Google beats Yahoo? How?

Which is the better business Google or Yahoo?

Well, you probably are going to choose Google – and you’d be right.

But do you know why they are a better business? Again, you might say better products etc… and again, I’m sure you’d be right.

But how would you measure the difference?

Profit? No, because profit is an outcome of a successful well run business - it is not an indication of the quality of the business by itself. Equally, some businesses are cyclical – that means profits go up and down with the economic cycle – but there can be better or worse cyclical businesses.

So, a comparative measure against a peer? Yes, that is a good idea, but not one using profit.

Okay, let’s go back to our piece on how successful entrepeneurs can build a smart business. The essence of a successful business is an increase (over time) of revenue per employee. This measure shows that the business is getting smarter, whilst also getting bigger.

And, when you look at the chart between Google and Yahoo – you can clearly see the really smart business. And yes, it is Google. But…

… it is even more interesting than that…

The really interesting point in this graph is around June 2009 – when Google’s declining revenue per employee switched direction and began an upward path, yet again.

This change co-incided with Google deciding to drop a number of peripheral activities and give greater concentration to search. As Martin Sorrell said in the FT that ”Google is a much more dangerous company than it was 12 months ago,” he said. ”They are much slimmer. They are more focused on search and more focused on mobile search.”

So, it would appear that the improvement in revenue per employee is a clear indication of becoming ‘a much greater competitor’ and of being ‘much more focused’.

So, then, revenue per employee is a single measure that really does tell you how well you are doing. It goes beyond a sense of having better products and allows you to be judged next to your peer group and for you to track your (hopefully) upward path.

So, the holy grail of business is not a fabulous valuation, but an upward trend in revenue per employee. Create that and you truly have a world beating business.