2008

Thesis Ben Morrow

[GOOGLE’S SUCCESS] While other companies were busy cramming the most ads possible on their homepages or squeezing every last hour of productivity out of employees, Google created an enjoyable experience for every party involved in the company including users, employees, and investors. Google’s success has come as a direct result of keeping people happy.

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TABLE OF CONTENTS

History .......................................................................................................................................................................................... 4

External Analysis ..................................................................................................................................................................... 4

External Environment ...................................................................................................................................................... 4

Global .................................................................................................................................................................................. 4

Demographics.................................................................................................................................................................. 4

Technology ....................................................................................................................................................................... 5

Economic ........................................................................................................................................................................... 5

Political and Legal .......................................................................................................................................................... 5

Socio-Cultural .................................................................................................................................................................. 5

Stakeholders ......................................................................................................................................................................... 6

Porter’s 5 Forces Analysis ............................................................................................................................................... 7

Potential New Entrants ............................................................................................................................................... 7

Suppliers ............................................................................................................................................................................ 7

Current Competitors ..................................................................................................................................................... 7

Customers ......................................................................................................................................................................... 9

Potential Substitutes .................................................................................................................................................... 9

Internal Analysis .................................................................................................................................................................... 10

Mission Statement ............................................................................................................................................................ 10

Financial Analysis ............................................................................................................................................................. 11

Value Chain Analysis ....................................................................................................................................................... 12

Competitive Advantages ................................................................................................................................................ 13

Value .................................................................................................................................................................................. 13

Rarity................................................................................................................................................................................. 13

Imitability ........................................................................................................................................................................ 13

Substitutability .............................................................................................................................................................. 14

Strategic Direction ................................................................................................................................................................ 14

Strategy ................................................................................................................................................................................. 14

Stated Strategy .............................................................................................................................................................. 16

Strategic Fit ......................................................................................................................................................................... 16

Other Strategies ................................................................................................................................................................. 18

Start-ups .......................................................................................................................................................................... 18

Acquisitions .................................................................................................................................................................... 18

Alliances ........................................................................................................................................................................... 18

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Leadership & Culture ........................................................................................................................................................... 19

Structure ............................................................................................................................................................................... 19

Culture ................................................................................................................................................................................... 19

Employee Perks ............................................................................................................................................................ 20

Leadership ........................................................................................................................................................................... 21

Problem Identification and Recommendations ................................................................................................... 22

Conclusion ................................................................................................................................................................................ 23

Appendix A .......................................................................................................................................................................... 24

Appendix B .......................................................................................................................................................................... 25

Appendix C ........................................................................................................................................................................... 26

Appendix D .......................................................................................................................................................................... 27

Works Cited .............................................................................................................................................................................. 28

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HISTORY

Google's founders, Larry Page and Sergey Brin, met by chance on a Stanford University tour in the summer of 1995. Page, at the time, was working on a PhD research project involving the mathematical properties of the link structure on the internet. The research project, "BackRub", used an algorithm to follow the links in a webpage and analyze all the connections. The PageRank algorithm generated a popularity index for each web page based on the quantity and quality of incoming links. By 1998 Google’s web crawler had indexed 60 million URLs and the company had been formally incorporated.

In the next few years Google became the gateway to the internet for the masses, as well as a traffic director that could make or break a company with its search rankings. Google Docs, Gmail, and Google Earth demonstrated the company’s aspiration to move beyond simple web queries, and its ability to merge playfulness with unparalleled functionality.

While other companies were busy cramming more motion ads on their homepages and squeezing every last hour of productivity out of employees, Google created an enjoyable experience for every party involved, including users, employees, and investors. Google’s success has come as a direct result of keeping people happy.

EXTERNAL ANALYSIS

EXTERNAL ENVIRONMENT

GLOBAL

Internet search is applicable to most cultures all over the world freeing Google from geographic dependence. In fact, the company now has 20 offices in the U.S. and international locations in over 30 countries working on research, sales, and marketing (Google, 2008). Google offers a personalized search engine for more than 115 countries, and as language support improves, the company is likely to gain market share. As computers become more affordable, many people in economically disadvantaged countries are gaining access to the internet for the first time and Google would like to route them through its search and productivity products, like Gmail, Docs, and Sites. Google’s web applications are now bundled into the operating system on low-cost Linux-based computers (Blankenhorn, 2008).

DEMOGRAPHICS

Google is well positioned in demographics because it has a relatively young userbase. This means that it will be less affected as the Baby Boomers age in comparison to other companies that depend on the 50 to 60 year-old demographic group. Internet search is also not a gender-specific issue, and would not be hurt by changes in the ratio of female to males. The company will however benefit when some traditional and paternalistic societies begin using the internet more frequently.

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TECHNOLOGY

Technology is obviously always improving and Google has taken specific measures to make sure it does not fall behind. Google can use commodity computer parts (cheap components) knowing they will fail by ensuring that every component always has a duplicate. The components are attached to the computer with Velcro rather than screws which allows for quick swapping and upgrading (May, 2007).

ECONOMIC

The United States is currently in a period of recession and stocks are trading at 52-week lows. However, technology companies like Google are relatively isolated because search and consequently internet-based advertisements have become a staple to the world society and economy. In fact, a recent Wired magazine article says that Google “looks particularly well-positioned to weather the downturn. Google's focus on highly targeted, measurable advertising makes it more recession-proof than many other businesses in tech.” (Schiffman, 2008) The crucial need to stay informed and constantly connected keeps such services vibrant despite the parched surroundings.

POLITICAL AND LEGAL

Formal institutions have not significantly affected Google’s operations, although Google has faced pressure from the Department of Justice to relinquish archived search terms (Buncombe, 2006) and from the Chinese government to censor search results (Liedtke, 2005). Google’s “Don’t be evil” mantra has been put to the test as users ask whether cooperation with governments undermines their privacy and freedoms. In 2008, Google responded to customer concerns when it added a privacy link to its home page. This link took users to a Privacy Center where they could learn about Google’s policies in regard to political and legal issues (Google, 2008).

Google has also faced concern on copyright issues because the company stores copies of third party web pages and images on their servers. They have responded to this criticism by releasing a copyright information page. The page provides the relevant information regarding digital information and provides links to notify both Google and the U.S. Copyright Office of suspected infringement (Google, 2008).

SOCIO-CULTURAL

The world is increasingly becoming more connected due to the means of communication available through the internet. And, for many people, the search giants like Google make the internet navigable. As internet use increases among all age groups and across all cultures, we will become increasingly more dependent on internet search.

In addition, most new cell phones are internet capable devices. People will use these devices for driving directions, to locate restaurants, check sports scores, download music, and even quick research. Google stands to benefit from this with an increased number of search queries. To enable more people to access Google’s services from their mobile devices, the company has released its

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Android Mobile Phone Platform and Operating System as well as the Google Mobile App that can be downloaded on other platforms such as the Apple iPhone.

STAKEHOLDERS

Figure 1. Stakeholder Importance

Google has a responsibility to manage its operations for the benefit of its stakeholders. Stakeholders include not only the shareholders of the company’s stock, but also the employees, customers, suppliers, trade associations, and community. Google decisions may be influenced by the government, activist groups, and the media, all who have their own agendas and responsibilities to the people they serve. Each stakeholder has a relationship with Google and this relationship is the source of the stakeholder’s power to affect Google’s decisions. Google’s distributed business model ensures that no stakeholder has a level of importance that could singly change the direction of the company, but the way that the mass of web users, media, and governments interpret their activity could influence the company’s objectives.

It is Google’s management’s job to ensure the survival of the firm and the long-term benefits of the stakeholders. Litigation and politics often have an effect on both the short-term and long-term results and that is why it is important to be vigilant of the external environment. Some stakeholders

Google

Stockholder

Employee

Customer

Supplier

FinancialInstitu-tions

TradeAssocia-

tionCompe-tition

Union

ActivistGroups

Govern-ment

Comm-unity

Media

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have conflicting claims, such as the user’s right to information and the government’s responsibility to protect information – or consequently, the user’s right to privacy and the government’s right to access records. Management is tasked to weigh the seriousness of each claim and decide which outcome will best benefit the majority of their stakeholders.

PORTER’S 5 FORCES ANALYSIS

Porter’s 5 Forces analysis is a framework for industry analysis and business strategy development relative to the competitors of the firm (QuickMBA, 2007).

POTENTIAL NEW ENTRANTS

The barriers to entry in the internet search market are high. The current competitors have thousands of servers deployed in locations all over the world and have accumulated many years worth of data about user habits. A new entrant would need to provide better search results at very fast speeds to compete in this highly competitive market. With that in mind, it must be recognized that when Google was founded in 1998, Yahoo, Excite, and Altavista dominated the search market and Google has since eclipsed them all (Viney, 2007). The market now, however, is more mature with a necessary path dependency to gather data on both the content of webpages and the search history of users. Therefore, the threat of new entrants in the internet search market is relatively low.

SUPPLIERS

Google’s ad system is a reliable source of income because both the ad-making partner and ad-receiving individual are both customers of Google’s. So as long as Google maintains its market dominance with the search product, supplier bargaining power will remain low. Google’s cost of revenue as a percentage of sales in 2007 was 40% (Google, 2007). This number is the same for Yahoo (Google, 2007) suggesting that both companies are equally efficient at maintaining supplier-seller collaboration.

CURRENT COMPETITORS

Google’s stated goal is to “organize the world’s information” (Google, 2008), and to merit they have created many complimentary products to their main internet search service. Targeted advertisements based on the information they collect with their products are Google’s primary source of revenue. In 2007, Google had revenues of $16.6 billion which grew an average of 115% annually in the preceding five years (Google, 2008).

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Figure 2. (Google, 2008)

Google’s main competitors, Yahoo, and Microsoft (operating under their respective brands - MSN and Live Search), posted revenues of $7.0 billion and $51.1 billion respectively (Google, 2007). There is a dizzying amount of money made in this industry.

Presently, Google commands 57% of internet searches in the United States (Agence France-Presse, 2008). This large market share enables them to improve the quality of their search results and targeted ads more quickly than their competitors. This creates a sort of self-perpetuating draw for customers as the search results constantly improve. Yahoo and Microsoft lag behind with 23% and 11% respective market shares (Figure 3) (Agence France-Presse, 2008). The competitive rivalry is strong and ongoing in this industry because large amounts of advertising dollars flow to the website that has captured the largest volume of searches.

0

2,000,000,000

4,000,000,000

6,000,000,000

8,000,000,000

10,000,000,000

12,000,000,000

Revenue

Google Revenue Growth

2003

2004

2005

2006

2007

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Figure 3. (Agence France-Presse, 2008)

CUSTOMERS

As of 2007, 99% of Google’s revenues are derived from advertising (Google, 2008). However, no single account contributes more than 3% to net revenue, and less than 5% of the revenue is generated by any given network partner site (Google Inc., 2007). This means that no single buyer has a controlling interest. In Google’s system many advertisers bid on keywords. Popular keywords like “Dallas Texas” are sold for much higher value-per-clickthrough than obscure topics (Google, 2008). This distributed approach allows Google to attract both large companies and small “mom-and-pop shops” keeping buyer power low.

POTENTIAL SUBSTITUTES

In 2008, the internet has become the mode chosen by millions of people all over the world to request and retrieve information. In light of this fact, there really is no suitable substitute for search. Information can be organized in different ways including categories and sorted by date, but Google provides tools to complete these tasks as well as conduct searches. A substitute product may be invented in the future, but there are no obvious substitutes to organizing information on the internet.

Google has positioned itself well to weather each of Porter’s Five Forces of Competition as well as stay afloat in a turbulent external environment. Google’s ability to please its stakeholders will continue to define the success of the venture and the future of the company.

57%

23%

11%

Search Engine Market Share

Google

Yahoo

Microsoft

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INTERNAL ANALYSIS

MISSION STATEMENT

Google’s mission, “to organize the world’s information and make it universally accessible and useful” (Google, 2008), speaks to their goals, but does not reflect the way they earn a profit. The statement definitely gives the company a future to strive towards, as it will be quite some time before all of the world’s information is easily accessible even though they have made great strides. The mission statement sets the company up as a resource that would be used by anyone who was doing research whether as part of a thesis or just a question out of curiosity. The mission statement doesn’t give a timeline, it only states the end result. The mission statement is broad enough that it allows for Google to use any means possible to organize information. This means that they are neither limited to search nor are they limited to using the internet in its current form.

The mission statement is graphic because it gives a sense of the scale of the endeavor in its bold declaration “to organize the world’s information” and become “universally accessible”. This definite goal with a strong focus gives the statement direction and flexibility as it does not specify the means, leaving lenient room in the respect of the physical products the company will produce. All the worlds information could never be made searchable or categorized because some data is private and other data is not defined in a computer readable form. However, even though the mission statement isn’t strictly feasible, it is desirable, motivational, and long-lasting. Google’s mission statement is quite distinctive and original because the scope of the project is much larger and more long-term than most other companies would aspire towards. It is complete in the sense that the goal is not just to organize information, but also to make it accessible and useful.

Figure 4. Home Pages

The statement is forthright in understanding the boon and the banes of advertisements to search engine users in its suggestions that “advertisements should not be an annoying interruption” (Google Inc., 2007) Figure 4 displays the difference between the homepage of the top competitors in the search industry. Google has long held a very human-centric point-of-view, and their mission statement reflects their dedication to user experience in their promise to “provide the most relevant and useful search results…independent of financial incentives” (Google Inc., 2007). Google is quick to recognize that customer faith will provide the basis for “increased traffic and strong word-of-mouth promotion” (Google Inc., 2007).

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The mission statement will probably not change either through the actions of competitors or through a changing external environment. Information retrieval is likely to only become more important in the future and therefore Google has set itself up well with the long-term vision of their mission statement. This projected prosperity does not, however, include the discussion of the company’s stakeholders in the statement or specifics on the monetary value creation.

FINANCIAL ANALYSIS

Google is a relatively young company that has been public since August 2004. At that time, a share of the stock sold for a paltry $85. By late 2007, the stock had reached a high of around $750, a whopping 882% return in 3 years (Google, 2008). The shares have now dropped down to the high $300 range (Google, 2008) due to the recession the United States is currently experiencing.

Google derives approximately 99% of its revenue from advertising (Google, 2008). Most of its online products are free to use and are supported by text ads that are displayed within the interface (Google Inc., 2007). This begs the question of whether Google has a sustainable business model if in the future people begin to ignore internet-based advertisements.

Financially Google is in much better shape than its main competitor, Yahoo. Google has about 2.4 times the revenue of Yahoo (Appendix B), but common size ratios allow comparison of the two. Google has a much higher Income from Continuing Operations/Sales ratio (Appendix B), which indicates that Google is more profitable than Yahoo. The two companies have a roughly equivalent Cost of Goods Sold/Revenue ratio at 40%, but Google’s Liabilities /Total Assets ratio is half of Yahoo’s indicating that Google is managing their debt better. Google’s Return on Assets shines as well at 23.2% versus Yahoo!’s 5.9% (Appendix B).

Keeping in mind the facts mentioned in the previous paragraph, Google slowed down by the end of the 2007 fiscal year. The growth ratios such as Sales Growth, Income Growth, Asset Growth were all down from 2006 (Appendix A). In addition the Activity ratios of Receivable Turnover and Fixed Asset Turnover were also down slightly (Appendix A). Profit margin and Return on Assets were also down, but still at healthy levels. These numbers do not mean that Google is in trouble; after all, they are still much higher than Yahoo!’s ratios. What they mean is that Google is moving out of its explosive, exponential growth and it will eventually settle at a more steady growth rate if their business model remains successful. No company can sustain a greater than 50% growth rate for too many years in a row.

Google’s spectacular growth is shown in the charts in Appendix C. In the past 5 years revenue has grown from $1.47 billion to $16.59 billion. In the Net Income Trend Graph, the revenue growth is pleasantly tracked by the net income.

Google is not a seasonal or a cyclical company, because its services are constantly desired. Appendix D shows that Google has not yet had a quarter where income or revenue was below the previous quarter’s reported numbers. Since the fourth quarter has not yet been reported for 2008, the Current Year Quarterly Stock Prices table in Appendix D shows fiscal year 2007 numbers. As stated earlier, Google’s stock performed remarkably through the end of 2007 and the Quarterly Stock Highs and Lows graph showcases that continued growth (Appendix D).

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VALUE CHAIN ANALYSIS

Google’s primary activities in its value chain vary slightly from a traditional model where raw materials are processed into finished goods for sale to a customer, gaining value in each step of the process. Since Google doesn’t produce physical products, its value chain is a bit more nuanced. Google gathers all the web users it can (the raw material) by enticing them to use its stellar search product with highly relevant results delivered promptly. Then, through assorted “signs” (text advertisements) it directs these same web users in the form of traffic to its advertising partners who transform the traffic into “conversions” or sales on their sites (the finished good). Google adds value not only by directing a quantity of web users to specific sites, but also by sorting the pre-qualified visitors using keyword association and search history to recognize users’ interests (Levin, 2007). In this manner, Google ensures that the users who are directed to a partner site are more likely to purchase a product there.

Figure 5. Google’s Value Chain

Google’s primary activities in its value chain are heavily dependent on the support activities of administration and human resources (Figure 5). Google has always tried to hire the most qualified and competent individuals to ensure that it excels at the research and development of its technology and systems. In fact the company often gives aptitude challenges and tests to help recruiters sift through the massive amounts of resumes they receive (Kopytoff, 2005).

Next to the employees, a large percentage of the cost structure is the infrastructure and systems. Google’s servers and internal software allow it to conduct operations, distribution, sales, and service. Each activity contributes to the value chain by increasing the profit of the firm. Google has locations all over the world (Google, 2008) to localize distribution, marketing, and service which in turn ensures maximum profit on a global scale. Profit is maximized by the company’s cultural awareness and social competence to tailor products to the regional needs of its users. By shifting activities geographically, Google can also take advantage of diversity from a human resources perspective and also perhaps lower salaries in countries other than the United States. Google has even begun outsourcing some of its copywriting to firms in India (Baker, 2006).

Google uses advanced analytics to measure the efficiency of its supply chain (the web users). This data about the history of its users is important because it helps Google improve its search

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algorithms and advertising interface. New technology and word-of-mouth promotion by its loyal users can bring in new customers and thereby increase the profit margin.

COMPETITIVE ADVANTAGES

Google has sustainable competitive advantages because the remarkable scores accrued in measures of value, rarity, imitability, and substitutability.

VALUE

Google’s search products bring value to their customers because they provide relevant websites promptly. Google has achieved the top market share in the search industry precisely because their product is rare. They are able to provide excellent links in the first few results for both well-known subjects such as “Dallas Cowboys” and uncommon, “long-tail” searches like “cerebrospinal fluid”.

As mentioned in the Value Chain section, Google excels at directing a large quantity of visitors to websites using its AdSense program. Many business are dependent upon the traffic AdSense brings to their website to generate income. For the advertisers this increased traffic translates into increased sales and directly helps the bottom line.

RARITY

Google’s search offerings are rare because of the relevancy of the results. Microsoft and Yahoo, Google’s main competitors, simply do not provide links that are as useful as Google’s.

Google’s website features a minimalistic design, which is uncommon. Most websites feature some sort of banner advertising and are littered with hundreds of words. The Google home page can only contain 28 words as a policy established Sergey Brin and Larry Page, the company’s founders. This keeps the clutter to a minimum which is a stark contrast to Yahoo and Microsoft’s search home pages.Google faithfully adheres to the provision in the mission statement which recognizes that “advertisements should not be an annoying interruption” (Google Inc., 2007). This rare service is testimony to their charge to never “compromise…user focus for short-term economic gain” (Google Inc., 2007).

IMITABILITY

Google’s results are not easily imitated because of the large infrastructure requirements to serve the relevant pages quickly. Google has servers all over the world all synced up and all running on a very large quantity of RAM, fast computer memory.

With each search Google refines its results so that the search engine gets “smarter” and caters to people’s individual preferences. Since Google has the largest market share, their search engine can effectively learn more quickly than competitors’ products.Google’s operations exhibit path dependency because it takes time to collect the data to provide results and even more time to analyze both the content and users reactions to the results. Without going through a process of refinement over a significant period of time, a competitor could not replicate Google’s search results. Google has used its analytics tools to help understand the social complexity of the meaning

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of keywords to specific groups of users. For example, one word like mouse has a variety of different meanings with each meaning being most important to certain people.

Google’s minimalistic interface is physically unique and has remained different because the competitors value advertising money more than user experience and devote larger swaths of screen real estate to graphical and motion ads.

Some of Google’s success is due to its strategic management or simply to the luck of being at the right place at the right time. This causal ambiguity leads to the belief that perhaps the time to start an internet search company was in the 1990’s and it would be vastly more difficult to gain market share in a competitive environment where users are used to the novelty of Google’s interface.

SUBSTITUTABILITY

There are different ways of organizing and accessing information, and right now searching the internet is arguably the best for retrieving information efficiently. Google does not confine itself to the search product it is most well known for and has special applications for browsing different kinds of information such as its Shopping, Books, and Music applications.

Google consistently delivers relevant results at blazing speeds with minimal hassle. These three competitive advantages set its core search functionality apart from the competitors whose web portals simply can’t keep up. Google should be able to sustain its competitive advantages through the foreseeable future, but it will need to continue to innovate new ways to diversify its advertising business so the company is not dependent on solely the AdWords service.

STRATEGIC DIRECTION

STRATEGY

Google’s strategy is built on a strong foundation of broad differentiation of complementary products. Complimentary products serve to increase the use of the each of the other products and increase brand awareness. Several of these unique provisions include its Docs & Spreadsheets productivity suite, Picasa the image organizing and editing program, Earth and Maps.

These products are the key to augmenting the company’s advertising business and expanding the breadth of the brand. Google reinforces its brand image by keeping its name in nearly all its products. From Google’s perspective, the more uses a person has for Google services, the more opportunity there will be to show them ads.

Figure 6. Products of the Brand (Joaquin,

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Figure 7. Google Products Yearly Unique Visitors (Riley, 2007)

Google also knows that an increase in the number of internet (or other information media) users will in turn bring more users to Google. This is why Google encourages free internet access with citywide wifi and lobbied the Federal Communications Commission to allow use of the “white spaces” as recently as the first week of November 2008 (Lawson, 2008). These unused frequencies between television channels can be utilized to create a situation where a person is always freely connected to the internet (and in turn, always viewing Google advertisements). Another example of this phenomenon is Google’s recent foray into the cellphone business. Google introduced the T-Mobile G1 and its accompanying operating system, Android, in September 2008 (Guynn, 2008). By creating a phone operating system built around the internet and integrating Google’s search and other web technologies into the device, Google appears to be pushing the adoption of smartphones and changing consumers’ perceptions of the purpose of a “phone”. The old mode of ‘communication’ is now the new mode of ‘living’. By making such useful products cheaply available, more customers today are able to meet a wide range of wants through the products and services Google offers.

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Google’s products do not fit nicely into a BCG matrix, which is better suited to the incremental innovation at traditionally-managed companies. Figure 7 demonstrated that the company does have a few breakout successes like Book Search, but other seemingly mature product markets such as email yielded success as well.

Google does not make money on most of its products, which is a stark contrast to most successful companies. For example, advertisements in the mail interface have notoriously low click rates, because people simple aren’t shopping for products while they are checking their email. But Google refuses to be anxious by this as the AdWords on their search service and AdSense on external sites are enormously popular and keep the company profitable. Secondly, Google’s goal is less about making money with their products and more about gathering information. The more data Google can gather and associate with a user account the more they can learn about what associations to make to give better relevance to their search product and the ads in the search interface. Eventually, all the ads will be personalized in a way that television advertising agencies could only dream of with their age and gender demographics. Google’s advertisements will be personalized according to hobbies,interests, and even one’stendency to purchase a specific type of product online.

Figure 8 shows a rather humorous view into the future where Google’s information indices extend beyond the outside internet to a much more personal level. The sober fact is that this idea is not farfetched at all. Google’s overarching strategy is to maximize its information gathering about individuals so it can transition its relevance algorithms from content-based to individual interest-based so that banner ads are just as much of a resource as text.

STATED STRATEGY

Google stands true to its declaration in the company mission statement to “organize the world’s information and make it universally accessible and useful”. This statement provides Google the opportunity to create its own microcosm of the world and opens the door to virtually limitless expansion. It has expanded nationally and globally, providing the premier search service in numerous languages and countries. But, Google’s great organizational skills are not just philanthropic – the company uses the same relevance data for its search results that it uses to deliver advertisements and make money (Google Inc., 2007).

STRATEGIC FIT

The leading competitors to Google’s work strategy are the technology giants, Yahoo and Microsoft. All of these companies’ motivations are simple -- try to draw the most advertising dollars from their respective internet properties.

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Figure 9. Ad Server Market Share (Attributor Corporation, 2008)

Ad Server Monthly Unique Users

Market Share Unique Domains Market Share

Google 1,107,489,739 35.30% 91,462 77.28 Double Click 1,079,203,140 34.39% 6,748 5.70% Yahoo 362,201,931 11.54% 5,147 4.35% MSN 309,290,121 9.88% 8,099 6.84% AOL 156,109,326 4.98% 1,976 1.67% Adbrite 73,446,676 2.34% 3,575 3.02%

However, Google manages to stay abreast of the crowd as illustrated in Figure 9 which displays Google covering over 90,000 domains and thus having the broadest reach. They also control DoubleClick, which is the image banner advertising complement to Google’s text ads. These two companies together draw the vast majority of unique users.

Google Yahoo! Microsoft To organize the world’s information and make it

universally accessible and useful.

To connect people to their passions, communities, and the

world’s knowledge.

To enable people and businesses throughout the world to realize their full

potential.

Each of the competitors offer many services on their websites and strategically do so to try to engage users for as long as possible. Each of their mission statements seem to indicate that they wield the world’s information to facilitate human connections. However, this was not always so -- when Google was started, it distinguished itself not by offering many products but simply making search work as fast as possible. The company sought to go in a different direction than the other web portals that tried to bring everything to the user on their home pages. While Google has maintained a very sparse, minimalistic design on its home page, the company has added all the services of its competitors (and more) to its war chest.

Figure 10. (Rimm-Kaufman, 2007)

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The cost to place an ad through Google’s AdWords program has increased over time, which is attributable to their increasing market share and leverage in the industry. However, the Average Sales Per Click in Figure 10 shows that Microsoft is more effective at generating conversions, from a click on an ad to the actual purchase of product.

OTHER STRATEGIES

Google regularly explores all three manners of diversification with new start-ups, with acquisition, and with strategic alliances.

START-UPS

Google has a rule that employees can spend 20% of the time working on pet projects that are not part of their job description. Such motivation helps Google innovate and diversify into previously untapped businesses but usually still makes use of their core competencies and capabilities. In fact both Gmail and Google News started off as 20% projects.

ACQUISITIONS

Several of Google’s products are derived from acquisitions including Docs, Earth, and YouTube. These products have expanded Google’s brand and brought the previous users of these services to Google. DoubleClick , as mentioned earlier, added the banner component of Google’s advertising business and brought along significant revenue to Google’s income statement.

ALLIANCES

It is interesting to note the Google and Yahoo recently explored an alliance for advertising but federal judges threatened an antitrust investigation so Google backed out. This move did not cause a financial setback being prompt and respectful of other partners. Yahoo and Google in fact have a history together. Back in the early 2000’s Google provided all of Yahoo’s search results.

Google has in the past started organizations to leverage the power of alliances. One example is OpenSocial which allows developers to create applications that will work on all the member companies’ websites. By giving developers a common API, the alliance hopes to draw some of the attention away from Facebook, which is the largest social networking site. Google also created the Open Handset Alliance to promote the use of its open source Android operating system. This alliance leverages the capabilities of both phone manufacturers and independent developers to compete with Microsoft’s Windows Mobile platform, RIM’s Blackberry, and Apple’s iPhone.

Google understands the wealth in diversification. Exploring new opportunities constantly over a solid base of research could prove profitable with the use of products that can reduce cost – cost of production, advertisements, etc. These new products are crucial in gaining leverage in the constantly changing market and providing an alternative industry if need be. Google understands that valuable profits and minimized risk can be garnered with international operations. The company’s international revenue totaled over $2.7 billion in the second quarter of 2008, 52% of their total revenue (Google, 2008).

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Google’s diversification coupled with its ongoing promise to deliver on its strategy has been the key to its success. Google remains the top brand image in the market.

LEADERSHIP & CULTURE

STRUCTURE

Google follows a fairly regular functional structure with management positions specialized by value chain activity. As a globally diversified company. These positions are further divided and grouped into regions of interest that aid the company in managing the breadth of its operations. As Figure 11 shows, within each top-level activity, there is a multidivisional structure where small business units are divided on the basis of geography or product market. This hybrid form of functional and multidivisional structure works well for Google. It ensures the centralized planning a large company needs while giving the small business units the flexibility to innovate like a small start-up company.

Figure 11. Corporate Structure (Google, 2008)

CULTURE

Board of Directors

Executive Management

Group

Engineering

Chief Information

Officer

Engineering

Research

Products

Product Management

User Experience

Marketing

Sales

Americas

Europe, Middle East, & Africa

Asia Pacific

Legal

General Counsel

Corporate Development

New Business Development

Finance

Treasurer

Real Estate

Financial Planning

20

Google’s informal corporate slogan is, “Don’t be evil.” The motto was first suggested by Paul Buchheit, the creator of Gmail, who said he "wanted something that, once you put it in there, would be hard to take out." He also added that the slogan was "a bit of a jab at a lot of the other companies, especially our competitors, who at the time, in our opinion, were kind of exploiting the users to some extent." The name of the company is a play on the mathematical term “Googol”, 1 followed by 100 zeros. It represents the company’s unique vision to organize more information and make more money than customers and investors thought was possible. Eric Schmidt, Google’s CEO, is fond of saying that according to their math, it will take 300 years to accomplish their goal (Mills, Google Reveals its 300-year Plan, 2005). These quirky things are part of what sets Google apart from the rest of corporate America. Even their IPO was unique – they use a Dutch auction in which the market determined the initial stock price to prevent insiders and institutions from quickly selling for a profit (Salkever, 2004).

EMPLOYEE PERKS

Google is often lauded for the way the company treats its employees. Fortune magazine ranked Google at the top of its lit of the best companies to work for in 2007 and 2008 (Fortune, 2008).Perhaps that’s because Google’s corporate vision includes such axioms as, “You can be serious without a suit.” (Google, 2008)

"The goal is to strip away everything that gets in our employees' way. We provide a standard package of fringe benefits, but on top of that are first-class dining facilities, gyms, laundry rooms, massage rooms, haircuts, carwashes, dry cleaning, commuting buses - just about

anything a hardworking employee might want. Let's face it: programmers want to program, they don't want to do their laundry. So we make it easy for them to do both." -Eric Schmidt,

CEO (Google, 2008)

TRANSPORTATION

Around the office Google’s employees get around on Segway and Razor scooters, and recently, custom bicycles. But for the longer morning commute from home, they offer free bus rides to the main Mountain View office. ''We are basically running a small municipal transit agency,'' said Google's director of security and safety, Marty Lev (Helft, 2007). The busses feature bike racks and leather seats, internet access, and allow pets onboard. For nearly a quarter of Google’s home office staff, this transportation keeps them from having to spend hours in the Silicon Valley traffic. FOOD Google hired their first chef in November 1999 when Charlie Ayers, ex-chef for the Grateful Dead, won a cook-off judged by the company's 40 employees. Ever since then “an unending supply of wholesome, free food” (Dudley, 2007) has been the trademark bonus of the Google corporate environment. There’s a rule that workers can never be more than 100 feet away from food, and the elaborate snack stations scattered throughout the office halls prove it has been carried out.

21

THE 70/20/10 RULE

Google allows employees to spend 70 percent of their time on the core business, 20 percent on related projects, and 10 percent on unrelated new businesses. This rule is so important that Google has people on staff to manage the 70/20/10 rule. The engineering and design staff make use of the “free time” to persue new products and technologies, but even the top-level managers adhere to the rule. According to Eric Schmidt, they spend 70% of time on search and advertising, 20% on adjacent businesses like Google News and Google Earth, and 10% on new things like the free wireless initiative (Battelle, 2005). The 20% rule has a good return on investment since about half of Google’s new product launches occur as a result of that “free” time, according to Vice President of Search Products & User Experience, Marissa Mayer (Eckoff, 2009).

LEADERSHIP

The culture that Larry Page and Sergey Brin started as the founders largely influences the leadership within the company. In 2001, they hired Eric Schmidt, who had multiple degrees in engineering, served as CTO of Sun Microsystems, and was previously CEO of Novell. According to Page, this unusual combination of technical and business backgrounds was key to Schmidt’s success at Google (Google Inc., 2004). As the new CEO, Schmidt’s roles included providing business supervision as well as "building the corporate infrastructure needed to maintain Google's rapid growth as a company" (Google, 2008). Page, Brin, and Schmidt run the company as a triumvirate because they believe that the “shared judgments and extra energy available from all three of us has significantly benefited Google” (Google Inc., 2004). The three meet daily in order to update each other on the business and brainstorm about the immediate issues (Google Inc., 2004). Google’s annual reports, other SEC filings, and videos are often very personal; and top-level management communicates in the first person to connect with investors.

Google also employs managers in unique positions that other companies may not have known they were missing. Google hired a Chief Culture Officer, Stacy Savides Sullivan, in 2006 to help maintain their characteristic start-up atmosphere (Mills, Meet Google's Culture Czar, 2007). They also have a Chief Internet Evangelist and a Distinguished Entrepreneur on staff to help identify and enable new technologies. These managers ensure Google stays innovative.

Google’s Leadership Development and Compensation Committee keep the compensation of managers in check and broadly work to entice and retain good employees (Google, 2008).However, right now the top management has already taken the proactive step and each of the three take a $1 annual salary (La Monica, 2006). They feel that the salary sends a positive message to both employees and investors that their interests very much the success of the company and the long-term stock performance. However, they are certainly not going without; Brin and Page were tied for

70%

20%

10%

Figure 12. Employee Time at Google

Core Business

Related Projects

New Ideas

22

the 5th richest people in the United States in 2007, each with a net worth of $18.5 billion (Forbes, 2007).

PROBLEM IDENTIFICATION AND RECOMMENDATIONS

Google’s implementation of its corporate vision as been wildly successful so far. The company has managed to keep a very distinct culture intact throughout its growth over the past 10 years. Going forward, Google will need to constantly keep checking itself to ensure the culture remains. In a recent article by the Wall Street Journal, some Google managers are quoted as saying they are revaluating the employee perks, 20% time, and infrastructure development due to lower revenue projections in light of the current recession (Morrison, 2008).

While it is important to control spending, these investments have historically produced great returns and have fueled the company’s innovation and speedy new product launches (despite an appearance excess). If Google can figure out how to weather the negative economic environments while maintaining its fun, productive atmosphere, then the company’s success is likely to continue… perhaps even long enough to realize full 300-year plan.

Google was criticized in its early years for paying its employees below industry averages, which was seemingly very bad given the high standard of living in the Silicon Valley area. However the company did award most of its employees with equity in the company that grew substantially after the company’s IPO. In addition, the company appears to have since rectified the low wage situation because according a recent news article, Google’s engineers now make an average of $112,573 plus stock options -- by contrast, Apple’s engineers make an average of $97,840 (Truta, 2008).

As Google grows in size, another challenge the company faces is how to retain their fun image. Microsoft received a lot of bad press for their monopolistic actions such as bundling software in the Windows operating system like the internet browser and media player. Even Apple, with the next largest market share, has been criticized for its tight control over its music distribution system and private APIs in its software. As Google moves further ahead with its cloud computing and smart phone platforms it will increasingly run into the same sort of backlash for keeping software proprietary. Proprietary products have historically worked well for companies (just look at the multitude of cell phone adapters in the market) but in order to keep its image, Google’s management will have to work hard to keep their open culture do their best to not “be evil” like the other large companies.

Google management’s can achieve their goals and keep all stakeholders (developers, customers, and investors) happy through the continued use of frank and consistent communication. Figure 13 shows how employees at every level of the company can manage the company’s image in the eyes of the stakeholders.

23

CONCLUSION

Google’s success is clearly attributable to how it treats the people who have a stake in the company. Google’s founders started the company with a unique vision and the implementation of that vision has been very successful. The degree to which the company succeeds in the future will largely depend on how it leverages its experience while staying true to that vision.

Open Source SoftwareChrome browser

Android operating systemPython programming lang.

Team Blogs & VideosGmail

Google DocsGoogle Privacy

CommunicationReports

SpeechesLetters

Figure 13. Keeping Stakeholders

24

APPENDIX A

RATIO ANALYSIS Google Current Year Prior Year 3 Years 4 Years 5 Years $ Percent $ Percent $ $ $ Income Statement Revenue 16,594 100.0% 10,605 100.0% 6,139 3,189 1,466 Cost of Goods Sold 6,649 40.1% 4,225 39.8% Interest Expense 1 0.0% 0 0.0% Tax Expense 1,470 8.9% 934 8.8% Income from Cont Operations 5,084 30.6% 3,550 33.5% 2,017 640 343 Net Income 4,204 25.3% 3,077 29.0% Balance Sheet Cash 6,082 24.0% 3,545 19.2% Short Term Investments 8,137 32.1% 7,699 41.7% Accounts Receivable 2,308 9.1% 1,322 7.2% 688 Inventory 0.0% 0.0% Current Assets 17,289 68.2% 13,040 70.6% Long Term Investments 1,060 4.2% 1,032 5.6% Net Fixed Assets 4,039 15.9% 2,395 13.0% Other Assets 202 0.8% 115 0.6% Total Assets 25,336 100.0% 18,473 100.0% 10,272 Current Liabilities 2,036 8.0% 1,305 7.1% Total Liabilities 2,646 10.4% 1,434 7.8% Stockholders' Equity 25,336 100.0% 18,473 100.0% Cash Flow Cash Flow from Operations 5,775 3,581 2,459 Dividends Paid Interest Paid 1,279 4,996 Per Share Market Price at Year End 691.48 460.48 Earnings Per Share - Basic 13.53 10.21 RATIO ANALYSIS Growth Ratios Sales Growth 56.5% 72.8% Income Growth 43.2% 76.0% Asset Growth 37.1% 79.8% Activity Ratios Receivable Turnover 9.1 10.6 Fixed Asset Turnover 4.1 4.4 Profit Ratios Profit Margin 30.6% 33.5% Return on Assets 23.2% 24.7% Return on Equity 23.2% 38.4% Price Earnings Ratio 51.1 45.1 Liquidity Ratios Current Ratio 8.49 10.00 Quick Ratio 8.12 9.63 Solvency Ratios Debt to Total Assets 0.10 0.08 Times Interest Earned (Accrual)

5463.25

14946.33

Times Interest Earned (Cash) 5.52 1.72

25

APPENDIX B

PRIMARY COMPETITOR ANALYSIS (Yahoo!) Google Yahoo!

Income Statement Revenue 16,594 6,969 Cost of Goods Sold 6,649 2,839 Interest Expense 1 Tax Expense 1,470 337 Income from Cont Op 5,084 695 Net Income 4,204 660 Balance Sheet Cash 6,082 1,514 Short Term Investments 8,137 488 Accounts Receivable 2,308 1,056 Current Assets 17,289 3,238 Long Term Investments 1,060 2,561 Net Fixed Assets 4,039 1,212 Other Assets 202 606 Total Assets 25,336 12,230 Current Liabilities 2,036 2,300 Total Liabilities 2,646 2,697 Stockholders' Equity 25,336 12,230 Prior Year Accounts Receivable 1,322 931 Prior Year Assets 18,473 11,514 Prior Year Equity 18,473 11,514 Cash Flow Cash Flow from Operations 5,775 1,919 RATIO ANALYSIS Income Statement Common Size Data Gross Profit/Sales 59.9% 59.3% Cost of Goods Sold 40.1%

40.7%

Income from Continuing Operations/Sales 30.6% 10.0% Balance Sheet Common-Size Data Current Assets/Total Assets 68.2% 26.5% Current Liabilities/Total Assets 8.0% 18.8% Liabilities/Total Assets 10.4% 22.1% Equity/Total Assets 100.0% 100.0% Profit Ratios Profit Margin 30.6% 10.0% Return on Assets 23.2% 5.9% Return on Equity 23.2% 5.9% Liquidity Ratios Current Ratio 8.49 1.41 Quick Ratio 8.12 1.33 Solvency Ratios Liabilities/Total Assets 0.10 0.22 Times Interest Earned (Accrual) 5463.25

Operational Ratios Receivable Turnover 9.1 7.0

26

APPENDIX C

TREND ANALYSIS 5 Years Ago 4 Years Ago 3 Years Ago Prior Year Current Year Revenue $1,466 $3,189 $6,139 $10,605 $16,594 Income - Continuing Operations $343 $640 $2,017 $3,550 $5,084 Cash Flow from Operations

$2,459 $3,581 $5,775

Total Assets

$10,272 $18,473 $25,336

$0

$10,000

$20,000

5 Years Ago

4 Years Ago

3 Years Ago

Prior Year

Current Year

REVENUE TREND

$0

$2,000

$4,000

$6,000

5 Years Ago

4 Years Ago

3 Years Ago

Prior Year

Current Year

NET INCOME TREND

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000

3 Years Ago Prior Year Current Year

INCOME TO CASH FLOW COMPARISON

Income -Continuing Operations

Cash Flow from Operations

$0$5,000

$10,000$15,000$20,000$25,000$30,000

3 Years Ago Prior Year Current Year

ASSET CHANGES

Total Assets

27

APPENDIX D

QUARTERLY DATA 1st Q 2nd Q 3rd Q 4th Q Annual Current Year Revenue 3,664 3,872 4,231 4,827 16,594 Last Year Revenue 2,254 2,456 2,690 3,206 10,605 Current Year Income 1,352 1,245 1,473 1,608 5,679 Last Year Income 845 921 1,046 1,185 3,997

CURRENT YEAR QUARTERLY STOCK PRICES 1st Q 2nd Q 3rd Q 4th Q

High Price $458.16 $522.70 $567.27 $691.48

Low Price $390.00 $419.33 $401.90 $460.48

01,0002,0003,0004,0005,0006,000

1st Q 2nd Q 3rd Q 4th Q

QUARTERLY REVENUE

Current Year Revenue

Last Year Revenue

0

500

1,000

1,500

2,000

1st Q 2nd Q 3rd Q 4th Q

QUARTERLY INCOME

Current Year Income

Last Year Income

$0.00

$200.00

$400.00

$600.00

$800.00

1st Q 2nd Q 3rd Q 4th Q

QUARTERLY STOCK HIGHS AND LOWS

High Price

Low Price

28

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