3.2 These companies used to charge a very

3.2
Innovation at Netflix

Today,
Netflix has emerged as a multimedia powerhouse. It is all a result of constant
improvement & innovation within Netflix at various stages from product innovation
to innovative HR policies. Netflix is the true winner of innovation
across-the-board. It has accomplished this by altering things across all its
verticals.

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3.2.1
Disruptive Innovation

When an
innovation caters to the unnoticed segments of a market, it creates a whole new
market by itself, thereby disrupting the existing market and uprooting the
already established key market players. Netflix is a great example of disruptive
innovation. Before Netflix, video & movie rental market was dominated by Blockbuster,
a video rental brick-and-mortar store. Reed Hastings observed various drawbacks
& voids left by the brick-and-mortar rental services as well as the customers’
expectations from the market. These were

1.     
The
brick-and-mortar store did not have any delivery option. The customers had to
drive all the way to the store to get a movie.

2.     
These
companies used to charge a very high late return fee on movies that were not returned
on time.

3.     
The
rental system was predominantly based on VHS and had not adopted the DVD format

4.     
The
market also catered to only new movies & very few old titles were available
for rent.

He then
started Netflix, a postal DVD rental service. The service was initially a
pay-per-rental system but later on turned into a subscription model. It
provided the customer with new as well as old models. Thus, through Netflix,
the voids of the markets, as well as the needs of the consumers, were met.

Following
competition from Netflix, Blockbuster began to lose revenue in mid-2000’s and
in 2010 filed for bankruptcy protection.

Just
like any other example of disruptive innovation, Netflix became a startup small
brand that ended up disrupting the market and an established market
player. 

It
rarely happens that a company disrupts its existing business model. But Netflix
seems to have covered both the roads to disruptive innovation.

In
2007, with the advent of the 3G broadband internet and increased internet
connectivity, Netflix decided to start their own video streaming service. Even
though the streaming service was a relatively new concept, it catered to the
needs of the customers who wanted a faster & cheaper method to view their
movies.

Even
Clayton Christensen, the father of disruptive innovation theory, thinks that
Netflix is a great example of how disruptive innovation actually works.

The
main reason why Netflix is a disruptive tech company is that when it introduced
its DVD rental service, it did not target the main customers of its competitor,
Blockbuster. The Blockbuster clients sought after new releases that too on request.
And Netflix provided them with neither. Initially, Netflix only appealed to a
very niche segment. These customers were movie buff who did not care about new
releases, had already adopted into the DVD era and were online shoppers.  

According
to Clayton Christensen, this is an indicator of disruption. A disruptive
business concentrates on those segments of the consumer group that have been
ignored by the other market players and then delivers a better-suited
alternative, often at a lesser price.

Eventually,
the company trickles up in the market. It keeps its competitive advantage
intact and adds features that would now appeal to the larger customer groups.
For Netflix, this change came with its streaming services. It was able to offer
a wider range of content that now appealed to the customers of its competitor,
Blockbuster.

Netflix
thus highlights the importance of innovation in not only establishing a brand’s
competitive advantage but also maintaining it. It is also one of the few very
few firms that have successfully disrupted themselves.

 

3.2.2
Reinvented HR

Netflix
did not necessarily innovate HR but it did reinvent the current HR policies. It
made them simpler. When Netflix started in 1997, it was a startup. It had the standard
HR policies especially when it came to vacations. They offered the standard 10
vacation days, 10 holidays and a few sick leaves.  As they grew, they realized that the
organization structure has become more complex. They saw a decline in talented
individuals in the company and making it less attractive to highly skilled
individuals. Netflix always focused on quality over quantity when it came to its
employees. A key role played in shaping the current corporate culture is by
Patty McCord. She worked for 14 years as Netflix’s chief talent officer (CTO). According
to her, there Netflix followed the some basic concepts in order to change the
organizational culture in the company. These principles are laid down in the Netflix
Culture Document, which was created by Patty McCord, Reed Hastings and other
employees. The document has been credited as the most important document to
come out of the Silicon Valley by Sheryl Sandberg, COO of Facebook and is now
used in companies even outside the Silicon Valley. These concepts are

3.2.2.1 Hire, Reward, and Tolerate Only Fully
Formed Adults

Netflix focuses on common sense over long and
complicated policies. It was observed that if the company carefully hires
people that would put the company’s welfare first and understands the need for
a high performance workplace, and then when faced with conflicting situations,
97% of your employees will do the right thing irrespective of the policies.
Also, when individuals work with like-minded high-performing individuals, they
are more happy & productive.

Also Netflix focuses on Adult-like behavior at
the workplace. It means being transparent with
bosses, colleagues & subordinates. Netflix implemented the adult-like behavior
in two areas – policy regarding leaves and travel and expense policy.

Instead of following a
formal leaves & vacation system, Netflix has kept this area open-ended. Salaried
employees were told to take off whenever they felt was appropriate. Bosses and
employees were asked to sort it out within themselves. There are a few ground
rules to avoid any problems. For examples, employees from accounting department
shouldn’t plan any leaves during the beginning or end of the quarters. Also for
more than 25 days of leave, the employee had to contact HR.  Senior leaders were made the role models of
this policy. They were asked to inform the other employees about their leaves.

Netflix also
eliminated the formal travel & expenses policy. Their current expense policy
is “Act in Netflix’s best interests.” The employees
are expected to treat the company money as if it was their own and spend it economically.
This moved the responsibility of the expenses to the front-line managers. It
also helped Netflix save some costs such as the cost of outsourcing a travel
agent.

3.2.2.2 Tell the Truth about Performance

Netflix
eliminated a formal feedback procedure for its employees. This helped in creating
an environment where the employees had honest & transparent conversations
with each other. Netflix believes that formal procedures are ritualistic and
does not show the employees true caliber.

Instead,
Netflix introduced 360o reviews. The rules for this were very simple
– employees had to find the things that they believe their colleagues should start
stop or continue with. Initially, the system was kept anonymous. Today,
majority of these 360o reviews take place face-to-face.

Netflix
also doesn’t organize any performance review meetings or annual employee
reviews.

3.2.2.3 Managers Own the Job of Creating Great
Teams

Netflix
asks managers focus on the short-term six month accomplishments of the team and
to focus on the skills required to reach those goals. This is because managers would
elect the right candidates, if they know their objectives clearly. Only when
the manager was fully sure of the team skills and the objectives, they were
asked to analyze how their current team members would fit into the skill sets
required. This helps the managers understand the strengths and weakness of their
team members and use them to the advantage of the team.

3.2.2.4 Good Talent Managers Think Like Businesspeople and Innovators First

 Having the right type of HR mangers was a very
important part of Netflix’s HR policy. The right talent manager would focus
less on the superficial peace at the workplace and would emphasize more on transparent
communication. This involves letting the employees know about the company’s expectations
as well as specify the required actions to reach their goals. Instead of being
cheerleaders, the talent manager should focus on what is actually best for the
company.