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 / Winter 2007 / Issue 49(originally published by Booz & Company)


The Google Enigma

Many of the most innovative and successful of Google’s new ser­vices are, in fact, ones it has acquired rather than created. Those include the hugely popular video-sharing service YouTube, the Weblog publisher Blogger, the virtual globe Google Earth, the online word processor Writely (renamed Google Docs), the wiki developer JotSpot, the news syndication service Feedburner, and the Internet phone service GrandCentral. When it comes to innovation, Google is starting to look less like a sower than a harvester, less like an inventor than an exploiter. That’s a natural and perhaps necessary progression for a rapidly growing company, but it belies the firm’s popular image as a wildly successful innovator.

When it comes to creating hit products, Google may actually be hampered by its unique economics. Because the cost of failure is so low, it can experiment in all sorts of areas and rush new services to market in the early stages of their development. That kind of freedom brings many benefits, but it can also lead to an erosion of discipline. In the absence of strong economic pressures, it’s easy for companies like Google to put off making the hard choices and difficult trade-offs that lie at the heart of long-term business success.

There are signs that Google is coming to recognize this problem. Over the past year, its management has begun tightening the reins on its organization, imposing some restrictions on the company’s freewheeling and free-spending culture. Late in 2006, in what CEO Schmidt called “a big change in the way we run the company,” it ordered its innovation teams to focus on fewer initiatives and reduce the overall number of products under development by 20 percent. An exasperated Sergey Brin admitted that he “was getting lost in the sheer volume of the products that we were releasing.” And when the company announced disappointing earnings for the second quarter of 2007, Schmidt put the blame on overhiring and announced that the company would be more conservative in expanding its staff in the future. Google is hardly staid, but it is growing up.

Fantasy and Stability
Google’s recent moves suggest that, though its business model may be unprecedented, it is not immune to the growing pains that have bedeviled successful young companies in the past. As cash pours in, it is all too easy for a fast-growing startup’s founders and executives to become convinced that the old rules don’t apply to them — that they are blessed with the Midas touch. Investors and reporters often buy into the fantasy, amplifying management’s cockiness. But as discipline weakens, the company inevitably begins to overreach and overspend — until some lapse or failure abruptly cures the hubris and returns everyone to reality.

The fact that Google appears to be following this well-worn path doesn’t take anything away from the company’s great accomplishments or the landmark innovations that form the pillars of its success. Nor does it mean that other companies should ignore its example. At the very least, Google’s use of powerful computers to collect and make sense of the operational and customer data flowing through the Internet and other networks provides a window into the future of many industries. And, on a related note, the company has created simple but useful systems for sharing information within and between teams, a challenge that has frustrated many firms. Google may not be a perfect model, but it deserves close attention and study.

Above all, Google teaches us, through both its successes and its failures, that smart companies — the ones that are not only consistently innovative but consistently profitable — exhibit three qualities. They hire talented people and give them room to excel. They measure progress and results rigorously and make course adjustments quickly. And they remain disciplined in their work and their spending, curbing the instinct to do too much at once. Of course, that sounds less like a radical rethinking of business verities than a restatement of them. Which brings us to a further lesson: Beware the inevitable hype about how the latest business trend or the newest overnight success “changes everything.” Yes, markets and technology change, sometimes with devastating speed, but through the turmoil, the underpinnings of business success remain fairly stable.

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