In April, 2012, Reed Hastings, the CEO of Netflix, surprised Wall Street by claiming Netflix would add seven million net subscribers in 2012, significantly more than trends would suggest. Unfortunately, in late October, only 2 months before the end of the fiscal year, he alerted the financial community that his new guidance was for net additions of between 4.7 and 5.4 million subscribers. As you would guess, the Netflix share price got hammered.
This isn’t the first time Netflix has been chaotic in regard to its business direction. Recall it was Fall, 2011 that it announced a sixty percent price increase on DVD rentals. Given the customer chaos that immediately ensued, Netflix quickly backed off of that increase.
Soon after that incident, Netflix announced it would split the company and the DVD business, which is its most profitable business, would be spun off and become a separate company called Qwikster. Again, this created massive confusion and a very negative reaction on the part of investors, causing Reed Hastings to quickly backtrack again and indicate the DVD business would not be spun off.
So…what was the result of all this chaotic behavior? Netflix stock price went from a high of $300 back in July of 2011 to the mid sixty dollar range in late October, 2012. More importantly, reliable vendors such as Amazon stepped in and aggressively took advantage of the shaken confidence of Netflix users.
How does a leader avoid the kind of spastic behavior? Here are a few basic suggestions:
1.) Encourage Fresh Thinking but Don’t Immediately Execute – You need bold and exciting ideas but avoid your immediate instinct to take them directly to the marketplace.
2.) What Can Go Wrong? – You should pick a small group of people and tell them you want them to be as skeptical as possible in regard to why the idea is not a good one. They should also think through the positives but a strong focus should be placed against what can go wrong.
3.) What’s the Customer’s Reaction? – After you complete the internal exercise of positives and negatives, it’s time to sample some customers and get their reaction. Various industries have various ways in which this can be achieved but it’s important to get some sense of how customers might react.
Given a bright idea, speed is important, but what is critical is not to do something stupid!