GOOGLE CASE STUDY

A Paper Presented in Partial Fulfillment Of the Requirements of The Robert Kennedy College, E-Business course July 2011

Abstract Google Inc. is an advertising giant in the internet marketing industry. This company was founded in 1998 by two Stanford University PhD candidates who wanted to organize the worlds information and make it more universally accessible and useful. This case study takes a detailed look at this extraordinary company and examines its existence. It describes how the company originated, what it does, how it competes. It also highlights some of Google Inc. early success factors, its governance structure, its culture and organizational processes. The case study then goes on to answer some specific questions on Google Inc.s competition and acquisitions and recommend a way forward in addition to enhancing its core search and advertising business.

Table of Contents

Table of Contents Introduction Company History Paid Listings Google Listings Improving Searches and Advertising Googles Organization Pressure on the core business Google Competitors Questions and answers References

3 4 5 7 8 9 11 12 13 14 22

Introduction
Google Inc. was incorporated as a privately held company in 1999 by Larry Page and Sergey Brin while they were attending Stanford University. This American corporation is now a multinational public entity invested in internet search, cloud computing and advertising technologies. Google hosts and develops a number of internet-base products and services and generates profit primarily from its internet search technology to serve advertisements base on web content, the users geographical location and other factors. This is achieved through its AdWord and AdSense programs.

In their 2008 year-end results, this Mountain View, California based company had posted gross revenues of $21.2 billion, an operating income of $5.5 billion, an employee count of 20,164 and cash and equivalents of $8.7 billion. In August 2004 Google completed its IPO at $85.00 per share. By November 2009 Google.com lead the search market with a 65.6% share of all US searches leaving it closest rival Yahoo.com with just 17.5%, Microsoft with 10% and the others with the remaining 6.9%. Outside the United States Googles lead was even larger and in numerous countries its market share was beyond 90%. As a result of Google reach in January 2010 Google share price rose to $600, giving the company a market value of $189 billion.

It has been estimated that Google runs over one million servers in data centers around the world and process over 1 billion search request and about 24 petabytes of user generated data every day. However, Google has become more than just a web search and advertising agent. Since the companys incorporation back in 1999 it has experienced rapid growth and has triggered a chain of products, acquisitions and partnerships beyond the companys core search engine. The

company offerings include online productivity software, such as Gmail email services, social networking tools, including Orkut, more recently Google Buss and the newly launched Google+. Google products now extends to the desktop as well, with applications such as the web browser Google Chrome, the organization and editing software Picasa photo, Google books, Google Docs and Google talk for instant messaging applications. The company also leads the way in the development of the Android mobile operating system which is used on a number of cell phones such as the Nexus One and the Motorola Droid.

Google has expanded its presence in online video and display advertising markets by the acquisitions of YouTube and DoubleClick and has demonstrated its ability to capture cross-sided networks with the introduction of products like Google Finance and Google checkout. This would suggest that Google was entering the traditional strongholds of e-commerce giants like eBay and Amazon. Google add personalized features to its home page which moved the ompany towards portals and engaged the attention of the portal king Yahoo! The company even threatened the old giant Microsoft with the introduction of its ad-supported software which included e-mail, calendaring and document-management systems. This action fueled speculation among competitors about Google strategic objectives and caused them to wonder what Google will do next.

Company History
As the World Wide Web expanded so did the demand for search services. Yahoo! was one of the early search services who selected and organize sites into categories by human editors. However, as the web grew, directory classification became insufficient. Other search engines entered the market such as Alta Vista and Inktomi which employed technology that automated search relying on software crawlers which created a searchable index of page content, along with algorithms that ranked page relevance based on keyword frequency. However, as web developers exploited search algorithms these search engines would return irrelevant listings and spam leaving users frustrated.

In January 1996 Larry Page and Sergey Brin, affectionately own as the Google Guys, began working on a research project to allow search engines to return a better result. They theorized about a better system that would analyze the relationship between websites. This genius pair called the new technology PageRank. The Google Guys asserted that the relevance of a website was determined by the number of pages and the importance of those pages, which linked back to the original website.

In June 1999, Brin and Page announced first round-funding for their start-up company called Google, form the elite venture capital firm Sequoia and Kleiner Perkins. After one year Googles index of one billion web pages surpassed all rivals. As a result Google replace Inktomi as Yahoo!s search engine. Initially Google was based in a friends garage and its revenues came solely from licensing its search technology to Yahoo! and other sites. Google had no advertising and only offered search result without content or communication tools. However many portals

offered numerous add-ons to encourage users to linger. This would yield more page views and generated advertising revenue.

The Rise of Paid Listings During this period a company named Overture pioneered a robust new model to make search commercially viable through paid listings. These paid listings were concise text ads labeled as Sponsored Links that appeared either adjacent to or interspersed with search results. This method known as Adwords would allow advertisers to bid for keywords, and bids determined the top-to-bottom ordering of ads on search-results pages. When web surfers typed in a term that matches an advertisers keyword, the advertiser is listed in a banner near the search result. Listings were sold on a per-click basis which means that advertisers only paid for the ad if the web surfer clicked on its listing. Oventure success was built on the fact that search engine leads were often more effective than banner ads on other websites as search engine users were often researching products they want to buy either now or in the near future. Success for Oventure also came through paid listings according to the cost-per-click pricing model which yielded substantial revenues while fulfilling many user needs. Advertisers sought to achieve high visibility on the internet as more hits on their websites brought more sales. They would compete vigorously for top positions which surged higher payments to Overture. Finally Overture supplied ads to the three largest portals (Yahoo!, MSN and AOL) which brought thousands of advertisers to their platform and further increase their revenue generation.

Paid Listings at Google In December 1999 Google entered the online ad market by introducing the cost-per-impression basis pricing model. Rather than charging for user clicking on ads Google charged an advertiser a fixed amount each time the user viewed the ads. However, in February of 2002, Google adopted a variant of Overtures model but with a weighted cost-per-click (CPC) bid by the ratio of an ads actual click-through rate (CTR) to its expected CTR base on Google predictions. Google believed that an ad with a low CTR would suffer a lower effective bid and would be shown less prominently if at all. This method resulted in maximized revenue for Google because an ad with a high CPC bid but a low CTR offered low revenue. Despite spending nothing on marketing Google soon emerged as a serious threat to Oventure. The Google website was rated the ninth largest in the US in early 2002, with 24.5 million monthly visitors hitting it and in May 2002, AOL announced it was switching to Google for both algorithmic search results and paid listings. Google market share surge past Yahoo! in 2004 and continued on this upward trend since reaching 73.9% in 2010 while Yahoo! share stood at 13.3%. However, Googles market share dropped back to 63.6% in May 2011 with the introduction of the Bing search engine who now holds 31.6% while Yahoo! now holds 14.6%.

In March 2003, Google expanded beyond search advertising by launching a contextual paid listing, a product called AdSence. Google AdSence is an affiliate program which offers website owners a chance to earn a commission for their willingness to place ads of others on their website. This program automatically delivers an advertisers text and image ads that exactly match to each affiliate site. This is a major improvement over matching individuals based on their preferences. The key to this method is the quality and appearance of both the pages and the

ads, as well as the popularity of the site. Hundreds of thousands participate in the affiliate program. Google in turns provides the affiliates with analytics that helps convert visitors to customers.

Despite its great success Google did not rest on its achievements but continued to develop new services that displayed more search advertisements. For example in 2002 it launched Froogle, a product search service that identified merchants for specific products along with their prices. Google then monetized Froogle through paid listings which appeared adjacent to search results. In 2005 Google also launched Google maps which offered faster scrolling and browsing than its competitors. Initially Google maps were launched without ads but soon afterwards Google added paid listings related to the area that surfers browsed to.

Google also competed to buy placements on partners sites and prevailed in a series of key deals. In 2005 it won the bidding war with Microsoft for the rights to show Googles ads on AOLs search results.

Improving Searches and Advertising

In the early epoch of the internet, more than half the web surfers search request failed to deliver useful results. Google recognized this problem and sought to improve it by constantly fine tuning its search algorithms. Google improved search results by incorporating personal searches, search history as well local and virtual searches into the mix. In addition to this achievement, Google expanded its efforts to attract more advertisers with more than a dozen sales offices in the U.S. and 30 international ones. Google also sought to extend its reach by engaging 10 million small

and medium-sized businesses in the U.S and beyond. The company used its search technology to assist small business in channeling their ads to the right target markets. The opportunity for Google was huge and U.S small business spent $22 billion on local advertising.

Google captured the market by offering advertisers the Google Analytics software for free. This allowed advertisers to track which keywords were more likely to yield sales and then increase their spending on those key words and reduce it on others. The strategy of constantly refining and improving on it products enabled Google to significantly increase its market share over its competitors, and by 2005 Google and its partners commanded 60% of the U.S paid listing revenue from 52% of the U.S search market, surpassing is closest rival Yahoo! at that time.

Observers believed two factors contributed to Google superior performance: First Google considered listing relevance and improved on Overtures policy of ranking paid listing solely according to CPC bids. Secondly, Googles two-side network attracted two to three times as many advertisers and searchers as Oventure. Advertisers were drawn to Google because its network offered more search traffic and offered lower minimum CPC bids (1c verses Oventure 5c). Google continued its strategy of expansion by its acquisition of DoubleClick in 2007, for $3.1 billion. This allowed Google to increase its strength position by placing display advertisements, which were DoubleClicks focus. Google also leveraged its Adsense technology to show both display as well as text ads. In 2009 Google announced plans to further expand its role in placing display ads by building an Ad exchange.

Googles Organization
In March 2001 Brin and Page hired Eric Schmidt formerly of Sun Microsystems and Novell to be Googles CEO. Brin and Page then took the titles of president of technology and president of products, respectively. After some initial resistance, Google announced plans for an IPO in 2004.

Governance Googles IPO prospectus provided for dual-class equity which gave 10 votes to shareholders with Class B stock verses one vote per class A shares. This was designed to give protection to Brin, Page and Schmidt from replacement from investors who may have second guessed the companys strategy and come after their leadership.

Corporate Values Early in Googles history the co-founders instilled strong corporate values in their employees. The companys philosophical statements included phrases like: (1) dont be evil, (2) technology matter and (3) we make our own rules. Brin and Page also stamped Google with a unique personality of being super smart, aloof, and dismissive of unsolicited advice and being very innovative.

Managing Innovation Google adopted an unconventional approach to managing innovation. It allowed its engineers to allocate 20% of their working time on projects of their choosing and Google derived many benefits for this initiative as programs like Google News and Orkut were born out of it. Google also encouraged rapid execution. Teams worked in groups of no more than five people as they

believed that productivity would diminish if teams were any larger. This approach allowed for hundreds of projects to be developed and flourish and add to the companys product range. With so many projects underway, setting priorities was a challenge. Googles response to this was the invocation on the 70/20/10 rule for allocating engineering efforts to necessary task. Seventy percent of engineering time should be spent on core business (web search and paid listings), twenty percent on projects that extends the core business and ten percent on fundamentally new businesses. Google also remained willing to invest in promising long shot and high risk projects where the returns were potentially great.

Pressure on the Core Business

Googles growth did not come without some complaints from its advertisers, users and others as described below: Advertisers complained that they were being charged for clicks that either did not occur were inappropriate or in some cases fraudulent. Some companies, such as Geico and American Airlines, challenged Googles sale of advertising triggered by search for trademarks. Online news publishers repeatedly complained that Google used their content without their permission, particularly on Google News, and sought payment for its use. Users also expressed concern about Google collecting history of their searches and the search result that they clicked on. This information was very sensitive and had the potential to reveal information about the users that they would not like the public to know about. Some Google advertisements were linked to sites that attempted to defraud users. For example some websites would promise free material but then required the user to pay before receiving the content.

Google Competitor
Yahoo! With 2008 revenues of $5.2 billion and operating income of $1.2 billion Yahoo! competed headto-head with Google in the search and paid listing market. Yahoo! also offered products that competed directly with Googles other search products. While Yahoo recognized the threat from Google and was directly locked in an arms race for market supremacy, each firms new products announced was soon matched by an even better product by the rival. This suggest a cyclical process of both Yahoo! and Google of exploiting the Porterss five force model to continue developing strategies to become the dominate giant in the ad and paid listings markets as well as introducing new products and services. In the end, Googles strategy proved too extensive for Yahoo! as Googles market share rose to 73.9% in 2010 while Yahoo! market share fell to 13.6% during the same period.

Microsoft Microsoft repeatedly renamed it search offering from MSN to live Search and now to Bing which launched in May 2009 to favorable reviews. Bring received praise for its integrated presentation of detailed data such as airfares and restaurant reviews. Bing search engines offered shortcuts to help users refined their searches and Bing even offered users up to 20% cash back if they browsed Bing, clicked an advertisers link and made a purchase. Microsoft promoted Bing at the tune of $80 million and in May 2011 it had a market share of 31.6% bringing Googles back down 10 point to 63.9% from its position the previous year. Microsofts was unsuccessful in attempting to acquire Yahoo!. However, Microsoft kept fighting and now the regulators have approved the partnership between them. Together they will surely mount a challenge to dominate

the lucrative search market. Microsoft is also trying to compete with Google in the cloud computing market by offering a web version in its next release of MS Office.

Questions
1. What are the key success factors behind Googles early success? Google is arguably the most popular search engines available today. This company is widely known for its unparalleled search technology and page ranking algorithm, which runs on efficient distributed computer systems. Googles superior search algorithm along with its strategic use of both software and hardware technology has proved to be one of its key early success factors. Another early success factor was the fact that PageRank, indexed web pages much faster and cleaner plus the algorithm returned more relevant information than its competitors. This gave surfers a more useful search result and a less frustrating experience. Googles network drew more advertisers because its platform offered more search traffic at a lower minimum cost. In addition, after just one year as a company, Google indexed over one billion web pages, much more than its competition. This ensured Google would be able to return better search results for even more obscure or difficult queries. It is clearly evident that Google Incs. innovation in search technology contributed to it being number one in the search engine business. Google demonstrated its innovative ability by constantly improving on its search results and introducing new products into the market that were far superior to its rivals products. Googles acquisition of people combined with its strong corporate culture was another key early success factor. During the technology bust, Google seized the opportunity to hire bright technologist and allowed them to focus on what they did best and that is to search. The

knowledge and skills that these employees brought were difficult to replicate and in some cases irreplaceable. An example of this was when Google hired former Microsoft Vice President and academic professor Kia-Fu Lee. Following the principles of management guru Peter Drucker that Knowledge workers believe they are paid to be effective Googles employees were well provided for. There were also allowed to spend 70% of their time on core business, 20% on products which extended the core business and 10% on new projects of their choosing. Out of this 70/20/10 rule products like Google news, Google Finance, Orkut and Gtalk were born, which proved to be very successful for the company.

2. Do you expect the search business to become more concentrated (i.e. dominated by fewer firms? Is search a winner-take-all business? Google has demonstrated its market supremacy by dominating it rivals and keeping giants like Microsoft at bay. Google reached this accomplishment in short period of time and has even become a threat to many technology firms in various sectors. Googles strategic arsenal combined with it financial power would deter any new start-up from entering the search market as the battle for a viable market would be an uphill arduous task. So it would be tempting to suggest that the search business would become more concentrated and the winner takes all. However, according to JPMorgan the global search market is estimated to be worth more than $60B by 2011. Therefore I do not see any competitor remaining quiet and allowing Google to take all the pie. Foreign Governments, particularly France, has branded Google as a tool of U.S. cultural imperialism and in 2005 France has announced a loan program for the development of a Franco-German multimedia search engine. China has also expressed concerned for Google China and the Chinese search engine Baidu commands 3.67% of the global market share. Finally observers have noted that Googles ever expanding

agenda has put it on a collision course with nearly every giant in the information technology industry. From Amazon, Comcast, eBay, Microsoft, Yahoo! Hulu, the online video authority, The Washington Post (news) and facebook, the social networking giant even to the Chineses intermediary Alibaba.com. Therefore a collaborative front from some of these giants may emerge to fend off the Google challenge.

3. In reviewing its deal with AOL, could Google afford to pay AOL more than 100% of the revenue generated by AOL searches? It is believed that Google paid $1 billion for a 5% stake in AOL, a company that was valued at the time by most analysts including JPMorgan to be worth $10 to 15 billion. The price paid for AOL illustrates the length Google will go to win a battle against its competitor. This also illustrates the value the company places on retaining its slice of the advertising revenue and the access to content such as entertainment, video and news that AOL brings. Another view point is that companies continue to be fearful of Microsofts capabilities and what they could do with their vast resources. However, this partnership will provide profitable results in the long-term as it yields 10 to 12 percent of Googles revenue, while giving AOL two to three times more revenue from each internet search. In addition, it derailed Microsoft as the deal makes it more difficult for MSN to develop a strong advertising network as scale is very important in order to attract advertisers according to JPMorgan. It is evident that Google took a long-term view of the deal and sought to protect itself from Microsoft gaining a foothold in the market. In other words Google could not afford to past up this deal. How did Microsoft maximum affordable bid for AOLs search traffic compare to Googles?

It is unknown what the financial value of Microsofts bid was but we can say without a doubt that Googles offer in terms of service was far more attractive for AOL. A closer examination of both offers suggest that Microsoft wanted to pair with AOL, by making a joint venture while Google wanted to expand its three year old partnership. Microsoft had plenty to gain by teaming up with AOL as it provided a strategic opportunity to kick its AdCenter, give its search engine capability a boost and catch up on Googles market share. However, AOL was concerned that Microsoft would put its other MSN assets into joint ventures and let them wither; Microsoft would then focus on its plans to thread internet functions throughout its windows and office software. On the other hand Google agreed to give favorable placement to AOL content, something it has never done before. Google would also promote AOL web properties and include their online videos amongst search results. Google would emerge from the deal as an advertising powerhouse, retaining its market share while allowing Time Warner to keep the strategic upside of AOL along with additional revenue. This was a winwin for both companies.

4. In addition to enhancing its core search business, should Google also branch out into new arenas? Which of the following would you recommend: 1) building a full-fledge portal like Yahoo!s; 2) targeting Microsofts desktop software hegemony; and/or become an e-commerce intermediary like eBay? From its inception Google has never changed its mission that is, to organize the worlds information and make it universally accessible and useful. While this mission has served well as a guideline, Google cannot remain the same or its rivals, particularly Yahoo! and Microsoft, will excel at Googles expense. Therefore Google must examine its options and chart a path for the future. Option one is to stay focus on its unique competency and

continuing to develop more superior search solutions. Secondly expand into new arenas, like building portals. The third option is to challenge Microsofts desktop hegemony or become an e-commerce intermediary like eBay. Option one is consistent with Googles corporate values and philosophy, Its best to do one thing really, really well and Great isnt just enough. Therefore by devoting the resources to further development of the search engine, Google can enhance its superior search engine by listing more relevant results. Google can then leverage the focus strategy to lure users from competitors so as to increase their market share. Google will also earn more revenue if it improves its search technology. As Google can retain users by providing more suitable search results, a huge pool of users will have the incentives to stay loyal to them. With more users come better click-through rates and thus more revenue from paid-listings. More users will also attract more advertisers. Continuous improvement in search engines to absorb market share on both sides of the platform should be the core activity for Google to stay profitable in the long run.

According to the Thomson Research, the most important criteria for choosing a search engine is the relevancy of the searching result. In other words, the proof of the pie is in the eating. Therefore this research would further support Googles decision to stay focus on developing superior search solutions.

The only drawback to the focus strategy is the forces of the external environment. Where the online search industry is in rapid growth now, but this will not continue forever. The use rate of internet by new users will eventually decline which will cause the growth potential of this

industry to come to an end and revenues to flatten. This can lead to a ferocious battle by competitors for market supremacy. However, Google may still be able to use its superior stance from its arsenal to differentiate its search engines and keeps its customer base.

A good advantage of option two is that it would give Google a comprehensive image and additional revenue streams. While the main focus of Google remains search engines it can apply the 70/20/10 rule to develop portals and provide more value added services to users. By doing this the information on the internet can be organized into more user-friendly ways. Google can categorize the information into different channels like health, shopping, news, lifestyles, sports etc. so users can easily find specific areas of content by just one click. This is also consistent with Googles mission. As a result users can derive more value and Google gets to keep its corporate image.

However this option has some drawbacks. Firstly Google may not have enough capability to compete with Yahoo! by building into a web portal. Yahoo! is a full-fledged portal which offers a broad range of services and has organized those services into channels which are more user-friendly. Yahoo! has also long positioned itself as a portal with great investment. Therefore if Google is to effectively compete it will need further development in portal building capabilities. Furthermore Google does not have enough man power to do so as only 10% of engineering effort is allocated to new business.

On the outset option three seems very enticing as Google can use its existing applications like Google docs, Google Desktop and running on Google Cloud to compete directly with

Microsoft. After all, Google Docs did win a contract to serve 34,000 Los Angeles employees at the expense of Microsoft. However, it is evident that Google lacks the development capability, as explained in option two, to improve on Microsoft superior office applications. To further strength the point in July 2009, Google announced plans for its own operating system, Google Chrome OS, which would have features such as speed, simplicity and security and get you on the net in seconds. As of July 16, 2011, no beta version was available.

Becoming an e-commerce intermediary like eBay seems the most plausible growth strategy for Google to enter. After all, searches are the first steps to many e-commerce transactions. Actually, numerous of Googles advertisers are also eBay sellers. Plus Google already has an application, Google Checkout, which competes directly with eBays PayPal service. Therefore, application development and advertising cost should be nominal.

The only limitation I see to this arena is that Googles current management structure cannot support an e-commerce platform. If Google becomes an intermediary, different departments will have to cooperate and collaborate. This will lengthen the decision-making and execution time and immensely distress Googles pliable structure. However, the growth potential is huge, as of December 2010 Ebays revenue was estimated at $9.156 billion. 5. Do you view Googles distinctive governance structure, corporate culture, and organizational processes as strengths or potential limitations? It is without a doubt that Googles distinctive governance structure, corporate culture and organizational processes are great strengths of the company. After all they have been used

successfully to win the fierce battles of competition put on by its rivals and to gain market dominance. Overall, the company governance, culture and processes have been perfectly blended to generate great innovative technological ideas one after another.

Googles creative corporate culture is superb for attracting bright minds and the Googleplex center is a perfect playground for creating the Google dynamics. The organizational 70/20/10 rule of allowing all employees to use 20% of their work time on pet projects, combined with the small teamwork proves to be an excellent formula for generating prototypes. If those prototypes are then found to be of value they can then be developed fully from alpha to beta.

The only limitation I can see is the possibility of ego getting in the way of doing great work. The size of the company may also be off putting and could cause customers to turn away. However, great leadership is about anticipating problem and neutralizing them before they arise. Therefore, so long as Google continues with its founders core values and great leadership skills I believe the organization will survive future storms.

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