In the case of Google & Yahoo, the results are striking. Not only has Google consistently invested more cash into R&D endeavors, but the fruits of those investments (as measured by revenues in this case), are much higher. Google not only spends more, but it generates far more revenue per dollar of R&D investment than its primary competitor. This disparity translates into a superior stream of earnings & cash flows. Investors have more than taken notice. Over the previous five years, shares of Google have considerably outperformed those of Yahoo.

Google: Using R&D Investment to Trump Yahoo:

Google has invested more in R&D than Yahoo. On top of that, Google has consistently generated more revenues (as well as earnings and cash flows) from each dollar invested in R&D. This isn’t simply a trend that has swung like a pendulum from quarter-to-quarter. This is a long term trend that has driven a period of sustained value creation through the strategy of continuous disruption.

Google’s Platform: A key to success

Our third attribute of Continuous Disruptive Innovation is perhaps the most obvious in the case of Google. Here, Google has unquestionably become the dominate name in search. It dominates search and has exploited that dominance to create value through endeavors in advertising, productivity tools & enterprise products (to name a few). Recently, the Company added Google Voice to its Gmail service (something we consider a strategic network of users), thereby creating a legitimate competitor to VOIP offerings such as Skype & Vonage.

The development of Android allowed Google to further penetrate the smartphone market in a meaningful & value creating way. In short, Google didn’t just quit once it dominated search. It continuously innovated its offering, often leveraging its loyal network of users to reach new markets, thereby growing earnings and cash flows.

Disruptive Management Teams Trump Disruptive Companies

Our final attribute for Continuous Disruptive Innovation focuses on the flexibility of management. Here, it is almost indisputable that Google has continuously thought “outside the box”, entering new markets and adapting its services as the competitive marketplace evolves. Google has been one step ahead of almost everybody (including non-traditional competitors). That forward thinking has not only driven superior stock performance as compared to Yahoo, but superior value creation as compared to most technology powerhouses.

Yahoo is a good example of the “other side of the coin”. Most recently, the Company has struggled to retain executive-level talent in numerous areas of its business. Such turnover can easily impair a company’s ability to achieve sustained value creation for stakeholders. Remember: Google’s superior financial and stock performance wasn’t built in a single quarter. Rather, Google created value in large part as a result of an outsized investment in research and development (over many years). This value creation was compounded by the fact that Google earned substantially more revenues, earnings & cash flows on its outsized investment. The company’s flexible & innovative management team continued to “raise the bar”, using Google as a platform to offer a portfolio of value-creating (and often disruptive) services. Continuous Disruptive Innovation allowed Google to compete in areas beyond search and eventually enter new markets.

While we often admire companies who have developed disruptive products and services, we acknowledge that not all of these companies are, themselves, disruptive. Companies that operate disruptive businesses are not created equal. Those who adopt the strategy of “disrupt, then defend” may create value for a period of time, but ultimately are overcome by competitors who: