Sunday, October 23, 2011

The Netflix Culture & Mistake

Netflix’s culture was described in a recent edition of the Business Insider. It makes an interesting read. At more than one hundred pages, it is quite long and detailed – but worthwhile.

While it is described as a statement of its company culture, it is more of a guide and blueprint for its employees on how the company operates or, perhaps more accurately what is expected of its employees.

Netflix’s culture document has three principal themes – Performance, Freedom, Responsibility - and expands into seven specific requirements which are listed below:
Values are what we value.
High Performance.
Freedom & Responsibility.
Context, not Control.
Highly Aligned, Loosely Coupled.
Pay Top of Market.
Promotions & Development.
 The several factors frequently emphasized:
“Performance” is the most important variable leading to success – it is cited repeatedly throughout the statement. It will overcome context and control failures, responsibility issues and success with hiring and promotions.
An indication of Performance’s importance are two warnings to employees: “Accomplish amazing amounts of important work.” “Adequate performance gets a generous severance package.”
“Think strategically.” “Focus on strategy & goals.”

“Minimize written rules.”

“Communication.” “Frequent department meetings.” “Honest, candid, non-political communication.” “Challenge prevailing assumptions.” “Courage to say what you think.” “Quick to admit mistakes.”

“Open internally about strategy and results.” (i.e., the company makes sure all employees are thoroughly familiar with its strategy and results)

“Judgment.” Largely refers to how decisions are made: Identify root causes, not symptoms. Think strategically, not tactically. Make good decisions regardless of uncertainties – i.e., do your homework.

“No toleration for brilliant jerks” Smart but difficult to work for managers are not retained.
In the first few pages they surprisingly go out of their way to harpoon Enron’s value statement that was displayed in Enron’s lobby: Integrity, Communication, Respect, Excellence.

It is unusual for a company’s culture to be a written document. Although one of the world’s most successful companies – Wal-Mart – publishes a statement of culture.

By comparison, in my fifteen years at Emerson Electric Co. there was none and one was never discussed. We all understood the culture and the company’s values. It was exactly the same as Netflix’s emphasis throughout its culture statement: “Performance” and “Strategic Focus”.

Netflix acknowledges that they know they are not perfect but continue to work toward achieving their goals by stating in the culture document: “We are getting better” “We keep improving our culture as we grow. We get better at seeking excellence.” This certainly gives credibility to the constructive perspective that supports Netflix’s statement of culture are.

However, Netflix does make mistakes. One major error was this year’s decision to separate its DVD service from its Internet streaming service. Three weeks after the spin off decision was announced, Netflix reversed itself and decided to not spin off its DVD service. It decided to keep both services under one name and one Web site.

The positives:
● The quick realization of a mistake with the reversal decision being made just three weeks after it was announced. (It took Coca Cola three months to reverse its New Coke decision.)

● A candid admission that a mistake was made and that hubris was a factor.

● The 60% price increase. It may make the mistake fade quickly, if it sticks, as it will have a significantly favorable impact on profitability.
The negatives:
● Contrary to its culture statement on Judgment, thorough homework for this decision was not completed.

● The admission that hubris played a big role.
● Can the company recover? Will competition capitalize on the error? Will customers accept the 60% price increase? Will Netflix record Net Losses in 2012?

Click on this link for Netflix's culture document.

Friday, October 14, 2011

What Leads to Business Failure?

Donald Keough’s book “The Ten Commandments for Business Failure” is an interesting, creditable book useful to Chief Executive Officers with a company culture that needs improvement. Donald Keough is the former President of The Coca-Cola Company.

The book is a short, easy read that covers all the elements of a positive culture. Some of it is self-evident. But if officers, second and third tier managers all read it, it would contribute to a re-focused culture. It would put everyone on the same page.

Commandments that lead to business failure:

Quit Taking Risks

Be Inflexible

Isolate Yourself

Assume Infallibility

Play the Game Close to the Foul Line. (i.e., a culture of self-dealing and corruption.)

Don’t Take time to Think

Put All Your Faith in Experts and Outside Consultants

Love Your Bureaucracy

Send Mixed Messages

Be Afraid of the Future

Lose Your Passion for Work – for Life

(*The title of the book is “Ten Commandments…”. Mr. Keough has included an Eleventh as “a little added bonus”.)

Tuesday, September 27, 2011

General Motors – Industry Leader?

Regardless of various company officials and politicians assurances that General Motors Company’s rescue is a success, several facts cast a cloud over its viability:
● Its products are not cost competitive.
Hourly union labor costs are too high at approximately $58 per hour. Its USA based Asian competitors have lower labor costs. Two are at $40 per hour – a significant 31% difference.

In this recessionary economic climate the recent union contract settlement seems to be a continuation of GM’s past practices of agreeing to a high cost settlement. Did it increase GM’s labor costs?

High labor costs have been and continue to be GM’s Achilles’ heel and needed to be corrected during its bankruptcy process.
● The Chevrolet Volt does not appear to be a viable product. High price at $40,000. Limited performance and cost disadvantage. Not competitive versus alternatives.
● Its Chief Executive Officer does not have in-depth experience in a manufacturing company – his experience is largely in service companies. This is a negative. In comparison, Ford Motor Company’s CEO has the in-depth background and experience operating inside a manufacturing company that bodes well for Ford’s success.
Mr. Jack Welch is an example of a highly successful chief executive officer of a manufacturing company. He started at a relatively low, entry level position at General Electric Company. As he progressed upward, he gained knowledge of all the functions in manufacturing which gave him the experience and instincts to develop GE into a successful company.
Can GM return to its leadership position with a number one USA market share in the next several years? With its high labor costs and questionable product line-up it is doubtful that GM can be successful competing with lower cost, well-run Asian competitors.

The New York Times, September 2011

Monday, May 9, 2011

Outsourcing from China – Avoiding this Horror Story

A recent article in Manufacturing News described the outsourcing horror story that has engulfed Fellowes Inc.  The large paper shredder manufacturer has suffered a significant loss in China.

A Chinese joint venture partner stole Fellowes Inc.'s proprietary assets and forced the operation into bankruptcy. The estimated cost is valued at a $100 million. Now the former Chinese partner is planning on entering the shredder business independently, in direct competition using Fellowes' seized assets.

While I am sympathetic with the impossible position encountered by Fellowes, this is largely the result of not employing a quality China based law firm to prepare and execute the initial contract. China is a country of rules, not laws.  Success depends on highly skilled, tough attorneys completely knowledgeable of China; Chinese culture, mores, dangers. One cannot be naive, for any investment in foreign environments requires extreme caution, due diligence, and a fundamental acceptance of the risk involved.

There are other examples of similar problems of doing business in China.  Often, the main source of the problem usually has occurred because a USA manufacturer has relied on a USA based law firm to develop legal agreements. Also, some difficulties have been encountered employing a China based expatriate law firm staffed with British or American lawyers. Again, it is essential to retain a law firm staffed and managed by China born and raised attorneys.

Unfortunately, once a Chinese company takes hostile action, similar to the one detrimental to Fellowes Inc., it is almost impossible to reverse the outcome because of the challenging Chinese legal system.  

To avoid such devastating potential pitfalls, do not enter into a joint venture to manufacture products in China. It is best, to construct a 100% owned and operated manufacturing plant in China. Ironically, it is nearly as easy to build an operating plant in China as it is to build one in the USA.  But the end product is far more secure, providing complete control of the operation, particularly the essential proprietary and confidential factors.

See the original Manufacturing News’ article  by Mr. McCormack here:

A Cautionary Tale Of Outsourcing To China: There Is No Recourse, You Could Lose Everything                        
by Richard McCormack                     April 15, 2011
Thousands of American companies that have moved production to China to take advantage of cheap labor might want to consider a case study that is unfolding for a U.S. manufacturing company. Fellowes Inc., one of the world's largest makers of office and personal paper shredders, is witnessing the destruction of its business, as its large Chinese manufacturing plant has been shut down by its joint venture manufacturing partner.