LESSONS FROM NETFLIX: HOW TO SYSTEMATICALLY UNLOCK INTERNAL INNOVATION

Kaihan Krippendorff
January 17, 2019

Kaihan Krippendorff

Strategy and Innovation Expert, author of four business strategy books

Do your people go into the kitchen … or do they go home?

When Kat Cole, a waiter at a local Hooters, learned there were not enough cooks that day to serve food, she watched as other waiters hung up their aprons. No food to cook means no food to serve, they figured.

But Kat and a few others chose the opposite route. They went into the kitchen to help cook. Kat later went on to become the CEO of Cinnabon and now serves as the COO of Focus Brands, which owns Cinnabon, Carvel, Schlotzsky’s, and four other major food brands.

How your people respond to unexpected opportunities and threats will determine whether your organization thrives or gets disrupted by change. It quite literally determines your future.

So, what stops your people from seeing and seizing opportunity?

The Expectancy Theory of Motivation offers the clearest explanation I have found for why people choose one behavioral option over another, why they choose home or the kitchen. Based on research pioneered by Edward C. Tolman and continued by Victor H. Vroom, the theory essentially argues that your people have different sets of motivations and will take action when they feel that:

  • There is a positive correlation between efforts and performance (effort-performance).
  • Favorable performance will result in a desirable outcome (performance-outcome).
  • The outcome will satisfy an important reward that they value (outcome-value).

EFFORT-PERFORMANCE

The effort-performance link speaks to belief in your ability (self-efficacy). Had Kat not believed she could cook what was on the menu, she would have gone home.

Unfortunately, the prevailing narrative reinforced in our media, lists of “most innovative” people, and our business literature is that entrepreneurs innovate and employees do not. The idea that entrepreneurs embody Silicon Valley mindsets that have them take risks, interpret failure as learning, try many things at once, think longer-term, or have a better understanding of the customer leads many employees to believe that somehow, they lack what it takes to act on a new opportunity. The truth, however, is remarkably different: 70% of the innovations that have most impacted society have come from employees, not entrepreneurs.

  • Do your people believe they have the skills, character traits, and abilities to innovate?
  • Is your organization’s leadership reinforcing a “you can do it” mentality, through their behaviors, language, and stories?

PERFORMANCE-OUTCOME

Let’s say your people have overcome the effort-performance step. They believe they are capable. They may still be stopped by the next link in the chain: they believe the effort will not result in a desirable outcome. Kat’s desired outcome was clear: keep the restaurant open. She knew she could cook, but if no one else stayed behind to serve or bus or work the cash register, her valiant cooking performance would lead to wasted food, not an open restaurant.

If your employees say “what’s the point” because the bureaucracy, hierarchy, short-term thinking, culture, rigidity, and lack of leadership support within your organization will anyway kill off innovation efforts, you have a performance-outcome issue.

Our research shows that four types of barriers create performance-outcome challenges:

  • Leadership: Is your leadership encouraging and celebrating innovative efforts?
  • Structures: Are your organizational structures creating time and freedom for employees to innovate?
  • Culture: Are you encouraging the kinds of cultural norms that lead to innovation (smart risk-taking, proactivity, willingness to take risks)?
  • Talent: Are you surrounding your employees with the kinds of coworkers who will jump in to lend a hand innovating?

OUTCOME-VALUE

Finally, if an employee does take action and produce a desirable outcome (e.g., a new innovation is launched), is that outcome linked to results that employees value?

While we don’t know what was going through Kat’s mind, she must have thought that keeping the restaurant open would have led to something she valued. She would be recognized, given a bonus, or maybe she just cared so much about the restaurant that she intrinsically valued helping it succeed. In Netflix’s much cited Culture Deck, the company intentionally activates such intrinsic motivation by stating as a key value, “You care intensely about our members and Netflix‘s success.”

Now many companies seek to link innovation outcomes to things employees value by offering financial rewards (e.g., a bonus for winning a business plan competition). But research indicates financial rewards are insufficient and can often suppress innovation. Instead social factors play a more important role: how colleagues, managers, and leaders react to innovation outcomes. Is the innovator experiencing celebration or jealous scorn? Are they viewed as contributors or outsiders?

  • Are failures celebrated for their learning value?
  • Is proactivity encouraged?
  • Do you expect employees to keep a pulse on the market and customer?

There is a system and a science to unlocking employee-driven innovation. At each step in the process – effort to performance, performance to outcome, outcome to value – you remove what stops innovation and introduce what encourages it.

Netflix does this well.

NETFLIX CASE EXAMPLE

Effort-Performance

They install effort to performance, showing employees they are capable of innovating, by assigning the success of innovations to employees not leadership.

Reed Hastings, cofounder and CEO of Netflix, has said, “I find out about big decisions that have been made all the time and I had never even heard about it—which is great!”

Netflix ranks “independent decision-making by employees” as its top core value.

Performance-Outcome

They increase performance to outcome, by rigorously killing off new ideas early. This may seem counterintuitive, but most innovative companies follow a similar philosophy. By encouraging lots of ideas and experiments but only launching a few, they widen their innovation funnel and thereby increase their success rate.

The list of innovations Netflix has killed is long:

  • Allowing customers to buy and own new releases of movies and TV shows (as Amazon does)
  • Selling advertising on its site
  • Investing in live sports and news
  • Selling used DVDs
  • Listing movie screening times at theaters on its site
  • Producing independent films and original movies for DVD distribution
  • Launching a Netflix set-top box

Outcome-Value

Netflix’s values link tightly to innovation. They encourage continually looking toward the future.

As Joel Mier, Netflix’s director of marketing from 1999 to 2006, said, “The constant question asked at Netflix has been how do you deliver what customers want today while building for a different tomorrow — organizational ambidexterity. I remember talking about phasing out the DVD and the internet driving content consumption at my first interview in 1999.”

They link innovation efforts to intrinsic value, saying in their Culture Deck, “We believe that people thrive on being trusted, on freedom, and on being able to make a difference…”

And they eschew process. When Hastings founded Netflix, he built it on a philosophy based on lessons he learned from launching a prior company (which ultimately sold for $750M). “The problem [at the prior company] was we were trying to dummy-proof the system, and eventually only dummies wanted to work there,” he said.

So Netflix’s core philosophy is “people over process.” They institute open leave policy, require no fixed rules on expense accounts or travel, and place no spending ceilings on contract signings.

CONCLUSION

Dissecting the chain linking effort to performance to outcome to values can expose what is blocking innovation from emerging within your organization. To help you isolate and address the root cause, ask yourself:

  1. Do your people believe they have what it takes to innovate (the effort to performance link)?
  2. Do they belief their performance will result in a desirable outcome (the performance to outcome link)?
  3. Will the outcome result in a reward that they value (the outcome to value link)?
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