Reinventing Netflix: The Changes that Made the Startup a Superstar
The following post is adapted from my personal academic coursework.
Reinventing Netflix: The Changes that Made the Startup a Superstar
Netflix is one of the most successful corporations of the 21st century and has become synonymous with at-home entertainment. While Amazon Prime Video, Disney+, Hulu, and over a dozen other companies are trying to replicate Netflix’s success and carve a little slice out of their market share, Netflix has become a household name in entertainment. Netflix has leveraged broadband improvements and a consumer-centered experience to grow rapidly throughout the developed world in the early part of the new millennium.
Hastings and Meyer noted that Netflix’s stock performed about 100 times better than the stock market average since its initial public offering and their critically acclaimed original programming is among the most popular in media, earning Emmy, Golden Globe, and Oscar recognition. Cunningham and Scarlata noted that: “Netflix’s success is a testament to… [it being] …the fastest-growing US brand…, …and to a range of consumer or demand-side factors, including a high-quality user experience, a relatively consistent price point that starts competitively low, the entrenchment of the service into our lexicon and popular conceptions of viewing, and an overarching emphasis on exclusive original programming…, created in part for a ‘lost generation’ of Millennial and younger viewers.” Hastings and Meyer explained the most impressive part of Netflix’s success this way: “Most interesting of all, unlike the vast majority of firms that fail when the industry shifts, Netflix had responded successfully to four massive transitions in the entertainment and business environment in just fifteen years:
1) From DVD by mail to streaming old TV series and movies over the internet;
2) From streaming old content to launching new original content (such as House of Cards) produced by external studios;
3) From licensing content provided by external studios to building their own in-house studio that creates award-winning TV shows and movies (such as Stranger Things, La Casa De Papel, and The Ballad of Buster Scruggs); and
4) From a USA-only company to a global company entertaining people in 190 countries.
Netflix’s success is beyond unusual. It’s incredible. Clearly, something singular is happening, which wasn’t happening at Blockbuster when they declared bankruptcy in 2010.”
What is the singular thing happening at Netflix? What is the company’s “secret sauce?” Why do they continue to not only stand, but thrive, in market conditions that would have pulled the rug from beneath most companies? Netflix founder Reed Hastings and bestselling author and professor Erin Meyer’s No Rules Rules: Netflix and the Culture of Reinvention attempts to answer this question by revealing the foundations of Netflix’s success and mindset behind the organization’s culture.
Hastings and Meyer opened with a brief overview of the origin of Netflix and description of its organizational culture before discussing Hastings’ pre-Netflix leadership experience as the founder of Pure Software, explaining the change process at Netflix, and detailing how they implement Netflix’s three guiding philosophies.
Hastings and Meyer described Hastings’ time at the helm of Pure Software, his failed first startup. While his experiences there helped propel Hastings to success with Netflix, the venture “could not adapt to changes in industry… …because… …[Pure Software] wasn’t optimized for innovation and flexibility” and “had become increasingly efficient and decreasingly creative.” Pure Software’s demise is symptomatic of what Kotter called “people living in overmanaged and underled cultures.” Fortunately, Hastings learned from his early failures and “hoped to promote flexibility, employee freedom, and innovation [at Netflix] instead of error prevention and rule adherence.
The Change Process
Interestingly, Hastings’ good intentions are not the primary driver of Netflix’s current corporate culture. Instead, the first technology bubble bursting and a subsequent massive layoff was the beginning of a change process that transformed Netflix into the seemingly unstoppable entertainment behemoth it is today. The need to remain profitable when the markets crashed created the sense of urgency that Kotter recommended for any substantial change. In fact, the situation was so urgent that Hastings “had to lay off a third of [Netflix’s] workforce.”
This critical moment became a turning point in Netflix’s story. As Hastings and his human resources manager, Patty McCord were trying to decide which 40 of Netflix’s 120 employees to lay off, they decided to keep “those who were exceptionally creative, did great work, and collaborated well with others.” Despite the reduction in personnel, Hastings and McCord noticed that after the layoffs, that “the atmosphere improved dramatically…, …the office was suddenly buzzing with passion, energy, and ideas…, …[and people] were getting everything done with a passion that seemed higher than ever… [and] spirits [that] were sky-high.” Eventually, they identified the underlying reasons for this change; the remaining members of the team had a higher average amount of talent per person than was present before the layoffs. This “talent density” became a core value of Netflix and Hastings continued the change process to anchor this value in the company’s culture.
A New Way of Doing Business
Kotter identified eight steps to effective organizational change. Hastings and McCord acted as Netflix’s guiding coalition and were able to move Netflix through these changes rather quickly because of how young and small the company was when they began the process. Grenny et al. suggested that influencers identify a small handful of vital behaviors, those things that people do that have a disproportionate influence on outcomes. Hastings and McCord identified maximizing talent density, increasing candor, and removing regulations as those high-leverage actions which would propel Netflix to success. They incorporated these vital behaviors as part of their strategy to accomplish their vision of making Netflix a flexible, free, and innovative leader in entertainment all over the world.
Hastings and Meyer described several of Hastings’ lessons learned during the early stages of his career and those which pertain to Netflix’s three vital behaviors.
Hastings learned some valuable lessons during his six years leading Pure Software that impacted his subsequent leadership of Netflix. Hastings and Meyer describe Pure Software in its early years as “a dozen people creating something new and having a blast” with “very few rules or policies inhibiting our actions.” However, as the organization began to grow, Hastings responded to his managerial headaches with policies. Hastings and Meyer related the stories of an expensive hotel bill which led to a travel policy and a damaged rug which led to a prohibition on pets in the office. These stories reflect some of Hastings’ early lessons—that people sometimes make foolish decisions and that rules reduce these foolish decisions.
Unfortunately, Hastings also learned that an abundance of rules curtails creativity along with the foolishness. While not mutually exclusive, productivity and rules do not mix well. Devereux et al. found that over-regulated workers will creatively bend or break the rules as they deem necessary to be able to do their jobs effectively or meet production expectations. In fact, this issue was so prevalent in the world of trucking that the United States Department of Transportation mandated electronic logbooks to cut down on drivers cheating the system and continuing to drive in violation of federal hours of service regulations.
Hastings and Meyer lamented that “those who were great at coloring in the lines were promoted, while many creative mavericks felt stifled…, …but [Hastings] believed that this was what happens when a company grows up.” While Hastings hoped for the best when he started Netflix, “he sought organizational flexibility,” but he still fundamentally believed that “if you don’t manage… …with policies or control processes, the organization is likely to descend into chaos.”
Maximizing Talent Density
Netflix's first vital behavior is to maximize talent density. Hastings and Meyer explained how talent density is a force multiplier because “talented people make one another more effective.” This is Biblical wisdom. Proverbs 27:27 (NIV) states, “As iron sharpens iron, so one person sharpens another.” One reason for this may be that people sink to the lowest common denominator, or in the words of the cliché, “a chain is only as strong as its weakest link.” Felps et al. found that instead of individuals conforming to the group, the group would sink toward the level of the lowest performer. Following the metaphor, a stronger “weakest link” makes a stronger chain. Hastings and McCord made talent density their top goal with Hastings “laser-focused on making sure Netflix was staffed, from the receptionist to the top executive team, with the highest-performing, most collaborative employees on the market.” Netflix calls its staff “stunning colleagues,” and they are critical to the remaining vital behaviors in Netflix’s strategy.
Increasing candor is another ingredient in Netflix’s success that has Biblical origins. In the Sermon on the Mount, Jesus admonished His audience to “Let your ‘Yes’ be ‘Yes,’ and your ‘No,’ ‘No’” (Matthew 5:37, NKJV). Similarly, Netflix strongly believes in employees saying what they mean. Hastings and Meyer observed that “candor was increasing talent density in the office…,” and that open feedback reduced office politics and increased response speed. They added that failing to give honest feedback is considered disloyal because “you could help the business—but you are choosing not to.”
However, increasing candor at Netflix is not as simple as one saying what he or she really means. The company establishes a culture and guidelines for giving and receiving honest feedback. Any feedback given must be helpful and actionable and those receiving feedback must express genuine appreciation for it regardless of whether they choose to implement the suggestions.
The final vital behavior that is part of Netflix’s strategic vision is removing regulations. Fleming stated that “rule behaviour and the efficacy of rules are deeply subject to interpretation and preference.” This is Biblically evident in that the Mosaic Law, for all of its specificity, ultimately served only to convict mankind and point toward Jesus, but could not save humanity. Hastings and Meyer explained that Netflix’s revised view on lifting regulations is that increasing freedom leads to increased personal responsibility.
Netflix remains on the cutting edge of the entertainment industry because of its commitment to maximizing talent density, increasing candor, and removing regulations. Hiring the best people, communicating honestly and openly with one another, and allowing freedom to drive personal responsibility has served the company well and will likely continue to do so in the years to come. Other organizations are increasingly following their lead and Netflix is not only transforming entertainment, but also corporate culture in the 21st century.
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Devereux, H., Wadsworth, E., & Bhattacharya, S. (2020). Workplace fiddles in the shipping industry. Employee Relations, 42(4), 933-948. https://doi.org/10.1108/ER-07-2019-0294
Felps, W., Mitchell, T. R., & Byington, E. (2006). How, when, and why bad apples spoil the barrel: Negative groups members and dysfunctional groups. Research in Organizational Behavior, 27, 175-222. https://doi.org/10.1016/S0191-3085(06)27005-9
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