“Lost” and Found

What causes a company to go astray? Recently published reports on the slips and stumbles of two much-heralded companies provide a close look at some of the internal dynamics that can undermine optimal decision-making and effective execution—even within organizations that have a history of market-leading performance. In the August issue of Vanity Fair magazine, Kurt Eichenwald offers an in-depth chronicle of “Microsoft’s Lost Decade.” And in mid-July, CNet posted a long piece by Greg Sandoval that explores “Netflix’s Lost Year.”

Behind those two headlines, there’s an oft-used metaphor. Organizational leadership, we tend to assume, is akin to spatial navigation: Either leaders know where to take their company, and how to take it there—or they don’t.

That metaphor is fine, as far as it goes. But a lost sense of direction, one that results in a “lost year” or a “lost decade,” is often a sign that leaders have lost something else—something that is arguably more fundamental to long-term organizational success than the ability to set a forward course. What they have lost, in many cases, is the ability to enable organizational conversation. That’s our term for the process by which key ideas and crucial information circulate within a company.

Neither the Eichenwald piece nor the Sandoval piece focuses on communication per se. Yet each article contains clues that point to the pivotal role that dysfunctional communication has played at Microsoft and Netflix, respectively. The recent history of both companies, in fact, illustrates the problems that ensue when leaders lose the thread of organizational conversation—when they fail to promote open and honest discussion, internally as well as externally.

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At Microsoft, Eichenwald argues, leaders established “a corporate culture that by 2001 was heading down the path of self-immolating chaos.” Central to that culture were practices that effectively obstructed the free flow of information. The company’s stacked-ranking system, for example, required managers to rate employees according to a bell-curve pattern. As a result, engineers and developers had a greater incentive to compete with each other than they did to collaborate with each other. Eichenwald quotes one former Microsoft engineer as follows:

[P]eople do everything they can to stay out of the bottom bucket. People responsible for [software] features will openly sabotage other people’s efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to ensure they didn’t get ahead of me on the rankings.

Another effect of Microsoft’s stacked-ranking system was to reinforce a rigid, top-down form of communication. Under that system, managers shared responsibility for rating employee performance, and employees therefore went out of their way to curry favor with all of the managers in their group. “Whenever I had a question for some other team, instead of going to the developer who had the answer, I would first touch base with that developer’s manager, so that he knew what I was working on,” one former Microsoft engineer told Eichenwald.

Where organizational conversation flourishes, leaders and employees alike are able to talk among themselves in ways that are interactive and inclusive: Ideas move back and forth between people of all ranks, and leaders empower employees to participate fully in cross-organizational collaboration. Microsoft, Eichenwald suggests, has fallen short on both of those counts. (In our book, Talk, Inc., we identify an array of practices that will enable leaders to become more interactive and more inclusive.)

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In the case of Netflix, the failure of organizational conversation appears to have occurred primarily at the executive level. By early 2011, CEO Reed Hastings had concluded that maintaining the company’s existing product and pricing options wasn’t a viable long-term strategy. It was an eminently reasonable view, and it spurred Hastings to develop a plan that would reconfigure the video-streaming and DVD-rental services that Netflix offers to customers. But in shifting to a new strategy, he lost sight of a crucial principle of leadership: It’s not enough to make the right decision; a leader also needs to talk about that decision with the right people, and in the right way.

Led by Hastings, Netflix decided to alter its basic product offering—and it did so with a minimum of internal deliberation. Here is how Sandoval tells the story:

Around March 2011, [Hastings] took his plan to his executive team and then to the company’s vice presidents. Some of the execs who heard Hastings talk about spinning off Netflix’s DVD operations into a new company … left the meeting thinking Hastings was only considering the idea. That impression was quickly corrected. … Hastings, it appeared, wasn’t looking for debate.

Hastings and his colleagues also faltered in their rollout of new product and pricing options. “When customers and the press pushed back, the Netflix response was haphazard,” Sandoval explains. A wave of harsh comments and subscription cancellations hit the company by surprise, and Hastings made the matter worse by communicating with subscribers in a way that seemed awkward and dismissive. He later acknowledged that point by writing in a blog post:

I messed up. … In hindsight, I slid into arrogance based upon past success. We have done very well for a long time by steadily improving our service, without doing much CEO communication. … But now I see that given the huge changes we have been recently making, I should have personally given a full justification to our members.

In each instance, leaders at Netflix behaved in ways that hindered the flow of organizational conversation. The company’s decision-making process reflected a lack of conversational intentionality, as we call it—an inability to foster strategic alignment through rich discussion and brisk debate. In the way that he communicated (or didn’t communicate) with external stakeholders, meanwhile, Hastings displayed a lack of conversational intimacy. Instead of interacting with customers in an open and accessible manner, he came across to them as aloof, and he seemed to be indifferent to their concerns. “Reed Hastings stopped listening, and that’s when the trouble started,” Sandoval writes. (Talk, Inc., also presents ideas and examples that will help leaders achieve greater intimacy and improved intentionality.)

The factors that have led Microsoft and Netflix to lose their way are numerous and complex. Both companies face truly daunting competitive challenges, and we don’t claim that better communication alone can make those challenges go away. That said, all signs indicate that leaders at each company have lost their flair for organizational conversation—and that loss has made it difficult, if not impossible, for them to mount a nimble response to strategic problems and opportunities.

[Cross-posted, in a slightly different form, at the Harvard Business Review site.]

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