Netflix: Geography, Age, Gender Not Good Predictors

David Morris wrote an article this week for Fortune titled, "Netflix: Geography, Age, and Gender are 'Garbage' for Predicting Taste." Morris writes, 

"'Geography, age, and gender? We put that in the garbage heap,' VP of product Todd Yellin said. Instead, viewers are grouped into “clusters” almost exclusively by common taste, and their Netflix homepages highlight the relatively small slice of content that matches their taste profile. Those profiles could be the same for someone in New Orleans as someone in New Delhi (though they would likely have access to very different libraries)."

Why is this statement so fascinating?  To me, it speaks directly to Netflix's competitive advantage.  If geography, age, and gender were, in fact, accurate predictors of viewers' preferences, then Netflix would have a far less formidable advantage over rivals.  Why?  Well, those variables are easy to identify and measure.  Others can get access to that data quite easily and build predictive algorithms using that information.  However, if more accurate predictive algorithms involve data that are not as publicly available, then Netflix has a key advantage.  In other words, if the predictive power rests with variables that come from proprietary data that Netflix has collected about us, then the sustainability of Netflix's advantage over competitors rises substantially.  The same holds true for any company trying to take advantage of "big data" to develop predictive algorithms.   The key is to unearth variables that matter, but hopefully, variables that are not easily identified and measured by others.  

Andy Grove: Silicon Valley Legend

Source: Time magazine

Andy Grove died this week.   A Silicon Valley legend, Grove led Intel for many years.  In 1997, Time named him its man of the year for his profound impact on society as the leader of one of the firms behind the computer revolution.  

Grove wrote one of my favorite CEO-authored books of all time - Only the Paranoid Survive.  In the book, he discusses the importance of constructive conflict as a means of making sound decisions particularly at strategic inflection points.   Here's an excerpt:

It is important to realize what the purpose of these debates is and what it isn't.  Don't think for a moment that at the end of such debates all participants will arrive at a unanimous point of view.  That's naive. However, through the process of presenting their opinions, the participants will refine their own arguments and facts so that they are in much clearer focus.  Gradually all parties can cut through the murkiness that surrounds their arguments, clearly understand the issues and each other's point of view.  Debates are like the process through which a photographer sharpens the contrast when developing a print.  The clearer images that result permit management to make a more informed - and more likely correct - call.  The point is strategic inflection points are rarely clear.  Well-informed and well-intentioned people will look at the same picture and assign dramatically different interpretations to it.  So it is extraordinarily important to bring the intellectual power of all parties to this sharpening process. 

Empathy for Workers, not just Users

Much attention has focused in recent years on the need for product developers to demonstrate empathy for the users, so as to understand how products can be improved to suit their needs.  Empathy is at the heart of human-centered design.   However, more attention should also be focused on the notion that leaders need to show empathy for their front-line employees just as much as they should for their customers.   Here's Kamakshi Sivaramakrishnan, CEO of Drawbridge, explaining to Adam Bryant of the New York Times how important empathy is to her leadership style:

The one thing that has remained consistent is that I’ve always respected people who lead from the front. A sense of empathy is extremely crucial to being a good leader. And it comes much more naturally if you’ve walked in their path.  The best way to inspire respect in people is when you can do what they’ve done or when you’re in the trenches with them. You can’t do that every minute of every day, but that is certainly something that I have respected in strong leaders.

The Downside of Employee Recognition Programs

Could there be a potential downside to non-monetary award programs for employees? Management scholars Timothy Gubler, Ian Larkin, Lamar Pierce set out to examine this important question. They collected data from an attendance award program at an industrial laundry plant. The company recognized employees with perfect attendance at an all-hands meeting. From among those recognized, one person's name was randomly selected to receive a $75 gift card. 

The researchers discovered that people did respond positively to the incentive for perfect attendance. However, people also tried to game the system, and their attendance record sagged after they lost eligibility for the recognition. The scholars also found that, "The awards crowded out intrinsic motivation in internally-motivated employees, who were already performing well by coming on time in the absence of rewards. These employees had increased tardiness after the program was implemented and they lost eligibility." In other words, the recognition program caused a drop in motivation among those workers already doing the right thing with regard to attendance.  The drop in internal motivation by these good employees led to a slight drop in productivity in the plant overall. Gubler explained the findings to Science Daily:

"Conscientious internally-motivated employees who were performing well before the award program was introduced felt the program was unfair, as it upset the balance of what was perceived as equitable or fair in the organization. So their performance suffered -- not just in terms of their attendance but also through a motivational spillover that affected other areas of their work -- including productivity."

What's the lesson here?  I do not think we should conclude that organizations should not recognize the good work of their employees.  However, we should think about what precisely we are rewarding, and how it might affect the behavior of our best employees.  They might already be engaging in the behaviors we wish to encourage.  By rewarding people for what our best employees are already doing, we might be demotivating our stars.  

How We Teach Design Thinking at Bryant University

Holacracy at Zappos

Several years ago, Tony Hsieh (founder and CEO of Zappos) made a dramatic change in the company's organizational structure and culture.   The online retailer had achieved a sterling reputation for customer satisfaction and employee engagement since its founding, and that success led to an acquisition by Amazon.  However, Hsieh has always been an innovator, and he wanted to try a different form of organization.  He implemented "holacracy" or a self-management approach.  The results have been mixed, to say the least.  Here's an excerpt from a Fortune article about Zappos:

The emphasis on employees—to the near exclusion of the usual metrics used to evaluate business—has made Zappos, owned by Amazon since 2009, a stalwart on Fortune’s annual list of the 100 Best Companies to Work For. It has been so celebrated for its 10 core values—which include “Create fun and a little weirdness” and “Build open and honest relationships with communication”—that the company has its own consulting unit to help others emulate the Zappos way.But this year, nearing the third anniversary of a shift from a traditional management structure to “holacracy,” a system that replaces hierarchies and bosses with “self-management,” something is different. In between the rapping and the report on the company’s “Pawlidayz” initiative to support pet adoptions, Hsieh, 42, takes to the stage to report disappointing news. He announces that scores on Fortune’s Best Companies to Work For survey have tumbled on 48 of 58 questions. Indeed, Zappos has fallen off the overall list for the first time in eight years. Two questions that generated particularly dismal results: Do employees think management has “a clear view of where the organization is going and how to get there”? And do managers “avoid playing favorites”?

I've been following Zappos for many years.  In fact, I visited the company in 2009 just prior to the Amazon acquisition.   I admire their ability to delight customers and engage their employees.  However, this move has created many problems.   I have three thoughts on this radical shift at Zappos. First, the organization has always adopted the notion that you can achieve great success by putting employees first.  However, I wonder whether this move to holacracy is truly in the best interests of employees.  Creating such confusion and ambiguity can be harmful to many employees.   No wonder then that many employees have left, some as a result of a buyout offer the company provided.  In the end, confusing employees could harm the ability to delight customers.  Second, Fortune reports that Hsieh made this move because he felt that Zappos was becoming too bureaucratic.  However, removing hierarchy does not equate to reducing bureaucracy.   In fact, holacracy brought with it many rules and procedures for how things should get done now.  Many meetings ensued as well.  Some have described holacracy as "doctrinaire."  In other words, the new approach may, in fact, be quite bureaucratic, but just in a different way.  Third, Hsieh purportedly hoped to reduce politics at the organization.  However, political behavior is not simply an outgrowth of hierarchy.  Politics emerges for a variety of reasons in organizations.  A lack of clarity about decision rights and organizational responsibilities, coupled with unclear mechanisms for employee evaluation, can actually lead to enhanced political behavior.  

Meg Whitman: Listening to Millennials

Forbes has a great interview with Meg Whitman this week.  In it, she talks about listening carefully to millennials in her organization.  Here's an excerpt:  

Whitman says “entitled is too strong a word” to define new graduates, but even that isn’t so bad. In fact, the impatience of today’s youth is useful at a $50 billion sales corporation like Hewlett Packard Enterprise. “They refuse to work on things that do not matter,” she says. She receives emails frequently from young hires complaining that a project they are working on isn’t going anywhere. That’s surprising, but it’s also useful.  “You would be surprised how many projects we’ve killed because a 22-year-old says, ‘That’s stupid,’ ” Whitman told the audience. “It’s a little annoying honestly.”

I've argued in the past that senior executives need to listen to young people.  They hear about new trends, ideas, and perspectives from these people.  Moreover, they often represent a key target market for their goods and services.  Finally, as one executive told me, "They are stupid enough to tell me the truth."  It made me laugh, but it was also a profound statement.  He meant that these young people did not worry about offending the boss or losing their job.  They were more willing to speak their mind, in a way that some older workers were not in his organization.   Young people do not have the experience to always know the right answers on tough issues, but they bring a fresh lens to problems.  You do not have to agree with them, or give them their way, but you can learn from them.  

Controversy for Jessica Alba at The Honest Company

Source: Wall Street Journal

By now, you all know the story of actress-turned-entrepreneur Jessica Alba.   Four years ago, she co-founded The Honest Company.   The firm aimed to provide families with eco-friendly products such as diapers and cleaning supplies that would not be harmful to children. The Honest Company enjoyed remarkable success, skyrocketing to a valuation of $1.7 billion as of August 2015. Now the Wall Street Journal reports that the firm may have some problems with one of its products. The newspaper explained: 

One of the primary ingredients Honest tells consumers to avoid is a cleaning agent called sodium lauryl sulfate, or SLS, which can be found in everyday household items from Colgate toothpaste to Tide detergent and Honest says can irritate skin. The company lists SLS first in the “Honestly free of” label of verboten ingredients it puts on bottles of its laundry detergent, one of Honest’s first and most popular products. But two independent lab tests commissioned by The Wall Street Journal determined Honest’s liquid laundry detergent contains SLS.

The company has objected to these conclusions.   Here is where it gets very interesting.   The Honest Company showed the Wall Street Journal a certificate from its supplier, indicating that the laundry detergent had zero SLS content.  The supplier, Earth Friendly Products LLC, told the newspaper that they obtained the document from their supplier, Trichromatic West Inc.  The Wall Street Journal contacted that chemical supplier.  Here is what the firm told the newspaper: 

"Trichromatic told the Journal the certificate wasn’t based on any testing and there was a 'misunderstanding' with the detergent maker. It said the 'SLS content' was listed as zero because it didn’t add any SLS to the material it provided to Earth Friendly and 'there would be no reason to test specifically for SLS.' It said the product in question 'was fairly and honestly represented' to its customer. Honest said it didn’t deal directly with Trichromatic and declined to comment further on the certificate. Earth Friendly reiterated that it relied on Trichromatic to test the ingredient." 

What's the lesson here?  Companies need to have visibility deep into their supply chain.  They need to understand precisely how their product is being manufactured and provided to them.  Such visibility proves especially important if a firm is making claims to consumers about how healthy, eco-friendly, organic or otherwise "good for you" those products are.   A company selling to end users cannot simply rely on its direct supplier to monitor and control other suppliers effectively.   If there's ever a good lesson for every supply chain professor to teach, here's one that certainly fits the bill.  

Vertical Integration at Amazon

The Wall Street Journal reports today that Amazon will be moving aggressively to expand its in-house logistics capabilities.  Here is the lead of the article:

Amazon.com Inc. is taking to the air with a fleet of planes, part of a broader effort to reduce its inflated shipping costs. The Seattle retailer plans to shuttle merchandise around the U.S. using as many as 20 Boeing Co. 767 aircraft it will lease from Air Transport Services Group Inc. News of the deal sent the air-cargo transportation company’s shares soaring as much as 24% on Wednesday.

Does this vertical integration strategy make sense?  Let's start with the first sentence of the Wall Street Journal article.  Will the move reduce costs for Amazon?  One would find it hard to believe that Amazon can move goods around the country more efficiently than UPS and FedEx.  Clearly, they cannot match the efficiency of those established players at the moment.  One does not save money simply by doing something in-house.  Some managers think you save because you eliminate the profit margin earned by the supplier (UPS and FedEx in this case).  However, that is not the case because you must invest heavily in new assets in order to conduct this activity within the firm.  Moreover, you may not be as effective at conducting this activity as your supplier.  Thus, it's not clear that profits will automatically improve.

Why then would they pursue vertical integration?  There may be other valid reasons.  First, they may be trying to offset supplier power in this case. In other words, building an in-house capability gives them negotiating leverage with big players such as UPS and FedEx.   Second, UPS and FedEx may be worried about investing in assets specific to Amazon.   Economists call this situation the "holdup" problem that arises when transaction-specific assets are in place.  If UPS and FedEx invest in assets that are unique to Amazon, they may find themselves in a poor negotiating position vis a vis Amazon.  Thus, Amazon may have to invest in these assets because their partners are reluctant to do so.  Finally, Amazon may make their entire supply chain more efficient through closer integration of their ordering, fulfillment, and delivery services.   Conducting delivery in-house may enable that closer integration and perhaps some resulting efficiency.   

In the end, it will be interesting to see how the vertical integration strategy plays out.  Once again, though, Amazon will have more latitude than most publicly traded companies, because investors have proven to be quite patient with them.   Most publicly traded firms would have a hard time justifying this type of vertical integration strategy, which may take some time to pay off.  Amazon will likely have the time to develop this strategy and realize the efficiency gains over time.