Marc Randolph knows a thing or two about disruption. He was one of the Co-founders of Netflix and since he left in 2004, he has been a mentor, investor, and CEO coach in numerous start-ups.
We are talking about how businesses stay relevant in a world that seems to be in a constant state of flux. Randolph believes that the key is to be very careful about what you are focusing on, especially if you are currently working in a sector that is in the midst of change or is about to undergo change.
“If you take Netflix, we started 20 years ago. Obviously it was a very different time and there was no streaming,” he says. However, this didn’t mean that the company couldn’t guess at the shape of things to come. Even in the mid-90s it was foreseeable that the tiny trickle of data flowing into homes via 56k modems would one day become a torrent. “We knew that, in the future, the world would look very different and we needed to build a business that would work for that.”
You have to disrupt yourself before someone does it for you.
The trick, he explains, was to start with the right premise. “If we’d said that Netflix was going to be the fastest and best shipper of plastic items [like DVDs], we would still have built the same company at first, but as the world transitioned away from DVDs to streaming, it would have ceased to be relevant.” So instead, Netflix built itself around being “the best place to find things you wanted to watch”.
All this may seem like a descriptive nicety, but it’s not. With this premise, Randolph says, you have an idea that is “platform-agnostic” and works equally well for a DVD rental website and a streaming service. What is more, he adds, the premise will still be relevant in the future.
A statement of intent
Jonas Kjellberg, one of the creators of Skype and a lecturer at Stanford University, takes a similar view. He believes that to create a company that is going to stand the test of time, you need clarity about your proposition.
This, he explains, makes it much easier to keep everyone aligned, whether they are customers, suppliers or employees. Here, he offers the example of the Swedish clothing company H&M. Their stance is admirably straightforward. Rather than saying that they are a cheap clothing company, they say that they are a fashion company but cheaper, Kjellberg explains. “They’re on Fifth Avenue like Prada, but there’s one less zero on their price tags.” Their statement of purpose and mission informs everyone. It acts as a rallying point for staff, a reference point for other stakeholders, and leaves customers in no doubt about what they are getting.
Jonas Kjellberg, Co-Founder of Skype
Of course, having a great proposition is not everything. You need to stick to your purpose even when it’s very tempting not to. But having this clarity in the first place means it is easier to stay the course.
If you look at highly successful companies, they often have a very clear definition of what they’re selling or what problem it is that they’re solving.
Had Netflix decided to be a great plastic-shipping company, Randolph says, it would have built big warehouses and worked on having strong relationships with certain shippers. But because it knew that this was not the future, it did not focus on a lucrative activity that was on the way out. “You find yourself making quite a lot of compromises at the time,” but it’s a form of long-termism. You make the present a little tougher for yourself but ensure that you have a future.
Changing the game
Kjellberg believes that businesses can deal with change in two main ways. “One is the re-engineering perspective. This says, ‘We’re selling the same service, but we have to adapt to new technology’. The other perspective is game changing – it’s where the technology enables you to change the operating model to something substantially different. This is disruptive technology.”
‘Disruption’ in the business sense is a term often misused to mean anything that creates significant changes. But it’s instructive to spend a moment looking at what the man who coined the phrase, Professor Clayton Christensen of Harvard Business School, meant by it.
Most people, he says, seem to agree that Netflix is genuinely disruptive. When it started it didn’t really target the customers of Blockbuster, the incumbent, who tended to rent new releases on impulse. If they wanted a DVD, they drove to their local store and rented it to watch immediately. Netflix, by contrast, had a great selection but required you to wait a couple of days for your DVD to arrive by post. It was aimed at people like film buffs and, initially, Blockbuster ignored it because it didn’t appear to be a threat.
However, as Christensen points out in the Harvard Business Review, “new technologies allowed Netflix to shift to streaming video over the internet [and] the company did eventually become appealing to Blockbuster’s core customers ...” The point is that disruptive technologies often don’t look dangerous until it’s too late.
No pain, no gain
If you want to stay relevant, you want to be the one doing the disrupting. “You need the cultural flexibility to say you’re willing to walk away from significant investment and significant success,” Randolph says. When Netflix started, it both sold and rented DVDs. “By the end of the first year, 99 per cent of the revenue came from selling DVDs.” However, it recognised that, in the long term, this was a dead end. “So we said, we’re going to be rental only and walk away from selling.” Ten years later, the company faced the same issue with streaming.
The point, he explains, is that you have to be willing to hurt your own sales in the present for a future you believe in. This sounds easy, “but it takes tremendous courage to cannibalise the parts of the business that pay employees’ wages and move on”. However, the alternative to doing this simply means waiting to become irrelevant. “Intel had a lock on the chip business but missed out on the smaller, lighter devices that didn’t want the chips they were making.”
So, how do you make the right long-term decisions? First you have to be open to new ideas. “When you come up with an idea and start a company, it is extremely unlikely that the future company will look anything like the idea you have today,” Randolph explains. “Each time you move forward, you have a collision with a customer and you learn something that pushes you in a new direction.”
If you look at Netflix, you can see how this process is still happening. Streaming video has changed the nature of the way stories are told. When TV series ran as weekly episodes they needed to tie up a story in 30 to 60 minutes. Each episode had to start with a recap and, ideally, end with a cliffhanger, both of which reflected the fact that viewers went seven days between episodes. But now people often ‘binge watch’ five episodes in one block. This gives writers and directors a lot of freedom. It is also notable that streaming video series are increasingly seen as a competitor to Hollywood’s summer blockbusters, despite not being an obvious threat initially.
Understanding your customer
Working out what you need to do to keep customers happy isn’t just a matter of listening to them, though: you also have to look at your data. “90 per cent of all data in the world was produced in the last three years,” says Kjellberg. “The challenge of analysing that data and turning it into something useful for the end consumer is going to be mind-blowing.”
A force for good
There is also a less high-tech side to staying relevant. Randolph says that innovation, in general, tends to be “a force for good” in the sense that it delivers a better customer experience and shakes up entrenched industries.
However, “there is another definition of good – and that is doing something which is good for the planet and good for humanity.” Businesses often fail to deliver here. “But they’re starting to realise that doing good is also good for business – and we now have a generation that increasingly expects this.”
Much of staying relevant, then, is just down to treating your customers (and other stakeholders) like human beings. This might be by delivering exactly what they want or it might be by giving them something “good” that resonates with their own humanity. The best businesses have always done this – but the exponential increases in processing power and data mean that, ironically, computers are making it easier for all businesses to be human.
Understanding your core asset and how it is affected by change will become more data driven. “If you take Zalando [the German fashion retailer, which Kjellberg is involved in], 50 per cent of their sales are through the e-mails they send customers. They’ve actually started to predict when you open mail and so send it to you at the end of your commute.” And this sort of tracking and understanding of customer behaviour is just the start. “It’s about using processing power to serve individual customers better.”