Case 2: Netflix

The Case Analysis Framework

The case analysis framework presented here is a synthesis of the frameworks used by your

professor and other marketing professors who use case analysis in their courses. It will provide a

solid structure to organize the diverse information presented in a case.

As you work your way through this framework, or a similar approach to case analysis, we offer

the following hints to increase your probability of success:

1. No one can analyze a case after reading it only one time, or even worse, doing the analysis during the first reading of the case. You should read through the case once just to get an

understanding of the nature of the case. During the second reading, you can begin to structure

and classify the issues as they appear. A truly comprehensive case analysis will probably

require at least three readings.

2. Don’t get trapped into thinking the “answer” to the case is hidden somewhere in the case text. There is never a single answer to a case just as there is never a single marketing strategy that

is appropriate for all situations. Each case is unique. Looking for tricks or shortcuts is not

appropriate.

3. Make an effort to put yourself in the shoes of the decision maker in the case. The use of role- playing as part of the analysis can be very useful. It helps you gain some feeling for the

perspective of the key parties at the time the case took place. After you have done several

analyses, you will likely come up with your own additional procedures or guidelines that

assist you with this process.

Step 1: Situation Analysis

The material presented in a case is much like the communications we have in our daily lives.

Usually our conversations involve the selection of a topic and then the discussion of that topic,

and so it is with cases. The problem is that we end up with bits and pieces of information that by

themselves are not very useful, but once organized, can be quite valuable in our assessment of the

situation. The first step in the framework helps you organize the pieces of information into more

useful topic blocks.

The process of assessing a situation is widely accomplished through the use of SWOT Analysis

(strengths, weaknesses, opportunities and threats). Looking at an organization’s strengths and

weaknesses is the first half of Step 1. This involves looking at the organization’s internal

environment. Strengths are those aspects of the internal environment that can help the firm

address a present problem, issue, or opportunity, while weaknesses are negative factors or

deficiencies that do not allow the firm to reach its full potential. One topic that should be

addressed is the content and appropriateness of the current marketing or sales plan. Is the plan

current? Do the key parties understand and utilize it? Was it developed with input from all levels

of the organization? The organization’s financial condition may also present strengths and

weaknesses. Is it in a solid position, and does it have, or can it acquire, needed funds at a

reasonable cost of capital? Other possible strengths and weaknesses might include managerial

expertise, human resources, product reputation and customer loyalty, patents and trademarks, age

and capacity of production facilities, channel relationships, and promotional programs (sales

force, advertising program, publicity, and sales promotion efforts). These are all issues that we

want to consider in terms of both the present state of the firm and identifiable trends.

Students assessing a case situation see the importance of considering the organization’s internal

environment fairly naturally. The aspect of SWOT analysis that gives students the most difficulty

is the external environment where all opportunities and threats reside. These are issues that exist

outside the boundaries of the firm. All opportunities and threats will exist at their present levels

even if the organization in question does not exist. Technology, competition, the macroeconomic

environment, regulation, and social and cultural trends are all issues that affect the success of an

organization’s strategies, but the organization has only limited influence on them.

Because the power to affect the external environment significantly is usually absent, management

must view the factors and forces present in the external environment as issues to be considered,

but not usually controlled. Managers should take steps to minimize the exposure to threats and to

take full advantage of the opportunities. You might think of opportunities and threats as currents

in a river. It is much easier to find a river whose currents will help take you where you are going

than to try to make headway going against the force of the river.

You may get hung up on several points when conducting a SWOT analysis. First, while a factor

will usually fall into only one of the four categories, this is not always the case. A factor can be

both a strength and a weakness, or an opportunity and a threat. For example, excess capacity in a

factory would be a weakness from a production efficiency standpoint. But, it could be a strength

if the firm is looking to introduce a new product because it will not have to build a new factory.

The second and more serious issue is the difficulty in identifying opportunities. There is a

tendency to confuse opportunities with possibilities. Something the company might do, such as

franchise its operations in an effort to expand, is not an opportunity. The mention of the

organization’s name in the opportunity is a clear indication that it is not an issue from the

external environment. Both threats and opportunities would be present even if the organization

did not exist.

Finally, you are accustomed to the material in a textbook containing accurate information that

should be believed and remembered. However, in some cases, you will find statements of

opinion that are often biased by a person’s motives and position in a firm. The organization’s

CEO who has just recently given approval to the firm’s strategic plan might say, “This is an

excellent mission statement that will effectively direct our firm’s efforts for the next decade.” Is

this really true? It might be, but it will be up to you to determine what is fact as opposed to

someone’s opinion. Opinions will need to be assessed in your case analysis to determine their

accuracy.

Step 2: Assumptions and Missing Information

As with life, it is neither possible nor realistic for cases to contain all the information a decision

maker might wish to have available. Usually a decision maker has only bits and pieces of

information. He or she must either fill in the gaps, or make the decision that the information is

not critical, fairly predictable, or simply too costly and time-consuming to justify collecting for

the decision at hand. A marketing manager might want to know the history of competitive

reactions to price cuts by his firm. This information may be present in company files. It also

might be available from trade sources or other noncompetitive channel members.

In step two you will list important information not contained in the case, why that information

might be useful, and how you might go about acquiring it. This is more than just a wish list. The

items included here should considered thoroughly. The list should contain pieces of information

that would help shore up or fill gaps in your SWOT analysis.

Some of the information that is not available can be addressed through assumptions. One might

assume that if information about the firm’s advertising budget is not available, it would be equal

to industry averages. The same assumptions might be made for other costs and revenues. It is

critical that these assumptions be realistic and clearly identified before and during the case

analysis. This list should contain only those items that will be truly useful in enhancing the

quality of the decisions made. It should not be a list of things that would be interesting to know.

The quality of your analysis will depend on your coverage of the framework, the depth of your

analysis, and the degree to which you can defend your recommendations.

Step 3: Problem Definition

The identification and clear presentation of the problem(s) or issue(s) facing the company is the

most critical part of the analysis framework. Only a problem properly defined can be addressed.

Define the problem too narrowly, or miss the key problem all together, and all subsequent

framework steps will be off the mark. Getting a clear picture of the problem is one major benefit

derived from SWOT analysis.

The process of identifying problems is similar to the one people go through with their doctors. A

nurse or assistant comes in to conduct a strength and weakness assessment on you. Your vital

signs are taken and you are asked about any symptoms you may be experiencing. Symptoms are

observable manifestations or indications that a problem may be present. Symptoms are not the

problem themselves. If you have a temperature of 103 degrees, that is a symptom. If the medical

staff were to pack you in ice for several minutes, that reading would probably approach 98.6

degrees. Would that make you well? It might make your condition worse! The doctor uses the

information collected from you, with knowledge of the viruses and diseases that are present in

the external environment, to identify what has led to your high fever. The doctor will attempt to

diagnose the real problem, then prescribe treatment from a set of feasible alternatives (make

recommendations about what steps will help solve the problem) and provide you with a

prognosis (an indication of the things you can expect to occur as you are recovering).

The case analysis process is similar to the doctor’s analysis and treatment of a patient in several

basic ways. First, symptoms are the most observable indication that a problem exists. Many

students are very quick to start treating the symptoms found in a case, as opposed to digging

deeper to find the underlying problem(s). A symptom may be that sales are down from previous

periods. If this is how you define the problem, your answer might be to cut the price. This might

be an appropriate step, but not based on the analysis to this point. Sales might pick up, but will

this reaction make the company healthier? This is a clear case of prescription without adequate

diagnosis.

The most important question in the identification of any problem is “Why?” The Why question

should always be asked after a potential problem has been proposed. To illustrate, pinpointing

the problem associated with the sales decline in our previous example might progress like this:

The problem is that sales have declined.

Why have sales declined?

Sales have declined because there are too many sales territories that are not

assigned to a salesperson.

Why are so many sales territories unassigned?

Sales territories are unassigned because sales force turnover has

doubled in the past year.

Why has sales force turnover doubled?

Turnover began to increase over a year ago when

the sales force compensation plan was altered in

order to reduced variable expenses.

When you can no longer devise a meaningful response to the Why? question, you have probably

found the problem. In this instance, the problem statement might read:

The current sales force compensation plan at XYZ Company is inadequate to retain an

acceptable percentage of the firm’s salespeople, resulting in lost customers and decreased

sales.

The problem statement should be brief—almost always one or two sentences. It should be to the

point, and it should provide a clear indication as to what must be addressed to improve the

performance of the organization.

Given this problem statement, our first reaction, to work on the symptom of reduced sales by

cutting prices, would clearly not solve the problem. When we work on symptoms, the symptom

may go away, but the problem will always manifest itself again with the same symptom, or a

related one. Cutting prices would enhance sales, but would it be profitable? And, with an

understaffed sales force, could the firm serve customers at a level that would keep them

satisfied?

Step 4: Development of Alternatives

Once we have the problem clearly and succinctly defined, we are in a position to develop a set of

strategic alternatives that have a reasonable potential to solve the problem. A key problem

students face in this step is that they generate a laundry list of a dozen fairly detail-oriented items.

These items have a lot more to do with the tactics of implementing a strategy than with

presenting alternative strategies from which we will make our selections. Going back to the sales

force example above, the list may include ideas such as:

 Take candidates through a more rigorous interview process

 Lengthen the training program

 Give every salesperson a company car

 Offer both individual and regional bonuses

 Increase company contribution to the retirement program for each year of employment

 Conduct an employee-evaluation training program for the firm’s sales managers

While these may all be good ideas, they are not strategic alternatives. The term alternative

suggests an either/or situation. From the list above, you might include several items in your

recommendation section. Strategic alternatives should identify basic directions the firm might go

with the sales force support of its product.

One alternative is always the status quo. You must understand that this is not a means of

avoiding a decision. If recommended as the next step, it is a conscious decision, based on a

careful evaluation, that the present strategy in use, perhaps with some tactical modifications, is

the best course of action in the current situation.

Besides the status quo, you should use creative thinking to come up with several truly strategic

alternatives. For our present example, one option might be to eliminate the external sales force

and start using a manufacturer’s representative network to sell to the firm’s customers. Another

alternative would be to use direct marketing, with an inside sales force to market the product.

Another possible option is to reemphasize the sales force with a more effective sales

management program, including better selection, compensation, evaluation, and recognition of

the sales force.

Frequently, the underlying problem facing the organization is the failure to have a current, widely

used, well-developed marketing plan. If the analysis indicates this to be the case, conducting a

comprehensive strategic market planning process should be one of the alternatives listed. This is

one of the few options that might be selected in combination with some other alternative.

Step 5: Evaluation of Alternatives & Recommendations

Once you have developed a set of realistic alternatives, it is time to do a thorough evaluation of

each of the options. Three major criteria should be used in this evaluation process. First, how

well does the alternative address the problem or issue as stated in Step 3? Closely related to the

first criterion is the consistency of the alternative with the organization’s mission, as well as its

ability to assist in achieving the plan’s stated goals and objectives. Clearly, for an organization

whose mission includes providing the most innovative health care products to doctors, nurses,

and patients, a low cost/price competitive organization model would be inappropriate.

This does not mean alternatives that are not consistent with the present plan should never be

selected. It does indicate that part of the evaluation for such alternatives must address the

complete modification of the organization’s strategic plan. Likewise, an objective of increasing

profit margins from 15% to 25% is not consistent with the alternative of becoming a low-price

provider. The deletion, or at the very least modification, of this aspect of the plan must be

considered in evaluating this alternative.

For each alternative, you should make an effort to estimate and evaluate the cost and revenue

implications of the option. Probable income statements, under corresponding stated assumptions,

should be included for each alternative. Exhibit 1 provides an example of just such an

assessment. Costs are certainly easier to calculate than revenue projections, but an effort must be

made to do both. To conclude simply that developing a new innovative product line for the

organization, without any discussion of the costs and benefits involved, or in what year each is

likely to occur, is an incomplete and unrealistic approach to case analysis. You should use what

you have learned from your accounting and finance courses when you conduct case analyses.

Look at any financial information you are given in the case, or that you can acquire, as a key

resource in conducting your analysis.

<Insert Exhibit 1 Here (see end of file)>

The final criterion is an important one that relates to the feasibility and probable success of each

alternative: How well do the alternatives coincide with the key findings from the SWOT Analysis

you conducted in Step 1? In other words, how well does each alternative match up with the

internal and external environments of the organization? Does the organization have, or can it

realistically acquire, the human and financial resources required by each alternative? Building

additional capacity to increase volume as the low-price provider is probably not a reasonable

alternative for an organization in great financial difficulty. Conversely, for a firm with limited

history and investment in research and development, becoming the innovative leader in the

industry will not be possible in the near term.

The external environment, in terms of the economy, competition, regulation, and cultural trends,

will have a major impact on the pro forma revenue projections you make in this step. Any

alternative that adds pollution to the environment will not be well received today. Often,

alternative analyses assume the competition is an inanimate object. Thinking that competitors

will stand still while you steal their customers with a new marketing strategy is not at all realistic.

Part of the evaluation of alternatives, and making projections about their potential success, is to

use the assessment of the external environment to make assumptions about what key competitors

will do. You must remember that as one company is setting a course for the future, most of its

effective competitors are doing likewise.

The recommendation portion of this step is often included as a separate phase in the case analysis

framework. We include evaluation with recommendation because, if the former is done well, the

latter should be a natural continuation of the process. The alternative chosen is the one that

stands up best in terms of all three criteria: consistency with mission, goals and objectives as

stated or as modified, strongest probable financial performance, and harmony with the internal

and external environments of the organization. With a thorough evaluation, the recommended

alternative should be a natural move. This does not mean that two alternatives will never be close

in terms of their attractiveness, but usually one will be a better match for the organization as a

whole.

One more note: Become accustomed to making recommendations in the face of unknown

economic or competitive conditions. While you will be able to know some things for certain

(such as gross domestic product or consumer spending), no one can possibly predict all future

events. As long as your evaluation is thorough, and your assumptions are clearly stated and

reasonable, your recommendations will be justified.

Exhibit 1

Hypothetical Pro Forma Assessment

Unfavorable

Environment

Neutral

Environment

Favorable

Environment

Sales

Dollars $2,000,000 $3,500,000 $7,000,000

Units ($5 per unit) 400,000 750,000 1,400,000

Costs

Product development $250,000 $250,000 $250,000

Production costs $1,200,000

($3 per unit)

$2,062,500

($2.75 per unit)

$3,500,000

($2.50 per unit)

Advertising $300,000 $300,000 $300,000

Sales commission (10%) $200,000 $350,000 $700,000

Other selling expenses $100,000 $135,000 $200,000

Earnings before taxes $ -50,000 $402,500 $2,050,000

Conclusion

We conclude with one final piece of advice: Like anything else, the learning benefits of case

analysis are dependent on the amount of effort you put into the analysis. Learning to think

critically and see the big picture are important lessons to be learned in a case course. Likewise,

learning how business activities (not just marketing activities) can be strategically integrated to

achieve superior results is the ultimate goal.