January 21, 2013
Considering Change? Don’t be a Netflix
BY Mary Mahoney
Developing and institutionalizing change management is a long-term process.
Rapid advances in technology, the evaporation of trade barriers and evolving consumer preferences are forcing businesses to re-evaluate their strategies – in some cases their fundamental business models – and implement changes in real time.
Change can be good. There’s even a formal discipline called change management devoted to it. But the way your organization develops and implements change can mean the difference between continued profitability and bankruptcy.
Consider Netflix. The Los Gatos, Calif.-based company got its start in 1998 by mailing DVD disks to customers’ homes. Two years later, it changed from pay-per-movie rental model to a flat monthly fee that provided unlimited rentals without due dates, late fees or shipping and handling charges.
Customers and investors loved it. Subscriptions skyrocketed from 857,000 in 2002 to 20 million in 2010. The company went public in 2002 with an initial public offering of $15 a share, and the stock price hit $300 per share by the summer of 2010.
In 2007, Netflix began streaming movies and TV shows over the Internet, for which it charged an additional fee to its DVD subscribers. Three years later, the company introduced streaming-only plans priced at $7.99 per month with DVDs available beginning at an extra $1.
The one-two punch of online and traditional mail-order rentals enabled Netflix to annihilate its competitors, notably Blockbuster, which declared bankruptcy in 2010, along with thousands of mom-and-pop movie rental stores. It also spawned competition from Walmart and Amazon.
Then in July 2011, Netflix shocked the marketplace, first by announcing new rates that would cost existing subscribers 60 percent more for streaming, and second by splitting its DVD and online rental services into two companies that would require existing DVD customers to subscribe to a second service to continue streaming.
Enraged Netflix customers posted comments all over the Internet. According to the Wall Street Journal, 800,000 members canceled their subscriptions during the third quarter of 2011. Investors followed suit. The price of Netflix stock price fell by 74 percent in a matter of days, reducing the company’s market capitalization from $16 billion to $4.6 billion.
Netflix Chief Executive Officer Reed Hastings subsequently apologized: “I messed up. There is a difference between moving quickly – which Netflix has done very well for years – and moving too fast, which is what we did in this case. In hindsight, I slid into arrogance based upon past success.” Hastings later scrubbed plans to split the company into two, but he did not rescind the price hike.
A recent book by Gina Keating, Netflixed, attributes the fiasco to the engineering-focused culture developed by Hastings that paid more attention to optimizing algorithms than to customers. In an interview with CNET, Keating said the company lost its consumer focus when its cofounder, Marc Randolph, was pushed out.
In contrast to the consumer-friendly “DNA” that prevailed when Randolph was at Netflix, Hastings has the “emotional IQ of zero” and “just doesn’t have any kind of empathy toward people in terms of consumers,” Keating said, attributing those observations to several of the people she interviewed for the book.
Such missteps are legend in the business world. Remember “New Coke?” Customer pressure forced Coca-Cola to restore its original soda formulation in 1985. Packaging matters, too. In early 2009, PepsiCo scrapped its redesigned Tropicana orange juice carton, just six weeks after rolling it out to great fanfare, after consumers gave it a big thumbs down. In 1999, traveler outrage led Delta Air Lines to drop a $2 surcharge on tickets not purchased on its website.
A March 2012 article titled Achieving Successful Strategic Transformation that appeared in the MIT-Sloan Management Review said companies attempting radical change fail more often than they succeed:
“Companies that are able to radically change their entrenched ways of doing things and then reclaim leading positions in their industries are the exception rather than the rule,” wrote authors Gerry Johnson, George S. Yip and Manuel Hensmans. “Even less common are companies able to anticipate a new set of requirements and mobilize the internal and external resources necessary to meet them.”
Some companies manage change more successfully than others. When poor performance by Cadbury Schweppes’ U.S. confectionery business triggered a hostile takeover bid in 1987, then-chairman Dominic Cadbury reacted by divesting the company’s food and hygiene businesses and giving other executives “the opportunity to initiate exciting new developments,” the article said.
Those developments included a joint venture with Coca-Cola, relocating the beverages headquarters from England to the United States and the refocusing the confectionery division. Cadbury, the last family member to head the company, retired in 2000, and the company later was sold to Kraft Foods Inc.
“If companies are to sustain high performance and transform their strategies, they need to foster alternative management coalitions and value constructive tension and challenges to the status quo,” the article said. Johnson, Yip and Hensmans make eight recommendations for integrating those principles into an organization.
- Build on history: Building on history requires managers to reflect on the evolution of their organization and the legacy they can draw on. Doing this involves asking what traditions are present, and which ones are absent. Based on the answer, management should consider new steps to take.
- Select and develop a new generation of leaders: Good companies carry out succession and talent planning, but often their succession planning merely maintains the current strategy. Instead, a true transformation requires succession planning that will yield different capabilities, with new leaders that are groomed and encouraged to develop alternative coalitions and business models. To make it happen, current leaders must nurture replacements who will question, modify or even be willing to reject the company’s heritage.
- Accept and encourage constructive mobility: Instead of always appointing the most predictable successors, companies should cultivate internal talent, fostering alternative coalitions that welcome challenge and encourage divergent perspectives. Managers should identify leaders who respect the past but have a distinctively different view of the future.
- Ensure that decision-making allows for dissent: There’s a fundamental difference between an organization built to maintain consensus around a dominant logic and one where managers naturally challenge it. A decision-making process that allows for dissent and challenge works only among people who can live with and welcome challenge.
- Create enabling structures that encourage tension: Creative tension between opposing views can also be fostered structurally. Such changes alone will not guarantee that alternative views will be heard and taken seriously, but changing the structure can make a difference in how people see ideas internally.
- Expect everyone to get behind decisions once they are made: Although constructive confrontation, contestation and experimentation are essential, there needs to be a point when leadership makes decisions and the different parties fall in line. The authors found that failures tend to happen when management mishandles the internal debate by stifling it, cutting it short or failing to build management teams with enough confidence to overcome doubts.
- Develop an overarching rationale: Managers need to develop clear positions concerning “what we are about.” Dominic Cadbury, for example, noted that the starting point is the company’s values: “These do not happen by chance, and they can’t drift either. There has to be some management there.” Values also need to be more than words; they should be believable and evident in top managers’ behavior.
- Beware of market size and dominance: Each of the successful companies that Johnson, Yip and Hensmans studied had developed some of their characteristics while competing against dominant players in their industries, at a time when they saw themselves as being seriously threatened. This raises an important question: when once-threatened companies become industry leaders, will management lose sight of the very qualities that helped create their success?
Developing and institutionalizing change management is a long-term process. Executives today would do well to consider the proactive moves taken by the likes of Dominic Cadbury and the missteps of firms like Netflix and Coca Cola.