Change Management at Netflix

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05/02/19 Management Reference this

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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.

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).

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)

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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