Netflix and Organizational Capabilities

Executive Summary: While I previously shared a thought exercise (link) on the kind of capabilities Netflix can demonstrate against its competition, this post is about the hard work that goes into creating an organization where teams work in concert, and in diverse ways, to develop these competitive capabilities. From the Desk-of-George-Lucas-Theory-When-In-Doubt-Make-Star-Wars-Prequels.

Why am I talking about Netflix?

Three reasons.

1. Innovation:
Netflix has been called an innovator that leverages its investments into innovation effectively towards business capabilities.

2. Market Capabilities:
Recently, there was news about Netflix looking at original programming, that kicked off this thought exercise on innovation and tactics below:
http://insightplusideas.blogspot.com/2011/03/innovation-and-tactics-series-netflix.html

3. Distinct Context:
Unlike the iPhone, Netflix has entered existing markets and upended them without much "confetti about cool". It's almost like a B2B company in a B2C market.

What does Netflix mean for Other Organizations?

Netflix continued to invest in streaming capability for many years, before launching the product. This demonstrates a long term thinking about its business and its markets.

How does an organization connect
a. investing in long term capabilities, and,
b. thinking about markets,
In hindsight, all of this is as easy as pie. Lets look at the challenges.

Challenges with Making the Organizational Connections:

Let's take two cases within two functions in an organization.

1. Finance:
Say you are a business finance manager, and a business manager comes over to you about a prototype he would like to acquire and integrate into the company's product and marketing portfolio. How do you not only help him acquire the prototype, but also give him the leeway to invest time and resources toward patiently integrating an early stage startup product into a reliable portfolio asset at the company?

2. Marketing:
As a marketing manager, say, you realize you need an organization wide communication and analytics sharing capability to meet the product and competitive environment in the medium term. What kind of marketing programs, and in what prioritized order, do you push, to deliver phased, sustained capabilities to your organization over the medium term?

Suddenly, this doesn't look all that easy, does it?

For managers battling to get things done within their silos on a daily basis, these are not easy questions to answer. Thinking about this gives you the scale of the effort that an organization needs to put into developing capabilities that impact its markets.

What do you think?

Panel: Creating Value through Operational Improvements

The panel discussion kick-off reminded me of a simple brand equity value chain, noted below in a slightly modified manner: look at the market for size and value, and work your way inward into the organization into the capital structure, evaluating improvements at each step.

To tackle the question of creating value in the current economic context, the panelists considered various tactics like evaluating the purchasing power of the customer, to benchmarking various activities of the organization. This can lead to evaluating options like changes to distribution strategy, or even product rationalization.

A Managing Director at Fenway Partners, who has been through the 2001-02 downturn, pointed out that you may save capital, but you are then faced with the challenge of deploying it.

He ventured three capital deployment options- buy debt at a discount, invest in organic growth by looking at operational investments, and invest in equity acquisitions. Investcorp’s analysis on operational improvements making an impact on exit multiples/ firm value fits into this decision making process.

Some questions I considered coming out of the panel:
Growth: Depending on the nature of the industry, and the cash at hand, what would encourage companies to pursue market share growth as a strategy? How are companies allocating resources to strategies that have a longer incubation time for results?
Risk Taking: How are companies deciding on change management risks in the current economic context?
Know Thy Customer: Given that customer segmentation is expected to lead to actionable marketing activities, how would it change in the changed economic context? While investing in understanding the customer may take a hit, how are companies evaluating situations where cutbacks here will hurt more than add value?

One Chart, One Slide to Show It All
Taking these questions and thoughts further, you really come to a simple X-Y bubble chart that lists points in the company’s value chain starting from financing to customer touch points on one scale, and profitability of investments on another, with bubble size being a function of risk.

Corporate Finance: A Decision Making Template
The decision making template behind this evaluation process could be:
1. What is the customer impact? One parameter to consider could be- would this improve customer “stick”? This helps evaluate customer acquistion programs, given that margins are under pressure and most companies are looking to increase volumes.
2. Do we have cash for change?
3. What is the profitability *profile* of each investment? E.g. Do certain improvements investments have "long tail" returns?
4. What is the exit strategy for this change project?


What do you think?


The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.