Library / Biographies | Industries

Date of review: January 2022
Book author: Reed Hastings and Erin Meyer
Вook published: 2020

No Rules Rules: Netflix and the Culture of Reinvention by Reed Hastings and Erin Meyer (2020)

The essence of the book is the importance of culture as a competitive advantage. It also reviews many real-life cases. It is an essential read if you plan to run your own business or consider investing in a new company. Looking just at financial statements is not enough, you have to know the company's culture especially if you plan to hold your investment over the long term.
Do you think you would deliver better results at your job if you were paid a higher bonus? If you are like me, you probably answered Yes. Actually, according to Netflix, the answer should be Not at all, at least if you work in the creative area. I was initially hesitant to read the book since so many resources are available online for free - especially the famous slide deck on Netflix culture, which I saved on my website HERE. I was also afraid to read yet another book on corporate success as so many of them say very little new other than 'A successful company had a successful founder who developed a successful product and achieved the success for his company with the help of a successful team'.

Luckily, the book turned out to be both helpful and enjoyable to read. It focuses on a few core ideas backed by various real-life situations. It focuses on a few core ideas backed by multiple real-life situations. I also liked the format with two authors: Reed Hastings, CEO and co-founder of Netflix, and Erin Meyer, an INSEAD professor and an author of another book - 'The Culture Map'. Two authors had slightly different roles, with Hastings stating key messages, his beliefs and rationale for particular decisions, while Meyer put it into a more general academic context.

The essence of the book is the importance of culture as a competitive advantage.

Hastings wrote: 'I am often asked, "How did it happen? Why could Netflix repeatedly adapt but Blockbuster could not? " [They…] held all the aces. They had the brand, the power, the resources, and the vision. Blockbuster had us beat hands down. It was not obvious at the time, even to me, but we had one thing Blockbuster did not: a culture that valued people over process, emphasised innovation over efficiency, and had very few controls'.

1. Increase talent density

NBA Dream Team

The culture at Netflix focuses on hiring the top talent only. I have not thought about this before, but if you have five stars in your team and two underachievers, the net result of that team would gradually converge with the team of seven average performers. According to Hastings and Meyer, keeping poor performers on the team management sends the top stars a message that mediocracy is tolerated here. Besides, even a minority, employees with the wrong attitude and mindset would eventually influence the star performers by lowering their standards, focus and energy level. Many experiments have proven this.

To solve the cost issue ('Rock stars' are expensive), Hastings split the functions at his firm into creative and operational roles. There is limited upside for an operational position (e.g. the best driver can reduce travel time by maybe 10% and have a 30% lower accident rate). Even if Netflix pays 3x more for such an operational role, the result won't change dramatically.

It is a very different situation with creative roles. The impact a great director can have on the ultimate success of a film can be tremendous. The effect on the P&L of a studio can be 10x, 100x or even 1,000x.

This is why Netflix pays in line with the market salaries for operational roles and top of the market for creative ones.

I was also surprised to learn that Netflix had a no-bonus culture. I did not realise that until I read and thought about it, but bonuses are not the key motivation for employees in creative jobs.

Netflix paid top salaries, which often equalled a base and a bonus at other firms, allowing employees to focus on the product and creative process and not worry about the final pay.

An interesting point, as Hastings writes, is that bonus culture relies on the premise that you can reliably predict the future and set the right set of KPIs (e.g. a number of new customers vs retention rate). But targets change depending on circumstances. In a bonus culture, employees become too short term focused trying to meet their formal targets in order to get a bonus. They also become risk-averse and generally less flexible in their views and strategic decisions.

Bonuses can be effective at incentivising mechanical work. But cognitive skills cannot be stimulated with a year-end bonus. In fact, performance gets worse as your mind starts focusing on the future bonus.

According to Netflix, high salaries, not high bonuses, are good for innovation. Besides, according to Hastings, top performers want to compete and succeed regardless of a one-time cash bonus.

2. Increase candour

The second step to improve the culture after filling your company with top talent is to introduce transparency in the company. In a normal company, this can backfire, but as long as your team is made up of the best professionals, they will appreciate it more and could even become more productive. Being open about key business indicators increases the sense of partnership and engagement among employees. They become even more responsible and treat the company as their own.

I was actually shocked to learn that after Netflix went public, its CEO Reed Hastings, has not changed his practice of announcing key financing results before the official release to the market. At least he notified employees that sharing this information with anyone outside of Netflix is a criminal offence. Such policy demonstrates how much trust the company's management had in its employees.

In a similar vein, Netflix is open about employees' performance. The company does not have year-end review sessions as feedback is constantly shared during daily life. It reminded me of the culture at Bridgewater Associates as its founder, Ray Dalio, likes to call it 'Radical Transparency'.

Feedback is highly appreciated, especially by managers when it comes from their subordinates.

There is a 4A rule on feedbacks at Netflix

  • Aim to assist. Feedback must be given with positive intent. Providing feedback to get the frustration off your chest, intentionally hurting the other person, or furthering your political agenda is not tolerated.

  • Actionable. Your feedback must focus on what the recipient can do differently.

  • Appreciate. Natural human inclination is to provide a defence or excuse when receiving criticism; we all reflexively seek to protect our egos and reputation. When you receive feedback, you need to fight this natural reaction and instead ask yourself, "How can I show appreciation for this feedback by listening carefully, considering the message with an open mind, and becoming neither defensive nor angry?"

  • Accept or discard. Netflix expects you to listen to feedback, but it is entirely up to you to decide if you want to take it into account and follow the advice.

Netflix is also famous for approaching inevitable personnel cuts - fast but generously in line with its unusual transparency. Its slogan 'Adequate Performance Gets a Generous Severance Package' is well known. Managers are expected to use the 'Keeper test' asking themselves, 'If a certain employee leaves tomorrow would I fight to keep him at all cost?'. If the answer is No, the manager should start looking for a replacement now.

3. No policy on almost anything. Lead with context, not control

I found it exciting to read how Netflix scrapped its holiday policy. Hastings and his former Chief of Staff and early partner in the business, Paddy McCord, decided that such policy increases bureaucracy and requires more efforts to control and monitor its employees. They also found that it was more important for employees to see how many days their managers spent on vacations. If a manager were away for two weeks a year, their employees would take less than two weeks of holidays.

Even more shocking to me was to read about Netflix expense policy. In short, there is only one policy: "Do what is in the best interest of Netflix if you owned the company". So, for example, Netflix employees are free to choose if they want to fly business or economy. They should expect their expenses to be randomly reviewed, especially if they are disproportionately high and are expected to have a good business reason. Taking a business flight in order to be fresh for an important presentation is considered a fair business reason.

4. Other interesting points

Netflix encourages delegating decision making to its employees. Managers are expected to have full trust in their teams. If they do not have confidence, then they should look for a replacement.

Netflix emphasises the importance of innovation. According to Reed Hastings, "Netflix is in a creative market. Its biggest threat, in the long run, is not making a mistake, it is lack of innovation". The real risk is failing to come up with ideas on how to entertain customers and therefore becoming irrelevant for them.

The family culture is not appreciated at Netflix. It creates a sense of security and tolerance for mistakes. You cannot lose your position in a family if you are not working hard enough. Such culture is bad for business, according to the authors. Instead, Netflix tries to create an atmosphere of a professional sports team made up of top performers all united by a single goal and eager to support each other. From time to time, players lose their positions and change teams as the coach wants to strengthen the team and achieve better results.

Netflix does not use the stack-ranking system for evaluating the performance of its employees like Microsoft or some other tech companies. Netflix does not have the policy to cut the bottom X% of under-performers. The reason is that such a system forces employees to compete against each other rather than compete against other businesses in the industry. It discourages collobaration. Instead, employees at Netflix constantly receive feedback as part of their daily work. If they do not deliver as expected, they will learn it from feedback rather than from an HR based on a formal year-end review.

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