Blog

What do Amazon and Netflix have in common?

Amazon and Netflix are competitors, in that Amazon’s streaming video service is directly competing with the Netflix offering, and both companies are now in the business of producing their own original series. And they have both posted good growth, and achieved record stock valuations: Amazon almost hit $1000/share this last week, and Netflix spiked to $390, an all-time high.

Of course Amazon is busy in a dozen or more markets — retailing, cloud computing, Android, Chrome, search, etc. — so it’s perhaps unfair to line the two companies up side by side.

However, in several crucial ways, the companies share some basic operational principles, directly the result of the management thinking of Jeff Bezos and Reed Hastings, Amazon and Netflix’s founders, respectively.

There are several interlocking pieces of the work compact at these companies. I wrote about Reed Hastings ‘talent density’ theory recently (see Countering the traps of complexity and growth by creativity and context: the Netflix model). His notion is that you can stay ahead of the complexity inherent in a business getting larger by increasing the percentage of high performing employees, and working hard to counter complexity without, however, resorting to processes to do so. Hastings believes that encoding operations into processes drives out high performing employees, and should in general be avoided.

In both companies, we see these principles at work:

  1. Only the very very best people are hired (high talent density).
  2. Don’t work to prevent problems (process approach), instead work to fix problems quickly (favor creativity and experimentation over predictability and efficiency).
  3. Leadership’s role is to set context (see How to balance autonomy and heteronomy: Doctrine) not to control decision-making through committees, management sign off, and long-range centralized planning (autonomy over heteronomy).
  4. Loosely coupled operations: minimal cross-functional meetings (see Amazon’s “two pizza” teams keep it fast and loose), organizational trust that others will apply the best tactics to achieve strategic goals, and constant refinement of tactics.

So that sets the context for the way that business gets done, but what about the compact with these high performing workers? And how does ‘advancing your career’ play out in organizations like this, where the goal is to continuously increase the talent density? The answer: It’s slow.

Brad Stone explored the Amazon side of this in Why It’s So Difficult to Climb Amazon’s Corporate Ladder, writing about his book The Everything Store: Jeff Bezos and the Age of Amazon,

[…] in my interviews with rank and file employees, one common complaint I heard is that positive feedback from superiors is rare and promotions even rarer. This, it turns out, is probably by design. Amazon Chief Executive Officer Jeff Bezos seems to believe his managers must raise the performance bar with every hire and promotion and that only exceptional talent should progress within the organization. As he has done in so many other ways, Bezos has codified his beliefs within his company in the form of a custom called the OLR, for organization and leadership review.

OLRs are a set of biannual meetings at Amazon at which senior leaders in each department gather to debate the strengths and weaknesses of their subordinates, to approve promotions and, in some cases, target the worst performers for dismissal. An internal company presentation posted on the Web describes the custom.

“OLRs give us the opportunity to identify our future leaders and prepare them for their next challenging role,” it reads. “Our Least Effective 10% of employees will be targeted for appropriate action to keep Amazon’s performance bar high.”

This system acts as a dramatic check on advancement, since other senior managers can block the advancement of employees, and they each have only so much pull to get candidates recognized as among the very very best. In principle, these companies are focuses on key metrics that represent results against objective goals. In practice, detractors suggest that there is a lot of politicking involved at Amazon, and not just objective assessment of how super the superstars are. The key point is that the pressure to resist advancement is strong.

Netflix positions its thinking in different terms, focusing on doing whatever is needed to hold onto the very very best employees. They pay top salaries, and instead of allocating raises across the board — 4% for all people in a team, for example — managers are more likely to concentrate on doing what it takes to keep the best performers. In effect, this leads to the same outcome as Amazon’s, which is that people either a/ are advanced because they are part of the exceedingly small percentage of the very very very best who look like a superstar in a company of stars, or b/ accept their relatively slow penetration into the company’s inner circles, or c/ leave to pursue opportunities elsewhere.

Netflix also makes it a matter of policy that they “want people to manage their own career growth, and not rely on a corporation for “planning” their careers.” Note that the ‘corporation’ in that sentence means Netflix. This benign neglect is a sign of laissez-faire management, which works only in the context of a culture dominated by the best and brightest, a culture of high talent density. This new covenant — which I wrote about in Dig Your Own Hole, Sharpen Your Own Shovel — leaves it to the individual to plan and execute professional development, but in a company like Netflix, where the vacation policy allows generous vacation time, people actually have the slack that is needed to ‘sharpen their shovel’.

This culture bears similarities to management and strategy consulting and law firms, which historically practiced an up-or-out model of professional career, and a path toward partnership or senior roles. In less hierarchical, modern companies the ‘up’ might refer to a leadership role on a new initiative rather than making partner, but the result is similar.

I believe that this will become recognized as the defining organizational cultural model of our time, the way that the man in the gray flannel suit defined post-WWII American business. The laissez-faire work compact works well in our time and circumstances, so long as the company is populated by stars, and complexity held down systemically.

The economy and society are changing too fast for process-based efficiencies to succeed, as a general rule. Success is increasingly tied to innovation, creativity, and agility. That puts pressure on leaders to select those people with the greatest levels of those characteristics, and to minimize impediments to them applying those skills. So the role of leadership is attracting stars, advancing only the superest superstars, and meanwhile characterizing the company’s goals clearly and embedding that into cultural context, or doctrine. This is the fast-and-loose form factor of work, which puts a high premium on individual and group autonomy over explicit consensus.

Netflix and Amazon are two companies that embody these principles, and will be leading indicators not only in the stock market, but in the marketplace of ideas surrounding the dramatic changes we are going through in the postnormal workplace.