Management May Be the Ultimate Limit on Growth

Last week I spent a lot of time thinking about the changing role of service providers as the technologies that power the platforms they provide increasingly impact their business models. Out of this came some speculation on who will be able to change most effectively to take advantage of the volatility and turmoil in the service provider market.

It seems that everyone is scared of Google—but should they really be that worried? As often happens when I started looking for answers to this question, I was reminded of some similar work a couple of years ago for a large (Fortune 50) client in a completely different industry. The question then was “Why is there only one GE?”

GE is a great company—and I should admit up front that (a) I admire much of what GE has been able to achieve and (b) I own the stock.

GE has also contributed a great deal to the theory and practice of running a giant global corporation—and confounded a number of business theorists at the same time.

If you’ve read Chris Zook’s book, Profit from the Core, you’ll recall that there are almost no examples of broadly diversified companies that are persistently successful.

As Zook’s data shows, companies that stray too far from the “core” of their success almost always fall behind those that stick to what they know or who grow only in areas that are immediately adjacent to their historic “core”

Except for GE.

Now it’s not as though GE tries to keep the roots of its success a secret—just the opposite, in fact. It’s one of the most studied companies anywhere. So we all know about the focus on being in the top three in every market; about Six Sigma; about “workout”; about the relentless measurement of performance; about the weeding out of the poorest performers and the investment in training for the best; about the importance of making the numbers the “GE way.” GE executives are also readily available to show the way.

The system that pushes people to the top of GE’s operating companies also pushes them out when they are passed over for promotion to the next level up. We know that the “system” works at GE. So why aren’t there any other successful large-scale conglomerates?

My conclusion then (and now) was that GE’s “core” is actually a system of management that is very nearly perfectly aligned to its corporate culture and chosen operating model. This system was put together under Jack Welch and allowed GE to essentially run any kind of business it wanted to (although along the way there were some spectacular failures when the necessary alignment failed to stick).

The challenge GE faced (and that Jeff Immelt is I believe steadily addressing) is that eventually, just about everybody who could tolerate working in the GE system was already in it—or at least the attrition and replacement rates were in balance. When this happens, you either have to stop growing or change the system. Immelt is subtly but steadily changing the system.

I see some of the same challenges happening at Google. It’s a truth of statistics that as you grow larger, the average capability of your resource pool will eventually start to decline—the next recruit just won’t be as smart as the rest because you’ll already have recruited everyone smarter who wants to work in your beautifully aligned system. Google hasn’t reached that point yet, but it might be getting close.

And there’s a lesson here for everyone that I have used over and over again for a couple of decades now: Don’t make success dependant on competencies you don’t have and can’t get.

To meet market expectations, Google would have to be about 20 times bigger than it is today. It’s very unlikely that its current “system” could work at that scale, even if it could maintain the revenue leverage that it currently achieves.

Of course, the Google leadership may well not care what the market thinks, and decide to remain exactly where they are now, doing what they do extremely well: Building platforms outside of conventional thinking. If so, they could be extremely scary for a long time.

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