Tuesday, July 18, 2017

What's the "Optimal" Failure Rate at Netflix?

When Orange is the New Black, House of Cards, and Crown became mega-hits for Netflix, many people credited the analytics capabilities of the company. Mining the customer data had enabled the firm to project the type of original programming that would be highly successful. By this logic, Netflix would achieve a lower failure rate on new shows than the major television networks. After all, broadcasters such as CBS and NBC cancel a substantial share of their new shows each year, some after only a few episodes. 

On the recent Netflix earnings call, many investors were pleased to hear about strong subscriber growth at the firm. However, some investors came away concerned about the amount of spending taking place as the firm acquires or develops new content. Moreover, some observers and analysts have expressed concern about the recent cancellations of some new Netflix original shows. Tom Huddleston Jr. reported on the company's reaction to this criticism in a recent Fortune article:

Meanwhile, also on the Monday earnings call, Netflix's chief content officer Ted Sarandos defended the company's recent cancellations of a handful of expensive, but underperforming, original series. "The more shows we have, the more likely in absolute numbers that you’ll see cancellations, of course," Sarandos said. The executive compared Netflix's recent spate of cancellations—including big-budget series like The Get Down and Sense8—to traditional TV networks that cancel nearly one-third of their new shows after their first seasons. Netflix, he said, has renewed 93% of its original series. With respect to the shows that Netflix opted not to renew, Sarandos argued: "If you’re not failing, maybe you’re not trying hard enough."

This quote from Sarandos raises a fascinating question.  What is the "optimal" failure rate at Netflix?  Surely, we would like the failure rate to be lower than the broadcast networks.  We would like to see the company reaping the benefits of its analytics capabilities.  At the same time, no one should want Netflix's failure rate on original programming to be zero.  We want the firm to take some chances in hopes of landing some surprising breakthrough hits.  Hopefully, the firm isn't simply guessing or drawing on the intuition of the "creatives" in the business.  We would like to see them engaging in "enlightened" experimentation, using big data to guide them while still taking some risks.   If they balance data mining and risk-taking in an effective way, the failure rate won't be zero, but it will be much lower than their broadcast and cable competitors.  

Monday, July 17, 2017

Proxy Fight at P&G: Can Activist Investors Drive Effective Change?

The Wall Street Journal reports today that activist investor Nelson Peltz has launched a proxy fight with Proctor & Gamble.  No company this large has ever faced a proxy fight.  The investor seeks a board seat in hopes of driving change. Peltz has been frustrated with the lackluster revenue and earnings growth at the consumer products giant over the past several years. According to the article, "Mr. Peltz’s Trian Management Fund argues that P&G failed to capitalize on a five-year savings plan that shrank the company by tens of thousands of employees, more than a dozen factories and hundreds of brands. Trian casts doubt on whether a second, five-year, $10-billion savings plan announced by P&G last year will produce results." 

Many observers and analysts have wondered whether activist investors would push for a breakup of P&G. After all, the company does operate a number of businesses including grooming (e.g., Gillette), fabric and home care (e.g., Tide, Cascade), oral and personal care (e.g., Crest, Prilosec), baby and feminine care (e.g., Pampers and Tampax), and household items (e.g., Bounty, Charmin). However, the company already has divested several units that appeared to be somewhat unrelated to their core brands; P&G divested its pet food, battery, coffee, and potato chip businesses in recent years. Peltz has signaled that he's not pushing for further divestitures at this time. 

What's the problem at P&G?  In my mind, the company can't cut its way to enhanced long run performance.  Perhaps costs are bloated, and some efficiencies must be attained.  However, the core problem remains innovation and growth.  In the heyday of A.G. Lafley's first tenure as CEO, P&G excelled because it generated product innovations that drove robust revenue growth (consider the remarkable success of Febreze and Swiffer).   These innovations have not come at the same pace in recent years.  Moreover, customers have traded down from the premium-priced products offered by P&G to more affordable brands.  Consider the success of upstarts in the razor business, as well as the increasing success of private labels in a number of P&G categories.  

What then of the proxy fight led by Peltz?  It seems to me that activist investors can be helpful at times in forcing difficult reorganizations, cost-cutting initiatives, and divestitures that management may be unwilling to undertake.  However, activist investors are not well-equipped to help companies jumpstart innovation and revenue growth.  How will this proxy fight solve the underlying growth problem at P&G?   It won't.   The company has much more challenging work to do than simply fending off an activist investor's attempt to snag a board seat.  



Sunday, July 16, 2017

Knowledge Increasingly Generated by Teams Rather than Solo Artists

Do great breakthroughs in knowledge occur as a result of a brilliant mind working alone, perhaps through some brilliant flash of insight? Or, is knowledge creation fundamentally a collaborative endeavor? Has the process of knowledge creation changed in recent years? Has it become more collaborative? Northwestern scholars Stefan Wuchty, Benjamin Jones, and Brian Uzzi studied these questions and have written a paper titled, "The Increasing Dominance of Teams in Production of Knowledge." 

The authors examined nearly 20 million articles from the Institute for Scientific Information Web of Science database. These articles include work from a range of fields including science, engineering, social sciences, the arts, and the humanities. They also studied more than 2 million patents issued during the time that these articles were published. 

The scholars report that, "For science and engineering, social sciences, and patents, there has been a substantial shift towards collective research. In the sciences, team size has grown steadily each year and nearly doubled from 1.9 to 3.5 authors per paper over 45 years." The authors found that solo authors tend to be more prevalent in the arts and the humanities, though collaboration has increased there as well. Moreover, the authors discovered "a broad tendency for teams to produce more highly cited work than individual authors" - a finding true across all fields. In fact, that trend toward higher citations of collaborative work has picked up in recent years. 

In sum, collaboration has become more important and more prevalent over time in the knowledge generation process. This statement represents more than just a well-worn cliche; the empirical data support this claim in clear and convincing fashion.

Friday, July 14, 2017

Sir Ken Robinson: How To Escape Education's Death Valley

Creativity expert Sir Ken Robinson has provided some excellent thinking on the state of education.  I love listening to him describe how we stifle creativity in our children at times, and how we can shift our thinking as educators.  Here's one of his terrific TED talks:

Thursday, July 13, 2017

Top Sales People Really Don't Make the Best Managers

The conventional wisdom is straightforward - the top individual performers don't always make the best managers.  That old adage holds true especially in the field of sales.  Many people believe that the best sales people don't make the best managers.   Is it true?  New research examines this assumption, drawing upon one of the most extensive databases ever collected to research this topic.  

Alan Benson, Danielle Li, and Kelly Shue examined data on salespeople at more than 200 firms. These scholars analyzed how individual performers did prior to promotion.  Then, after these individuals were promoted to managers, they examined how the performance of their new subordinates was impacted.   The richness of the data enabled the scholars to compare salesperson performance under this new boss vs. other previous supervisors.   What did they find?  Chicago Booth Review reports:  

The best salespeople did not make the best managers: demonstrated sales skill, as evidenced by managers whose sales doubled before their promotion, corresponded to a 10 percent drop each in the sales performance of new subordinates.  The typical newly minted manager is in charge of five people. Therefore, the doubling of a manager’s sales predicts a total team sales drop equivalent to half the sales of one worker.

Thus, the conventional wisdom is true.  Moreover, the negative impact of promoting the wrong people is substantial.  Companies need to understand the skills and qualities required to become good sales managers, and based on that analysis, they must change their promotion criteria.  Meanwhile, they must find other ways to reward top individual performers, rather than using promotion as a key incentive.   

Wednesday, July 12, 2017

Grooming Future Leaders

Retired Brigadier General Bernard Banks, now teaching at Kellogg, offers some interesting insights on developing future leaders.  Banks explains that companies need to begin grooming future leaders when individuals are not yet managing others.  He advocates providing individuals temporary opportunities to lead others as an initial developmental opportunity, before people are promoted to managerial positions.  Banks explains: 

According to Banks, a better path is to begin grooming future managers when they are still in nonmanagement roles, so that they can develop prior to moving up the ladder. For example, a company might place people on teams where they have no formal authority, but are nonetheless expected to work collaboratively with others. Or a company might temporarily provide leadership assignments. When a manager leaves for vacation or is occupied with another assignment for a finite period of time, a nonmanager—rather than a colleague already in a managerial role—might be asked to fill in.  This early investment can feel like a risk at the time, admits Banks, but he has seen it pay off in future leaders. “When they make that transition, they have a reasonable expectation of succeeding in that new role.”

Banks also argues that individuals need to take ownership of their development plan.   Companies should not simply be telling workers what they need to do next to develop as leaders.  The process should involve a healthy dose of self-direction.  Individuals need to identify opportunities for development, rather than always waiting to be told what to do.  

Monday, July 10, 2017

Chief Justice John Roberts' Commencement Address

I heard about Chief Justice John Roberts' commencement address at Cardigan Mountain School in New Hampshire the other day.   I had an opportunity to watch the speech on YouTube, and I thought he shared a vitally important message.  Moreover, it was unique, avoiding many of the usual pieces of advice offered by graduation speakers.   Take a look for yourself: