Google's Long-Term Challenge: Keeping The Fire Alive

It seems silly to worry about how an 8-year old 9-year old company is going to keep its passion alive, but given how fast Google has become a huge, dominant global incumbent, it’s time to start wondering. 

Google ambushed Yahoo, the former search leader, not just because Sergey, Larry, and the other early Googlers were brilliant, but because Yahoo had hit cruise control.  Most of the execs who drove Yahoo’s dominance in the late 90s had retired (or been retired), and they had been replaced in some cases by clock-punchers.  (The company’s colossal strategic error–taking its eye off the search ball–didn’t help).  The ossified Yahoo Finance team was the classic example: Until the roll-out of a far more innovative Google Finance embarrassed the snoozing Yahoo division into action last year, the team had barely rolled out a new feature in five years.

Now that Google has become one of the most profitable and most important companies in the world (really), early execs can not only retire with dynastic wealth, they can also exit at the top of their games–after hitting the 3-pointer to win with no time left on the clock.  They can parachute into almost any other company on earth and walk the halls as independently wealthy celebrities.  They can become angels and VCs.  They can start their own companies, without having to bother with business plans or financings. They can do anything–while taking credit for all future success Google enjoys (and/or being able to blame others if it tanks).  With Google undergoing a necessary transition from nimble start-up to bureaucratic global corporation, many execs are taking this route.

Judging from other companies that have had it and then lost it (AOL, Yahoo), as well as companies that maintained the fire for decades (Microsoft, GE, Goldman Sachs), some of the key factors are:

  1. Culture that rewards excellence and punishes clock-punching
  2. Consistent, passionate senior leadership
  3. Ongoing opportunity to create vast wealth for executives

If Google wishes to keep the fire alive, in other words, it would likely be well-advised to:

1.   Start firing its weakest 5% of employees every year
, even if these employees are doing a satisfactory job.  Consistently invoking the competitive “stick” instead of just a carrot works wonders for overall excellence, drive, and morale.

2.   Keep the Brin, Page, Schmidt triumvirate in place and driven for as long as possible.
  Microsoft destroyed competitors for nearly two decades because Gates and Ballmer took not winning as a personal insult.  If/when Eric goes into politics and Sergey and Larry retire into “Chief Visionary” roles, Google’s best years will be behind it.

3.   Dig into that vast profit stream and pay successful executives like Wall Street’s biggest hitters, year after year.  We estimated last week that Google’s core business has astounding 75%-plus profit margins.  Unless Google keeps finding ways to spend a big chunk of those profits, its profit margins will inevitably rise as it slows hiring and gets more efficient.  For many reasons, it is in the company’s interests NOT to let its margins rise (drawing the ire of competitors, regulators, etc, for example).  And one way to ensure that margins will not rise would be to reward successful employees the way Wall Street does: with vast pots of money in good years.  The combo of carrot and stick would ensure that getting a job at Google remained as competitive as getting a job at Goldman (and also make the annual culling more tolerable).

Google takes justifiable pride in being a “different kind of company.”  In the coming years, the most important way it must be different is to fall into the same business-as-usual trap that crippled Yahoo, AOL, and dozens of other once-dominant incumbents.

See Also: How Profitable is Google’s Core Biz?  75%-plus Profit Margins

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