The hardest
business to disrupt
is your own.
The smartest time to do it
is while it still works.
A FINAL THOUGHT
Don’t wait for the old model to disappear.
Build what replaces it.
THE BOARDROOM TAKEAWAY
WOULD YOU
KILL YOUR
BEST BUSINESS?
THE DECISION FILES / 02
Reed Hastings, Netflix and the Art of Proactive
Self Cannibalisation.
True strategic leadership is not about seeking
an exit in times of crisis; it is having the discipline
to fund the technology of tomorrow using the
cash engine of today and enduring the brutal
execution risks that follow.
STRATEGY I LEADERSHIP I MEDIA & ENTERTAINMENT
A POWERFUL
MACHINE
A SIMPLE
IDEA
IN THIS ARTICLE
01 / THE CASH ENGINE
02 / THE INNOVATOR’S DILEMMA
03 / FUNDING TOMORROW WITH TODAY
04 / THE DISTRIBUTION TRAP
05 / THE QWIKSTER MISSTEP
06 / STRATEGIC LESSONS
07 / THE BOARDROOM TAKEAWAY
THE STRATEGIC EQUATION
By the mid 2000s, Netflix had fundamentally rewritten the
rules of home entertainment. Its red-envelope DVD by mail
service was a highly efficient logistical machine, with a growing
subscriber base and solid operational cash flows.
From the outside, the business was robust, defensible and
profitable. For Reed Hastings, it was a ticking clock.
Hastings was keenly aware of Clayton Christensen’s
framework: market leaders rarely fail because they
mismanage their core business; they fail because
they remain loyal to it for too long while disruptive
technologies mature on the periphery.
Rather than waiting for an external entrant to render
physical media obsolete, Netflix chose to embrace
proactive cannibalisation.
In 2007, broadband infrastructure was limited and streaming
quality was modest. Netflix leveraged the financial stability
of its DVD business to underwrite the massive investments
required for streaming content licensing, server infrastructure
and product development.
Streaming was initially offered as a free value add to DVD
subscribers, a deliberate move to shift consumer behaviour
onto the new digital architecture while the physical business
footed the bill.
As streaming grew, a new risk emerged:
Distribution dependency. Netflix was reliant on licensed content from studios such as Disney, Warner Bros. and Sony.
To reduce this vulnerability, Netflix made a bold move in 2011, commissioning original content at scale, starting with
House of Cards.
In 2011, Netflix announced the split of its DVD and
streaming services, creating a new brand: Qwikster.
The move was poorly communicated and backfired.
It resulted in ~800,000 lost U.S. subscribers in a single
quarter and a stock price decline of over 75% within
months. Hastings issued a public apology and
abandoned the split.
01 Protect core to fund edge: Use legacy
cash flows to finance high uncertainty
innovation.
02 Anticipate supplier encroachment: Move
up the value chain before partners become
competitors.
03 Execution trumps vision: Strategic clarity
means nothing without operational discipline.
Hastings understood that successful strategy requires an uncomfortable trade-off: using today's profits to fund the very technology designed to obsolete those profits.
The ability to disrupt yourself does not eliminate execution risk. Strategic foresight shows you what needs to be broken; only operational empathy and disciplined governance will ensure the company survives the rebuild.
Protecting Today
+ = Inevitable Decline
Resisting Tomorrow
Funding Tomorrow = Strategic Cannibalisation
with Today
Right Direction ≠ Flawed Execution
Dominance Without
Complacency
The Fear of Standing Still
A Calculated Bet
Upgrading the Value Chain
Right Direction, Flawed Execution
01 The Dominant Cash Engine
02 The Fear of Standing Still
03 Funding Tomorrow With Today
04 The Vulnerability of Distribution
05 Commissioning the Future
06 The Qwikster Misstep
07 Strategic Lessons
08 The Boardroom Takeaway
