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Netflix - A Lesson in Mis-Alignment

By Patrick Thean

dateThu, Nov 17, 2011 @ 07:27 PM

It is critical to have a clear execution plan aligned with your strategy.  Proof of alignment (or not) can be seen by your actions: 

  1. Your actions today (short term) line up well with your strategy longer term.
  2. Your actions are in harmony with your co-workers.  You do not have projects competing for resources that you can't seem to complete without hurting teammates' projects or goals.
  3. Your actions, even in a crisis, do not flip flop or change directions thereby confusing both customers and employees.
Ok. Let's talk about Netflix.  They were one of the early dot-comers.  Very successful, even considering the current snafus.  Netflix started off by delivering DVD's via mail to your home.  Their model was very different than the reigning king at that time (Blockbuster).  You choose how many DVD's you wanted at a time and paid a monthly subscription fee.  You received the DVD's by mail, kept them as long as you wanted, then mailed them back in the enclosed prepaid envelope.  It was nice and very simple for customers.  Where strategy is concerned, different always trumps better.  Different is good - In Netflix's case - very good indeed!   Then when streaming videos happened, they took advantage of the fact that they had a customer base and simply added streaming videos to your PC's and other home devices to your subscription at no additional charge.  So far, great execution!  Today they are the leading streamer of videos.  When iPad came out, they were right there, streaming movies and shows to my iPad.  Wow!  Stock price goes through the roof!
 
Then summer of 2011 brought along challenges and their execution has been haphazard and very costly.  How costly you ask?  Here are two major tangible financial setbacks:
  1. Cost to investors:  Netflix stock price has fallen by 48% year to date, losing $209 per share for investors!
  2. Cost to Netflix:  Losing customers and revenue.  Netflix lost 780,000 customers (200,000 more than forecast in September)
In addition to the financial costs, they also tarnished their reputation and confused their customers.  Trust is a very hard thing to build.  For a brand, trust also takes a very long time to build, and unfortunately can be lost very quickly overnight.  Netflix's trust index has definitely fallen with their customers.  And of course, when it rains it pours.  Competitors are now swinging at them.  Amazon just announced their Fire tablet, and that streaming videos to their prime customers will be included as part of their Prime membership.  Wow!
 
What happened?  Summer came and Netflix raised prices by splitting their DVD and streaming services.  You would be automatically signed up if you were already a Netflix customer for both services.  They never really clearly said they were raising prices.  But, if you did the simple math, you could tell you were going to be paying more for both services.  Some customers were unhappy.  But many were like me, willing to pay for both and wondering why Netflix bothered to make their simple model more complicated.  Initially their stock price went up as investors probably expected their price increase to increase their net incomes or profits.  Then they lost their Stars partnership and with it a portion of their streaming video library.  Their stock price falls.  Their CEO responds with and apology Email to all their customers, apologizing for arrogance, yet continues with confusing execution by announcing that the company was going to split into 2 companies - Qwikster and Netflix.  Another complication for their customers.  They continue to get punished on both Wall Street and Customer Street.  Finally, during the week of October 10, Netflix announced that they were reversing their plan, scrapping Quikster. 
 
We can learn something from every example, even when it is a good example of what not to do!  So, what are the "NOT DO" lessons we learned to help us execute stronger?
  1. Focus on your core customer.  Sure, raising prices may have made some customers unhappy.  Who represents the true core customer for Netflix?  I would suggest that it might be a person who wants both DVD's and video streaming, in a very simple and no hassle way.  Those folks might have been ok with the price increase as long as it kept the service simple and seamless.
  2. Align your execution with a clear strategy.  Be decisive to steer though troubled waters.
  3. Listen to your customers.  Don't fake listening (CEO letter) and then make things ever worse for them.  
  4. Have a compelling vision and destination postcard for your customers and well as your employees.  Why would people want to sign up to be your customers?  Build an awesome journey for people to sign up for.
  5. Play to win, don't play not to lose.  Verne Harnish taught me this one.  When you become the gorilla and have something to lose, sometimes you stop playing to win, but to keep what you have.  The minute you worry that you have your reputation or something to lose, you have already started losing.  Sun Tzu (The Art of War) said that all battles are won before they even start.  In this case, if you play not to lose, you already lost the battle before you've even started.
 
 

Patrick Thean

 

Photo Credit: iStock by Getty Images