Google, Inc. in 2014

Agenda

1. Current Situation

2. Review History and Vision/Mission

3. Strategic and Financial Objectives

4. Business Model and Strategic Group Map

5. SWOT

6. Strategic Issues

Current Situation: Google Performance 2014 revenue $66 billion- a 19% gain over 2013

-11% revenue from non-advertising venues in 2014- up 2%; 59% outside U.S.

Net Income $14.4 billion- 16% gain vs 2013 resulting in a 22% net margin.

Return on Equity (ROE) 14.6%-down 2.2 points.

Earnings per share (EPS) $21.07 nearly $2.00 increase versus 2013

Debt/equity .05

Cash from operations $22.3 billion- a 20% increase over 2013 & representing

34% of revenues.

U.S. search engine market share grew slightly to 67.8% in 2014.

Digital ad market share remained at 31.5% worldwide.

Current Situation: Google Products

Web: “Google”: Search, Toolbar, Chrome, Bookmarks Specialized Search: “Google”: Custom Search, Patent Search, Scholar, Shopping, Finance, Trends, Flights Home and Office: “Google”: Docs, Slides, Drive, Drawing, Sheets, Forms, Sites, Calendar, Translate, Voice, Wallet, Cloud Print, Store, Keep, Gmail, Chrome PC Social: “Google”: Groups, Blogger, Hangouts and Google+ Mobile: “Google”: Search, Maps, Play, Waze and Android OS Geo: “Google”: Maps, Earth, Panoramio Media: “Google”: Books, News, Play, Image Search, Video Search, Picasa and YouTube Business: “Google”: Cloud Platform, Analytics, Trends, App Premiere, Bigquery, DoubleClick, AdWords, AdSense, Mobile AdSense, My Business, AdMob, Domains, DropCam and Google for Nonprofits Innovation: “Google”: Code, Glass, Loon, Fiber, TV, Deepmind, Car, Nest OTHER Business Units: Google Energy, Google Ventures

A Simple History of Google...

Google was founded in 1998 by Larry Page and Sergey Brin to provide effective and

more efficient web search services through their PageRank algorithm

In 1999, Overture monetized the search market and introduced paid listings based on

cost/impression (CPC) on search sites.

In 2000, Google became Yahoo’s search engine. 2002 AOL’s. Started weighted

(CPC) bid system based on actual and expected click through rates (CTR) in 2002.

Introduced “contextual” paid listings in 2003.

On August 19, 2004, Google went public on the NASDAQ stock market; it completed

an IPO of $85 per share and raised $1.66 billion in the public offering.

Since the IPO, Google has completed 174 acquisitions, launched a myriad of

innovative products and services beyond its core web search service.

Google has since become the third largest company in the world in terms of

revenues, profits, assets, and marketable value (Forbes, 2014).

Google’s Vision

● Provide access to the world’s information in one click

● Have a positive impact on the world through technology

Source: 2013 Founder’s Letter

Google’s Mission

● Unofficial Mission: “Don’t be Evil”

To organize the world’s information and make it universally

accessible and useful.

Google’s Strategic Objectives ● Increase U.S. search engine market share to 69% in 2015.

● Increase share of advertisements by 4th Q 2015 to 32%

● Increase share of mobile ads by year end 2015 to 51%

● Derive 14% of revenue from non-search venues in 2015.

● Further strengthen and protect strong brand and perception

● Enhance breadth and depth of product line; enhance and expand

technical expertise

● Invest heavily in R&D on new search and information and other leading

edge technologies in 2015 and next 5 years

● Expand international search, distribution and operations in emerging

Google’s Financial Objectives

16% increase in annual revenues

12% increase in net income

Increase non-search revenue from 11% to 14% of total revenue

Maintain net margin at 22%

Maintain ROE at 14.6%

Maintain debt/equity of .05

Increase EPS 10%

Maintain cash position from operations

Maintain R&D expenditures at 15% of revenue

Google’s Business Model Profits Formula: Revenues: Advertising sales, Google AdWords,

AdSense, DoubleClick, Mobile AdSense.

Main costs: people, data centers, acquisition cost

and R&D costs.

Key Resources: Intellectual: portfolio of patents and algorithm

technology. Brand is an important asset.

Physical: offices and data centers in 40+ countries

and 1 million+ servers.

Human: The “Googlers” (Google Employees)

Financial: Ad revenue from Google website and

non-Google websites and product sales.

Value Proposition: Google offers a user-friendly platform that includes a

search engine that generates the most relevant

results and targeted ads; and phone OS (Android),

Google Apps and computer OS (Chrome) makes it

simpler for the user to navigate on-line.

Processes: Google has global ad sales and support teams,

operations and data center processings and multi-

product sales force.

Google allows their employees to utilize 20% of their

time on individual, innovative ideas and projects.

Strategic Group Map

SWOT Strengths:

Proprietary search algorithm & thousands of patents - Distinctive Competency

Innovative culture and expertise-Core Comp.

Technology and engineering expertise -R&D investment highest except versus MSFT

Very strong financial position-revenue, income growth, margins, debt

Patents High search share and brand awareness Large database of customers and variety of search

related products Strong operations-1 million servers Dedicated to innovation AND profits Corporate governance and board

Weaknesses:

89% of revenue from search advertising Lack of strong share in non-search segments Lack of transparency and privacy disclosure Too many high risk ventures outside core

competencies?

Opportunities:

Over half of world doesnt have internet Increasing smartphone, multi-device use and access

to internet New technologies- robotics, smart homes, etc. Increased use of social networking Cloud use

Threats:

Traditional “search” in mature or declining lifecycle Traditional, direct/vertical search; social networks,

mobile, apps, other operating systems, other information sources/providers new companies (many competitive forces!- Porter).

Regs./litigation- monopolistic, competitors, foreign governments, consumers

Patented technology not Google’s Displacement as default search engine Exchange rates Hacker attacks

SWOT Grid

Offensive Strategies

Turnaround Strategies

Defensive Strategies

Diversification Strategies

Opportunities

Threats

w e a k n e s s e s

s t reng t h s

Google’s Strategic Issues 1. How will Google protect and grow their search-ad market share?

2. How will Google stay ahead of the innovation that could block ads?

3. How will Google stay true to their mission and still stay relevant?

In the 2014 10K, Larry Page stated, “The idea of trying new things is reflected in

some of our new, ambitious projects. Everything might not fit into a neat little

box. We believe that is exactly how to stay relevant.”

4. What new technology will Google harness, develop and make theirs?

5. What will Google do to more effectively penetrate the social media, e-

commerce and PC, tablet and phone market?

6. What will Google do to help countries without internet to have access?

What are the key factors behind Google’s early success?

1. A search engine that is faster and delivers more reliable

results.

2. A simplistic homepage structure and user interface.

3. Good financial backing and advisors.

4. A new profit and cost model for paid advertising.

5. Free brand exposure due to licensing agreements for Google

search engine. Agreement with AOL.

6. Localisation of search results geographically.

7. Free ad campaign creation software portals for advertisers.

Is “Search” a Winner-take-all category?

Search engines are the platform for ad hosting and advertising generates revenue.

The larger your market share on your search engine, the more vendors will pay for

advertising space.

AdWords does not allow companies to design ads that can be used across multiple

search platforms. That raises that cost to the advertiser to put their ads on multiple

search engines.

40% of web searches are motivated by intention to search for products and has

commercial motives. Of all the e-commerce, 70% of transactions start with a

search.

YES

Could Google outbid Microsoft for AOL’s traffic?

By 2014, AOL only had a 1.3% market share so now there is no reason for Google

to want to outbid for this business. Google has plenty of cash on hand if they

would want to, but there is no strategic reason to do so.

In their 2005 partnership, it cost Google $1B for a 5% equity stake in AOL and a

$300M credit towards ads on Google that promote the parent company’sproducts. This partnership lasted 5 years. AOL had a 9% market share for

searches. They effectively stopped Microsoft from adding this to their 16%. The

larger the search audience, the more that companies are willing to pay for ads. In

addition, the more people viewing these ads, the more possible Click-throughs

which adds value for the end user, Google and the advertiser.

Is Google’s governance structure, corporate culture and

organizational process a strength or weakness?

- Brin, Page, Schmidt have nearly 80% voting rights; Don’t be Evil Innovative Culture

Limitations - Anti-takeover stance could be negatively perceived as corporate dictatorship and

management entrenchment; detrimental to shareholders’ rights and interests. Mixed research

suggests negative performance. Backlash from those who perceive Google as evil.

Advantages - Our belief is that we maximize stockholder value by maintaining a long-term

focus. Rather than thinking about ways in which we can create short-lived economic gains each

quarter, we focus on serving our users and delivering the most relevant information as fast as

we can. -Larry Page

-Protects against hostile takeover. Allows more latitude to carry out mission and create

disruptive innovations with potential higher payoff. Board is very strong; checks and balances -

Sarbanes Oxley adherence. Some research suggests positive performance. Management is key.

Strength!- Sales up 3X, income 2X since 2009; share price 8X since IPO! Minimal backlash

from Don’t be Evil mantra. Allows very innovative culture.

Stock price growth since 2005

Is Google’s unique organization a strength or liability?

As stated in last question, it allows long term focus on strategy and

culture/values.

As long as human, operational, R&D and other capital resources, with

passionate, dedicated pursuit (Jim Collins) accompany strategies outside of

core search business; at same time must be able to defend and to grow the

core search business as “opportunities” arise or attacks are made..

As long as high risk projects do not drain assets.

As long as Board and their three key owners are fiscally smart.

Strength

What are the managerial lessons learned from the case?

Google is the model for the successful “Late-Mover advantage” and for

being flexible and agile despite their size. (Search, Ads and Android)

“No plan survives the first shot” - Barron Von Molke. Strategies must be

flexible and aggressive and not complacent to protect share.

In the 2013 Founder’s letter, Larry Page states that they started Google “to

develop services that significantly improve the lives of as many as

possible. We’re motivated by a profound belief that access to knowledge

will improve humankind.” Google is currently at the top when it comes to algorithms and advertising.

They must not become complacent in order to stay there.

What should Google do next?

1. “Defend” and enhance the core search business, maintaining status as “the” premier search engine through internally developed new technologies and,

acquisitions and vertical integration into mobile (Protecting the Cash Cow)

2. Expand search into other venues such as video, mobile and print.

3. Avoid frontal “Offensive” attacks on Apple, Microsoft, & other major players.

Use flanking, second mover or leap frog competitive tactics in e-commerce,

office software, mobile/tablet space.

4. Continue to focus on innovation as an offensive strategy: Google Fiber, Google

Loon and other leading edge innovative technologies.

5. Find new ways to gain and utilize information: ex. purchase of Waze, Nest:Home

In addition to enhancing its core search business, should Google also branch out into new arenas?

1.Building a full-fledged portal like Yahoo!’s-Not recommended. Already tried that with iGoogle which was not very successful.

2.Targeting Microsoft’s desktop software hegemony?-Not recommended. Not a direct attack. They already have similar/equivalent desktop software.

3.Become an e-commerce intermediary like eBay? -Recommended. But do not benchmark against eBay. Use existing product

What “Other” things could Google do? 1. Google could buy Twitter

- Google+ was a bust and getting a fast entrance into the giant market of social media gives them instant access to more specific information and more space to place ads.

2. Google could add live streaming to YouTube - Google already had a huge success with live streaming the 2012 Olympics. Google could add on live sporting events like Professional Football or Soccer.

3. Google could partner with or buy Netflix - This would give Google quick entrance into a vast amount of streaming and keep competitors from buying Netflix. The video streaming and on-demand market has been growing in popularity at a fast pace.

4. Google could buy GoPro -GoPro has brand recognitions, could use technology to advance Google Glass and

Final Recommendations for Google Create a new Mission:

“Create leading edge information technology for

the betterment of mankind.”

or

“Make future generations brighter, healthier, and more informed.”

How to implement:

Create radical solutions for global problems with breakthrough technology and

resources: further develop robotics, thought communication, home ecosystem

communication & information, self health monitoring systems etc.

As Larry Page stated in 2014, “Google probably needs a new mission

”

“Google’s ever-expanding agenda has put it on a collision course with

nearly every company in the information technology industry…

Who’s afraid of Google? Everyone.”1

1Kevin Kelleher, “Who’s Afraid of Google?’ Wired, December 2005, pp. 233-236

Where are they now? 2015

Alphabet - The holding company Larry Page and Sergey Brin, CEO and President of Alphabet

Sundar Pichai, CEO of Google

Companies are Google, Inc., Calico (anti-aging research lab), Google Ventures,

Google Capital, Google X, Nest, Fiber

Idea is that Alphabet will allow Page and Brin to explore innovative sectors

All companies will share a common goal: How can Alphabet improve our lives?

Innovations - self driving cars, delivery drones for disaster relief, robots, life

extension project, artificial intelligence (Deep Mind), exploration, intelligent

glasses, contacts that measure glucose levels, fight oppression technology, virtual

reality cameras, clean energy, safe homes, internet access for all

Trading as GOOG - class C stock

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Appendix Slides:

Appendix

Appendix

Search Share by Country

# 1 and #2 brands

Appendix: Worldwide Market Shares

Smart Phones:

2013

2014

Android: 79.8% 84.8%

Apple iOS: 12.9% 11.6%

Windows OS: 3.4% 2.5%

Digital Ad market share (non-device):

2013 ($120B) 2014($140B)

Google: 31.92% 31.45%

Facebook: 5.82% 7.79%

Microsoft: 2.45% 2.54%

Yahoo!: 2.86% 2.52%

Amazon: 0.63% 0.75%

AOL: 0.94% 0.88%

Net Mobile Internet Ad Revenue: 2013($18B)

2014($33B)

Google: 50.4% 50.2% Facebook*: 17.8% 22.3% *(includes Instagram since 2012 purchase)

Twitter: 1.5% 2.8% Amazon: 0.1% 0.3% Other**: 24.2% 20.5% **(Other include all of the “in-app” advertising)