How Netflix and Pixar Build Cultures of Innovation

Pixar began in 1979 as a computer division of Lucasfilm. From the beginning, the core team had the vision of creating the first completely computer-generated animated film. Steve Jobs acquired the company from Lucasfilm in 1986, and they partnered with Disney to finally achieve that goal in 1995 with the release of Toy Story. Disney purchased Pixar in 2006 for 7.4 billion dollars, and today, their success includes 24 feature films, 23 Academy Awards, and over 14 billion at the box office.

Netflix was founded in 1997 after the founders had the idea of renting DVDs online. They thought they could use the internet to compete in the home rental business that Blockbuster dominated. So they created a subscriber business that rented DVDs and eventually transitioned into the world's largest streaming service. They have produced over 126 original series, earning 15 Academy Awards and 126 Emmys. They also have over 203 million subscribers in 190 countries.

Both companies have not only succeeded but disrupted their respective markets. They have done this by purposely thinking counterintuitively to traditional organizational thinking. Utilizing similar principles to create a culture of "freedom and responsibility" that has helped them innovate while larger and more established companies stagnate.

Context Not Control

“If you want to build a ship, don’t drum up the men to gather wood, divide the work, and give orders. Instead, teach them to yearn for the vast and endless sea." - Antoine de Saint-Exupéry

Traditional Hollywood decision-making has a top-down organizational structure that includes multiple layers. Approvals are often "bubbled" up to people higher in the hierarchy. The more important the decision (or more expensive), the more layers it must be approved by.

For example, at the bottom, some creative executives can manage and approve small details and handle minor changes. However, more important aspects of a project would need their boss, someone in middle management. For bigger decisions, approval would go to a Vice President then to a Senior Vice President. And for the biggest decisions, like needing to hire a key role on the film or signing a major contract, that decision would work it's way all the way up to the CEO. So for one project, different aspects would need approval by up to 5 levels.

Reed Hastings, CEO of Netflix, believes the traditional manager approval process is the surest way to block innovation. Both Netflix and Pixar work against these traditional systems. They strive to create cultures that emphasize freedom and responsibility. This means they empower their employees to make important decisions that most companies only trust to higher levels of management.

Not only can multiple approval processes slow down execution, but it also takes away motivation and psychological investment from the people closest to the work. People desire and thrive on jobs that give them control of their own decisions. The more control - the more ownership and motivation they will have. Committing to freedom and responsibility, Netflix and Pixar can attract some of the best talent in the world.

In addition to attracting the best talent - they also believe it helps them find the best solutions. Ed Catmull, former President and Co-Founder of Pixar, writes, “We believe that, in all likelihood, our solution won’t be as good as the one the director and his or her creative team comes up with.”

In fact, Netflix has a motto “Don’t seek to please your boss, seek to do what is best for the company.” That means it’s okay for someone to implement an idea that their supervisor dislikes. The intention of this is not to be disrespectful, but they want their people to make the best decision without factoring in pressure from their boss.

An example, At one point, CEO Reed Hastings and Netflix's Chief Product Officer were publicly against their service offering downloads. They felt it would distract from their core mission of improving their streaming capabilities and be irrelevant for most users. However, one employee, a User Experience Researcher, decided to research and test out some of their assumptions.

He did have hesitancy at first. At most companies, going against leadership would not be a good move. But Netflix is known for their motto, so he decided to proceed. At the time, Netflix was getting ready for an international expansion. He found that many people commonly used downloading on other services such as YouTube in some key markets. Once this information reached Hastings and the Chief Product Officer, they admitted wrong and changed course.

So if leaders aren’t there to approve decisions, what's their responsibility? Outside of hiring and retaining top talent, the job of a leader is to set the context of larger company initiatives and values. So if someone is struggling with a decision, leaders will set the right context to inform that decision but not take over.

Another example from Netflix, Director of Original Programming Adam Del Deo had just watched one of the greatest documentaries he had ever seen. Icarus is a 2017 documentary by Bryan Fogel, which documents his exploration of doping in sports. During his investigation, he is pulled into an international doping scandal when he asks for the help of Grigory Rodchenkov, the head of the Russian anti-doping laboratory.

An unbelievable and real story, many studios were bidding for the rights to distribute. It was commanding more money for a documentary than had ever been paid. Netflix already bid 2.5 million for it that morning but learned it was too low. Adam couldn’t decide if it was worth an even higher bid. So he asked his boss what he thought.

His boss replied, “Listen, it doesn’t matter what I think; you’re the doc guy, not me. We pay you to make these decisions. But ask yourself if it's the one - Is this going to be a massive hit? Is it going to be an Oscar nominee like Supersize Me or An Inconvenient Truth? If it’s not, that’s too much to pay. But if it’s “the one,” you should pay whatever it’s going to take, 4.5 million, 5 million, if it’s the one - Get the movie."

While both Netflix and Pixar want to give individuals the freedom to make the final decision - The responsibility part can be a lot to place on one person. In some situations, an employee will sign a contract for millions of dollars by themselves, or a filmmaker will have to decide how to fix a movie that has millions already invested. And while they empower individuals to make important and often difficult decisions, teamwork serves a critical support role.

Group Input

“We believe that ideas - and thus, films - only become great when they are challenged and tested.”  - Ed Catmull

Group feedback serves an essential function. When making decisions, people don’t know how the market (or audience) will react. Exposing ideas to multiple people before they are released to the public can be a small sample size of what to expect. This can help people improve their ideas before investing a lot of money in them.

When companies have a culture of frequent feedback, everyone has the ability to adjust and improve more consistently. Pixar and Netflix attract some of the best talent globally, and both companies have systems that help the individual take advantage of group knowledge.

Pixar is famous for having what they call the “Braintrust” The Braintrust is a group of people to who the director will show their movie frequently throughout production. Its objective - "Put smart, passionate people in a room together, charge them with identifying and solving problems and encourage them to be candid with one another."

Pixar wants to support its filmmakers by giving them the ability to make the film that they're passionate about. However, there are inevitably problems in every film that the filmmakers may be blind to. This is where the council of the Braintrust comes in.

One of Pixar's directors, Brad Bird, gives an example of how the Braintrust helps identify problems. While working on the movie The Incredibles, the Braintrust raised concerns about a scene of an argument between two of the main characters. They felt the scene's tone made one of the characters look like a bully and might turn audiences off. After the meeting was over, Brad went back to see if he could address their concerns. However, he felt like the scene was correct. So what was wrong?

He found that the problem wasn’t with the tone (like the Braintrust thought) but with the animation. For example, one of the characters was much larger than the other. So after a simple adjustment, he showed the scene again, and the feedback was much better. Brad writes, “Sometimes the Braintrust will know something’s wrong, but they will identify the wrong symptom.”

This is an important example because it shows that someone not involved with the project could be correct that something is wrong but have no idea how to fix it. The best solution comes from the person who knows all the complexities and consequences of slight changes. Balancing the need for feedback without taking away autonomy is critical.

Braintrust has two key components that make its feedback effective. First, notes come from other creative people, not layers of executives who don’t understand telling a story (a common problem in most studios). Second, it gives context to the director without taking away their autonomy because the Braintrust doesn’t have authority.

Catmull writes, “The Braintrust has no authority. This is crucial: The director does not have to follow any of the specific suggestions given. Instead, after a Braintrust meeting, it is up to them to figure out how to address the feedback. Braintrust meetings are not top-down, do-this-or-else affairs. By removing from the Braintrust the power to mandate solutions, we affect the dynamics of the group in ways I believe are essential.”

Netflix has a similar process for feedback and has the person in charge of a project "farm for dissent." This is typically done by sending out a public memo explaining what they want to do and why to their peers. People are encouraged to respond with criticism or support for a project, either with comments or ratings of -10 to +10.

They are looking for people to challenge their ideas, think of something they haven’t thought of, but they aren’t looking for consensus. Like Pixar’s Braintrust, the group's job is to give critical feedback, but the person they called the "informed captain" will make the final decision.

Candor

“Believe me, you don’t want to be at a company where there is more candor in the hallways than in the rooms where fundamental ideas or matters of policy are being hashed out.” - Ed Catmull

Another ingredient to ensure the team offers the best ideas and solutions is increasing people’s comfort with candor. Candor is a critical ingredient to ensuring everyone is speaking what's really on their minds. Netflix and Pixar want their employees to give feedback frequently. But it isn’t as easy as it sounds.

People intuitively know that feedback is good, but giving and receiving feedback can be difficult. For example, many people struggle with giving a candid opinion out of fear of offending the other person, being viewed as difficult, or not being viewed as a “team player.” In addition, companies may fear that having their teams give frequent and candid feedback could lead to a dysfunctional work environment.

However, not having a team speak candidly is worse. Without candor, there is no trust. Without trust, there is no creative collaboration. Catmull writes, “A hallmark of a healthy creative culture is that its people feel free to share ideas, opinions, and criticisms. Lack of candor, if unchecked, ultimately leads to dysfunctional environments.”

Pixar’s Braintrust is modeled on the working relationship of the five original filmmakers working on Toy Story. Catmull explains, “From Pixar’s earliest days, this quintet gave us a solid example of what a highly functional working group should be. They were funny, focused, smart, and relentlessly candid with each other.”

Leadership has a big role in ensuring their organization prioritizes candor. When problems arise, or the team is discussing solutions, instead of focusing on the problem itself, Catmull believes the manager's job is to focus on the dynamics of the group by making sure everyone is using candor and not holding back.

As CEO, Hastings receives more critical feedback than anyone at Netflix. To create and maintain a culture of candid feedback, leaders have to encourage employees to give them a lot of feedback. Whenever a leader receives critical feedback, they need to respond with gratitude and reinforce to the person giving the feedback that they did the right thing by giving it. This sends the message every time to the rest of the group that feedback is welcome and expected.

Comfort With Failure

“It’s critical that your employees are continually hearing about the failed bets of others so that they are encouraged to take bets that of course might fail themselves. You can’t have a culture of innovation unless you have this.” - Reed Hastings

A lot of companies fail to innovate due to their pursuit of efficiency. Being too risk-averse can cause companies to reject new ideas and become irrelevant. Unfortunately, there is an unbalanced view of failure, one that overemphasizes the downside and doesn’t emphasize enough the value of knowledge that comes from it.

Matt Ridley, who wrote How Innovation Works writes, “The surprising truth is that nobody really knows why innovation happens and how it happens, let alone when and where it will happen next.”

Therefore, being innovative is a trial and error process. For people or organizations to be innovative, they have to find ways to try out many ideas. Of course, if someone tries out many ideas, that means they will have a lot of failures. But every failure leads them to get closer to a better idea.

Failure can be strategically used as a process of discovery. There is only so far planning will take you. At some point, you have to act and discover what variables you are presented with along the way. The cost of failure is an investment. So a certain tolerance has to be built into a companies expenses. Instead of an unforeseen expense, failures should be viewed as an R&D expense.

When Netflix is trying to figure out a new market or what will work, sometimes it’s just as important to know what paths don’t lead anywhere. An example, when Netflix was expanding into international markets, they had no idea what other countries liked to watch or didn't like to watch. Therefore, they wanted to make sure they were taking risks in some of the bigger markets to learn. Being too conservative wouldn't allow them to learn as fast.

Andrew Stanton, director of Finding Nemo and WALL-E, thinks of it this way - In a battle, if you're faced with two hills, and you're unsure which one to attack, the right course of action is to hurry up and choose. If you find out it's the wrong hill, turn around and attack the other one. The only unacceptable decision is running between the hills.

In the same way, Netflix and Pixar use the intelligence of their teams to give feedback during a project; they use that same intelligence to analyze failures and extract important lessons. Pixar uses a “postmortem,” a day-long meeting to evaluate what went wrong on a film and ways to fix it.

Netflix has a few meetings a year dedicated to analyzing bets that were placed. This way no decision goes to waste. People are less likely to make the same mistake if they don’t avoid it. So people are encouraged to embrace their failures and what they learned. They want their team to talk openly and frequently about them and not try to brush them under the rug.

To truly realize the positive benefits of failure, companies have to create an environment to uncouple fear and failure. Both companies believe this is one of the most important jobs of leadership. This is only accomplished with trust, and leaders can only build trust through their actions.

To start, leaders at Netflix and Pixar are very open to their own failures. By talking about their own failures frequently, they make it safe for others to do the same. However, the most important action a leader can demonstrate is responding well when their employees fail. When a leader doesn't respond well or overreacts, it conveys that failures are not okay.

Of course, anyone wants to minimize the negative aspects of failure just as much as you want to maximize the positive aspects. But if you are empowering the best person to make a final decision, having leaders frequently give context, have team members stress test ideas frequently, and review mistakes to help with future decisions, that contains much of the damage that could happen.

Conclusion

Working in such innovative, creative, and competitive spaces, Netflix and Pixar are consistently venturing into the unknown. They don't know which stories are going to be great. They don't know what will work in different markets. They don't know what will resonate with audiences. As a result, they have to confront a high level of randomness and uncertainty.

Therefore, they have built cultures that operate as agile learning machines in a space that demands innovation. Starting with freedom and responsibility, they take full advantage of individual intelligence and motivation. First, empowering talented people to be the source of new ideas. Then they take advantage of group intelligence to help people refine and build those ideas.

They work hard to ensure they have an environment where people are comfortable giving and receiving regular feedback. Then they take decisive bets, understanding that failure isn't a negative but a necessary part of innovation. Finally, they extract all the information they can learn from failure and mistakes on future projects: showing companies and individuals principles for success.

References:

• No Rules Rules: Netflix and the Culture of Reinvention by Reed Hastings and Erin Meyer
• Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration by Ed Catmull
• How Innovation Works: And Why It Flourishes in Freedom by Matt Ridley