MKTG3303 UWA 1 Managing Innovation Netflix Introduction & overview What does it mean to innovate? The stages taken from forming an idea in someone’s mind and applying resources into that idea to develop it into a valuable product, process or service that can be used and applied in real life is innovation. These stages, from start to finish, form a process and this is the key term in innovation that people need to understand. Another factor that defines innovation is whether the new idea is valuable to the organisation. The execution of a new concept is not innovative if it does not provide any form of improvement or positive change, usually in the form of a competitive advantage, to the organisation or its customers. Thus executing a concept or thought into an outcome that is valuable to the organisation is where managing innovation plays an important role. What does it mean to manage innovation? The innovation process within an organisation can be complicated and involves a variety of different activities and therefore the effective application of knowledge into the development of products and processes needs to be managed. A good manager of innovation will guide and implement the tasks necessary to execute the innovation. Reasons why it is so challenging is the combination of high risk and high return, the importance of organisations innovation to gain competitive advantages and the conflicting differences in the freedom needed to drive innovation as well as the need for strong management (Maital & Seshadri 2012). Organisational knowledge is important to the firm in creating innovative ideas and products. Innovation stems from the knowledge and information that people already have and manipulating this information into new ideas. This process can become lost unless managed appropriately. This is why managing innovation often means managing the intellectual knowledge trapped deep within an MKTG3303 UWA 1 organization by providing employees with time and resources needed to invest in knowledge sharing and idea creating. Overview Netflix is one of the most disruptive innovative companies talked about today. The founder and CEO of Netflix Reed Hastings came up with the idea of renting DVD’s through mail on a subscription basis and guiding his company on the path of becoming and online streaming site for movies and TV shows. This idea revolutionized the way people were paying and watching movies. Customers could subscribe to the product and where able to watch as many DVDs as they wanted. It also meant that customers didn’t even need to leave their own home! This innovative idea was disruptive to the entertainment industry as it meant there was no need for physical movie stores and eventually physical DVDs, instead movies and shows could be streamed online instantly, anytime. Contributions & resources Hastings was once the founder of Pure software and sold the company for $700 million, in 199 he invested $2.5 million in start up cash for Netflix and the website was launched in 1997. By this time he had acquired 30 employees and only 935 movies to rent (Proceedings of KDD Cup and Workshop 2007. Netflix bases its movie ratings on customer recommendations. It was initially using a software package by Cinematch but wasn’t happy with the quality of the product and there were no better alternatives on the market. To overcome this problem Netflix needed a new software package to be created that was better than what they had. So on October 1st 2006, the company put out an incentive for a $1 million dollar prize to the first developer that created a better software program for video recommendations that beat its existing algorithm by 10% (Proceedings of KDD Cup and Workshop 2007 Netflix was always preparing for the future. Although the company was initially only renting movies through mail it had its sights on the prospects of Internet MKTG3303 UWA 3 technology and streaming movies online. Online streaming wasn’t achievable at the time with the technology available so to build on its resources Netflix “started investing 1% to 2% of revenue every year in downloading” (Inc 2005). By 2001 Hastings began investing $10 million a year into the research and development of online movie streaming (Forbes 2011). The management team CEO Reed Hastings has created a unique management style for himself at Netflix. He simply works to hire the best people he can for the roles he needs and then gets out of their way. “Our leaders hire, develop and cut smartly, so we have stars in every position” (SlideShare 2013). He believes that people do their best work when they have the freedom and the responsibility to do so. Thus Netflix has a generally laid back structure. Some perks of this freedom include limited organizational policies such as clothing and holidays taken as well as the ability to generate their own compensation packages. The most important aspect of this structure is the ability for employees to make their own decisions. All that management does is encourages employees to make smart ones. The company’s mantra when making decisions on anything is “act in Netflix’s best interests” (SlideShare 2014). Another structure adopted by managers to encourage innovation through out the organization is to provide context for employees and not control. This means that managers provide employees with insight and understanding to make sound decisions. A question that managers at Netflix ask themselves when employees make mistakes is what context had I failed to provide? Networks Netflix’s first critical partnering move was with DVD player manufacturers. This helped to drive consumer interest in the new media format. Netflix was smart enough to reduce the adoption chain risk that the manufacturers were facing by making these strategic partnerships, and it provided Netflix with great visibility into the market (Culp et al.). MKTG3303 UWA 3 To move the company forward and advance its progress in the movie streaming and mailing industry, Netflix needed an edge over movie content and so realized the need for original content. Netflix then sought out to make exclusive deals with producers for their movies and shows. “This transition begins on February 1, 2013 with House of Cards, a Netflix Original TV show starring Kevin Costner, being released exclusively through Netflix” (Culp et al.). This strategy worked to compete with Netflix’s competitor HBO who was pinching subscribers for its own original content. In 2003 Wal-Mart entered the market of movie rental service and thus became a major competitor for Netflix for the next two years (Inc 2005). Instead of continuing to compete against each other in the market Hasting sought out to have dinner with the CEO of Walmart and they came to an alliance where Walmart would discontinue its rental service and the two companies would promote each other (Inc 2005). Organizational Features: Management practices Netflix has taken a dramatic and novel approach to human resource management and practically reinvented the concept. As the former chief talented officer, Patty McCord stated “When I started there, the expectation was that I would default to mimicking other companies’ best practices (many of them antiquated),… I rejected those constraints. There’s no reason the HR team can’t be innovative too” (Harvard Business Review 2014). Netflix wanted to attract and retain the absolute top performers to the company and the process of becoming a company that only held the best employees was what was so innovative. If you weren’t excellent at your job or your skills no longer applied to the company in its current state then you would be let go with a generous severance package. Netflix was thereafter driven to finding the best employees for the job and dismissing, as quickly as possible, those that were simply ok at it. This strategy was further reinforced with the organisational culture held at Netflix. MKTG3303 UWA 5 Organizational culture There are seven aspects of Netflix’s culture discussed below (Harvard Business Review 2014), together they all revolve around the drive to attain only the best employees at Netflix. Values are what we value The company pays attention to the types of values that are held by their employees and there are nine that they view as particularly important; judgement, communication, impact, curiosity, innovation, courage, passion, honesty and selflessness. Netflix made sure to hire and promote employees who held these values in high regard. High performance Managers use a keeper test where they ask themselves, which one of my employees would I fight hard to keep if they told me they wanted to leave? To the employees that the answer would be – not very hard, they would be dismissed with respect and a rich severance package. Freedom and responsibility Netflix provides employees with a great deal of freedom and responsibility in the company to nourish and attract innovative people. Context and control Managers set an appropriate context for employees instead of trying to control them. High performing people do better in a context they understand. Highly aligned and loosely coupled The company’s strategy and goals are broadly understood. This helps to align the company through cross-functions. Pay top of market The three questions to ask are; What could that person get elsewhere? What could we pay for replacement? What would we pay to keep that person if they had a bigger offer elsewhere? MKTG3303 UWA 5 Promotions and development Netflix views everyone as independent adults and want people to manage their own career growth and not rely on a corporation for “planning” their careers. If someone is to be promoted at Netflix there are two conditions that they must pass; job has to be big enough and the person has to be a superstar in their current role. Organizational Learning: Netflix has seemed to cover many strategies to influence a company that is innovation driven. One topic that hasn’t been evident as a key tool to facilitate innovation in the company is learning. An innovative product comes from the facts and information already existing in our head and manipulating that information into new ideas. If the company isn’t interested in encouraging learning through the organization among employees then that pool of information where creativity stems from might be lost. The CEO might want to consider ways to enhance the organizations learning within the company, an example of this would be through cross-function activities. Another strategy that wasn’t evident in my research was Netflix striving for a diversified company. When people are similar they think similarly and creativity is lost. When a team comes from different backgrounds the individuals think differently and people are encouraged to exchange new ideas. Netflix is adamant on letting go people who don’t perform. Although this drive has worked for Netflix in creating an environment with only the best people for the job the CEO must remember that the innovation process often comes with failure as not every creative ideas is a successful idea. The company can’t fire every time a person fails, as it doesn’t always necessarily mean that the person isn’t right for the job. As Bill Gates states “It is fine to celebrate success, but it is more important to heed the lessons of failure.” MKTG3303 UWA 7 Market Changes: In the year 2007 Netflix was finally able to stream videos online through a subscription membership. This was achieved through an “increase in broadband penetration and the rollout of high speed 3G wireless networks combined with the emergence of high quality graphic streaming capabilities on laptops and other media devices such as video game consoles” (Culp et al.). Many players had tried to enter before but Netflix had ten years to develop the site and it held one of the most sophisticated recommendation engines on the Internet. It had also had the opportunity to refine the site to optimize user capability. Many people believed with its original large user base from DVD’s by mail and the industries high fixed costs would create first mover advantage for the company. This was not the case as many competitors tried to enter the market, however, most did not prevail. “Netflix seamlessly carried over its existing large subscriber base and [so] became the first Company to successfully penetrate the Internet video streaming market” (Culp et al.). MKTG3303 UWA 7 References: Culp, C, et al. Netflix: Past, present, and future innovation. Available from: http://faculty.tuck.dartmouth.edu/images/uploads/faculty/ronadner/11EIS_Main_Project_-_Netflix_Paper.pdf. [1 September 2015]. Forbes 2011, How Netflix Innovates and Wins. Available from: http://www.forbes.com/sites/chunkamui/2011/03/17/how-netflix-innovatesand-wins/. [31 August 2015]. Harvard Business Review 2014, How Netflix reinvented HR. Available from: https://hbr.org/2014/01/how-netflix-reinvented-hr. [3 September 2015]. Inc. 2005, How I Did It: Reed Hastings, Netflix: The founder of Netflix on developing a passion brand, and sustaining it as passions change. Available from: http://www.inc.com/magazine/20051201/qa-hastings.html. [31 August 2015]. Maital, S & Seshadri, D.V.R 2012, Innovation Management, New Dheli, India. Proceedings of KDD Cup and Workshop 2007, The Netflix Prize, Netflix. Available from: http://www.netflixprize.com/assets/NetflixPrizeKDD_to_appear.pdf. [31 August 2015]. SlideShare 2013, Netflix organizational culture. Available from: http://www.slideshare.net/stevenpappas3/netflix-organizational-culture? qid=0baeac22-4e65-4ffa-ad24-2055233ef422&v=default&b=&from_search=1. [1 September 2015]. SlideShare 2014, Netflix marketing plan. Available from: http://www.slideshare.net/evelyneringia/netflix-markeitn. [1 September 2015]. Trott, P 2012, Innovation Management and New Product Development, Essex England.
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