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NETFLIX

How is the company that revolutionized the way we rent movies rein­venting itself? By making the movie-watching experience even more hassle-free. Netflix is utilizing superior customer service, emerging technologies, strategic partnerships, and an ever-growing subscriber base to transform the traditional video-rental model into a 21st­century on-demand concept.

No More Waiting

For only $8.99 a month, Netflix’s 12 million customers can instantly watch any of its 17,000 movies and TV episodes streamed to their TVs and computers and can also receive any of its 100,000 titles delivered quickly to their homes. Netflix members can exchange DVDs as often as they want using a postage-paid return envelope. There are never any due dates or late fees. Everything is hassle-free and picture perfect! Netflix was founded in 1997 and has truly revolutionized the way we rent movies. It launched its online subscription service in 1999 and has now become the world’s largest online movie rental service.

The company has more than 55 million discs and, on average, ships 1.9 million DVDs to customers each day. On February 25, 2007, Netflix announced its billionth DVD delivery. Two years later, on April 2, 2009, the company announced that it had mailed its two billionth DVD. The com­pany recently announced the availability of a free Netflix app for the iPhone and iPad allowing users to instantly watch TV episodes and movies. The company is experiencing amazing growth in subscribers and revenues. For fiscal year 2009, rev­enues exceeded $1.6 billion with net income rising above $123.5 million.

Keys to Success

What accounts for Netflix’s success? Co-founder and CEO Reed Hastings believes the key to the sustained growth of the Los Gatos, California-based company is no secret at all— it thrives and stays ahead of competitors because of its renowned customer service. Beating out such heavyweight competition as Amazon, Apple, and Target, Netflix was crowned Number 1 in online retail customer satisfaction by independent surveys from Nielsen Online as well as in nine consecutive sur­veys by ForeSee/FGI Research.

Netflix's continued focus on providing customers with what they want allows the company to differentiate itself from the competition. More than 97% of Netflix’s subscribers live within one day of delivery from the company’s 58 distribution centers or 50 shipping points. For example, Netflix has seven shipping centers in Florida, six in California, and six in the state of New York. Netflix even provides customers with movie recommendations based on the customer’s own re­views, renting habits, and location. A Netflix subscriber can check to see what movies and television programs are popu­lar in their town. Another key success factor for Netflix has been the quick adoption of emerging technology and the formation of strate­gic partnerships. According to Hastings, “Netflix’s differenti­ated service, which combines DVDs delivered quickly by mail and movies streamed instantly over the Internet, is a key ele­ment driving our growth.”

In order to accomplish this, Netflix has partnered with con­sumer electronics companies to bring to market a range of de­vices that can instantly stream movies and TV episodes from Netflix directly to members’ TVs. These devices currently in­clude Blu-ray disc players and new Internet TVs from LG Electronics; Blu-ray disc players from Samsung; the Roku dig­ital video player (a palm-sized box to set on top of a TV); Microsoft’s Xbox 360 game console; TiVo digital video recorders; and, soon, Internet TVs from Sony and VIZIO. Netflix is even shipping instant streaming discs for the Wii enabling viewers to catch their favorite TV episodes and movies on their Wii consoles.

Putting People First

But has Netflix’s ability to attract and retain a dynamic, high-performance workforce also been an important factor that has propelled the company to such success? Yes, in order to succeed in this business, Hastings is betting as much on people as he is on technology and his business vision. The company does not act like other large employers when it comes to its human resources management and cul­ture. Instead, Netflix has created a very interesting organiza­tional culture based on freedom and responsibility, innovation, and self-discipline. Patty McCord, Netflix’s chief talent officer, understands that deftly managing the talent mix at Netflix is paramount to the success of the company.

Netflix is committed to hiring and retaining the best talent in the industry. One of their recruitment and retention practices is to pay top salaries. Netflix believes that one outstanding employee does more and costs less than two adequate performers. Thus they pay at the top of the market and strive to hire only outstanding employees. Interestingly, pay isn’t linked with performance in the sense of annual “merit” reviews. Annual compensation reviews are market-based as well. Salaries are pegged to job markets to ensure that Netflix’s pay packages are always the best around.

Freedom with Accountability

If you are identified as a top performer, you get top salary and are given the freedom to put your talents to work making Netflix’s strategy successful. But if you’re something less than a top performer, say just “average,” there isn’t room at the company. “At most companies,” says Hastings, “average per­formers get an average raise. At Netflix they get a generous severance package.” The Netfix focus on large salaries is coupled with the free­dom to spend it as employees think it is best. Employees choose how much of their compensation is paid in cash and how much in stock or stock options.

Flexibility Rules a Productive Work Environment

Netflix not only hires carefully, it offers a unique and highly productive work environment rich in features that appeal to today’s high-tech and high-talent workers. They believe in freedom and responsibility, not rules. Since 2004 Netflix has not had a vacation policy. Instead, the company encourages employees to take time off when they need to. Similarly, they do not have a 9-to-5 work schedule but measure people by how much, how quickly, and how well they get their work done, not by how many evenings or weekends they are in their cube. 16 Netflix has a lot riding on its human resource strategy. Will it continue to pay off?

Case Analysis Questions

1. What are the limitations and risks of Netflix’s human resource management practices?

2. What performance appraisal methods would be most consistent with the organizational culture surrounding Netflix’s HRM practices?

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