Are Executives Dumb? Or Do We Blame the Fog of War?

Megan McArdle, a writer for The Atlantic Magazine, has a nice piece discussing if stupidity should be blamed for some of the choice decisions made by executives. Using the Netflix flub – she wonders:

But how do we get from “that was a bad idea” to “Reed Hastings doesn’t understand what business he’s in?”  When internet commentators see odd behavior that they don’t understand, why do they assume that the most parsimonious explanation is that management must be a bunch of drooling morons?

 I mean, Reed Hastings did manage to build this rather large and successful business that killed off one of the most successful retail operations of its day.  It’s possible that he just sort of did this by accident.  But is this really the most likely explanation?  That he didn’t understand the first thing about how people watched movies, or how to run a business?
The available evidence seems to indicate that at some point, Reed Hastings was a smart guy.  Smart enough to count to twenty with his shoes on. Smart enough read pages 1-15 of the kind of introductory strategy text where they solemnly tell you to figure out what business you’re really in.  Smart enough to grind Blockbuster into a pile of gleaming blue-and-white sand while launching a streaming service so popular that it now accounts for something like 20% of peak-load internet traffic.  If you want to write an article on how he’s a big fat idiot who couldn’t find his ass with both hands in the dark, then you should probably have a theory of the transition between these two states of Reed Hastings.  Did he suffer a stroke?  Start dating distractingly gorgeous supermodels?  Has he been licking the paint chips in his gloriously restored Victorian mansion?

I too have been guilty many time at looking in the rear-view mirror and wondering what the executives were smoking?  Megan’s point is that we are not giving the executives the benefit of the doubt – that these decisions are sometimes made with a limited choice set and very limited information.  On the other hand I wish we could put data flight recorders in the C-Suite – this way we would know for sure that a problem was preventable and avoidable and entirely based on bad human judgement and decisions making –> case-in-point the Air France 447 disaster.

8 Comments on “Are Executives Dumb? Or Do We Blame the Fog of War?”

  1. Karim,

    Thanks for joining this important conversation.

    It apperas to me that the Reed the created the Netflix concept and the Netflix Prize concept is fundamentally inconsistent with the Reed that created the Qwikster concept. The first two concepts are customer-centric and customer-inclusive. The last one [Qwikster] apperas a radical departure from these principles.

    Is it possible that the Qwikster concept was a miscalculated or poorly-timed response to a difficult Innovator’s Dilemma?

    See my note for more detail:


  2. Karim,

    Interesting post. I do love The Atlantic.

    You should consider talking with Willy about Reed if you’re interested in him specifically. He’s met him several times.

    My thought is that somehow along the way, at least one of two things happened (1) he got disconnected from his customers, likely by some org structure or some consulting company persuading him he didn’t know his own customers anymore and (2) the company grew to a size where his build and revise strategy no longer worked, and he didn’t realize it. The company did lots of experimentation in the early stages of it’s development.

    I heard on NPR that Netflix is going to be rolling out some of its own TV shows, as well as YouTube. Interesting…


  3. srp says:

    The comment thread on McArdle’s post has a hilarious discussion among some of the regulars about trying to get customer service from General Electric.

    I notice that neither previous comment has a suggestion of how Netflix should handle the strategic problem McArdle notes in her post–how to deal with suppliers’ insistence on higher prices for their streamed content relative to what they are willing to allow on physical media.

  4. To @ariegoldshlager’s point, the key distinction is that the Netflix prize allowed input within a constrained set of circumstances. Participants were free to suggest solutions, but there was a clearly defined success function. Competing solutions were incrementally better.

    Unfortunately, this criteria is difficult to apply to truly strategic shifts. The Qwikster / Netflix split is perfectly rational on a segmentation basis, but it underestimates the utility of the dual DVD/streaming option. Could a Netflix-prize approach have brought about a different outcome? Considering the difficulty of testing major changes (barring parallel universes), I’d say no.

  5. To Steve and Humberto’s points:

    Is it practical to include customers in designing the future Netflix service in the following way?

    “A group of men designing their ideal men’s store discovered that they did not want the lowest price for clothing of a specified quality but the highest quality for a specified price. (They decided how much they were going to spend before going shopping.) Second, they wanted clothing arranged by size rather than type so they could go to one part of a store where all types of clothing in their size were gathered. (Because they disliked shopping, they waited until they wanted to buy several things before they went shopping.) Third, they wanted saleswomen, not salesmen, because they said ‘You can’t trust a man’s opinion of how you look’. Finally, they wanted sales personnel to be available only when asked for.”

    • srp says:

      It’s the eternal tension between inspiration and research in design. It’s not as cut and dried a distinction as people sometimes portray, as research need not involve conscious design input from users. For example, my understanding is that the idea of quick turnaround for eyeglasses that spawned Vision Center was NOT turned up directly in focus groups with optometric customers. Rather, managers interpreted the feedback they received about the experience of buying eyeglasses and came up with the short-lead-time strategy. The decade-old growth of anthropological research approaches in marketing follows the same logic–observe and try to understand, but don’t necessarily expect your customers to be designers.

      On the other hand, we have lots of evangelists for user design and open-source design who think that these are panaceas for the future. An obvious constraint here is the degree of user technical knowledge about the possibilities embedded in design space. For example, would the men’s store described in your comment actually work? Was it tried? I can readily imagine problems arising, such as the fact that an individual’s sizes aren’t consistent across garment types, so grouping that way might not minimize running around the store while it made stocking more complex and time-consuming. And I’m not sure what the practical implication of the “highest quality for a given price” vs. the “lowest price for a given quality” distinction is for merchandising and marketing decisions. Logically, those would be the exact same items for some combination of “givens.” I’m more persuaded by some of von Hippel’s stories where users are technically proficient buyers–say, electrical engineering customers inventing new test instruments independently of or in collaboration with instrument vendors.

      • Steve,

        I fully agree with your assessment of the men’s store concept. I also agree that Lead Users, [Creative Consumers, or Emergent Customers] will prove more effective than “average” consumers in collaborating with companies.

        However, I would like to add that most customer-collaborative or customer-inclusive design processes would have most likely disqualified the Qwikster concept. The customers were very decisive and very conclusive about the concept, so much so that Netflix had to rapidly retract it.


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