Netflix Misses the Evidence: Three Management Lessons

Netflix Missteps

The CEO of Netflix, Reed Hastings, was riding high nearly four months ago. Everything was going right, but the visionary leader, who co-founded Netflix in 1998, was concerned about significant changes underway in the video rental business. The DVD-by-mail business was not only costly to support… handling, inventory and postage costs were high… but consumers were expressing an increasing preference for video streaming.

In response to these threats, Hastings made an announcement on September 19, 2011 that caught many off-guard. DVD subscriptions would be raised by 60 percent and another company, Quickster, would be created to focus only on the DVD-by-mail business. Customers who wanted both would have to contend with an increase in price and the inconvenience of dealing with two companies.

Then came the big surprise: an unprecedented customer reaction. Not only were subscriptions cancelled but the company’s brand took a real beating.

Hastings later admitted, that Netflix should have taken more time to explain that the company had little choice but to raise prices to cover higher fees for video and streaming rights. But the justification came too late. Defections continued and the reactions on Main street and Wall Street were devastating.

Management Lesson

Perhaps Hastings had no choice in an intensely competitive market under pressure from changing consumer preferences and movie studio demands. So it may not be that what he did was so wrong as much as it was how he did it.

To some extent he was right, he should have taken more time. But his real misstep was that he took action with little inclination of the possible reaction from his subscribers.

What needed to be done, if we follow the advice of Professors Pfeffer and Sutton, writing in a 2006 Harvard Business Review article, was something that many companies routinely fail to do: collect evidence first and then act. Hastings needed to test his strategy using a focus group or to have sent a simple e-questionnaire to a small group of subscribers. There is, of course, the possibility that he would have discovered little resistance to his plan, but given the magnitude of the reaction an outcome like that would have been highly unlikely.

But wasn’t he warned? Indeed in a New York Times article it was mentioned that a friend had told him to be very careful about taking such action. But he apparently failed to heed the warning.

Hastings made three classic errors in decision making.

  • Evidence. Major decisions or changes in strategy require hard evidence. Not evidence from those around us…. where discussions can devolve into group think… but evidence from those that matter, our stakeholders or our customers.
  • Overconfidence. Hastings had been extraordinarily successful and one risk of success is falling prey to hubris and overconfidence. A strong brand and solid customer loyalty would increase anyone’s confidence, but here it crossed the boundary and went too far. In fact, when major strategic changes are considered, it is far better to have more questions than answers.
  • Confirmation Bias. When you are reluctant to consider new information in framing a problem, you can fell prey to another trap that Russo and Shoemaker, in their book Winning Decisions, call confirmation bias. This is the tendency to favor evidence supporting one’s current beliefs and dismissing evidence that is contrary to these beliefs. Not listening to those in a position to give you good advice can be perilous.

All three are classic errors. And they are classic because we see them occur over and over again. They occur when the stakes are small and, as Netflix has reminded us, when the stakes are high. So, reminding ourselves what they are and being vigilant in preventing them from taking their toll on our decision processes can certainly help us make better decisions. 

Source by Barry Shore, Ph.D.

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