Oct 10, 2011

Netflix Rewinds

Was it only three weeks ago that Netflix announced plans to split into two businesses—one for online video streaming and another called Qwikster for DVDs by mail?

For Netflix Chief Executive Reed Hastings, who has received a ceaseless torrent of unfavorable publicity since announcing the strategy, the three weeks have probably felt more like three years. Now, to stop a customer exodus, the company has done an about-face. Although Netflix is sticking with a price increase that it also announced earlier, there will be no second business.

We wrote earlier about some of the possible reasons that Netflix went astray. Ultimately, though, what caused the company to reverse course was that the customer spoke, and the customer didn’t like the new plan. It was that simple.

“It is clear that for many of our members two websites would make things more difficult,” Hastings explained, “so we are going to keep Netflix as one place to go for streaming and DVDs.”

Peter Drucker certainly would have appreciated the concession. “Customers only want to know what the product or service will do for them tomorrow,” Drucker wrote in Management: Tasks, Responsibilities, Practices. “All they are interested in are their own values or wants. Any serious attempt to state ‘what our business is’ must start with these truths about the customers.”

[EXPAND More]Clearly, whatever assumptions Netflix originally made about the market in deciding to split into two businesses was, in some way, invalid. But its willingness to reconsider the approach, rather than forge ahead in the face of the evidence, is most admirable. “Failure of the strategy to produce the expected results is usually the first serious indication that the Theory of the Business needs to be thought through again,” Drucker noted in Management Challenges for the 21st Century.

What’s more, such failure doesn’t have to end in disgrace. Instead, Drucker said, failure is often a timely wake-up call—and a potential spur to innovation. “Failure should always be considered a symptom of an innovative opportunity and taken seriously as such,” Drucker wrote in Innovation and Entrepreneurship. “It is precisely because the unexpected jolts us out of our preconceived notions, our assumptions, our certainties, that it is such a fertile source of innovation.”

What kind of innovative opportunity might Netflix find in its unexpected failure?[/EXPAND]

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