An Enthusiastic Thumb's Up for Netflix

Save for enjoying the occasional Charlie Chaplin or Buster Keaton send-up in his younger days, Peter Drucker was never much of a movie fan. Yet he certainly would have appreciated Netflix's efforts to upgrade its film recommendation system for its customers.

Netflix (NFLX) announced last week that it was awarding an international team of researchers and computer whizzes a $1 million prize for improving by 10.06% the online movie rental company's ability to predict what films its users will enjoy based on how they've rated other titles.

The winners, who bested tens of thousands of other teams from more than 180 countries, took nearly 36 months to reach the required 10% threshold as they labored to make technical advances in the field of taste prediction. By prompting scientists to wrestle with a huge data set of 100 million movie ratings, Netflix may well have spurred advances in large-scale modeling that will have widespread impact.

Achieving Concrete ResultsBut it was three underlying management principles, which Netflix embraced by setting up the contest in the first place, that would have earned an enthusiastic thumb's up from Drucker.

The first is that, by its very nature, a competition like this is all about achieving concrete results, not merely generating well-intentioned activity. And in the end, that's the most important thing for any organization to do. "Supplying knowledge to find out how existing knowledge can best be applied to produce results is, in effect, what we mean by management," Drucker asserted.

The second principle highlighted by theNetflix prize is that to be successful, companies must constantly strive to gain deeper insight into their customers' wants and desires. Nearly every business says that it does this, of course. But relatively few approach it with the discipline required—one reason that many corporations lose half their customers within five years. "What the people in the business think they know about customer and market is more likely to be wrong than right," Drucker wrote in his book Managing for Results. "Only by asking the customer, by watching him, by trying to understand his behavior can one find out who he is, what he does, how he buys, how he uses what he buys, what he expects, what he values, and so on."

Going Outside for InformationDrucker worried that computers weren't terribly good for this job. The information they spit out "tends to focus too much on inside information," he explained, "not the outside sources and customers that count." While Netflix, Amazon (AMZN), Google (GOOG), and others have made great strides over the last decade in getting inside consumers' heads, most brick-and-mortar companies must still figure out how to use their IT networks for a similar purpose.

For whether your business is online or not, Drucker's maxim holds true: Outside "is where the results are. Inside an organization, there are only cost centers." Which brings us to the third principle showcased by Netflix: a bold willingness to open up in general to the outside.

This sounds much easier than it is. After all, "it is the inside of the organization that is most visible to the executive," Drucker noted. "It is the inside that has immediacy for him. Its relations and contacts, its problems and challenges, its cross-currents and gossip reach him and touch him at every point. Unless he makes special efforts to gain direct access to outside reality, he will become increasingly inside-focused."

Gaining TractionStill, more and more, some of the best-performing companies are getting beyond what Drucker termed this "degenerative tendency." IBM (IBM), Hewlett-Packard (HPQ), Procter & Gamble (PG), and others are engaging in collaborative research and open innovation. Intuit (INTU) is devising ways, as co-founder Scott Cook has described it, for consumers, employees, sales prospects, and even those without any ties to the company to "volunteer their time, energy, and expertise to make life better for our customers." One example: a "Q&A community" that's embedded in Intuit's TurboTax software product, which provides users with a forum to learn from and share information with one another.

Meanwhile, the prize model is also gaining traction across the corporate arena as well as in the social sector. The X Prize Foundation, for instance, is promising eight-figure bounties to those able to make huge leaps in private space exploration, genomics, and alternative-energy vehicles. And sites such as InnoCentive allow companies to post challenges in product development or applied science, and then have outsiders vie for cash or other goodies as they attempt to solve them. Netflix, for its part, is already dangling another monetary prize for those who can create an algorithm that uses demographic and rental history information to predict the taste of users who haven't rated any movies.

But what every manager should keep in mind is that you don't need to stage a contest to mirror Netflix's commitment to attaining results, its attentiveness to the customer, and its eagerness to reach beyond its own walls to find and cultivate the best thinking from anywhere.

By doing these things every single day, your business will be the real winner.

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