Policies and control processes became so foundational to our work that those who were great at coloring within the lines were promoted, while many creative mavericks felt stifled and went to work elsewhere. I was sorry to see them go, but I believed that this was what happens when a company grows up.

Then two things occurred. The first is that we failed to innovate quickly. We had become increasingly efficient and decreasingly creative. In order to grow we had to purchase other companies that did have innovative products. That led to more business complexity, which in turn led to more rules and process.

The second is that the market shifted from C++ to Java. To survive, we needed to change. But we had selected and conditioned our employees to follow process, not to think freshly or shift fast. We were unable to adapt and, in 1997, ended up selling the company to our largest competitor.

Instead I reminded myself of what I often tell leaders throughout Netflix:

When one of your people does something dumb don’t blame them. Instead ask yourself what context you failed to set. Are you articulate and inspiring enough in expressing your goals and strategy? Have you clearly explained all the assumptions and risks that will help your team to make good decisions? Are you and your employees highly aligned on vision and objectives?

I was also told that a brand-new CEO shouldn’t be trying to make huge acquisitions. I was “crazy,” as one of our investment bankers put it, because the numbers would never work out and this was an impossible “sale” to the street.

The banker had a point. It’s true that on paper the deal didn’t make obvious sense. But I felt certain that this level of ingenuity was worth more than any of us understood or could calculate at the time. It’s perhaps not the most responsible advice in a book like this to say that leaders should just go out there and trust their gut, because it might be interpreted as endorsing impulsivity over thoughtfulness, gambling rather than careful study. As with everything, the key is awareness, taking it all in and weighing every factor—your own motivations, what the people you trust are saying, what careful study and analysis tell you, and then what analysis can’t tell you. You carefully consider all of these factors, understanding that no two circumstances are alike, and then, if you’re in charge, it still ultimately comes down to instinct. Is this right or isn’t it? Nothing is a sure thing, but you need at the very least to be willing to take big risks. You can’t have big wins without them.

I went to our board’s compensation committee and explained the dilemma. When you innovate, everything needs to change, not just the way you make or deliver a product. Many of the practices and structures within the company need to adapt, too, including, in this case, how the board rewards our executives. I proposed a radical idea— essentially, that I would determine compensation, based on how much they contributed to this new strategy, even though, without easily measured financial results, this was going to be far more subjective than our typical compensation practices.

You are the customer of the supplier,” I said. “Why doesn’t the same principle apply?”

“Well, we recently renegotiated our lease agreements with the mall operators and owners,” he said. “We went in with a Win/Win attitude. We were open, reasonable, conciliatory. But they saw that position as being soft and weak, and they took us to the cleaners.”

“Well, why did you go for Lose/Win?” I asked.

“We didn’t. We went for Win/Win.”

“I thought you said they took you to the cleaners.”

“They did.”

“In other words, you lost.”

“That’s right.”

“And they won.”

“That’s right.”

“So what’s that called?”

When he realized that what he had called Win/Win was really Lose/Win, he was shocked. And as we examined the long-term impact of that Lose/Win, the suppressed feelings, the trampled values, the resentment that seethed under the surface of the relationship, we agreed that it was really a loss for both parties in the end. If this man had had a real Win/Win attitude, he would have stayed longer in the communication process, listened to the mall owner more, then expressed his point of view with more courage. He would have continued in the Win/Win spirit until a solution was reached they both felt good about. And that solution, that Third Alternative, would have been synergistic—probably something neither of them had thought of on his own.