Book Excerpt: How Netflix Always Wins
Excerpted from Why Digital Transformations Fail: The Disciplines Of How To Take Off And Stay Ahead, by Tony Saldanha, with permission from Penguin Random House India.
One of the problems with digital transformation is that digital technology is so ubiquitous that deciding where to leverage it can be a challenge. Following a disciplined approach to address this is possible, as we will see in the following example.
Netflix is probably the best-known serial disruptor in modern corporate history. It has disrupted its own business model at least three times within twenty years (i.e., disrupting store-based rentals with mail-in DVDs and then streaming videos and original content creation) and is now working on its fourth (i.e., leveraging international presence).
What Netflix and other serial disruptors have is the uncanny ability to understand where digital technology can be leveraged the most to create or enable disruptive business models. This is what I call “digital leverage points.”
Digital leverage points are simply the best areas where digital technology can be leveraged.
Netflix’s Digital Leverage Points
Netflix’s multiple disruptions have a few things in common. They are aimed at driving market penetration, along with excellent customer experience and very low costs. Under the surface these are all supported by the company’s ability to react quickly to change, its enviable culture, and a consistent willingness to leverage technology to transform its own business model. Those last three items are Netflix’s digital leverage points.
Detect The Disruption Early And Use It
When Netflix was created, all that they wanted to be was the world’s largest DVD mailing company. Then Hastings realized that within five years of Netflix’s inception, internet bandwidth speeds would grow exponentially. At that pace, the customer experience of ordering DVDs and then waiting a few days to receive them in the mail was going to be disrupted by the instant gratification model of video on demand. The move from mailing DVDs to streaming seems logical today, but it was an extremely bold decision at a time when internet speeds were modest and Netflix’s DVD mailing business was flourishing. Today Netflix accounts for a third of all the bandwidth in the US. This ability to detect disruptive forces and leverage them before their competition continues to serve them well.
Culture As A Winning Ingredient
The second leverage point has been Netflix’s organization culture, which is legendary. Netflix truly empowers its employees and minimizes processes that are considered normal by other HR organizations. Netflix treats its employees as “fully formed adults.” The basic assumption is that its employees want to do the right thing for Netflix, and given the freedom they will deliver their best, taking the appropriate risks to innovate. So, there are no expense reports to be approved, you get unlimited vacation, there are no annual performance reviews, and the compensation packages are lucrative.
The third leverage point is Netflix’s technology advantage. Netflix chose an extremely scalable and open technical architecture very early on. Whether optimizing their physical DVD distribution systems or streaming video, they have leveraged their technical foundation as a strength. Netflix converts each film into more than fifty versions to reflect different screen sizes and quality and stores them so that the movie doesn’t have to be converted when downloading to match your screen’s size and resolution. Interestingly, Netflix hosts its video streaming at Amazon—one of its competitors.23 This ability to distinguish between a leverage point and a commodity service is strategically important.
In summary, Netflix continues to transform its business models repeatedly by being disciplined in leveraging its strengths of market agility, culture, and technical superiority. Now let’s contrast that with a case of an organization that was not as fortunate in understanding its digital leverage points.
Understanding Digital Leverage Points
Digital leverage points are strategic areas within an enterprise where technology has the most transformational (i.e., not just automation) impact in the Fourth Industrial Revolution. These are identified through a deep understanding of the organization’s opportunities and strategic choices. This is where the major digital transformation bets need to be placed, such as with digital retail (e.g., Walmart), big data (e.g., most health-care providers), user centricity (e.g., Zappos), and so on. Digital leverage points can be internal or external to the enterprise. Placing digital transformation bets on internal capabilities is equally valid, as with highly efficient logistics (e.g., Amazon), R&D (e.g., Intel), supply chain (e.g., Apple), and others.
Digital leverage points are tailored for each enterprise. They differ from those in other industries and may differ from those of competitors.
The challenge with identifying digital leverage points is that it presupposes a certain level of understanding of what digital technology can do. That’s the dilemma that most leaders find themselves in. If you’re unsure about where disruptive technology can play within your business model, then how do you strategically choose the right areas?
The good news is that there is a deliberate sequence of steps that can be followed here. It doesn’t even need new tools or methodologies, as you will note in the following paragraphs. The answer, once again, is discipline. It involves a deliberate approach that starts with “what’s needed,” then evaluates “what’s possible,” and finally connects the two using structured creativity. Specifically:
- Start with business strengths, opportunities, or pain points. This should link to the normal strategy processes. You can’t go too wrong if you’re playing with strategic opportunities.
- Understand the digital possibilities. Use internal or external experts to understand what digital technology can do relative to the enterprises goals. A basic level of digital literacy helps move this along.
- Translate strategic strengths, opportunities, and pain points into big ideas that use digital. Use creative processes to put together digital possibilities with potential strength or opportunity areas. Using approaches such as design thinking can help significantly.
Now, let’s look at each of these steps in more depth.
Start with Strategic Strengths, Opportunities, or Pain Points
Disruptive transformation comes from one of three areas in any organization:
- Enabling new business models
- Creating new types of digital product or service offerings
- Transforming operational processes for competitive advantage
The starting point with identifying strategic opportunities. There are several strategy development and renewal processes that can help. One of the favorites is the Business Model Canvas.
The Business Model Canvas was developed by Alexander Osterwalder in 2008 to visually depict and align strategic choices in value proposition, infrastructure, customers, and finances. Inserting digital possibilities into the mix can help you identify potential ideas and tradeoffs in new business models, new business offerings, and transformational operational processes.
Tony Saldhana is currently an advisor to boards and c-suite executives on digital transformation.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.