CASE STUDY: GOOGLE, 2014
A Report of a Senior Study
by
Kelsey Handel
Major: Finance/Accounting
Maryville College
Spring, 2015
Date approved
,
by
Faculty Supervisor
Date approved
,
by
Division Chair
ASTRACT
This manuscript is a 2014 case study on Google Inc. The study reveals the
importance of innovation in an environment of fierce competition. Chapter I consists of a
thorough analysis of the company’s history, the external environment as well as the
internal environment. Chapter II is an Instructors Manual prepared to assist college
professors in discussing and teaching the case in undergraduate strategic management
courses. The manual encompasses a case synopsis followed by five discussion questions
and answers. The first question involves an analysis of the financial performance of the
company. The second question asks for a SWOT analysis. Other theory questions in the
manual include the application of Porter’s Five Forces Theory, Blue Ocean Theory and
an analysis of Google Inc.’s use of People Analytics.
Introducing an entirely new way to search for information online, Google Inc.
shocked the online search engine industry in 1998. Search results were faster and more
accurate than any other site before its time. Google expanded to become a leading
international technology company with a strong hold on the industry.
Yet, Google’s usual policies and business practices baffled investors and fellow
companies alike. The company faced a tough obstacle from falling ad rates, a place where
most of Google’s revenue derived as it offered its online services for free. Competition
intensified forcing Google to realize that something new had to be done. What made
Google so different from its competitors? What strategies or initiatives did Google
employ to hold on to its leadership position in the industry?
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TABLE OF CONTENTS
CHAPTER I Google inc., 2014 ......................................................................................... 1
History......................................................................................................................... 2
External Environment ................................................................................................. 6
Trends ..................................................................................................................... 7
Surge of video game phenomena ........................................................................ 8
The proliferation of online video ........................................................................ 8
The rise of online shopping ................................................................................ 9
The increase of internet crime ............................................................................ 9
Competition........................................................................................................... 10
Facebook ........................................................................................................... 10
Twitter ............................................................................................................... 11
Internal Environment ................................................................................................ 11
Leadership ............................................................................................................. 11
Larry Page ......................................................................................................... 11
Eric E. Schmidt ................................................................................................. 12
Sergey Brin ....................................................................................................... 13
Corporate Culture.................................................................................................. 14
Organizational Structure ....................................................................................... 16
Operations ............................................................................................................. 17
Endnotes............................................................................................................................ 19
Exhibits ............................................................................................................................. 22
CHAPTER II..................................................................................................................... 27
Synopsis .................................................................................................................... 27
Discussion Questions ................................................................................................ 28
Answers to Discussion Questions ............................................................................. 29
Endnotes .................................................................................................................... 48
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CHAPTER I
GOOGLE INC., 2014
“Sixteen years after we started Google, we’re just scratching the surface of what’s
possible. Sergey and I come to work each day excited about what lies ahead and the
extraordinary people we work with. Googlers make everything possible, and they are our
future. And, while the world may have changed over the years, we’re as motivated by the
potential to make a difference in people’s lives today as when we first started.”1
Larry Page; Google Inc. CEO
Google focused on innovation. It strived to make itself better, faster, and more
efficient, and it succeeded more often than not. Google formed a thriving company
culture that inspired greatness in the workplace. It broke free from the standard way of
business and focused on important work issues for the company. Was it important for
workers to work all possible work hours in proper suits and ties? Should a company’s
concerns begin with deciding which individual should make the decisions for a group of
employees? Google had a new, inspiring way of work that resulted in consistent amazing
work from its employees, or “Googlers” as Google called them.
Google’s new idea for company culture started with a workplace that employees
never wanted to leave. Although the benefits of working for Google were impressive,
Google understood that it’s the small things like free transportation, good food, strategic
breaks, and strong employee relationships that made a large difference each day. The
facilities, among others, made coming to work fun and enjoyable. This meant that Google
1
retained its employees because happy employees didn’t want to leave. The next step in its
plan was to hire high-quality employees based on talent, skill, and diversity who could
combat the technological challenges that Google encountered. These employees were
adept, bright, and intuitive; yet, competition for these talented individuals was intense.
There weren’t many individuals who could do what Google technicians did with the
passion they did it with.
History
Google was founded by Larry Page and Sergey Brin in 1998 (Exhibit 1). Page and
Brin met at Stanford in 1995 when Larry was visiting the campus to help him make a
decision on whether or not he would attend Stanford to study for his PhD. Sergey was
assigned to show Larry around.2 The tour must have gone well because in 1996 Larry and
Sergey were already collaborating on a search engine called BackRub that operated on
Stanford servers for over a year until it took up too much bandwidth. It wasn’t until
September 15, 1997 that Google.com was registered as a domain. The name “Google”
was chosen from a play on the word “googol,” which is a mathematical term for the
number represented by the numeral 1 followed by 100 zeros, and is used to reflect Larry
and Sergey’s mission to organize a seemingly infinite amount of information on the web3.
Before heading to the Burning Man festival, where over 60,000 people make the
journey to the Black Rock Desert for one week out of the year to take part in an
experimental community4, Larry and Sergey incorporated the iconic Man into the logo to
keep people informed where the Google crew would be for a few days. It served as a
comical “out of office” message from the founders to the users. This would become the
first of over 2000 “doodle’s” Google would have on its homepage5. Popularity rose such
2
that an entire team of talented illustrators (“doodlers”) and engineers was dedicated to it.
In the beginning, the doodles mostly celebrated familiar holidays; yet, they came to
represent a wide array of events and anniversaries from John James Audubon’s birthday
to the Ice Cream Sundae6.
On September 4, 1998 Google filed for incorporation in California. It proceeded
to make itself at home with a new workspace in Susan Wojcicki’s (now the CEO of
YouTube) garage space in Menlo Park, California. Due to the high price of hard drives,
its very first server rack was built from LEGOs, plastic sheeting, and some case fans 7.
The largest hard drives available at the time were 4GB. To get 40GB of disk space,
Google needed to have them assembled. The cost of the disks were enough that Google
didn’t have much left to spend on a suitable server case so one was put together. Four
years later, Google would be running its algorithms off a 5,000 computer data farm. In
2014 it was estimated Google ran in excess of 1.5 million computers to power its global
search empire8.
Google opened a bank account in the company’s name and deposited the first
check made out to Google Inc., $100,000 from angel investor Andy Bechtolsheim, which
it had received two weeks before filing for incorporation when Google was just an idea9.
A business angel investor was an individual who had enough business experience
relevant to a company that he or she understood a vision or a product in the early stages
of a company’s development in a way that other investors might not10. Andy
Bechtolsheim was a German immigrant and fellow computer whiz from Stanford who cofounded SUN Workstation, which became the foundation of Sun Microsystems in the
early 1980’s11. His net worth was $4.5 billion and growing, thanks to Google success
3
among other items. $100,000 invested in Google in 1998 was worth more than $2 billion
in 2014. With this type of angel funding, Google was able to hire its first employee, a
fellow CS grad from Stanford named Craig Silverstein. He worked for Google for more
than 13 years before leaving with mixed feelings to join education startup Khan
Academy12. In his goodbye email to staff he stated:
“Some of you thought this day would never come (as one person once put it:
“Will you die at Google?”), and it was an extremely difficult choice. I am as
passionate about Google’s mission now as I’ve ever been, and as proud of the
work we’re doing to achieve it. While a lot has changed at Google over the
years, I think we’ve done a remarkable job of staying true to our core mission
of making the world a better place by making information more accessible
and useful. I am looking forward to pursuing that same mission, though in a
slightly different way, at Khan.”13
Even before Google moved out of its garage office, “PC Magazine” reported that
Google had “an uncanny knack for returning extremely relevant results” and recognized
it as the search engine of choice in the Top 100 Web Sites for 199814. While still basking
in the glow from its first big article, it moved from the start-up garage office into new
accommodations at 165 University Avenue in Palo Alto with a total of eight employees
in February, 1999. The staff had grown to eleven employees by the time of the first press
release in June. Just six months after the last move, Google relocated to its first Mountain
View location at 2400 Bayshore.
With the coming of a new century, Google stepped up its game with the
announcement of MentalPlex: Google’s ability to read your mind as you visualize the
search results you want while staring at an animated gif15. Of course something like that
wasn’t possible, but it began Google’s tradition of April Fools’ Day hoaxes. MentalPlex
displayed several humorous error messages on the search results page such as, “Error 01:
Brainwaves received in analog. Please re-think in digital,” and “Error: Insufficient
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conviction. Please clap hands 3 times, while chanting "I believe" and try again.”16 On
April 1, 2004 Google announced its product called “Gmail” (Exhibit 2) which was a
webmail service with a gigabyte of free storage. Hotmail offered only 1/500th as much
storage, and Yahoo Mail offered only 1/250th 17. An entire gigabyte seemed too good to
be true. People thought the company was kidding because of the date and the jokey feel
to the announcement. Though improbable and misleadingly announced, Gmail was real.
In May of 2000 Google took a huge step forward and won its first Webby Award
and released its first 10 language versions of Google.com in French, German, Italian,
Swedish, Finnish, Spanish, Portuguese, Dutch, Norwegian and Danish18. Google.com
became available in over 150 languages soon after. October marked the beginning of
Google AdWords, a new advertisement method that advertised local or global businesses
based on the words people typed into the search engine. This provided a more useful
advertisement method for Google users. Two months later it released the Google Toolbar,
a browser plug-in that made it possible to search without visiting the Google homepage.
Eric Schmidt was named Google’s chairman of the board of directors in March 2001 and
was promoted to CEO five months later.
2001-2004 were years of acquisition, expansion, and innovation for Google. It
introduced services and invented new search and advertisement methods, among other
breakthroughs. In August 2004, it became a publicly-held company with an IPO of
19,605,052 shares of Class A common stock for $85 per share19. Although its Final
Prospectus stated that it had “no specific plans for the use of the net proceeds,”20 it most
definitely did. Programs such as Google images and Google Maps were released, and that
was just the beginning. Apps and programs such as Google Finance and Google Scholar
5
were born during this time, along with the Google ideal of a greener, more
environmentally-friendly company. In November of 2007, it introduced Android, its first
open platform for mobile devices. Then, there was an explosive amount of updates and
advancements such as the Google Chrome web browser, Google apps for iPhones and
other mobile devices, Google maps and navigation, and Google Crisis Response. It also
made advancements in self-driving cars and announced an agreement to purchase the
clean energy from 114 megawatts of wind generation in Iowa as part of its long-term goal
to power its operations with 100% renewable energy21.
In April 2011, Larry Page took over the title of CEO, and Eric Schmidt became
executive chairman, but the innovation movement did not slow. Updates and new
technologies continued to be made at an advanced rate, including a project in 2013 using
balloon-powered internet access to hopefully become an option to connect to rural,
remote and underserved areas, and for crisis response communications22. Google was not
a one-trick pony company. It had ideas and projects working in many different markets,
and showed no signs of slowing down in 2014.
External Environment
The internet grew phenomenally fast since its launch. It permeated nearly every
aspect of life, providing fast, relatively inexpensive, and nearly unbounded access to
enormous amounts of information and entertainment, as well as a plethora of practical
and increasingly important applications.23 The number of web servers exploded from
slightly over 10,000 in December 1994 to around 550 million in December 2011.24 This
could partially be attributed to the affordability of computers. If component prices were
low, PC manufacturers could sell products for less, making them easier for consumers of
6
all socioeconomic classes to obtain. Individuals bought PC’s especially for the internet
connection they provided. 71% of US households had broadband access as of the end of
2012, and penetration was expected to increase to 77% of households by 2017.25 The
internet was becoming a necessity to get through the day. This spurred the invention of
wireless fidelity (or Wi-Fi), which enabled users of laptop computers and other mobile
devices to access the internet from a variety of public locations such as cafes, hotels, and
airports.26 Technology of this sort continued to grow from the occasional “hot spot” to
potential “super Wi-Fi” that covered entire cities with only a handful of hotspots needed.
Then, enhancements such as 4G or LTE (long-term evolution) for mobile devices like
cell phones and tablets were launched.
Trends
There were five specific trends that changed the face of the internet. With this
technology people were able to do amazing things such as chat with people across the
world, go shopping without leaving home, or run a business from our bedroom. One of
the main online movements was the market of online music. Of all the companies
involved in online music, Apple Inc.’s iTunes was the obvious leader of the pack;
although, it faced its share of doubts. Industry innovation would always be questioned
because it was not fully understood. New technology always had speculations to work
through. Apple, for instance, faced backlash from record companies that believed selling
single songs was restraining music sales27. In 2008, iTunes became the largest music
retailer on units sold, even surpassing Wal-Mart Stores Inc.28 Amazon then became a
strong competitor for music downloads, causing Apple’s sales to decline as Amazon’s
7
sales grew. With the explosion of mobile devices, Pandora Media Inc. took a stand and
made it’s footprint on the market.
Surge of video game phenomena
1.4 billion Online users played Internet video games around the world as of 2012,
and it was projected that this number would roughly double to 2.4 billion by 2017.29 As
technology and expertise increased, bigger and better games could be made. Online
access for games was considered a necessity for current consoles such as Microsoft’s
Xbox 360, Nintendo Co. Ltd.’s Wii, and Sony’s PlayStation 3 (PS3). Social networking
brought about a new kind of gaming called “social gaming,” where people can play
internet games on social media sites like Facebook. Zynga Inc., the largest and most
prominent company in the social gaming segment, went public in December 2011 and
went through tough times. Interestingly, Google invested between $100 and $200 million
in Zynga, among others, in mid-2010 as part of its preparation to increasingly focus on
social media.30
The proliferation of online video
Another aspect of online interaction that blossomed from internet use was online
video. Videos had been a notable part of the mainstream Internet for well over a decade,
becoming more available based in part on innovations in related technologies and
improvements in computing power and broadband access speeds.31 To follow this trend,
Yahoo bought Broadcast.com, and Google bought YouTube. In 2005 (when YouTube
was created), 63 billion videos were viewed online, according to comScore. Over six
billion hours of video were watched each month via YouTube, which equated to nearly
an hour for every person on the planet.32 From the start of internet video, advertisement
8
using these capabilities grew faster than most all other advertising categories. Companies
such as Netflix, Hulu, and Vine along with YouTube, made their business entirely off of
the online video capability and became multi-million dollar companies.
The rise of online shopping
An especially large market that emerged was the online shopping market. This
capability added a new layer to competition where companies had to compete for not
only the best price, but on selection, service, and shipping. Meeting these new
requirements wasn’t easy, companies had to invest time and money into establishing an
internet-enabled product with customer service. Many real world retailers lost market
share to internet-based competitors because of accessibility, but other companies grew
significantly because of internet sales. Other companies embraced the internet for other
kinds of business uses such as video conferencing, corporate intranets, blogs, and apps.
Thing like this improved communications among employees, customers, and partners
which reduced associated costs.33
The increase of internet crime
Although other trends led to improvements in lifestyle and economy, the last
trend involved the increase in information abuse. Some examples of the bad side of the
internet were junk e-mail (commonly known as spam), computer viruses, and identity
theft.34 This brought about the creation of software security to protect against malicious
attacks, Internet-connected devices and equipment, identity theft, and ransomware.35
Attacks like this were not only directed at large companies and businesses, but small
businesses and individuals, as well. This spurred an unfortunate trend of cyber-attacks
that were used for things as small as spam in your inbox and for things as large as
9
terrorism as a top security threat. The battle against spam eating up bandwidth and
infecting computers with viruses continued, though many small battles against them
forced criminals to work outside of the US. As a result of more sophisticated, widelydeployed, and aggressively-managed anti-spam technologies, spam volumes fell in 2010,
2011, and in 2012.36 As a result, miscreants moved on to more vulnerable technologies
and targets.37
Competition
In its Industry of Computer Services and the Internet, Google had impressive
competition. Two of its main competitors were Facebook Inc. and Twitter Inc, large
companies that provided personalized internet services to consumers around the world.
Facebook
Facebook Inc. (FB) was the world’s largest social media company and property.38
In 2014 its chairman and CEO was Mark Zuckerberg and it had 6337 employees. This
company’s website was used for social media along with different additions for
advertisements, games, entrepreneurship and other job opportunities. The Facebook
Platform was employed by developers to build apps and integrated websites that were
personalized and social, and by advertisers interested in reaching users, in part based on
shared information related to age, location, gender, interests, etc.39 People used Facebook
to connect to family and friends that were far away by sharing pictures, videos, and
messages in a way that would have been difficult or time consuming without it. Despite
stiff competition, Facebook dramatically increased its lead and strongly solidified its
place as the leading social network in terms of users.40
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Twitter
Twitter Inc. (TWTR) was a "global platform for public self-expression and
conversation in real-time." The company believed it had developed a fundamentally new
way for people to discover, find, create and distribute content, with an emphasis on
simplicity.41 In 2014 its CEO was Richard Costolo and it had 2712 employees. The
largely public nature of the platform allows Twitter content to be easily found, consumed
and distributed, increasing its related reach and impact.42 Twitter fulfilled the social
media side of the market and provided a real-time update of what was happening to those
around you, locally and across the world. People would get on Twitter, not just to see
what their friends were doing that day, but they could follow important figures that may
affect their lives such as the president of the United States or their favorite news station.
Although it was thought that Twitter was doing well, much would have had to go right
for it to truly fulfill its potential, particularly in a world where technologies and tastes
were constantly changing.43
Internal Environment
Leadership
Larry Page
Google Co-Founder Larry Page was raised in an environment that promoted his
early love for computers, invention, technology, and business. His mother was a
computer programming professor at Michigan State University, and his father was a
computer science and artificial intelligence professor at Michigan State.44 Larry grew up
around computers, science magazines, and a family with computer knowledge. Even his
older brother was part of his learning environment by teaching Page how to take things
11
apart and put them back together. Page started out as the CEO and grew the company
from 2 to more than 200 employees45, but ended up hiring Eric Schmidt to take over
because of his experience. Page was appointed to president of products. Schmidt made a
huge impact as CEO; under his leadership, Google dramatically scaled its infrastructure
and diversified its product offerings while maintaining a strong culture of innovation.46
After a decade of amazing work from Schmidt, Larry Page became CEO once again. In
those ten years, Page observed Schmidt and learned what it took to run a company. In his
work with Google, Page was honored with the Marconi Prize in 2004 along with cofounder Sergey Brin. He was a trustee on the board of the X PRIZE, and was elected to
the National Academy of Engineering in 2004. Schmidt was close with Page, offering
him advice if needed, although Schmidt stated that he was confident in Page’s ability to
run the company and believed he was ready to take control.
Eric E. Schmidt
Schmidt had an electrical engineering degree from Princeton, a PhD in computer
science from UC Berkeley, years of software work at Bell labs and Xerox PARC, a chief
technology officer position at Sun Microsystems, and a CEO position at Novell under his
belt before joining the Google family in 2001.47 For ten years, from 2001 to 2011,
Schmidt served as Google’s CEO and oversaw the company’s technical and business
strategy along with Larry Page and Sergey Brin.48 Schmidt had what the founders did not,
which was experience in business, leadership, management, and strategic planning that he
had gained in his work with Novell and Sun Microsystems, Inc.49 He used this knowledge
to lead Google Inc. into the global community. Schmidt was a member of the President’s
Council of Advisors on Science and Technology and the Prime Minister’s Advisory
12
Council in the U.K.50 He was elected to the National Academy of Engineering in 2006
and inducted into the American Academy of Arts and Sciences as a fellow in 2007.51 He
chaired the board of the New America Foundation, and since 2008 had been a trustee of
the Institute for Advanced Study in Princeton, New Jersey.52 In May 2012, Schmidt
became a member of Khan Academy’s board of directors, and joined the board of The
Economist in 2013.
Sergey Brin
Sergey Brin was born in Moscow, Russia and immigrated to the United States
with his family when he was six to escape anti-Semitism Russia.53 When asked about it,
Brin explained that although he was teased in school, he was thankful for the life he was
given, knowing that it was better than the hardships his parents had suffered through in
Russia. Brin, along with Page, had strong influence from his parents. His father was a
professor of mathematics at the University of Maryland, and his mother was a scientist
who worked for NASA on projects related to climate and weather forecasting.54 Brin was
also exposed to computers at a young age, and his curiosity for science and technology
grew rapidly. After high school, Brin attended the University of Maryland, graduating in
three years with highest honors in mathematics and computer science.55 While Page
became more interested in the business side of Google, Brin focused on his personal
passions in new product production and technology strategies, his greatest strengths,
according to Schmidt.56 When asked what he would like to be remembered for, Brin
answered that he’d like to be remembered for making the world a better place.57 He
wanted to improve the technologies and business side of Google, but philanthropy was
13
important to him, as well, which was evident in the research of “green” technology he
hoped to develop in the future.
Corporate Culture
“We don’t just want you to have a great job. We want you to have a great life.
We provide you with everything you need to be productive and happy on and
off the clock.”
Larry Page, Google cofounder
Google provided a successful model for building and maintaining employee
satisfaction, which promoted customer satisfaction.58 Google had an extreme amount of
respect for its employees and was dedicated to provide them with a creative and
comfortable environment in which to work and pursue their personal ideas for the
company. Google regarded feeding employees seriously. Employees could get gourmet
meals cooked for free at work, which not only cut out the time spent leaving the building
to buy food, but also allowed employees to build community as they shared ideas at meal
times.59 Google believed that “good food powers good thinking and good work.”60
Charlie Ayers, or Chef Charlie, made a big impact on the food culture at Google and
helped create a menu that employees could get excited about.
Before it became a public company, Google made it clear that it wasn’t like other
companies, and it didn’t intend to change after its IPO. In a letter to potential investors,
Google stated that it was not a conventional company and did not intend to become one.61
It emphasized an atmosphere of creativity and challenge, which helped it provide
unbiased, accurate, and free access to information for those who rely on it around the
world.62
14
Google constantly improved its search services, and worked every day to make
them better, faster, and more accurate. This was possible in part because of Google’s “7020-10 percent rule.” Google asked that 70 percent of an employee’s time go into doing
their daily work, 20 percent of their time working on what they think would benefit
Google, and 10 percent of their time on any personal interests they might have.63 There
were reviews and performance evaluations twice a year of the ideas employees came up
with, which allowed employees the chance to be promoted if they had something
especially innovative. Many of Google’s significant advances happened in this manner.64
AdSense and Google News were both innovations thought up in the 20 percent of time.65
Of course innovation was something to strive for, but at Google, they didn’t expect every
idea to work. Employees might try an idea and come up with nothing, but they were
encouraged to move on, learn from it, and try again. Among the perks of being a Google
employee were all the amazing things you can take advantage of at the office. This
included snack rooms, nap rooms (Exhibit 3) , game rooms, gyms, lap pools, no dress
code, organized roller blade hockey games, on site massages, on-site doctors, off-site
trips, parties, etc.66 Google truly believed that happy workers were good workers and
wanted employees to love being a part of the company they worked for.
Impressive benefits were another item Google employees enjoyed. They included
medical, dental, and vision insurance along with life, accidental death, and long- and
short-term disability insurance.67 Google offered a flex spending account plan for health
needs, dependent care, and transportation. If needed, employees could go through the
company to find legal consultations, financial planning, and short term counseling.68
401(k) plans, college savings plans, generous holiday and sick time, maternity and
15
parental leave, financial assistance for adoption and the purchase of energy-efficient cars,
and a gift-matching program for contributions to charitable organizations were offered to
each Google employee. The company wanted to take away anything that might get in the
way of an employee’s happiness and ability to thrive by providing everything for free onsite. This not only attracted talented new employees, but this made it much easier for
current employees to stay as Google had a mere 5% turnover rate in 2006.
The caliber of employees was a main focus of the company. Not just anyone
could work for Google; those benefits had to be earned. They put applicants through a
pre-employment testing process which indicated the likelihood of compatibility with the
corporation, and expected them to solve puzzles on billboards in order to apply69. This
may seem like it would push away applicants more than it would draw them, but that was
the point. The challenges placed were there to draw in the kind of employee that would
relish the challenge, and would find solving the riddle a fun experience. Solving the
riddle and passing the test were only the beginning of the employment journey with
Google. Potential employees might participate in as many as six interviews to ensure they
were a good fit70. Google wanted highly skilled workers with a love of solving problems,
whether a simple riddle or multilevel online services to meet new needs.
Organizational Structure
Google was run by self-management and management by peers.71 There weren’t
many tiers to the management tree which allowed for fast production of a program so it
could be quickly tested and improved. Google did its best work on numerous initiatives
in teams of three to five people72. The flat organization allowed for hundreds of projects
to be in progress simultaneously without the need to get it approved by so many people.
16
If all the team members on the project approved of the direction they were headed, it was
tested in real-time by Google users, where they acquired data which was analyzed to
decide whether or not the team should scrap the project and start again, or improve what
they had made using the new information.
When asked about management Eric Schmidt answered, "This model works when
you have the right people. It would be a complete failure in an organization of people
who wanted to be told what to do and had one big project. We try to have as little middle
management as possible. They get in the way."73 The Google world was a fast-paced
improvement machine. It did great work in groups in small amounts of time, which made
it an exciting place to learn, work with talented people, and create new concepts.
Operations
Google’s financial statements showed consistent growth from 2009 to 2013. In 4
years Google almost tripled its revenue from $23,651 million in 2009 to $65,142 million
in 2013, and nearly doubled its income from operations from $8,312 million to $15,126
million (Exhibit 4). This was impressive growth for a company that dealt almost totally
with software and online services. Google must profit from exceptional service and user
customization.
With growth in revenue came expected growth in company expenses, showing
that Google was still expanding. This was evident in the growth of the property, plant and
equipment assets on the balance sheet. This account increased as Google continued to
build and furnish new facilities (Exhibit 5).
Google didn’t plan to give out quarterly earnings estimates like other companies.
Founders, Page and Brin, stated they would not smooth results: “If earnings figures were
17
lumpy when they reached headquarters, they will be lumpy when they reach you.”74
Google said this not with the intent to confuse investors, but instead hoped to promote
consideration for long-term goals instead of short-term goals. Google worked differently
with its employees. It promoted innovative ideas that often failed, but could change the
face of technology when they were successful. This was why it advised people to look at
the long-term progress. The failures look bad on a quarterly statement, but make all the
difference for annual company progress. Failures were a part of the innovation process.
Google stock price showed valleys in the short term, but the overall trend was
upward (Exhibit 6). This had been true for Google since its IPO in 2004. Its unorthodox
methods frustrated people who didn’t understand and made Google’s public debut a bit
rough. The end result was the acquisition of a large amount of capital for the company
and a larger stock price that continued to grow over the years.75 There were always
people who didn’t understand Google practices or didn’t agree with the business
methods, but Google found a way to succeed through the road less traveled.
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ENDNOTES
Page, Larry. "2013 Founders' Letter." Google – Investor Relations. Google Inc., 2013. Web. Sept. 2014.
<http://investor.google.com/corporate/2013/founders-letter.html>.
2
"Management Team." Google – Company. Google Inc., n.d. Web. Sept. 2014.
<https://www.google.com/about/company/facts/management/>.
3
"Our History in Depth." Google – Company. Google Inc., n.d. Web. Sept. 2014.
<http://www.google.com/about/company/history/#top>.
4
"Burning Man - Welcome Home." Burning Man. Burning Man Project, n.d. Web. Oct. 2014.
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<http://www.forbes.com/profile/andreas-von-bechtolsheim/>.
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"Management Team."
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Swisher, Kara. "End of an Era: Google’s Very First Employee, Craig Silverstein — Technically, No. 3
— Leaving." AllThingsD. Dow Jones and Company Inc., 09 Feb. 2012. Web. Sept. 2014.
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"Our History in Depth."
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"Google’s April Fools' Day Hoaxes – 2000 to 2010."
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McCracken, Harry. "Google’s Greatest April Fools’ Hoax Ever (Hint: It Wasn’t a Hoax)." Time. Time, 1
Apr. 2013. Web. Sept. 2014. <http://techland.time.com/2013/04/01/google-april-fools/>.
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"Our History in Depth."
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"Our History in Depth."
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Oct. 2014.
<http://www.sec.gov/Archives/edgar/data/1288776/000119312504143377/d424b4.htm>.
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"Our History in Depth."
22
"Our History in Depth."
23
Kessler, Scott. "Computers: Consumer Services & the Internet: Current Environment." S&P Capital IQ
Industry Surveys. Standard & Poor’s Financial Services LLC, May 2014. Web. Oct. 2014.
<http://0www.netadvantage.standardandpoors.com.library.acaweb.org/docs/indsur///csi_0514/csi_0514.ht
m>.
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Kessler, Scott. "Computers: Consumer Services & the Internet: Industry Profile - Industry Trends." S&P
Capital IQ Industry Surveys. Standard & Poor’s Financial Services LLC, May 2014. Web. Oct.
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"Computers: Consumer Services & the Internet: Industry Profile - Industry Trends."
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"Computers: Consumer Services & the Internet: Industry Profile - Industry Trends."
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"Computers: Consumer Services & the Internet: Industry Profile - Industry Trends."
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"Computers: Consumer Services & the Internet: Industry Profile - Industry Trends."
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"Computers: Consumer Services & the Internet: Industry Profile - Industry Trends."
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"S&P Capital IQ Company Profile: Facebook Inc." S&P Capital IQ Industry Surveys. Standard & Poor’s
Financial Services LLC, n.d. Web. Oct. 2014.
<http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/cp/companyOverView.
do?SPPW_ID=300930&pc=NET&auth=1920241771600331171331802080321452530960032460
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"S&P Capital IQ Company Profile: Facebook Inc."
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"Computers: Consumer Services & the Internet: Current Environment."
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"S&P Capital IQ Company Profile: Twitter Inc." S&P Capital IQ Industry Surveys. Standard & Poor’s
Financial Services LLC, n.d. Web. Oct. 2014.
<http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/simpleSearchRun.do?
ControlName=CompaniesSimpleSearch >.
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"S&P Capital IQ Company Profile: Twitter Inc."
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"Computers: Consumer Services & the Internet: Current Environment."
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"Eric Schmidt." Forbes. Forbes Magazine, n.d. Web. Oct. 2014. <http://www.forbes.com/profile/ericschmidt/>.
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75
Basch, Reva.
21
EXHIBITS
Exhibit 1: Google’s Founders Larry Page (left) and Sergey Brin (right)
Source: http://www.incomediary.com/google-follows-these-8-simple-rules-and-soshould-you
22
Exhibit 2: Gmail Logo
Source: http://www.maximumpc.com/best_email_service_2013
Exhibit 3: Water Lounge in Zürich Switzerland Google Facility
Source: http://www.hometrendesign.com/cool-google-emea-engineering-hub-office-inzurich-switzerland-architects-by-camezind-evolution
23
Exhibit 4: Comparative Income Statements
GOOGLE INC CLASS C (GOOG) CashFlowFlag INCOME STATEMENT
Fiscal year ends in December. USD in millions except per share data. 2009-12 2010-12 2011-12 2012-12 2013-12 TTM
Revenue
23651
29321
37905
50175
59825
65142
Cost of revenue
8844
10417
13188
20634
25858
27602
Gross profit
14806
18904
24717
29541
33967
37540
Operating expenses
Research and development
2843
3762
5162
6793
7952
8933
Sales, General and administrative
3651
4761
7313
9988
12049
13481
Other operating expenses
500
Total operating expenses
6494
8523
12975
16781
20001
22414
Operating income
8312
10381
11742
12760
13966
15126
Interest Expense
58
84
83
94
Other income (expense)
69
415
642
710
613
756
Income before taxes
8381
10796
12326
13386
14496
15788
Provision for income taxes
1861
2291
2589
2598
2282
2736
Net income from continuing operations
6520
8505
9737
10788
12214
13052
Net income from discontinuing ops
-51
706
168
Net income
6520
8505
9737
10737
12920
13220
Net income available to common shareholders
6520
8505
9737
10737
12920
13220
Earnings per share
Basic
10.32
13.36
15.1
16.42
19.43
19.72
Diluted
10.21
13.17
14.89
16.17
19.08
19.37
Weighted average shares outstanding
Basic
632
637
645
645
665
671
Diluted
788
646
654
645
677
682
EBITDA
9836
11777
14235
16432
18518
20057
Source: Morningstar
24
Exhibit 5: Comparative Balance Sheets
GOOGLE INC CLASS C (GOOG) CashFlowFlag BALANCE SHEET
Fiscal year ends in December. USD in millions except per share data. 2009-12 2010-12 2011-12 2012-12 2013-12
Assets
Current assets
Cash
Cash and cash equivalents
10198
13630
9983
14778
18898
Short-term investments
14287
21345
34643
33310
39819
Total cash
24485
34975
44626
48088
58717
Receivables
3178
4252
5427
7885
8882
Inventories
505
426
Deferred income taxes
644
259
215
1144
1526
Prepaid expenses
836
1326
1745
2132
2827
Other current assets
23
750
745
700
508
Total current assets
29167
41562
52758
60454
72886
Non-current assets
Property, plant and equipment
Gross property, plant and equipment
8130
11771
14400
17697
23837
Accumulated Depreciation
-3286
-4012
-4797
-5843
-7313
Net property, plant and equipment
4845
7759
9603
11854
16524
Equity and other investments
129
523
790
1469
1976
Goodwill
4903
6256
7346
10537
11492
Intangible assets
775
1044
1578
7473
6066
Deferred income taxes
263
265
Other long-term assets
416
442
499
2011
1976
Total non-current assets
11330
16289
19816
33344
38034
Total assets
40497
57851
72574
93798 110920
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt
3465
1218
2549
3009
Accounts payable
216
483
588
2012
2453
Taxes payable
37
197
240
24
Accrued liabilities
2247
3256
4356
6968
7986
Deferred revenues
285
394
547
895
1062
Other current liabilities
2361
2007
1673
1374
Total current liabilities
2747
9996
8913
14337
15908
Non-current liabilities
Long-term debt
2986
2988
2236
Deferred taxes liabilities
287
1872
1947
Deferred revenues
42
35
44
100
139
Other long-term liabilities
1703
1579
2199
2786
3381
Total non-current liabilities
1745
1614
5516
7746
7703
Total liabilities
4493
11610
14429
22083
23611
Stockholders' equity
Common stock
0
18235
20264
22835
25922
Additional paid-in capital
15817
Retained earnings
20082
27868
37605
48342
61262
Accumulated other comprehensive income
105
138
276
538
125
Total stockholders' equity
36004
46241
58145
71715
87309
Total liabilities and stockholders' equity
40497
57851
72574
93798 110920
Source: Morningstar
25
Exhibit 6: Stock price graph
Source: http://www.nasdaq.com/symbol/goog/stockchart?intraday=off&timeframe=5y&splits=off&earnings=off&movingaverage=None&lo
werstudy=volume&comparison=off&index=&drilldown=off
26
CHAPTER II
GOOGLE INSTRUCTOR’S MANUAL
Synopsis
Google began operations in 1998 in Menlo Park, California. Its founders, Larry
Page and Sergey Brin, led Google from a small business with homemade equipment and
very little funding to an award winning, global company with industry shake-up products.
Before Google was created, Page and Brin successfully pitched ideas to angel investor
Andy Bechtolsheim, and they gained a significant kick-start for their Google bank
account, allowing them the boost they needed to create an industry leading company.
Google’s mold-breaking internet search engine provided extremely relevant results to its
users and became the search engine of choice.
Google earned the success it had, but that was just the first step in a long life of
innovation. Google released popular programs such as AdSense, Gmail, Google Images,
and Google Maps, among others, that people used every day. It created an entirely new
web browser called Google Chrome and began releasing products like Android phones
and Google Apps for mobile devices. The company would soon branch off into other
industries such as automotive. It advanced into self-driving cars and clean energy, hoping
to one day power its operations with 100% renewable energy.
27
Page and Brin didn’t want Google to be like every other company. They wanted it
to be different and unique, especially when it came to employees. They created a
community atmosphere for Google employees that allowed Googlers to enjoy coming to
work and to create new programs with a skilled team. Google had an inviting work
environment which encouraged creativity and community for employees. This provided
Google with an extremely low turnover rate.
Though Google has been on the fast track for 16 years, the company faced its
share of hardships. It struggled to attain skilled employees in a highly-competitive
market; yet, Google avoided bad press. It innovated and improved their products to keep
up with demand and industry competition, and discovered new ways to gain a profit
when the main operation, Google search engine, was a free service. How would Google
stay ahead when the industry contained strong, profitable competitors?
Discussion Questions
1. Provide a financial analysis on Google comparing the company ratios to recent prior
year ratios, major competitor ratios and industry average ratios.
2. Identify and describe the strengths, weaknesses, opportunities and threats of Google.
3. Conduct a Porter’s Five Forces Analysis of Google.
4. Identify how Google employs Blue Ocean strategy. Describe specific characteristics
of the strategy. Provide examples of implementation.
5. Identify how Google employs the People Analytics strategy. Describe specific
characteristics of the strategy. Provide examples of implementation.
28
Answers to Discussion Questions
1. Provide a financial analysis on Google comparing the company ratios to recent
prior year ratios, major competitor ratios and industry average ratios.
Students will use the financial information of Google, Facebook, and Twitter as well as
industry ratios to prepare the financial analysis. They will gain an understanding of ratios
used to determine liquidity, efficiency, profitability, and leverage of a company. Google
ratios are compared over a 5 year period and with industry averages and competitor
ratios. The historic stock price is examined to determine market response to company
performance.
Liquidity refers to a company’s ability to quickly generate cash from current assets to
support its operations and pay off its short-term debt obligations. The greater the
coverage of liquid assets to short-term liabilities the better, as it is a clear signal that a
company can pay its debts that are coming due in the near future and still fund its
ongoing operations76. The table below provides Google’s liquidity ratios, as well as
industry and competitor ratios.
The first ratio is the current ratio (current assets/ current liabilities). Google’s 2014
financial statements show a current ratio of 4.8, which meant Google had $4.80 in current
assets for every dollar of current liability. Considering anything above $1.00 is a good
number, Google was doing well. Besides the surplus in 2011, overall liquidity steadily
increased over the past five years. Compared to competitors, Google had catching up to
do, it was not as liquid as the other two companies, but it was above the industry average.
29
The second ratio is the quick ratio, which is a liquidity indicator that further refines the
current ratio by measuring the amount of the most liquid current assets there are to cover
current liabilities77. The quick ratio excludes current assets that are more difficult to turn
into cash, such as inventory. The beginning of the trend showed some inconsistency in
the direction of the quick ratio with large jumps and drops in quick liquidity. But as the
years went on the trend showed that Google was stabilizing, not allowing for such large
movements all at once. Similar to the previous ratio, Google was still below its
competitors, but the ratio itself was strong, above the industry average, and was showing
signs of upward movement. Investors could feel confident investing in a company with a
solid ratio like this.
Ratio
2010
2011
2012
2013
2014
5 Year
Industry
FB
TWTR
Average
Average
2014
2013
Current
4.16
5.92
4.22
4.58
4.80
4.74
2.4
9.60
11.42
Quick
4.00
5.70
3.95
4.28
4.52
4.49
2.2
9.04
11.01
Asset Management is the process of ensuring that a company's tangible and intangible
assets are maintained, accounted for, and put to the best use. The first ratio is Total Asset
Turnover (TAT). This ratio compares the amount of sales or revenues generated per
dollar of assets. It is an indicator of the efficiency with which a company is deploying its
assets78. In Google’s case, this means that in 2014 it generated $0.55 in sales for every
$1.00 of assets. Google was consistently ahead of both its competitors and the industry
average during all five years.
30
The second ratio is Days Sales Outstanding (DSO). This is a measure of the average
number of days that a company takes to collect revenue after a sale has been made. The
lower the DSO, the better a company is at quickly collecting its accounts receivable. The
table below shows that Google’s overall DSO is larger than Facebook’s, and smaller than
Twitter’s.
Ratio
2010
2011
2012
2013
2014
5 Year
Industry
FB
TWTR
Average
Average
2014
2013
0.07
.43
.32
- 40.80
98.67
TAT
0.60
0.58
0.60
0.58
0.55
0.58
DSO
46.25
46.60
48.42
51.15
50.50
48.58
Profitability ratios usually get the most attention from investors because they show how
well a business can generate earnings as compared to its expenses and other relevant
costs incurred during a specific period of time79. They demonstrate the survivability of
the company as well as the benefit received by shareholders. The larger the number, the
more successful a company.
The first ratio is Return on Assets (ROA). This illustrates how well a company’s
management is employing its total assets to make a profit. The table below shows that
Google, at 11.93%, was slightly more efficient in utilizing its asset base than Facebook,
at 10.07%, and was significantly more successful than Twitter, who had a -30.75% return
on assets. Overall, though, Google’s return on assets was below the industry average and
showed a decline.
31
The second ration is the Return on Equity (ROE). This ratio compares a company’s net
income to its average shareholder’s equity. Basically, it measures how much the
shareholders earned for their investment in the company. Google’s numbers were
significantly higher than Facebook’s and Twitter’s, but the return on equity trend over
five years showed a decline, though it was barely below industry average.
The final profitability ratio is the profit margin. This ratio shows the amount of profit
generated by a company as a percent of sales. It is used to detect consistency or
positive/negative trends in a company’s earnings. Over the years 2012-2014, Google
profit margin was above the industry ratio and just below Facebook’s, but was showing
signs of slowly increasing at the end of the trend. Google and Facebook had significantly
stronger ratios than Twitter.
Ratio
Return on
2010
2011
2012
2013
2014
5 Year
Industry
FB
TWTR
Average
Average
2014
2013
17.30% 14.93% 12.91% 12.62% 11.93%
13.94%
17.5% 10.07%
-30.75%
20.68% 18.66% 16.54% 16.25% 15.06%
17.44%
16.0% 11.34%
-47.77%
29.01% 25.69% 21.40% 21.60% 21.88%
23.92%
17.8% 23.46%
-97.06%
Assets
Return on
Equity
Profit
Margin
Debt and Capital Structure (Debt management) ratios are used to assess the amount of
debt a company has in relation to assets or stockholders equity. The first ratio is called
Debt to Assets, which can be calculated by adding the long and short term debt, then
32
dividing by the total assets. The higher the ratio, the higher the risk of the company.
Knowing that, Google, in comparison, has a bit more to worry about than its competitors.
Both Facebook and Twitter had smaller debt to asset ratios than Google, but Google was
still below the industry average in debt to assets.
The second debt ratio is the Debt to Equity ratio, which is calculated by dividing its total
liabilities by stockholders' equity. This indicates what proportion of equity and debt the
company is using to finance its assets. In 2014, Google’s Debt to Equity was 25.39%,
which means that for every dollar of equity in the company, there was around $0.25 of
debt. Figures above 100% demonstrate a capital structure that is comprised of greater
amounts of debt than equity. When comparing Google to its competitors, you see that
Google’s ratio was higher than its competitors, though the number was still low.
Ratio
Debt to
2010
2011
2012
2013
2014
5 Year
Industry
FB
TWTR
Average
Average
2014
2013
0.2007 0.1988 0.2354 0.2129 0.2031
0.2102
0.2310 0.1017
0.1236
0.2511 0.2481 0.3079 0.2705 0.2549
0.2539
- 0.1132
0.1410
Assets
Debt to
Equity
Stock Price Fluctuation is the final part of the financial analysis. Stock price shows the
company from the perspective of the public. If a company’s stock price increases, it
means investors are expressing their trust in the company. They are basically saying they
believe the company has value and they believe it’ll continue to grow. The graph below
shows the maximum stock time frame available at the time.
33
The graph demonstrates strong fluctuations in the stock price, but this is typical of a
graph representing such a short period of time. Google was a fairly new company at this
time, so there wasn’t a graph that would properly depict the history of its stock price or
the pattern the company was likely to follow. Despite this drawback, the graph does show
the price levels Google was selling stock for at this time, which has them in an
impressive stock price range.
2. Identify and describe the strengths, weaknesses, opportunities and threats of
Google
34
Strengths
1.
It had established a brand name for itself and
was considered to be the number one search
engine on the web.
2. It received reputation by its popularity which
proceeded by its word of mouth publicity, so it
doesn’t need to put much effort in marketing its
search engine.
3. It offered many products and services such as
Desktop products, Mobile products, Web
products, and Hardware products.
4. It hired PhDs specially to work towards
enhancing the search engine algorithms which
will render the search faster, more relevant and
more efficient.
5. It provided the most updated outcomes to its
users by ranking the web pages with its PageRank technology that gave the users access to
the important pages first.
6. Strong liquidity ratio
Weaknesses
1.
2.
3.
4.
Opportunities
1.
2.
New acquisitions.
It could diversify into non-ad business models to
remain profitable.
3. It could grow more into the electronics industry.
4. It could continue to improve driverless
electronic cars.
5. It could continue its progress with the Android
Operating System81.
6. It could continue progress with Google fiber
cables.
It relied on one source of income. More than
85% of Google’s revenue came from online
advertising alone.
Google was often involved in patent litigations
over breached patents and other intellectual
property. These litigations were costly and
time consuming and distract the company
from innovating rather than litigating80.
It had a weak presence regarding the socialnetworking space.
Decreasing profitability ratios
Threats
1.
2.
Competition from Facebook and Twitter.
Unprofitable products. Google has introduced
many products and services but few of them
earn profits for the business.
3. Falling Ad Rates. In recent years and
especially in 2013, the company has been
faced with declining revenues from ads and as
a result, the profitability of the company has
taken a hit.
4. Rapidly changing technology
Google’s strengths were that it had a strong brand name with a great reputation
built from a fast, relevant and efficient search engine as well as other products. It
received reputation by its popularity which was proceeded by word of mouth publicity. It
didn’t need to put much effort in marketing its search engine. Its weaknesses were that it
35
relied too much on revenue from ads, didn’t have a strong presence in social media, and
was continuously in litigation wars.
Google had an opportunity involving acquisitions of other companies. Google
acquired Motorola in 2012, obtaining more than 17,000 patents from the business82.
Revenue diversification could be a large opportunity that could create more than one
mode of revenue for the company. Google also had an opportunity to further the progress
of amazing technology it already had under development. Some of these technologies
include electronic devices (smart phones and tablets), driverless electronic cars with
technology that could be easily installed in future models, the Android Operating System
which was a direct competitor to Apple and Samsung, and Google fiber cables that were
being tested to deliver internet content at an astonishing 100 times as fast as providers at
the time83. One of the threats Google must worry about are its competitors, Facebook and
Twitter. The advent of Social Media seriously threatened Google’s dominance in the
internet world and the company had to pull an ace to deal with the increasing features
available on competitors websites. Google also had to worry about the threat from its
unprofitable services. Google offered many online services for free, so they received no
revenue for the time and effort they put into keeping those services at the top of their
game. Another large threat Google had to fight was the falling ad rates and therefore
falling revenue. This is partly due to the global economic slowdown they were
experiencing and partly because competitors were snapping at its heels in a more
aggressive manner. Indeed, Apple had already taken steps to garner search engine
revenues in its devices and hence, Google had to be cognizant of the challenges that lay
ahead84.
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When looking at Google’s strengths, weaknesses, opportunities, and threats, there
was obvious room for growth and improvement. Its weaknesses regarding its single
source of income and its weak presence in social media were areas that could be fixed
and improved over time. Google could gain another source of revenue and could develop
a stronger social media base.
Google could have taken advantage of the strength of its brand name to create
new and innovative products and services. That was the advantage of a well-established
brand name. It hired only the best and brightest to work at Google, and this showed in the
quality of products and services provided. Nothing was ever half done, and nothing was
ever above being improved. The type of employee Google hired would not settle for
anything but the best. Google had to continue to fight for these talented people so other
companies wouldn’t get them first. The progress with driverless cars, electronic devices,
and Google fiber cables were opportunities it could take advantage of. These innovations
were industry changing and put Google on an entirely new level as a company.
As a result of the SWOT analysis, the strategic changes Google should have implemented
would be to establish more than one source of revenue so it wouldn’t be so dependent on
online advertising, to establish itself as a stronger competitor in the social-networking
space, to acquire more patents by acquiring other companies with strong patent
portfolios, and to continue pushing the new technology they have in progress as well as
develop more new ideas. Google had the potential to be an unquestionable leader in its
industry, with these changes in place it would send a message to its competitors that
Google was not an ordinary company.
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3. Conduct a Porter’s Five Forces Analysis of Google.
There are many ways to assess a company’s industry dynamics, but Porter’s Five
Forces is one of the most respected models of industry analysis. Porter’s attempts to
realistically assess potential levels of profitability, opportunity and risk based on five key
factors within an industry. This model may be used as a tool to better develop a strategic
advantage over competing firms within an industry in a competitive and healthy
environment. It identifies five forces that determine the long-run profitability of a market
or market segment85. Understanding the competitive forces, and their underlying causes,
reveals the roots of an industry’s current profitability while providing a framework for
anticipating and influencing competition (and profitability) over time86. These five forces
are Supplier Power, Buyer Power, Barriers to Entry, Threat of Substitute Products, and
Rivalry.
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Supplier Power
Depending on where the power lies, suppliers may be able to exert an influence
on the industry. They may be able to dictate price and influence availability, but because
of the nature of Google’s suppliers, supplier power was relatively low. Google received
most of its revenue from ad sales, and there were an almost unlimited number of
companies and businesses that would pay to have their business advertised by Google.
Therefore, if one business drops their ad with Google, another business would quickly
step in to fill its place. When considering Google’s movement into the mobile phone
market, though, the suppliers had slightly more power, but Google was a power house
and was known for its success. At this time, mobile phone suppliers were working hard to
keep Google happy. However, one large thing Google was considering was their
dependency on Microsoft, and slight dependency to Apple. Google depended on its
search program running smoothly on their products, and would likely have had serious
troubles if they had decided to remove Google capabilities from their computers. This
was improbable because of Google’s success, though. Customers who were loyal to the
Google search engine might have refused to buy a computer if it couldn’t run Google,
therefore the overall power of suppliers was relatively low.
Buyer power
The power of buyers describes the impact customers have on an industry, but as
of August of 2013, Google was the market shareholder88. The pie chart below shows the
market share at that time.
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This graph shows that Google controlled almost 75% of the market. Google’s products
were better, faster, more efficient, and higher quality while offering most of their
products to customers for free. However, the buyer power would be considered moderate
because of the demand for and heavy reliance on search engines in the daily lives of
people using the internet at this time.
Barriers to Entry
While it was possible that a new company could have developed new technology
or a better search engine because most of what Google did was on a programming level
and didn’t rely on raw materials, or Microsoft could have stopped using Google toolbars
in their products and started using their own, these outcomes were very unlikely.
Microsoft didn’t have anything that could keep up with Google at the time and the cost of
purchasing the hardware, the servers they would use to distribute their programmed
product, was a large barrier to overcome. Google was definitely considered to be a
difficult company to beat, especially because of their strong financial position.
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Threat of Substitute Products
It is possible that Google could have lost their customers loyalty to another
product if one was developed that could keep up with the power and speed it had in its
search engine. Google’s customers were asking for more and more services for free, so it
had to keep them happy by constantly upgrading their services while continuing to bring
in revenue. Google also had to keep a strong hold on the market for highly intelligent and
skilled employees in order to keep innovating its technology. However, because of the
similarity of the functions that other search engines offered at this time, they were not
strong enough to be substitute products. Therefore, Google was affected very little by the
threat of substitute products.
Rivalry
Google’s search engine was on an entirely different level than most of its
competitors, but when it comes to ad revenue and the amount of “clicks” its software
receives, Google was fighting against two strong competitors, Facebook and Twitter.
They each had their own method of advertisement, but the ad market was slowly falling
at the time. An advantage Google had was that it’s search technology was so new that
there was very little in the way of government regulations regarding search engines, so
they were able to set the pace and political environment for the industry of search
engines. Another advantage was the brand identity involved with the Google name. Even
in the beginning, news about Google was spread by word of mouth so Google didn’t have
to advertise. This continued to the point where Google was a household name and was
added to dictionaries with the definition, “to search for something on the internet using
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the Google search engine (a computer program that finds information)90.” Google was a
strong company, but there will always be rivals trying to catch up and beat the company
that started it all.
4. Identify how Google employs Blue Ocean strategy. Describe specific
characteristics of the strategy. Provide examples of implementation.
In an increasingly competitive environment, companies look for new strategies to
help them compete on a more effective scale. Some well-known competitive strategies
include Porter’s three generic strategies; differentiation strategy, cost leadership strategy
and focus strategy. Among the three, two of these strategies are used to better understand
a more modern strategy Google excels at. This modern strategy is Blue Ocean Strategy.
Blue Ocean Strategy (BOS) was developed by W. Chan Kim and Renée Mauborgne in
200591. It combines differentiation and cost leadership strategies to create a new
perspective on competition. Differentiation strategy is focused on design innovation,
reliability, and aggressive marketing. The main focus is to provide unique and premium
products. Cost leadership strategy focuses on reducing operational cost and striving to
have the lowest price for the same value.
In simple terms, Blue Ocean Strategy can be described as a mixture of these two
strategies, but there is much more to it. BOS suggests that a company should strive to
escape from the bloody water, or Red Ocean, of the competition for the same market
share and move into the calm, uncharted waters of the Blue Ocean, far away from the
competition. This means, according to BOS, companies who are competing within the
confines of the existing industry or are trying to steal customers from rival competitors
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would be much better off spending their time and effort on developing uncontested
market space that makes the competition irrelevant.
92
Google was a prime example of BOS. Google identified that there was a better
way to search the internet than by concentrating on selected words chosen by frequency
of appearance. Google developed an easy to use, non-portal, search engine that was
superior to other web search options available at the time. Google made the competition
irrelevant, set the bar high and swam out into uncontested market space. Google’s release
of Gmail in 2004 with an unheard of gigabyte of space for every user was another
product that pushed them further away from the Red Ocean. Google continued its move
toward clear blue water again in 2008 when it developed its Android mobile operating
system. At the time of its release, Android prompted experts to compliment the company,
saying Google had the power to influence, disrupt and rearrange markets93. Other
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products that were in the works and would likely have the same effect on the company
and the market were Google Glass, driverless cars, and Google fiber cables.
Google’s competitive strategy was to put space between itself and its competitors
by creating consistent and highly innovative technological advancements, using homemade hardware and software infrastructure to provide substantial computing resources at
low cost, and investing substantially in developing its brand. Therefore, it can be said that
Google simultaneously achieved both cost leadership and differentiation strategies and
that encapsulates the underlying concept of the Blue Ocean Strategy.
5. Identify how Google employs the People Analytics strategy. Describe specific
characteristics of the strategy. Provide examples of implementation.
Google was known to be a newer company, only having been built a decade ago
at this time. This gave them an overall aura of being full of the latest and greatest
technology, strategies, and business practices. In a lot of ways, this is true. It was a global
company built by a couple of talented college grads that didn’t want to do what the other
companies were doing. They wanted to create their own path and do things the way they
thought was best, and not by general company standards. There were many aspects of
Google that were very different from normal business practices, but there was one
strategy Google used that was showing results and gaining popularity among other
leading companies. This strategy was called people analytics. People analytics is the use
of people-related data to optimize business outcomes (and solve business problems) at the
individual, team, or organizational levels94. This strategy was used by Google in their
human resource functions, though it could be used in almost any sector of its company.
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The basic premise of the people analytics approach is the importance of accurate people
management decisions, as they are the most impactful decisions a firm can make.
Common HR sections of this time had been known to make decisions on gut instinct
alone, which is dangerous when dealing with such a large cost section of the company
that often takes up 60 percent of corporate variable costs95.
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Google reinvented human resources and produced amazing workforce
productivity results that few can match (on average, each employee generates nearly $1
million in revenue and $200,000 in profit each year)97. It even reinvented the name of
their human resources department, calling it “people operations.” One example of
Google’s people management practices that highlight its data driven approach was its
effective hiring and retention algorithms. Google developed a successful algorithm for
predicting which candidates had the highest probability of succeeding after they are
hired, and developed an algorithm to proactively and successfully predict which
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employees are most likely to become a retention problem, which allowed management to
act before it was too late and it further allowed retention solutions to be personalized98.
Another example is their use of data in improving diversity. Unlike most firms,
analytics are used at Google to solve diversity problems. As a result, the people analytics
team conducted analysis to identify the root causes of weak diversity recruiting, retention,
and promotions (especially among women engineers). The results that it produced in
hiring, retention, and promotion were dramatic and measurable99.
Their data driven approach also improved their workplace design. Google found
that increased innovation in employees came from a combination of three factors:
discovery (learning), collaboration, and fun. It consciously designed its workplaces to
maximize learning, fun, and collaboration. Managing “fun” may seem superfluous to
some, but the data indicated that it is a major factor in attraction, retention, and
collaboration100.
Another example of people analytics in Google was an increase in discovery and
learning. Rather than focusing on traditional classroom learning, the emphasis was on
hands-on learning (the vast majority of people learn through on the job learning). Google
increased discovery and learning through project rotations, learning from failures, and
even through inviting people like Al Gore and Lady Gaga to speak to their employees.
Clearly self-directed continuous learning and the ability to adapt were key employee
competencies at Google101.
Companies like Google considered people analytics to be a core differentiator and
made significant investments to build this capability. There were an almost unlimited set
of business challenges that can be addressed by analyzing the behavior or interaction data
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that translates to outcomes102. Google knows this and is quickly integrating it into its
company structure. This strategy fits Google culture extremely well, as Google is made
up of mostly engineers and writers of software that don’t always fit into normal business
models.
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Endnotes
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86
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Porter, Michael E.
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Copeland, Vanessa.
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Chan, Kim W., and Renee Mauborgne. "Blue Ocean Strategy." Harvard Business Review. N.p., 01 Oct.
2004. Web. 20 Mar. 2015. <https://hbr.org/2004/10/blue-ocean-strategy/ar/1>.
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<http://www.blogbigtime.com/business/blue-ocean-strategy>.
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