The inside view and the outside view

It's easy for business people to forget about the great difference between the inside view and the outside view. That is, the experience customers have with software systems is enormously different from the experience business people have deploying those systems. This means that making an otherwise good business decision about software systems can have terrible, unforeseen consequences.

The Netflix company just learned this lesson the hard way. It doesn't take a rocket scientist to see the progression from VHS tapes to DVDs to streaming video. Netflix built its business by renting DVDs when the competition was still renting clunky VHS tapes. Just a few months ago, the company decided it was time to get a similar head start on the next new technology, but they failed to look at the outside view when they crafted their solution.

They split off the portion of the company that provides streaming video from the older, DVD-supplying part. From the inside of the company, this looked like a really good idea and, from that perspective, it was. It allowed Netflix to offer their streaming video service to customers unencumbered by the older technology. The problem is that this doesn't reflect the point of view of their customers, the outside view.

My wife and I have been happy Netflix customers since they started. We rent DVDs and also stream video from them. As my wife so succinctly said, "I want to go to Netflix to get movies, not to one company for DVDs and another for streaming video." Her sentiments neatly encapsulate the outside view: subscribers think about Netflix as a provider of motion picture entertainment, not as a provider of some particular media.

Netflix learned a hard lesson in the importance of looking at things from the user's perspective, rather than just from their own internal one. This little hiccup has cost them 810,000 subscribers and their market cap has dropped by over a quarter just in the last three months.

In the old days when the variable costs of manufacturing dominated income statements, what was good for the company was usually good for the customer. Today, when the experience of people is far more important than the cost of raw materials, business managers need to focus on their users, their employees, and their stakeholders, and not on their internal business processes. The way to success is by making customers happy, even if it means more work inside the company's walls. The only way to please people is by carefully studying their outside point of view.

1 Comment

Bob MacNeal
You hit the bull's-eye in your critique of Netflix. The Netflix blunder is one for the ages that will be studied for years to come. Netflix might have had sound internal reasons for splitting DVD and streaming, but failed to foresee the consequences to the Netflix brand (Net + flicks). Indeed we used Netflix for the flicks not for the delivery mechanism. The inside / outside view is an important point. By all accounts Netflix was insular and tone-deaf. Not only did they act on the “inside” importance of the delivery mechanism, they simultaneously raised prices 60 percent during a prolonged recession marked by high unemployment and fewer disposable entertainment dollars.

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