Competitive Strategy 42001 – Spring 2019

Wednesday 6:00 to 9:00 pm

Netflix Case Discussion Questions

4. Whitney Tilson argues that Netflix’s competitive advantages are not sustainable. Reed
Hastings disagrees. Whom do you agree with and why?
Netflix has a number of competitive advantages including:
• Strong brand recognition and large customer base (16.9 million customers) as a result of
it being a “category creator”
• First mover in streaming with strong relationships with device partners (Apple,
streaming consoles, gaming systems)
• Strong recommendation engine developed over years due to significant database of
customer viewing patterns
• Currently have attractive streaming content deals (e.g., Starz)
• Ability to provide content from a variety of media creators (e.g., Disney, Starz, Sony,
Epix, etc.)

Overall, Netflix has number of competitive advantages that are sustainable and would be
difficult for competitors to replicate. First and foremost, Netflix has incredibly strong brand
recognition due to it being a “category creator.” Being a “category creator” has also allowed
Netflix to develop a large customer base. New entrants to the industry will have to invest
significant time and resources to develop comparable brand recognition. Moreover, Netflix’s
large customer base allows them to spread the cost of content across a large user base. New
entrants will incur significant losses until they are able to grow their user base enough to cover
the large upfront cost of content. Moreover, the fact that Netflix is currently not a content
producer allows them to position themselves as a value-added distribution partner to content
creators rather than as a competitor. This gives Netflix the ability to provide content from a
variety of content creators (e.g., Disney, Time Warner). As an example, it would likely be very
difficult for Disney to provide Time Warner content as part of its streaming service as Time
Warner would be hesitant to provide media rights to a direct competitor. The ability to offer
content from a variety of media sources in one place is a convenient benefit to consumers.
Netflix also mas a small sustainable advantage with its recommendation engine which would
take competitors time to develop. Finally, Netflix has already developed the streaming
infrastructure / technology and hardware partnerships. Competitors will incur significant
upfront costs to develop comparable infrastructure / technology.

Netflix’s attractively priced streaming content deals are currently an important differentiator.
However, it seems likely that these deals will become more expensive when they are
renegotiated. Therefore, I do not believe it is a sustainable competitive advantage in the long
run.

5. What strategic moves should Netflix make in order to strengthen its position?
 In order to strengthen its position, Netflix should invest in advertising to continue to maintain its
brand reputation in the market. Netflix should also continue to position itself as a partner to
content creators. This will allow them to offer content from a variety of content creators which
will be a critical differentiator from other offerings. With that said, Netflix should also begin to
develop its own content. In doing so, it will be important for Netflix to avoid appearing as a
competitive threat to other content creators. However, the ability to offer unique content on its
own will increase the differentiation of Netflix’s platform and improve its negotiating leverage
with other studios as they will no longer be as reliant on them.

Enterprise Case Discussion Questions

3. Is Enterprise’s competitive advantage sustainable? Why or why not?

Enterprise has a number of competitive advantages in the rental car industry including:
• Operates in attractive market niche that has far less competition than airport rental car
industry
• Significant network of inexpensive rental offices (90% of the American population lives
within 15 minutes of an Enterprise office)
• Developed strong relationships with service managers of every good-size auto
dealership and body shop in its markets leading to significant referral business
• Developed agreements with many dealers to provide a replacement for every car
brought in for service. At major accounts, the company sets up an office on the premises
and keeps cars parked outside so customers don't have to travel back to the Enterprise
office
• Sophisticated computer network to track the whereabouts and service history of each of
its 315,100 cars, keeping inventory lean and cars on the road an average of six months
longer than competitors
• Handles its own reservation avoiding 10 percent travel agent commissions and a
separate 3 percent fee that other rental car companies pay to use a shared reservation
system
• Brand recognition and track record of providing strong service in its market niche
• Strong culture and employee base

Overall, Enterprise (the “Company”) has number of competitive advantages that are sustainable
and would be difficult for competitors to replicate. Enterprise’s significant network of
inexpensive rental offices places them the Company in close proximity to its target customers
which allows them to provide replacement vehicles with unmatched speed / convenience. Avis,
Hertz, and other players in the industry would have to incur significant start-up expenses to
build a comparable network. Moreover, these large competitors will be hindered by their high
cost airport locations. The high capital cost of building a large fleet and branch network will also
deter new start-up competitors from entering Enterprise’s market niche.

Arguably, Enterprise’s strongest competitive advantage is the relationships that it has developed
with auto dealership service managers and body shop employees. When target customers need
a replacement vehicle, they are unlikely to spend a significant amount of time researching
options and instead will rely on the recommendation of service managers and body shop
employees. As such, auto dealership service managers and body shop employees are significant
 sources of referral business for Enterprise. It would be very difficult for an Enterprise
competitor to develop a comparable rapport with these individuals as Enterprise has built these
relationships over years. In addition, Enterprise’s agreements with car dealers to provide a
replacement for every car brought into service and its on-site locations at many car dealers
provide unmatched convenience to customers. It will be very difficult for Enterprise’s
competitors to provide a similar offering as dealers will likely only want one rental car offering
on-premise.

Finally, the last competitive advantage that will be difficult for competitors to replicate is
Enterprise’s brand recognition and track record of strong customer service in its target market.
Enterprise’s brand recognition and track record have been developed over years. It will take
significant advertising expenditures and / or years of providing this service for competitors to
develop a comparable reputation.

Enterprise’s other competitive advantages (i.e., sophisticated computer network, handling own
reservations, keeping cars on road 6 months longer, and strong culture / employee base) are
currently important differentiators. However, it will be easier for well-capitalized competitors
(Avis, Hertz) to replicate these advantages. Therefore, I do not believe they are sustainable
competitive advantages in the long run.

4. What strategic moves should Enterprise make in order to strengthen its position?
In order to strengthen its position, Enterprise should continue to invest in its core market niche.
Enterprise should continue to grow its branch network (although it should be cautious and avoid
overbuilding and becoming too dense with its network). Moreover, the relationships it has
developed with auto dealers and body shop employees are critical differentiators. Enterprise
should devote significant resources to continuing to build and maintain these relationships and
perhaps seek to develop a more formal referral program (revenue / profit share) to further
increase the “stickiness” of its relationships with these individuals. Enterprise should also invest
in advertising to maintain and improve its brand recognition and reinforce its reputation as the
leading provider of replacement rental vehicles. Finally, Enterprise should focus on establishing
its presence in international markets in order to be the “first-mover” in developing relationships
with auto dealers and body shop employees in international regions.