1: “In 2011, Netflix was on a roll,” Carolyn Dewar, Scott Keller, and Vikram Malhotra write in CEO Excellence.
The company was a media darling. Its rapidly growing, highly popular subscription business delivered DVD rental movies to customers’ homes.
Still, Netflix CEO Reed Hastings knew that streaming was the future.
“It was a classic innovator’s dilemma—for Netflix to keep growing it would have to cannibalize its DVD mail business,” the authors write.
Reed’s solution? Divide the DVD-by-mail and unlimited streaming offerings into two separate services.
Plus implement a 60 percent price hike for customers who wanted both offerings.
What happened? “Millions of Netflix customers fled and the company’s stock price dropped 75 percent,” Carolyn, Scott, and Vik write.
Oops. Sometimes, a big vision falls flat. As in, splat.
Reed took responsibility for the mistake: “I messed up,” he wrote to customers. “I owe everyone an explanation. The key thing I got wrong was not fully explaining the pricing and membership plan changes announced a couple months ago.”
But his explanation wasn’t enough, the authors note. “Customers really didn’t want two separate services at a higher price,” they write. “By the fall of that year, he shut down [the stand-alone DVD-by-mail] before it even opened and returned to a single subscription model named Netflix.”
“In hindsight,” Reed shares, “we were too focused on not dying with the DVD. We looked at all these companies with collapsing business models like Kodak and Blockbuster. It was really a hard problem. We learned an important lesson. The fact that your company may not be strategically positioned for the next ten years—your customers don’t care about that.”
2: Looking back, it is clear that Reed was 100% correct about the future of streaming. “In spite of not being perfect in execution,” Carolyn, Scott, and Vik write. Reed “had moved quickly and still made the right call on the bigger decision to move from DVD to online.
“He identified an opportunity where many others saw a challenge. In the face of persistent skepticism and competition, he managed to grow Netflix through rapid technological expansion and addressed the evolving needs of an ever-growing customer base.
“While the DVD-by-mail service became a niche,” they note, “Netflix has grown into an immense streaming business with two hundred million subscribers, $20 billion in revenue, and nearly nine thousand employees.”
From its inception in 1997, the company’s market capitalization is now nearly $300 billion.
As Reed learned first-hand, “making big moves in a fast-moving, uncertain environment with many variables that can’t be controlled is risky,” they write.
3: The more significant danger for leaders, the authors believe, is not showing courage when faced with adversity.
Feike Sijbesma, former CEO of Dutch life sciences and materials sciences powerhouse Royal DSM, says: “When we did daring things my board asked, ‘Are you sure?’ My answer was, ‘Of course not, there’s no way to be sure.’ We created a culture to be open about having insecurities, but also to have the guts and determination to go after the opportunities.”
Venturing into rough waters is step one. Staying the course is the critical step two.
“In his strategic push to make his UK spirits company more customer-centric, Diageo CEO Ivan Menezes diverted commercial and marketing efforts away from distributors and toward consumers,” Carolyn, Scott, and Vik write.
Ivan faced heavy criticism from investors as well as from inside the company. “The entire organization was watching to see if we’d blink,” he recalls. “But we stuck with it, explained why, gained credibility, and really set the foundation for growth.”
What happened? Diageo achieved top-quartile shareholder returns in its peer group.
“Being terrified but going ahead and doing what needs to be done—that’s courage,” writes Piers Anthony, author of the Xanth fantasy series. “The one who feels no fear is a fool, and the one who lets fear rule him is a coward.”
Says former Medtronic CEO Bill George: “I’ve seen some otherwise very well-qualified CEOs who lacked courage,” he shares, “and their companies managed for a while but atrophied over time.”
More tomorrow.
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Reflection: What scares me about the future? Are there any bold moves I can take now to set my organization on a new path?
Action: Discuss with a colleague, my team, or my board.
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