Facebook Inc. (NASDAQ:FB) President & CEO Mark Zuckerberg and his wife, Priscilla Chan, were named the “most generous” philanthropists in 2013 after donating nearly $1 billion worth of Facebook stock to the Silicon Valley Community Foundation, according to the latest report released Monday by the Chronicle of Philanthropy. Zuckerberg, 29, and Chen, 28, also topped the list as the youngest donors ever.
Robert I. Sutton, Stanford professor and co-author of "Scaling Up Excellence: Getting to More Without Settling for Less," spoke with IBTimes TV about the secrets to Facebook's scaling success, as the social media network celebrated its 10th anniversary on Feb. 4.
“Well, for us what scaling is -- you’ve got a little bit of goodness, you want more of it,” said Sutton. “So that’s one of the most universal leadership skills, whether you’re leading a little group or you’re leading a giant organization. If you look at the history of Facebook, Mark started out leading a little group, now he’s leading a giant organization. In Facebook’s case, one of the things that’s really struck us is we know about their phonetic growth.”
Sutton and co-author Huggy Rao explain in the book that “scaling up” is a challenge leaders face as they try to spread beliefs and behavior from the few to the many as an organization grows larger and older. They argue that scaling depends on finding “pockets of excellence” within an organization so leaders can spread that positive behavior to other areas.
“They [Facebook] have never lost sight from the very beginning that, especially every engineer and product developer that comes in, they have got to instill a mindset, not just grow the footprint,” said Sutton. “That’s one of the key things about scaling. They don’t lose sight of that, even though ‘move fast and break things’ is their motto, it’s part of their mindset. That’s one thing that I’ve always really admired about them. It started out with Mark just going around and talking to everybody, and now it’s a system that they call ‘boot camp’ where you spend six weeks, even before you know what your job is, doing 12 or 13 different jobs and actually making changes in the Facebook site.”
Sutton said two cautionary tales can be learned from Starbucks and Yahoo regarding why companies need to ask themselves what is sacred and what is taboo.
Although Starbucks Corporation (NASDAQ:SBUX) reported fiscal first-quarter earnings on Jan. 23 that beat Wall Street estimates, same-store sales growth declined, as global comparable-store sales grew 5 percent, compared to 6 percent a year ago. Earnings per share for the quarter came in at 71 cents on revenue of $4.24 billion, compared with earnings of 57 cents per share on sales of $3.80 billion in the year-earlier period.
“Starbucks is different because you’re doing chains, so you’re replicating chains, and in that case it’s sort of like stamping out products that are a little bit more consistent,” said Sutton. “Starbucks in Malaysia are different than they are in New York, so you may have to do a little local customization.”
Meanwhile, Yahoo! Inc. (NASDAQ:YHOO) posted fiscal fourth-quarter earnings on Jan. 28 that topped analysts’ expectations, but the company disappointed investors after its first-quarter outlook came in below estimates. Although the Internet company issued adjusted earnings of 46 cents, above estimates for 38 cents a share, on revenue of $1.20 billion, Yahoo forecast net income during the current quarter between $130 million and $170 million, short of analysts' expectations.
“But I think the Yahoo-Facebook comparison is a better comparison,” added Sutton. “They [Yahoo] lost sight of sort of who their core was, and the way we would put it, and this is very important when you’re a leader and you’re trying to spread and sustain excellence: What is sacred for us and what is taboo? One thing that should have been sacred for them, frankly, is user experience and lack of complexity.”
Facebook on Jan. 29 announced fiscal fourth-quarter earnings rose 83 percent to $780 million, or 31 cents a share, as revenue increased 63 percent to $2.59 billion, compared with a profit of $426 million, or 17 cents a share, on sales of $1.59 billion during the fourth quarter of 2012.
Wall Street had expected the company to report earnings excluding items of 27 cents a share on sales of $2.33 billion, according analysts polled by Reuters.
“To me that’s a really big difference in organizations – what’s sacred or what’s taboo,” added Sutton. “People keep their focus on it. Starbucks is interesting, and Howard Schultz wrote a book about this called ‘Onward.’ They lost sight of what really mattered to them, which was the customer experience in coffee. Now their sort of bringing that back and they’re reinventing it for the modern age so we can use our devices and the like, but they're an organization that has sort of lost its soul and is now sort of bringing it back.”
Facebook said net income for the full year in 2013 came in at $1.50 billion, as revenue increased 55 percent year-over-year to $7.87 billion. Revenue from advertising rose 76 percent to $2.34 billion during the quarter from the same period in 2012. Mobile advertising revenue represented approximately 53 percent of advertising revenue for the fourth quarter of 2013, up from nearly 23 percent of advertising revenue in the same quarter of 2012.
“What’s sacred for one organization might be taboo to another, but it’s sort of like, who are we? It’s like an identity crisis,” Sutton said. “So I’ll give you secrecy. To Apple, secrecy is sacred. You have an open-source company like Mozilla which produces Firefox’s browser. Their secrecy is taboo. It just depends who you are. To me that’s a really important part. Another part that really comes from Facebook and they really highlight is they scaled faster than just about anyone, but they always knew when to slow down and think.”
The social networking site averaged 757 million daily active users in 2013, an increase of 22 percent year-over-year, while mobile daily active users averaged 556 million, an increase of 49 percent year-over-year. Monthly active users increased 16 percent year-over-year to 1.23 billion, and mobile monthly active users increased 39 percent year-over-year to 945 million.
“They’ve [Facebook] always known when to slow down now, so they can scale faster later. So this idea of being phonetic I think is the wrong move. Just because things happen fast doesn’t mean people aren’t actually thinking,” Sutton said.
Although the social media giant saw a 60 percent increase in revenue through its mobile advertising business during the third quarter, Chief Financial Officer David Ebersman said in October during the company’s previous conference call that the social media giant saw a decrease in daily active user engagement in younger teens. In November, messaging app Snapchat turned down a $3 billion cash offer from Facebook after the social media company bought Instagram for $1 billion in 2012.
“In terms of teens, we don’t have any new data to report today,” said Ebersman, as the company evaded questions regarding a possible decline in teen users during its fourth-quarter conference call with shareholders on Jan. 29.
“So the thing I worry about Facebook, I believe they will continue to be a great company, but you actually don’t know because I at one point I might have answered that about America Online, for example,” said Sutton. “The advantage is they are sort of one big integrated thing. The disadvantage is, when everybody leaves, they have no other product to sell you. That’s the challenge.”
Facebook joined the S&P 500 index on Dec. 20, 2013, less than two years after its initial public offering.
Shares of the social media company soared nearly 17 percent on Jan. 30, a day after releasing its stronger-than-expected earnings report, sending the stock to an all-time high of $62.50 after going public in May 2012 at $38 a share. Since then, the stock has reached multiple new highs and hit a record high of $64.57 a share on Friday, Feb. 7.
On Monday, Facebook shares opened at $64.30, rose to $64.49, and then closed down 1.20 percent to $63.55.
“For Facebook and a lot of those tech companies, and this is a scaling problem, is they might be able to get bigger and bigger and do most of the creative work in Menlo Park,” said Sutton, “But the question is can we replicate the creative work somewhere else?”