Tuesday, December 6, 2011

Efficiency vs Innovation

It seems that about every nine months I visit my Yahoo mailbox (Yahoo has the largest installed base in the US with 282mm identities and is second to Hotmail worldwide). On my most recent visit, I was greeted with an extensive upgrade. The home screen was touting a 2x speed improvement, better spam control, new social features and unlimited attachment storage; with a whopping 100Gb limit/attachment (in cooperation with YouSendIt). All these adjectives sounded great. Indeed, it's much improved, and it's as if the team went down a check box of features in a methodological way and executed in an efficient manner. Yet, sadly, like much of Yahoo today, it offers little in the way of real innovation or insight. It lacks passion.

The stagnation of Yahoo, while incredibly visible, is not a solitary event, in fact, after reading Jane Jacobs' Economies of Cities and Carlota Perez's Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (thanks to Fred Wilson for suggesting it) there's a real science into why Yahoo is a shining example of markets ruthlessly punishing companies losing their innovative way, while not embracing the next logical developmental milestone; efficiency. Microsoft, as an example of successfully crossing this chasm. It is hardly innovative, however, under Steve Ballmer's leadership, it's undeniably an efficiently run organization.

Markets experience overlapping cycles. For example, we have the ebb and flow of financial markets, represented by the financial exchanges and innovations from fleet footed vendors spurring the advance/decline of production markets.  Each are related and often complementary, but with different foundations and drivers. Carlota Perez highlights that new markets are financed through production capital (much time and innovation and relatively little money), funding the ways and means of production. Later, financial capital (facilitated by the banking industry) supplies the means for massive deployment and broad sharing of wealth (ignoring for this discussion inevitable bubbles). While Jane Jacobs points to the drive to efficiency as the antithesis of innovation. Using the growth of cities, and the failure of planned urban renewal as examples, she gives a series of cases of how central planning stifles innovators. 

From the outside, I assumed that when Carol Bartz was brought on board at Yahoo, she would be a terrific hire. A no nonsense manager with a purposeful perspective, it seemed that she would bust through the layers of bureaucracy holding back the Company from building on its success and innovating within the social and mobile waves hitting the industry. The Company under her leadership did pare down the bureaucracy and had clear lines of authority, but it lacked a fundamental and axiomatic truth. In this industry a company must evolve and innovate in order to prosper. Yahoo did neither. 

Press reports about numerous Private Equity players preparing bids to acquire Yahoo are logical. With an abundance of Financial capital available, they surely will bring efficiencies new owners will demand. I just hope, that building on the failure of Ms. Bartz, there is a remnant of the culture that made this a once proud company and they uncork the beauty of Production capital which is so sorely needed.

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