd marketing. More on herd marketing in the future.

http://www.amazon.co.uk/Herd-Change-Behaviour-Harnessing-Nature/dp/0470060360

http://www.amazon.com/Nature-Marketing-Swarm-well-Herd/dp/0230203361