Netflix and Next tricks – Business transformations

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One of the biggest and most persistent challenges facing a successful company is how to respond to a new generation of technology aimed at destroying the company’s core profit engine.1 Fracking technology, for example, has radically changed the oil industry, shifting the focus (and growth) from offshore to land. Electric cars will soon render some combustible products obsolete. Indeed it’s likely that everyone reading this will be involved in re-inventing their business at some point and since these changes are picking up in pace, it’s something you’d better be good at! Let’s see how one company managed (and sometimes mismanaged) their transformation.

Netflix’ original business model was DVD rental by mail, making it more convenient and less expensive for consumers to get their movies – a challenge to which Blockbuster was unable to respond. However, a new technology called ‘video streaming’ shifted the market and presented a huge challenge to Netflix. They were able to move to a streaming model but unfortunately for Netflix, video streaming moved the power away from content distributors to the content providers. Since Netflix had zero leverage with the content providers its costs to purchase and stream videos went through the roof. To soften the blow to consumers Netflix tried to tie video rentals and video streaming into one package and raised their monthly subscription fees from $9.95 to $16.95 / month. Customers couldn’t hit the delete button fast enough and sales plummeted along with Netflix’ stock.However, Netflix didn’t just roll over and die. Since they couldn’t convince content owners to release programs at a reasonable price they decided to create their own content. You may know their flagship series “House of Cards” and more are in the works. This backwards integration has created both content that Netflix can sell to other networks and leverage to be used in negotiations for content from other networks like HBO and Showtime. Netflix’ transformation is still a work in progress but they are profitable and adding subscribers at an amazing rate.This is a very simple description of the changes that took place in Netflix. To make a transformation to another business model author John Kotter suggests eight steps:

  1. Create a sense of urgency around a single big opportunity. In Netflix’ case this was video streaming.
  2. Build and maintain a guiding coalition with no internal hierarchy.
  3. Formulate a strategic vision and develop initiatives to capitalize on the big opportunity.
  4. Communicate the vision and strategy to create buy-in and attract a growing volunteer army.
  5. Remove any internal barriers that prevent your organization from moving toward the vision and strategy.
  6. Celebrate visible and significant short term wins.
  7. Don’t declare victory too soon.
  8. Institutionalize the change in the culture.

Despite fundamental improvements in technology that undermined the business in which they previously prevailed, Netflix responded first by offering video streaming and then by producing their own content. How will your company respond to changes that might make your business model obsolete?

1. How Netflix Reinvented Itself, Peter Cohen Forbes April 23
2. Accelerate; How the most innovative companies capitalize on today’s challenges and still make their numbers; John Kotter HBR Nov 2012

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