No Rules Rules: Netflix and the Culture of Reinvention - Softcover

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Reed Hastings is an entrepreneur who has revolutionized entertainment since cofounding Netflix in 1997, serving as its chairman and CEO since 1999. His first company, Pure Software, was launched in 1991 and was acquired just before Netflix launched. Hastings served on the California State Board of Education from 2000 to 2004 and is an active educational philanthropist. He has sat on the board of several educational organizations including Dreambox Learning, the KIPP Foundation, and the Pahara Institute. He received a BA from Bowdoin College in 1983 and an MSCS in artificial intelligence from Stanford University in 1988. Between Bowdoin and Stanford, Reed served in the Peace Corps as a volunteer teacher in southern Africa.


Erin Meyer is the author of The Culture Map: Breaking Through the Invisible Boundaries of Global Business and a professor at INSEAD, one of the world’s leading international business schools. Her work has appeared in Harvard Business Review, The New York Times, and Forbes.com. In 2019, Meyer was selected by the Thinkers50 as one of the fifty most influential business thinkers in the world. She received an MBA from INSEAD in 2004, and she currently lives in Paris, France. In 1994 and 1995 Meyer also served in the Peace Corps as a volunteer teacher in southern Africa. Visit erinmeyer.com for more information.

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Longlisted for the 2020 Financial Times & McKinsey Business Book of the Year



Netflix cofounder Reed Hastings reveals for the first time the unorthodox culture behind one of the world's most innovative, imaginative, and successful companies



There has never before been a company like Netflix. It has led nothing short of a revolution in the entertainment industries, generating billions of dollars in annual revenue while capturing the imaginations of hundreds of millions of people in over 190 countries. But to reach these great heights, Netflix, which launched in 1998 as an online DVD rental service, has had to reinvent itself over and over again. This type of unprecedented flexibility would have been impossible without the counterintuitive and radical management principles that cofounder Reed Hastings established from the very beginning. Hastings rejected the conventional wisdom under which other companies operate and defied tradition to instead build a culture focused on freedom and responsibility, one that has allowed Netflix to adapt and innovate as the needs of its members and the world have simultaneously transformed.



Hastings set new standards, valuing people over process, emphasizing innovation over efficiency, and giving employees context, not controls. At Netflix, there are no vacation or expense policies. At Netflix, adequate performance gets a generous severance, and hard work is irrel­evant. At Netflix, you don't try to please your boss, you give candid feedback instead. At Netflix, employees don't need approval, and the company pays top of market. When Hastings and his team first devised these unorthodox principles, the implications were unknown and untested. But in just a short period, their methods led to unparalleled speed and boldness, as Netflix quickly became one of the most loved brands in the world.



Here for the first time, Hastings and Erin Meyer, bestselling author of The Culture Map and one of the world's most influential business thinkers, dive deep into the controversial ideologies at the heart of the Netflix psyche, which have generated results that are the envy of the business world. Drawing on hundreds of interviews with current and past Netflix employees from around the globe and never-before-told stories of trial and error from Hastings's own career, No Rules Rules is the fascinating and untold account of the philosophy behind one of the world's most innovative, imaginative, and successful companies.

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1

A Great Workplace Is Stunning Colleagues

In the 1990s, I liked to rent VHS videos from the Blockbuster down the street from our house. I'd take two or three at a time and return them quickly to avoid late fees. Then one day I moved a pile of papers on the dining room table and saw a cassette that I'd watched weeks ago and forgotten to return. When I took the movie back to the store, the woman told me the fee: $40! I felt so stupid.

Later, that got me thinking. Blockbuster made most of its margin from late fees. If your business model depends on inducing feelings of stupidity in your customer base, you can hardly expect to build much loyalty. Was there another model to provide the pleasure of watching movies in your own living room without inflicting the pain of paying a lot when you forgot to return them?

In early 1997, when Pure Software was acquired, Marc Randolph and I started thinking about opening a movies-by-mail business. Amazon was having good luck with books. Why not films? Customers would rent VHS cassettes from our website and be able to return them via the mail. Then we learned it would cost $4 to mail the VHS cassette each way. There wasn't going to be a big market. It was too expensive.

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. Then I went back to my place in Santa Cruz and waited anxiously for them to arrive. Two days later they dropped through the mail slot, unharmed.

In May 1998, we launched Netflix, the world's first online DVD rental store. We had thirty employees and 925 movie titles, which was almost the entire catalog of DVDs available at the time. Marc was the CEO until 1999, when I took over and he became one of our executives.

By early 2001, we'd grown to 400,000 subscribers and 120 employees. I tried to avoid the leadership fumbles of my Pure Software days, and although we avoided implementing excessive rules and controls this time, I also couldn't characterize Netflix as a particularly great place to work. But we were growing, business was good, and work for our employees was OK.

Lessons from a Crisis

Then, in the spring of 2001, crisis struck. The first internet bubble burst, and scores of dot-coms failed and vanished. All venture capital funding stopped, and we were suddenly unable to raise the additional funds we needed to run the business, which was far from profitable. Morale in the office was low, and it was about to get lower. We had to lay off a third of our workforce.

I sat down with Marc and Patty McCord-Patty had come with me from Pure Software and was head of Human Resources-and we studied the contribution of each employee. We didn't have any obviously poor performers. So we divided the staff into two piles: the eighty highest performers who we would keep and forty less amazing ones we would let go. Those who were exceptionally creative, did great work, and collaborated well with others went immediately into the "keepers" pile. The difficulty was that there were many borderline cases. Some were great colleagues and friends but did adequate rather than great work. Others worked like crazy but showed uneven judgment and needed a lot of hand-holding. A few were exceptionally gifted and high performing but also complainers or pessimists. Most of them would have to go. It wasn't going to be easy.

In the days before the layoffs, my wife remarked how on edge I was, and she was right. I worried that motivation in the office would plummet. I was convinced that, after I'd let go of their friends and colleagues, those who stayed would think that the company wasn't loyal to employees. It was bound to make everyone angry. Even worse, the "keepers" would have to shoulder the work of those let go, which seemed certain to lead to bitterness. We were already short on cash. Could we bear a further collapse in morale?

The day of the layoffs arrived, and it was awful, as expected. Those who we laid off cried, slammed doors, and shouted in frustration. By noon it was finished, and I waited for the second half of the storm: the backlash from the remaining employees. . . . But, despite some tears and visible sorrow, all was calm. Then, within a few weeks, for a reason I couldn't initially understand, the atmosphere improved dramatically. We were in cost-cutting mode, and we'd just let go of a third of the workforce, yet the office was suddenly buzzing with passion, energy, and ideas.

A few months later the holidays arrived. DVD players were popular that Christmas, and by early 2002, our DVD-by-mail subscription business was growing rapidly again. Suddenly, we were doing far more work-with 30 percent fewer employees. To my amazement, those same eighty people were getting everything done with a passion that seemed higher than ever. They were working longer hours, but spirits were sky-high. It wasn't just our employees who were happier. I'd wake up in the morning and couldn't wait to get to the office. In those days, I drove Patty McCord to work every day and when I swung up to her house in Santa Cruz, she would practically leap into the car with this big grin: "Reed, what's going on here? Is this like being in love? Are these just some wacky chemicals and this thrill is going to wear off?"

Patty had put her finger on it. The entire office felt like it was filled with people who were madly in love with their work.

I'm not advocating for layoffs, and fortunately we haven't had to do anything like that at Netflix since. But in the days and months following those 2001 layoffs, I discovered something that completely changed the way that I understand both employee motivation and leadership responsibility. This was my road to Damascus experience, a turning point in my understanding of the role of talent density in organizations. The lessons we learned became the foundation of much that has led to Netflix's success.

But before we go on to describe those lessons, I should give Patty a proper introduction because she played a critical role in the development of Netflix for over a decade, and her protŽgŽ, Jessica Neal, runs HR for Netflix today. I first met Patty McCord while at Pure Software. In 1994 she called the office out of the blue and asked to speak to the CEO. My younger sister was answering the phones in those days, and she put Patty right through. Patty was raised in Texas, which I could hear faintly in the way she spoke. She said she was currently working for Sun Microsystems in the HR department, but she'd like to come to Pure Software and run HR for us. I invited her in for a cup of coffee.

During the first half of the meeting, I couldn't understand anything Patty was saying. I asked her to tell me her HR philosophy, and she said: "I believe that every individual should be able to draw a line between their contribution to the corporation and their individual aspirations. As the head of human capital management, I would work with you, the CEO, to increase the emotional intelligence quotient of our leadership and improve employee engagement." My head started to spin. I was young and unpolished and after she stopped, I said: "Is that how all HR people speak? I couldn't understand a word. If we are going to work together you are going to have to stop talking like that."

Patty was insulted, and she told me so straight to my face. When she got home that evening and her husband asked her how the interview had gone, she told him, "Bad. I got in a fight...