No Rules Rules: Netflix and the Culture of Reinvention

by Reed Hastings

Antioco listened carefully, nodded his head frequently, and then asked, “How much would Blockbuster need to pay for Netflix?” When he heard our response—$50 million—he flatly declined. Marc and I left, crestfallen.

It was not obvious at the time, even to me, but we had one thing that Blockbuster did not: a culture that valued people over process, emphasized innovation over efficiency, and had very few controls. Our culture, which focused on achieving top performance with talent density and leading employees with context not control, has allowed us to continually grow and change as the world, and our members’ needs, have likewise morphed around us. Netflix is different. We have a culture where No Rules Rules.

The safer the atmosphere, the more innovation you will have.

Policies and control processes became so foundational to our work that those who were great at coloring within the lines were promoted, while many creative mavericks felt stifled and went to work elsewhere.

If you give employees more freedom instead of developing processes to prevent them from exercising their own judgment, they will make better decisions and it’s easier to hold them accountable.

If you build an organization made up of high performers, you can eliminate most controls. The denser the talent, the greater the freedom you can offer.

When talented staff members get into the feedback habit, they all get better at what they do while becoming implicitly accountable to one another, further reducing the need for traditional controls.

In his famous commencement speech at Stanford University, Steve Jobs said: “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something—your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.”

Amazon was having good luck with books. Why not films?

But a friend told me about a new invention called DVDs, which would be coming that fall. “They’re like CDs but hold a movie,” he explained. I raced to the post office and mailed myself several CDs (I couldn’t find an actual DVD for my test). Each cost thirty-two cents to mail.

We learned that a company with really dense talent is a company everyone wants to work for. High performers especially thrive in environments where the overall talent density is high.

If you have a team of five stunning employees and two adequate ones, the adequate ones will sap managers’ energy, so they have less time for the top performers, reduce the quality of group discussions, lowering the team’s overall IQ, force others to develop ways to work around them, reducing efficiency, drive staff who seek excellence to quit, and show the team you accept mediocrity, thus multiplying the problem.

If you have a group with a few merely adequate performers, that performance is likely to spread, bringing down the performance of the entire organization.

I trace this personality trait back to my childhood. When I was a kid, my parents were supportive, but we didn’t talk about emotions in our house. I didn’t want to upset anyone, so I avoided any difficult topics. I didn’t have many role models for constructive candor, and it took me a long time to get comfortable with it.

We work hard to get people to give each other constructive feedback—up, down, and across the organization—on a continual basis.

At Netflix, it is tantamount to being disloyal to the company if you fail to speak up when you disagree with a colleague or have feedback that could be helpful. After all, you could help the business—but you are choosing not to.

But it’s when employees begin providing truthful feedback to their leaders that the big benefits of candor really take off.

The higher you get in an organization, the less feedback you receive, and the more likely you are to “come to work naked” or make another error that’s obvious to everyone but you. This is not just dysfunctional but dangerous.

Giving employees more freedom led them to take more ownership and behave more responsibly.

But this is the most important message of this chapter: even if your employees spend a little more when you give them freedom, the cost is still less than having a workplace where they can’t fly.

But of the group of nine, all of whom were at least adequate programmers, the best far outperformed the worst. The best guy was twenty times faster at coding, twenty-five times faster at debugging, and ten times faster at program execution than the programmer with the lowest marks.

the offer of a higher bonus led to poorer performance.

People are most creative when they have a big enough salary to remove some of the stress from home. But people are less creative when they don’t know whether or not they’ll get paid extra. Big salaries, not merit bonuses, are good for innovation.

I always try to go to the work spot of the person I’m seeing, instead of making them come to me.

DON’T SEEK TO PLEASE YOUR BOSS. SEEK TO DO WHAT IS BEST FOR THE COMPANY.

Our mantra is that employees don’t need the boss’s approval to move forward (but they should let the boss know what’s going on).

A job should be something you do for that magical period of time when you are the best person for that job and that job is the best position for you. Once you stop learning or stop excelling, that’s the moment for you to pass that spot onto someone who is better fitted for it and to move on to a better role for you.

the Keeper Test: IF A PERSON ON YOUR TEAM WERE TO QUIT TOMORROW, WOULD YOU TRY TO CHANGE THEIR MIND? OR WOULD YOU ACCEPT THEIR RESIGNATION, PERHAPS WITH A LITTLE RELIEF? IF THE LATTER, YOU SHOULD GIVE THEM A SEVERANCE PACKAGE NOW, AND LOOK FOR A STAR, SOMEONE YOU WOULD FIGHT TO KEEP.

Each employee selected a handful of people she wanted to receive feedback from, and those people filled out the report anonymously, rating the employee on a scale of 1 to 5 across a series of categories and leaving comments. We used a “Start, Stop, Continue” format for the comments to ensure that people didn’t just pat each other on the back but gave concrete, actionable feedback.

If you’re starting up your own company and your goal is innovation and flexibility, try to keep decision-making decentralized, with few interdependencies between functions, in order to nurture loose coupling from the outset. It will be a whole lot trickier to introduce once your organization has settled into a tightly coupled structure.

WHEN ONE OF YOUR PEOPLE DOES SOMETHING DUMB DON’T BLAME THEM. INSTEAD ASK YOURSELF WHAT CONTEXT YOU FAILED TO SET. ARE YOU ARTICULATE AND INSPIRING ENOUGH IN EXPRESSING YOUR GOALS AND STRATEGY? HAVE YOU CLEARLY EXPLAINED ALL THE ASSUMPTIONS AND RISKS THAT WILL HELP YOUR TEAM TO MAKE GOOD DECISIONS? ARE YOU AND YOUR EMPLOYEES HIGHLY ALIGNED ON VISION AND OBJECTIVES?

The 4As are as follows: Aim to assist Actionable Appreciate Accept or decline Plus one makes 5: Adapt—your delivery and your reaction to the culture you’re working with to get the results that you need.