A study about the innovation process in Netflix trough the time, and the impact of HR on it.

2. Summary
Table of content
Introduction......................................................................................................................................................... 1
Netflix in brief...................................................................................................................................................... 1
Innovation in Netflix trough the time.................................................................................................................. 2
Innovation process in Netflix............................................................................................................................... 3
A company with a start-up mentality.................................................................................................................. 4
Frugal innovation in Netflix ................................................................................................................................. 5
Seek opportunity in adversity ......................................................................................................................... 6
Follow your heart ............................................................................................................................................ 6
And what about E-Raws?..................................................................................................................................... 6
Lean start-up method in E-Raws ..................................................................................................................... 6
Frugal Innovation – Follow your heart ............................................................................................................ 7
Conclusion ........................................................................................................................................................... 7
References........................................................................................................................................................... 8

3. 1
Introduction
Before becoming the platform of video streaming we know today, Netlix business model was quite different
since they’ve started in 1997 by sending physical DVD’s to people, through the post office. Through the years,
they’ve completely managed to change their business model, thanks to innovation. (Muriel D. V. 2014)
Thus, we will tackle in a first part, the evolution of Netflix offer through the time, and the importance of
innovation in this process. Then we will focus more on the entrepreneurial characteristics of Netflix.
Netflix in brief
Netflix Inc
Netflix is an American company which offer a streaming service with TV shows and movies. Netflix
was created by Reed Hastings and Marc Randolph in 1997 (PR Netflix n.d). It is now the leader in
the field of legal streaming with thousands of films and series that can be rented online. Netflix has
recently arrived on European market, and is still facing a huge economic growth.
Name: Netflix, Inc Foundation date: 1997
Founder: Reed Hastings & Marc Randolph Share price (04/11/15): 109.74 USD
Head office: Los Gatos, California Turnover (USD Mn): 5,504.7
CEO: Reed Hastings Employees: 2189
Main competitors: Popcorn Time, HBO, Amazon Prime instant video, Hulu Plus, and local video
club.

4. 2
Innovation in Netflix trough the time
When Netflix started in 1997, their business model was already a major innovation: they were
proposing a subscription, which was enabling people to rent DVD’s for unlimited time. DVD’s where
sent through the post office, to the customers (Muriel D. V. 2014). In this particular point, we can say
that Netflix was already applying the concept of Innovation as defined by Schumpeter (Karol S. 2013)
in the sense that they were creating themselves a new market, thanks to a new technology.
From the beginning, Netflix was able to apply the concept of blue ocean strategy to themselves. For
the record, the blue ocean strategy, is a strategy where you create a new market, with a new client
group, which lead to a high profitability (W. Chan Kim and Renée M. 2005). By using DVD’s and
sending them to customers directly at their home, Netflix created itself a new market and successfully
manage this blue ocean strategy.
In 1999 the company is already making some money, by generating a turnover of $ 5,006,000 (Netflix
Inc, 2002). It allows them to focus more on innovation, and on a way to improve their service. Thus,
after a year of reflexion, they launches, in 2000, personalized recommendation for movies, based on
their members rating (PR Netflix n.d). Consequently to this innovation which provide a better quality
service, the number of subscribers skyrocket from 292 0000 people in 2000, to 456 000 people in
2001.
From 1999 to 2007, Netflix has been sending DVD’s to their customers, using the post office.
However, in 2007 internet has become a major phenomenon, and 70.2% of the Americans are already
using it (Internet World Stats 2014). Instead of fighting this revolution called “internet” which could
represent a huge threat, to his business, Reed Hastings choose to launch a streaming offer, which
allows subscribers to instantly watch TV shows, and movies, on their PC. (PR Netflix 200 n.d).
According to a lecture delivered as part of module M401SML, this way of acting refer to the
“lemonade” principle in the five principle of effectuation (Chomel 2015). Indeed, instead of fighting
against this innovation, Netflix has managed to use it as a new source of growth. This strategy will be
successful because in 2009, the number of subscribers overtake 10 million people, for the first time
in Netlix history, to reach 12,268,000 people (Netflix, Inc. 2009).
In 2009 and 2010, Netflix continue to innovate by becoming available on more supports, as Xbox,
PlayStation, Ipad, Iphone, and so on… (Pr Netflix n.d). By doing so, Netflix want to become the
streaming reference for youngs, and gamers.
All these innovations will be rewarded in 2012, when Netflix will win his first Emmy Engineering
Award (PR Netflix n.d). This award is granted by the National Academy of Television Arts & Sciences
to reward company which develop significant innovation in broadcasting technology (The National
Academy of Television Arts & Sciences n.d)

5. 3
Innovation process in Netflix
We just saw, the major innovations that Netflix implemented over the year in the previous part. It’s
now time to focus more on how they implemented them, and how they are still innovating today.
Something interesting about Netflix is that they do not have, on purpose, a clear innovation process.
The concept of process itself, is not fitting well with Netflix’s corporate culture. They even say: ‘Once
you lock into one process you stop innovating’ (Unexpected Sources of Inspiration 2015). Netflix
believe that they need to remain free in their way of working and thinking, in order to have the best
ideas possible, without having to get through many steps of a process, each time you want to propose
something. The idea is to have a progressive procedure which let you innovate and try new things.
(Unexpected Sources of Inspiration 2015). This vision of innovation rely on a very strong corporate
culture, where each employee is free to do almost what he wants, as long as it is in Netflix best
interest. In 2009 the CEO, Reed Hastings will publish a document called “Freedom and responsibility
culture” in order to promote the Netflix corporate culture, and show the path to follow for companies
which would be interested. This document had a huge impact, so much so Sheryl Sandberg, Facebook
COO, will qualify it as 'The Most Important Document Ever to Come out of the Valley' (Business
Insider n.d).
To sum up, there is no real innovation process in Netflix, instead, they are using empirical observation
to innovate. When they have an idea, they build a prototype of that idea, and they try it on a small
percentage of customers (FrAndroid 2015). This method called A/B testing enable them to launch
and explore new ideas, without risking too much. Then, if they have good feedbacks from the test
panel, they launch the idea to all the other subscribers.
For instance: According to Todd Yellin himself, who is VP of Netflix in charge of innovation, their
platform interface is crucial to the success of the company, because people don’t want to spend ages,
looking for something to watch (FrAndroid 2015).
As a consequence, before pushing out a new user interface (UI) for their service, they select a
representative panel of customers, and they make them try this interface. This is the concrete
application of the A/B testing method .The best part is that customers don’t even know that they are
testing the new UI, they think that everybody has the same as they have. Netflix will measure the
effectiveness of the new UI by calculating the time needed for each person, to launch a program. If
it appears that this new UI is relevant, Netflix just have to propose it to all the others customers.
Netflix is also well aware that some of his –illegal- concurrent such as Popcorn time, are proposing a
better interface than they do. Consequently, they take inspiration from it, and they try to do
something better.
Another important thing that help Netflix to innovate is the Big Data. In fact, they use it to track
down, the way their customers behave themselves when they use Netflix: Do they see a lot of trailer

6. 4
before choosing a program? How much time do they spent reading the synopsis? Etc… All of these
date are analysed in order to improve the recommendation made by Netflix. Having an excellent
system of programs recommendation is also crucial for the company, because 75% of the videos that
are seen, come from these recommendation (InfoQ 2014). And to maintain a high quality service of
recommendation, Netflix doesn’t hesitate to dedicate a lot of resources, to this aspect. Concretely
three hundred people are working to maintain and improve Netflix content recommendations, and
one hundred and fifty million are spent on it (Gigaom 2014).
However, an interesting point to consider is the difficulty for Netflix to adapt his suggestion according
to external factors such as time, day, holidays and so on. Indeed, it is likely that people watch
different programs according to their mood, their feelings. And Netflix is still struggling to identify
well, what to propose, to who, and when (InfoQ 2014).
Finally, another expression of the importance of innovation for Netflix, is the resources allocated to
it. In fact, the research and development department at Netflix, employs at least one thousand
people. (Industrie Techno 2014). If we correlate this number with the total employees of Netflix
(Netflix has currently two thousand and one hundred eighty nine employees) we realize that, almost
half of the company work force is allocated to innovation.
In the light of these elements we can easily understand why Netflix is often quoted as one of the
most innovative company in the word.
A company with a start-up mentality.
Even if Netflix has now become a major company, with thousands of employees, the start-up spirit
is still an essential component of Netflix’s identity. As we saw before, Netflix is using the lean start-
up principle, to innovate.
For the record, here is a model of the lean start-up principle:

7. 5
Let’s take again the example of a new UI developed by Netflix, in order to improve his service.
The first step in order to design a new UI is to have ideas about this new one. This step match with the
“ideas” step of the lean start-up method. Then, Netflix build a prototype of this idea (this is the “build” and
“product” step in the chart), and they push it to a small panel of subscribers. The next step, (“measure”and
“data”) is crucial, because this is where you get the feedbacks from your customers.
As we saw in a lecture delivered as part of module M401SML , the lean start-up philosophy is to make a
prototype of your product or service, as fast as possible, and to test it as soon as possible, in order to see the
market reaction (Chomel 2015). The goal is to create something that people are actually ready to buy. Netflix
as well understood this philosophy because they pay good attention to their customer’s feedbacks.
And finally, if the feedbacks are good, Netflix implement the new innovation, in his service, and push it to all
of his customers.
In many companies, the more employees there are, the more managers monitor them. Netflix as a very
different way of seeing things. They’ve been quoted many time as an example in term of management
(Business Insider n.d).
In fact, Netflix as a very specific form of management, because all of the employees are –almost-
totally free to do what they want. For example:
 There is no vacation policy. Employee can take as much vacation as they want, as long as the
work is done, and you’re covering your responsibilities.
 You do not need to have your expenses approved by your manager
 You do not have yearly performance review.
The philosophy, is that Netflix let you free to do what you want, as long as you do it Netflix’s best
interest (Timothy S. 2015). In general, Netflix assume that you have amazing judgement, which is why
they let you free to do what you want. All of their management system is based on the core principle
which is “Freedom and responsibility. This system has been built to promote innovation and
creativity. Indeed, employees are pushed to innovate, without having the fear of being refrained by
their managers.
This way of managing people, this capacity of innovation, is deeply link with an entrepreneurial mind-
set. In fact, one of the main advantage of being a start-up, is that you can be agile, you’re flexible,
and you trust your employees. And when all of this characteristics are present, it’s easier to innovate!
Frugal innovation in Netflix
Even if Netflix is a huge company, they are still applying to themselves some of the frugal
innovation principle:

8. 6
Seek opportunity in adversity
Netflix’s CEO, Reed Hastings has always been looking for new opportunities in adversity! A concrete
example of that would be in 2007, when Reed Hastings chose to use the streaming as a growth
area, instead of fighting it. And he did so, even if the streaming was, in the principle, destroying his
business model (Pr Netflix n.d).
Follow your heart
As we saw before, this aspect is really important in Netflix. In fact, Netflix really believe in
employee’s opinion, and they encourage them to follow their heart in their everyday job.
And what about E-Raws?
E-Raws is the name of my entrepreneurial project of the year. The goal of our project is to create a structure
able to identify talented gamers, and to offer them to play in international e-sport competition. To do so, we
will create a Gaming Club, built on the same model than regular sports club, like tennis club for example.
In practice, it will be a physical club, where people will be able come to share a drink, and play some video
games on console, but mostly, they will come to play E-Sport. They will have high quality computer, and a
beautiful arena, where they will have everything they need to train themselves. We will give coaching to
people who want to improve themselves, and we will recruit the best players, in order to make them run for
national, and international E-Sport tournament. When we will have acquired some reputation, and a good
credibility, we will be focusing more on being E-sport team’s managers.
We apply, in our daily project life, many principles that we just saw before:
Lean start-up method in E-Raws
We really believe in this method, which is way we are applying it for every aspect of our project. For
example, we have built a first business offer, and we are now going to test it! To do so we will organize an
event with many potential customers, that we met online, and we will talk to them about our idea, and what
they think about it. The goal is to see, if what we believe to be interesting, appear to be truly valuable or not.
In many business project, you need to build your offer and proposal with the potential customers, but this is
particularly the case in our case! Indeed, geeks are very demanding customers, and they know very well
what they want! Consequently, if we want to succeed, we definitely have to build our service, for geeks, but
with them too.

9. 7
Frugal Innovation – Follow your heart
It is very easy for me, and our team, to follow our heart on this project, because we have quite a precise idea
of what we want to achieve. We have a good understanding of the market, because we are a part of the
community we want to target. Moreover, we have the vision, of what we want to become in the future.
Consequently, is quite easy for us to follow our heart, and our intuition.
Frugal innovation – Seek opportunity in adversity
We are also trying to apply concepts of frugal innovation to our project, and especially the “seek opportunity
in adversity” concept. In fact, we discover some weeks ago, that one of our potentials customers was
opening this winter in Lyon. Instead of fighting him directly, we’ve slightly adapted our business model, in
order to take advantage of the fact that he will give a lift to our ecosystem. It would be interesting to work
with them, and try to organize events in common, instead of being direct competitors.
Blue ocean strategy
In the same way as Netflix as managed to use the blue ocean strategy, we are trying to do the same thing in
E-Raws. The idea of creating a club, especially made to identify and create a pro player team, is something
totally new in the video game world, and especially in E-Sport.
Conclusion
As we saw in this course work, Netflix is a very innovative company, that as managed to keep his
entrepreneurial spirit over the years. If Netflix is such a success today, is mainly because of its capacity to
constantly innovate, and find new opportunities. One of Netflix’s biggest asset, is its human resource, and its
knowledge in people management.
Even if Netflix is still having some challenges to face, like succeeding is international development, we can
affirm without a doubt that this is one of the most innovative company in the world.

10. 8
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