Change Management at Netflix

Organizations That Manage Change Well: Netflix’s
Constant Evolution

“The only constant in life is change”, a quote by the philosopher Heraclitus in 400 B.C.E remains true today (Graham, 2007). Whether it be in response to a major event or discovery that shakes an organization’s core function, or simply in accordance to incremental transformations, change is inevitable for all organizations. While some organizations experience the pressures of change more often than others, all organization’s must recognize, anticipate, and plan for external change forces, as well as set forth internal organizational changes to remain relevant and competitive in any given industry or field (Chou, 2011). Leaders of organizations must evaluate the industry in which their organization operates within and apply their findings to anticipate possible major changes to minimize disruption, as well as seek new practices and technologies to increase productivity, effectiveness, and overall performance. The adaptability and willingness to change is a company’s greatest competitive advantage. For all organizations, change is a vital and ongoing process, which if implemented and managed correctly, allows an organization to evolve with modern changes and remain successful within their field. Being adaptable and ready for change is a company’s greatest competitive advantage when operating in today’s the rapid and constantly changing global market (Anderson, 1991). This increased presence of change must be met by highly skilled and organized leaders who use methods and strategies to successfully manage changes and their implications (Chou, 2001). One company that has gained and maintained mass success due to their adaptability and forward-thinking methods is Netflix – United States most popular internet streaming service.

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With over 109 million users,
in over 190 countries around the world, streaming more than 125 million
hours of TV shows and movies streaming per day as of 2017, Netflix is the
world’s leading internet entertainment subscription streaming service. The
streaming service offers users the ability to stream network and original television
series, documentaries, and feature films. The service allows members to watch
as much as they want, when they want, and where they want – with service access
on nearly any internet-connected screen. Members are able to play,
pause and resume watching, all without commercials or commitments (Netflix,
2016). The company was founded by Reed Hastings and Marc Randolph in September
of 1997 in Scotts Valley, California. The now tenth largest internet company
when based on revenue, began as a DVD rental by mail delivery service and has
continued to change and adapt its business models and according strategies to
external and internal factors ever since its startup (Netflix, 2016).

Change has the capacity
to better an organization or demise of it. When change is handled and managed successfully,
success and growth will result. Netflix’s success, and Blockbuster’s eventual
demise are examples of how organizations offering similar products and services
can either thrive or fail in the face of external technological and industrial
changes. During Netflix’s initial years of operation, both Netflix and
Blockbuster offered physical hard copy movie rentals. Blockbuster, which had seamlessly
survived the change from VHS to DVD technology, provided its services by means
of retail locations where costumers could browse movie options on shelves, make
their selection, and pay the initial fee based on various factors such as how
recently the film was released, or how many nights the customer wished to rent
it for. Originally, Netflix used a similar business model as Blockbuster,
basing their services on pay per rental basis, but rather than having retail
locations, Netflix customers would go to the company’s website to make their
rental selection, that would then be mailed to the customer’s home. However,
after a short initial trial of this original method and receiving lackluster
response, Netflix introduced a subscription feature to its business model.
Subscription members could rent a movie, keep it for however long they wished
or return it to rent another for one monthly fee – allowing members to rent as
many movies as they wished for one fixed price (Lotz, 2017). The differentiation
this created between the two companies’ business models began Netflix’s success
in the industry and its domination over its indirect competitors, such as Blockbuster.
Blockbuster was heavily dependent on revenues generated from hefty late fees to
create a large portion of their revenue as part of their business model. Netflix
could charge less for their services, and eliminate late fees from their
business model due to their decreased cost of operations. Netflix’s consumer-friendly
model of no late fees, low cost and wide media selection overpowered the
immediate convenience of going to a corner store to pick up a movie for a night
for many consumers (Satel, 2014). By April of 2003, Netflix had reached one
million subscribers. Blockbuster launched its response to Netflix’s competitive
threat by implementing an online unlimited rental subscription service for the
fixed price of $19.99 per month in August of 2004, but by this time Netflix had
already established its place and customer base in the market, impeding on
Blockbuster’s venture potential (Satel, 2014).

Netflix’s initial DVD
rental by mail delivery service began stealing market share in the
entertainment industry, respectively due to its adaptable business model to fit
a niche consumer need. However, Netflix achieved the success that it has today by
anticipating and adapting to a major upcoming change that was recognized at the
time of its founding. This massive change was the internet and its possibly
infinite capabilities. Netflix’s founder, Reed Hastings, stated that he
originally dubbed his company the name ‘Netflix’ because even in 1998 he had recognized
the potential of the world-wide web. Reed one day he expected, and hoped, that
his company would be offering DVD rentals by means of an online streaming
service, therefore he wanted to name the company something that complied with
its eventual fate (Fortune.com, 2009). Netflix was created at the time of the
wide spread adoption of the DVD, founders of the company, Reed and Marc, even
tested their initial mailing DVD service idea by mailing a CD-Rom back to
themselves because they did not yet own an actual DVD. The founders expected
that just like VHS – DVDs would be around for a long time, but anticipated and
prepared for the day that they were not. The company’s name and its origin highlight
how Netflix as an organization was not only ready for change disruption, but
waiting for it from the very beginning.

In 2007, Netflix launched
the company’s online streaming service. Subscribers were still able to continue
mail order DVD rentals, but could also stream a limited number of hours online
– all for the fixed monthly subscription price (Huffington Post, 2015). This
was the result due to the change of available technology and consumer wants.
Just like ten years before when the switch was made from VHS to DVD, the next
change was ensuing. This was the adoption and availability of high speed
internet and portable computers capable of streaming media. In 2010, Netflix
began expanding into the global markets. The company first expanded into
Canada, then in 2011 moved into various other countries around the world (Lotz,
2017). Competition quickly ensued, not only were other online steaming services
becoming available and more widely utilized, such as Hulu and Amazon Prime Video,
but television networks were also beginning to offer online streaming
subscription services, as streaming services had enabled consumers to cancel or
decrease their cable packages while still enjoying media entertainment, just at
a lower cost. To maintain and grow their market share and customer base,
Netflix began to produce original and exclusive content in the form of series,
movies featuring popular actors, and documentaries. Netflix could produce smash
hits for their customers because they created shows based on what their users
preferred to watch. By using their own website’s analytics of what their
members were watching, for how long, when they stopped watching a series or
movie, and more. For example, 70% of media being streamed on Netflix by its’
users are television series (Fortune.com, 2009). These observations helped them
to produce highly rated, award winning exclusive series, which helped Netflix
to keep their existing members and gain new subscribers. Since online streaming
subscriptions have a very low switching cost for users, it was vital that
Netflix recognized this potential threat and adapted their practices in
accordance (Investopedia, 2016).

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Although not seamlessly
achieved, Netflix has gained and maintained its immense amount of success as an
online streaming entertainment subscription service by constantly reinventing
itself in accordance to changes in technology, regulation, and consumer wants –
all while also creating and pioneering changes within their industry to meet
and anticipate the needs of the stakeholder (Management Help, n.d.). This has
been achieved by having adaptable and separate business models for each
business function, each with their own strategy. These organizational changes
would not have successfully occurred without the proper internal implementation,
and management of change. Devising the best strategic and tactical plans is
essential for success, but cannot be achieved without an in-depth understanding
of the human side of change management. This refers to the alignment of the
company’s culture, values, behaviors and people to encourage the desired
results.  Managing change is a complex,
dynamic, and challenging process (Mabey, 1993). It is never a choice between
technological or people-oriented solutions, but a combination of both (Bullman,
2000).

Effective change has been
characterized as unfreezing old behaviors, introducing new ones, and
re-freezing the new (Mosca, 2011). Successful organizational change begins at
the top. An organization’s leaders and upper management must have a clear and
concise understanding of the change that is occurring and be able to clearly
articulate it. In times of change and uncertainty, all eyes go to the
organization’s leaders for strength and direction.  Leaders must be aligned with one another and
moving in the same direction towards the common goal. Next, the case for the
change must be clearly laid out. A clear explanation of what changes will occur
and why they are necessary must be communicated to every layer within the
organization. In times of change, it is essential for all members of the
organization to know what is expected of them so that feelings of insecurity
and confusion, feelings which can lead to resistance to and denunciation of the
change, can be calmed.  A multitude of
various factors are associated with failure rates when it comes to succeeding
in change management. Even if change is endorsed by management, an
ill-conceived implementation plan, lack of commitment from an organization’s
leaders, and limited utilization or integration of already existing systems and
processes within the organization can lead to the failure to accept and adapt
to organizational changes (Mariotti, 1998).

Another important aspect
of successful change management is knowing the values that matter to the
organization and the overall goals the organization wants to achieve. Focusing
on reacting to those opportunities for change relevant to overall organizational
goals, as opposed to reacting to every invitation for change, helps companies
to make smart and practical decisions (Mosca, 2011). Due to globalization and
overall resource development, new forces and opportunities for change are
occurring more rapidly than ever, it is important to develop responses and
proactive actions that align according to an organization’s, or their
stakeholder’s needs (Bataldon, 1998). Constant change with a lack of reasoning
leads to negative organizational performance, as unnecessary change is a drain
on company resources, including financial, and human alike. Large
organizations, which employ a high number of employees, will not perform as
they become exceedingly bureaucratic. As stated by Steiner, organizations that
are known to be bureaucratized and hierarchical are less flexible, and less
willing to change, as well as less likely to empower their staff (Steiner,
2001). Organizations will not get full value from their employees if they
insist that employees do only what they are told. Therefore, leaders must learn
how to manage change, to move forward with successfully. There is no “one
best way” to manage change in an organization. Organizations must
introduce approaches to organizational change which matches their specific
needs, and requirements (Mosca, 2011)

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Netflix as an
organization has demonstrated their capabilities of successful change
management based on their multitude of major changes evident throughout the
company’s existence. Netflix has been able to achieve this by their unique and
somewhat unprecedented organizational culture. Netflix, although a large
organization with nearly five thousand employees (Statista, 2016), is not a
typical industrial firm, which is what many of today’s traditional
organizational theory and practices are based on, but rather is a creative
firm. The difference between the two is substantial – industrial firms thrive
on reducing variation, or reducing errors, while creative firms thrive by
increasing variation, as stated by the company’s founder and current CEO, Reed
Hastings (McCord, 2015). Due to this difference of firm variety, Netflix must
create and adhere to different organizational methods relevant to their newer
and less common style of business – creative. Netflix’s core culture concept is
based on open and honest communication between all levels and in every aspect
of the firm’s function. Netflix does not have set vacation policies, rather
they encourage employees to decide their own appropriate amount of vacation, when
they wish to take it and communicate this to their managers. To encourage
employees to utilize this policy, upper management is encouraged to set a precedent
by taking vacation time themselves and communicating that to their employees.
The CEO even reportedly taking four different week-long vacations in 2015. However,
this concept is also protected from abuse by Netflix’s next major culture
feature. This is the notion of their compensation method. Results are rewarded,
but effort producing no result is not. If an employee, although at one time was
extremely valuable and well liked, no longer fits Netflix’s changing needs,
they will be given an honest explanation and very generous severance package.
Netflix has found that by focusing on building the best team by having the best
talent has enabled them to continue to adapt and evolve as a company. Once an
employee can no longer benefit the company, they are able to bring in new
talent to keep company moving forward. Employees of Netflix understand this
concept upon being hired, which is why almost all severed employees are
understanding and accepting of their termination. Netflix believes in trusting
in the hired talent to complete the given tasks in the best way the talent sees
fit. Netflix giving their employees the freedom of autonomy allows for
flexibility, and innately eliminates the issues resulting from bureaucratic or
hierarchical structure, something that can often arise in a firm of Netflix’s
size (Mosca, 2011). Netflix found that by replacing rules with
transparency, accountability, and trust, overall productivity and performance
improves, and expenses decrease. Netflix believes in hiring good, talented
people – letting common sense and acting in the best interest of the company
guide employee behavior (McCord, 2015).

Due to new technology,
regulatory changes, societal or stakeholder expectations, as well as competitors
– rule-driven organizations, operating within a rapidly changing industry, are
unable to keep up with the constant adaption required to gain or remain
successful, losing customers and market share to those organizations that do
have the capability to evolve. Netflix maintains its ability to change through
its organizational culture concept – freedom and responsibility. The company
invests in hiring the best possible talent, and rewards high-performer –
weeding out continuous, unimproved low performers.

References

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Chou, & Zolkiewski.
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Mabey
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Lotz, A. (2017, October 26). The
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