CORPORATE LEADSHIP IS A SPECIALTY

 

How important is capable management to a startup company in the digital age? Many Silicon Valley newcomers find it more profitable to merge with a larger competitor when the founders get beyond their executive expertise. That happens when a well-established innovator in the technology industry fails to meet the firm’s potential because a better managed competitor crowds them out of the field.

An historic example is the recent demise of Yahoo that lost its independence and early dominance of internet search with its acquisition in July by Verizon. The purchase price was $4.8 billion, a significant come down from the company’s peak market value in 2000 of $128 billion. How could company that started in 1994 as a fun project in a Stanford dormitory lose so much of its position and value?

The business magazine The Economist lays the blame on management with three deficiencies overlooked by a succession of four CEOs in a short period of three years. That is a certain sign that management of a rapidly growing firm must be very nimble and make good choices. Often the founders of a company in new technology cannot let go of their “baby” and stay in control too long when their expertise is more in the creation of a product not its management.

Here are examples of bad decisions made by Yahoo management during its rapid growth. One of the three deficiencies cited by The Economist was deal making. The opportunity to acquire Google for $1 million was passed up; another failed option was to acquire Facebook for $1 billion that fell through when Yahoo tried to negotiate the price down; the deal to acquire YouTube and the proposed purchase of eBay fell through because of clashing egos,

Yahoo shareholders should feel that the extravagant salaries paid to four chief executives was not value received. In 2008 the founding CEO turned down the sale of Yahoo to Microsoft for $45 billion. His pride of managing his own company overcame a good strategic decision. Founders of a technology company are not usually visionary turnaround artists. Steve Jobs, who successfully saved Apple, was the exception.

Another deficiency at Yahoo was a chronic lack of focus. Instead of concentrating on its strength, Yahoo sprawled. By 2001 it had 400 different products and services, The Economist reported. Finally, the leadership didn’t know what the company was while Google was focused on search and e-Bay on e-commerce.

The third deficiency cited at Yahoo was empire-building by executives who were feeding their egos moving in the wrong direction. As Yahoo sprawled doing too many things at once, and failed to respond to the emergence of social media and the mobile Internet.

These are lessons that should be taught in graduate business schools to the novice executive officers of rapidly expanding new technologies. When I was mentoring undergraduate students at the Rady Business School at UC-San Diego, I became discouraged that my students were too focused on traditional textbooks on economics and business administration. Any effort to engage a conversation on current events was futile as my students did not seem to read the current periodicals.

Case in point was the near collapse of the EU economy during the first financial crisis of the Greek banking system. At the time we were having meetings, I inquired what these economics majors were discussing in the classroom. I was told the EU subject was not on their class agenda. As the students progress into graduate school for their master’s in business I hope they are given more cutting-edge instruction so they will not be another executive of the next Yahoo to fail.

The latest social-media powerhouse to fall on bad times is Twitter. One of the founders, Jack Dorsey, returned as CEO to try to resuscitate the company. He was pushed out in 2008 because his board of directors thought his unruly creativity was damaging the growth of the upstart internet company. Competition from Facebook and Snapchat cut into Twitter’s early prospect of becoming a mega-giant in its field.

Unlike the triumphant return of Steve Jobs to Apple, Twitter has not shown a turnaround since Dorsey took over. The stock value has fallen by one-half. Observers believe the problem is that the CEO is not fulltime. Having founded a new company after departing Twitter, Dorsey is devoting half of his time and attention to the other venture, Square, a financial management server.

Here is another exception to the theory that founders don’t make managers with the caveat that it’s a matter of giving full attention to the job. When an upstart begin to decline, it becomes a vulnerable target for a take-over by a competitor. Mark Zuckerberg founded Facebook and was a billionaire before age 30. He still runs an innovative company successfully. He seems to be everywhere plugging his social media service with considerable recognition. The company is worth $360 billion and counting.

Facebook went public in 2012 with much fanfare but with lagging stock value. The company is now worth $360 and counting, Zuckerberg is the fifth richest person in the world.

That takes management.