Corporate Entrepreneurship and Innovation in Silicon Valley: The Case of Google Inc

Todd A Finkle. Entrepreneurship Theory and Practice. Volume 36, Issue 4. July 2012.

In May 2009, Sergey Brin and Larry Page, co-founders of Google, Inc., were trying to determine how they were going to navigate Google through the worst recession since the Great Depression. Their primary problem was how to maintain the company’s culture of corporate entrepreneurship and innovation in the face of stagnant profits and a host of other issues. Google sought answers on how to increase corporate entrepreneurship and innovation during the worst economic environment that the company had ever experienced.

Introduction

In May 2009, Sergey Brin and Larry Page, co-founders of Google, Inc., watched Green Day in concert at the famous Shoreline Amphitheatre in Mountain View, California. The brilliant young entrepreneurs had many things on their minds. They tried to determine how they were going to navigate Google during the worst recession the United States had seen since the Great Depression (Willis, 2009). The Standard and Poor’s 500 (S&P 500), one of the most popular indicators of the U.S. economy, had dropped to an intra-day low of 666.79 on March 6, 2009 from an intra-day high of 1576.09 on October 11, 2007 for a collapse of 57.7% (S & P 500 Index, 2009). Worldwide stocks had decreased on average by approximately 60%.

Warren Buffett, Chairman of Berkshire Hathaway and one of the most prolific investors of all time, foresaw the current economic turmoil in early 2008. Buffett stated, “Even though the numbers do not state it, the United States was in for a deep long-lasting recession” (Buffett, 2008).

By early 2009, U.S. retirement accounts also dropped by an average of 40% or $3.4 trillion (Brandon, 2009). Many U.S. retirees saw their pensions cut in half and many were forced to go back to work or rely on their families to support them.

Brin and Page had never witnessed anything like this in their young lives. Even the ever successful company they created in 1998, Google, Inc., was feeling the effects of the crisis. At its low point, Google’s stock price dropped 51.35% from an intra-day high of $713.587 on November 2, 2007 to an intra-day low of $259.56 on November 20, 2008. The stock price picked up momentum recently and traded at $410 as of May 28, 2009.

As the young entrepreneurs listened to the Bay Area band Green Day, they pondered their next moves. Google had problems. The company’s primary problem was how to maintain the culture of corporate entrepreneurship and innovation in the face of flat net profits from 2007 to 2008. As a result of this, the firm had to fire several employees for the first time in the company’s history and eliminate products that made no money (Blodget, 2009). Furthermore, employees left for a variety of reasons (e.g., lack of mentoring and formal career planning, too much bureaucracy, low pay and benefits, high cost of living in the area, desire to start their own business, etc.).

In a little over 10 years, Google had grown to a company with over 20,000 employees. If Google wanted to continue its main strategy of growth through innovation, it would have to find a way to recruit the best employees and retain them.

Background of Founders

Google was founded by Larry Page and Sergei Brin, who met in 1995 while they were PhD students in computer engineering at Stanford University. Page was born in Lansing, Michigan on March 26, 1973 and was the son of a computer science professor at Michigan State University who specialized in artificial intelligence. Page’s mother also taught computer programming at the Michigan State University (Thompson, 2001, p. 50).

Page spent his youth learning about computers and immersed himself into multiple technology journals that his parents read. Page had a very impressive educational background. He attended a Montessori school initially, and then went to a public high school. He later went on to earn a Bachelor of Science Degree (with honors) in computer engineering from the University of Michigan. Page was then accepted to graduate school at Stanford where he met Brin and began his study of website linkages. Nicola Tesla, a Serbian inventor who was a contemporary of Thomas Edison, was Page’s inspiration. Tesla was superior to Edison in some respects; however, he failed at commercializing his inventions. Page wanted to do both.

In 1973, Sergey Brin was born in Moscow Russia. At age six, Brin and his family who were Jewish, fled Russia to the United States to escape anti-Semitism. Brin’s father was a mathematics professor at the University of Maryland and his mother was a research scientist at NASA’s Goddard Space Flight Center. Brin attended a Montessori high school and graduated with a degree in computer science and mathematics with honors from the University of Maryland. He then began to study computer science at Stanford University until he dropped out to form Google with Page. Brin was the more gregarious; however, both were strong willed and opinionated.

At Stanford they began their quest to “organize the world’s information and make it universally accessible” (Miller, 2006, p. 10). Google began as a research project at Stanford University in January, 1995.

Page started his research under the tutelage of Dr Terry Winograd, a computer science professor at Stanford. His research focused on which web pages linked to a given page. His initial problem was trying to determine the number of citations in academic publishing. He called his research project “BackRub.” Brin soon joined Page on the project. Page began exploring the web in March 1996 by using Page’s Stanford home page. It was at this point that Page and Brin developed PageRank, an algorithm that ranked the importance of the sites that were relevant to the entry.

Page and Brin did not create the algorithm with the intention of making money, but they wanted to have a significant impact on the world. As time went on they decided that they did not want to create their own company, but they wanted to sell their invention to one of the existing search companies (e.g., WebCrawler, AltaVista, Yahoo!, etc.). However, all of these companies stated that there was no money in search and rejected them.

By 1996, Brin and Page had servers and computers stacked in their dorm room. Initially targeted at Stanford students, the two consulted with two former Stanford students that started Yahoo!, Jerry Yang and David Filo. They encouraged Brin and Page to create their own company. So the two decided to drop out of school and start their own business. In 1998, Sun Microsystems co-founder Andy Bechtolsheim, who also dropped out of Stanford to become a successful entrepreneur, wrote a check for $100,000 to Brin and Page and they formed a new company called Google, Inc.

Growth of Google

Since its founding in 1998, Google was one of the most innovative companies in the world. The company ranked at the top with other leading companies like Apple in the development of innovative products and technologies. Corporate entrepreneurship and innovation was the heart and soul of the company’s success.

Google initially set up its business in a garage at 232 Santa Margarita, Menlo Park, California in 1998. Later that year, Google was named Search Engine of Choice by PC Magazine in the Top 100 Sites of 1998 (Lowe, 2009, p. 282). In 1999, Google moved to a new office space in Palo Alto to make room for several new employees. Palo Alto was the location of Stanford University. The city was in the heart of Silicon Valley and was the location where the first semiconductor chip was created in 1956 by Fairchild Semiconductor.

In 1999, Google received its first significant influx of capital, $25 million in venture capital financing from Sequoia Capital and Kleiner, Perkins, Caufield, and Byers, both located in Silicon Valley. Members of both firms sat on the board of directors of Google.

In 1999, the term “googler” was termed for “people who used Google.” In August, 1999 Google moved to Mountain View, just south of Palo Alto. Google moved into an empty building next door to Silicon Graphics, a firm that was founded by a former Stanford electrical engineering professor, Dr. James Clark and seven graduate students and staff from Stanford. Clark would go on to found Netscape Communications, myCFO, and Healtheon. A review of the history of Google can be seen below.

Stages of Growth

Hamel and Breen (2007) described the growth of Google into five stages:

Google 1.0.

Brin and Page invented a search engine that searched the Web, won millions of eyeballs, but generated no real revenue.

Google 2.0.

Google sold its search capacity to AOL, Yahoo!, and other major portals. These partnerships generated revenue and sparked a surge in search requests. Suddenly, Google started to look like a business.

Google 3.0.

Google crafted a clever model for selling ads alongside search results called AdWords. Unlike Yahoo! and others, it eschewed banner ads, and took a newspaper’s “church-and-state” view of advertising and content by clearly differentiating between ads and search results. Moreover, advertisers paid only when users actually clicked on a link. Google was well on its way to becoming the Internet’s leading retailer of ad space.

Google 4.0.

Google’s initially controversial Gmail service, which served up ads based on a computer analysis of each incoming message, provoked a serendipitous bit of learning that led to the creation of AdSense. This breakthrough gave Google the ability to link its ads to virtually any sort of Web content, not just its own search results. AdSense gave webmasters a new way of monetizing content and vastly expand the scope of Google’s business model.

Google 5.0.

Google used its windfall from advertising to fund a flock of new services, including Google Desktop (a cluster of information utilities accessible directly from a user’s PC screen), Google Book Search (an ambitious plan to digitize the books from the world’s greatest libraries), Google Scholar (a tool for searching academic papers), and Google Chrome, a new Internet search browser.

The company also purchased a number of other firms over the years including, Keyhole (which became Google Earth), Writely (which became Google Docs), YouTube, and Android (which went on to become the Android Operating System for Google’s new phone launch called the Android in 2008).

In 2008, Google had more than $4 billion in revenues with the majority of it coming from the company’s AdWords business model or click-through advertising. AdWords was one of the most revolutionary developments in the media world since television itself, said author John Battelle (2009): “AdWords was what made Google … Google.” AdWords was what generated the ads—or “Sponsored Links,” you see on a Google results page. You only have to pay for the link when someone actually clicks on the link and goes to the advertiser’s web site. It was called “pay-per-click.”

Strategies at Google

Google’s primary corporate strategy was related diversification. Google achieved its diversification strategy through corporate entrepreneurship and innovation and acquisitions. This enabled Google to increase its offerings and decrease its competition. As the industry leader, Google used offensive strategies by constant innovation of its product lines and expansion into other industries like mobile phones, maps, blogging, news, health, etc.

Google provided internet users with the most relevant search results on as many topics as possible. This included going international to outsource and expand markets by providing its products in foreign languages. Google’s business level strategy was a broad differentiation strategy, because it offered features that other search engines did not, such as translating from one language into another, while still providing the most relevant search results.

Philanthropy at Google

Philanthropy was widespread at Google. The company gave 1% of its equity and yearly profits to philanthropy. Google’s five primary areas that it focused on were: (1) Google.org, which used Google’s information and technology to build products and advocate for policies that address global challenges; (2) Engineering Awards and Programs that supported the next generation of engineers and maintained strong ties with academic institutions worldwide pursuing innovative research in core areas relevant to its mission; (3) Information and Tools to Help You Change the World that were used to promote causes, raise money, and operate more efficiently; (4) Charitable Giving that supported efforts in the local communities and around the globe; and (5) Google Green Initiatives where Google gave back to the community through financing humanitarian efforts in Africa and research on alternative fuels and global warming (Google.org, 2010).

Competition

Google operated in markets that changed rapidly. Google faced the possibility of new and disruptive technologies and faced formidable competition in every aspect of their business, particularly from companies that sought to connect people with information on the web. The company considered Microsoft Corporation and Yahoo! Inc. to be their primary competitors.

Google faced competition from other web search providers, including start-ups as well as developed companies that were enhancing or developing search technologies. Google competed with Internet advertising companies, particularly in the areas of pay-for-performance and keyword-targeted internet advertising. The company also competed with companies that sold products and services online because these companies were trying to attract users to their web sites to search for information about products and services. Google also provided a number of online products and services, including Gmail, YouTube, and Google Docs, which competed directly with new and established companies offering communication, information, and entertainment services integrated into products or media properties.

Google competed to attract and retain relationships with users, advertisers and Google Network members, and other content providers in different ways (see below, Google’s 2008 Annual Report):

• Users. Competed to attract and retain users of their search and communication products and services. Most of the products and services Google offered to users were free, so the company did not compete on price. Instead, the company competed in this area on the basis of the relevance and usefulness of search results, features, availability, and ease of use of products and services.
• Advertisers. Google competed to attract and retain advertisers. Google competed in this area principally on the basis of the return on investment realized by advertisers using the company’s AdWords and AdSense programs. Google also competed based on the quality of customer service, features, and ease of use of its products and services.
• Google Network members and other content providers. Google competed to attract and retain content providers (Google Network members, as well as other content providers for whom the company distributed or licensed content) primarily based on the size and quality of its advertiser base, and its ability to help these partners generate revenues from advertising and the terms of the agreements.

Silicon Valley

Culture and Location

Google was located in the heart of Silicon Valley, Mountain View, California. According to Randy Komisar, an entrepreneur-turned-venture capitalist at Kleiner, Perkins, Caufield, and Byers, “In Silicon Valley we have created a culture that attracts the sort of people who prosper in ambiguity, innovation, and risk taking” (Harris, 2009). Other parts of the United States have also been successful at building innovative technology corridors like Boston, Massachusetts and Austin, Texas.

Silicon Valley was often called South San Francisco, but was really comprised of about 60 miles of suburbs immediately to the south of the city of San Francisco. Some of the more prominent cities and companies included (North to South) South San Francisco (Amgen and Genentech), San Mateo (YouTube), Redwood Shores (Oracle Corporation, Electronic Arts, and Sun Microsystems), Menlo Park (most venture capital firms), Palo Alto (Hewlett-Packard and Facebook), Mountain View (AOL, Intuit, RedHat, Symantec, and VeriSign), Sunnyvale (Yahoo!, Ariba, NetApp, and Advanced Micro Devices), Santa Clara (Applied Materials and Nvidia Corporation), Cupertino (Apple, Inc.), San Jose (McAfee, eBay, Adobe Systems, and Cisco Systems), and Los Gatos. Hundreds of prestigious high technology companies were located here.

Cost of Living

Silicon Valley was one of the most expensive places to live in the United States. During the recent housing boom, the average house in the region sold for $800,000. Prices differed depending on the city. For example, during the height of the housing boom an average house in San Jose sold for $710,000. However, by 2009, the price had fallen to $475,000 or a 33% plunge. Real estate in Palo Alto held up better than other parts of Silicon Valley. The average price of a home at the housing peak was $1.2 million versus $1.1 million in early 2009. Several factors contributed to Palo Alto’s resilience: (1) The city was sunny and beautiful; (2) its proximity to Stanford; (3) the limited amount of housing available (no space for new homes); (4) its proximity to all of the top high-tech companies in the region (Google and Apple were 15 minutes away), and (5) the prestigious K-12 school system. Steve Jobs, CEO of Apple Inc.; Steve Young, former star quarterback of the San Francisco 49ers; and Page all lived in Palo Alto.

The average per capita personal income in the United States was $39,751; however, in Silicon Valley salaries were 30% above the average. While this may sound encouraging, the cost of living in Silicon Valley was significantly higher than most places in the United States. For example, if you made $100,000 a year in Dallas, Texas and took a job at Google and moved to Palo Alto you would have to make a salary of $252,226 to afford the same lifestyle. The high cost of living was a barrier that the company had to overcome when recruiting employees.

Education and Employees

There were a number of universities and colleges in the San Francisco area; however, there were only two world class research universities: Stanford University and the University of California at Berkeley. Some of the brightest minds from all over the world came to Silicon Valley to work and/or attend these schools. San Jose State University, which was also located in Silicon Valley, was also a major feeder of engineers to high tech companies in the region. Furthermore, several of these engineers went on to become leaders in their respective companies (e.g., Gordon Moore, founder of Intel Corporation in 1968).

The region was a breeding ground for some of the brightest minds in the world. The area had a forward looking energy. People were more entrepreneurial because they had witnessed great wealth creation. According to Bill Powar, one of the founders of VeriSign, “I worked at Visa for 30 years, but when the internet was created we saw an opportunity to create the first internet security system that is still used today.” Powar made millions on the initial public offering and retired.

Access to Capital and Legal Infrastructure

Money was another key variable for the success of Silicon Valley. Sand Hill Road in Menlo Park was famous for the large number of venture capital firms in a very small area. During the dot.com boom, real estate there was the most expensive in the world. A small number of employees worked in very small office buildings that were often hidden by trees and bushes. At Kleiner, Perkins, Caufield, and Byers, one of the premier venture capital firms in the world, bottlebrush trees hid the name of the firm. Other prestigious venture capital firms there were Sequoia Capital, Interwest Partners, Kohlberg Kravis Roberts, Draper Fisher Jurveston, etc. This proximity to venture capital gave Google a competitive advantage since venture capital firms liked to be close to their investments and sit on their boards.

As Silicon Valley grew, the number of law firms specializing in funding, litigation, resolving disputes, high tech companies, and intellectually property grew enormously. Many of these firms were located in San Francisco and Palo Alto.

Corporate Entrepreneurship and Innovation

Corporate entrepreneurship (Guth & Ginsberg, 1990) is a term used to describe entrepreneurial behavior inside established mid-sized and large organizations. Corporate entrepreneurship can be formal or informal activities aimed at creating new businesses in established companies through product and process innovations and market developments (Zahra, 1991). Innovation is a key ingredient of corporate entrepreneurship where one can take an idea or invention and create something new of value. For example, an innovation of the toothbrush is the electric toothbrush.

Rule and Irwin (1988) stated that companies established a culture of innovation through: the formation of teams and task forces; recruitment of new staff with new ideas; application of strategic plans that focused on achieving innovation; and the establishment of internal research and development programs that were likely to see tangible results.

The roots of corporate entrepreneurship proliferated at 3M Corporation. 3M was the first company that introduced “organizational slack” as a key factor enabling their engineers and scientists to spend 15% of their time on projects of their own design. As a result of this many inventions came out of 3M (e.g., Post it Notes and Scotch Tape).

Corporate Entrepreneurship and Innovation at Google

Google’s mission was not based on money alone; rather it was to improve the world. The heart and soul of Google was based on entrepreneurship and innovation. The philosophy of the company started at Stanford University. Stanford had a program dedicated to the formation of technology oriented ventures called the STVP or the Stanford Technology Ventures Program in the School of Engineering. The school had a rich 100-year history of students and faculty that created fledging organizations like Federal Telegraph and Telephone, Hewlett-Packard, Varian Associates, SRI International, Yahoo!, Cisco, Sun Microsystems, Silicon Graphics, Varian Medical Systems, and VMware.

Stanford encouraged their professors to create companies based on their research. According to Dr. Thomas Lee, the founder of Stanford’s Integrated Circuits Laboratory, “Entrepreneurship is built into the DNA of Stanford.” When Lee arrived, he said that colleagues told him that he would have to do a startup. He said there was a kind of peer pressure on campus to start a business. The President, John L. Hennessey, had prospered as an entrepreneur in MIPS Computer Systems (now MIPS Technologies) and Silicon Graphics (Harris, 2009). Stanford also encouraged their professors to take equity stakes in companies. This culture fostered entrepreneurial ventures throughout the region. In the 2009 student business plan competition there were 235 entries, double the amount during the dot.com boom.

Google’s management model was similar to other high-tech companies like Microsoft, Apple, and Cisco. Google bought many of the buildings around its original office. The make-up, location, and culture of the company were similar to that of a college or university. It was not uncommon to see many bicycles around the campus traveling from building to building along with people playing volleyball outdoors.

According to current CEO Eric Schmidt (2009), “I looked at Google as an extension of graduate school; similar kinds of people, similar kinds of crazy behavior, but people who were incredibly smart and who were highly motivated and had a sense of change, a sense of optimism. It was a culture of people who felt that they could build things; they could actually accomplish what they wanted and ultimately people stay in companies because they can achieve something.”

Brin and Page created a company that had some of the brightest minds in the world. Similar to a top flight university, they hired the brightest minds, worked in small teams, received feedback, and their mission was to improve the world. The culture of Google had similar values as academia in the sense that everything was questioned. Ideas were critiqued by your peers not just your managers. At Google, position and hierarchy seldom won an argument, and the founders wanted to keep it that way (Hamel & Breen, 2007).

Another factor that contributed to the success of Google was their flat, open organizational structure. Typical corporate models had many layers of management and strategy was driven top down. However, at Google, the company was highly democratic and employees were encouraged to question anyone. Strategy tended to come from bottom up. Company President, Eric Schmidt, stated that he talked with many employees every day about their various projects. The culture and structure of Google initiated from Brin and Page’s attitude, “We do not like authority and we do not like being told what to do.” Brin and Page understood that breakthroughs come from questioning assumptions and smashing paradigms (Hamel & Breen, 2007).

In order to increase the effectiveness of communication, the company developed an intranet, called “MOMA,” or “Message Oriented Middleware Application.” MOMA was a Web page and threaded conversation for each of the company’s several hundred internal projects, making it easy for teams to communicate their progress, garner feedback, and solicit help. The company also created a program called Snippets, a site where all Google engineers could post a summary of their activities. Any Googler could search the Snippets list to locate individuals working on similar projects, or to simply stay abreast of what was happening (Hamel & Breen, 2007).

Google also had a policy of giving outsized rewards to people who came up with outsized ideas, a team-focused approach to product development, and a corporate credo that challenged every employee to put the user first (Hamel & Breen, 2007).

Support from Top Management

Google sought out the best and brightest from all over the world. Google was committed to having one of the most open and entrepreneurial environments in the world. Evidence of this could be seen in a recent study of MBA graduates who were interviewed about which company they wanted to work for and Google was number one, where 20% of all MBA graduates said they wanted to work for Google after graduation (CNNMoney.com, 2009).

Corporate Culture and Employees

The most critical factor in stimulating entrepreneurship within Google was the culture. Keys to success included forming an innovative and loose structure with quality employees. It was also essential to reward entrepreneurship and innovation.

Google’s hiring process was based upon the belief of Brin and Page that A-level talent wanted to work with A-level talent and B-level talent tended to hire B-level talent or lower. This can ruin an organization. As a result, Google’s hiring process could be painful to applicants. Interviews often extended several weeks and potential employees were often given scientists’ Mensa-level problems to solve on the spot. Decisions on candidates were made by veteran associates and executives. It was an admittedly brutal process, but it weeded out anyone who was merely average (Hamel & Breen, 2007).

Brin and Page tried to keep the layers of management to a minimum. They also tried to keep the communication channels narrow so people could act quickly. They disliked taking orders from people and hated being managed. According to Brin and Page, “Our management philosophy amplified that quality employees who are motivated do not need to be managed.” Similar to academia, Google gave their employees a lot of freedom.

Google’s web site stated that its philosophy was, “Never Settle for the Best.” Google’s persistence, along with enormous amounts of energy and ambition brought about its success. The company’s website listed “Ten Things Google Has Found to be True”:

1. Focus on the user and all else will follow.
2. It is best to do one thing really, really well.
3. Fast is better than slow.
4. Democracy on the web works.
5. You do not need to be at your desk to need an answer.
6. You can make money without doing evil.
7. There is always more information out there.
8. The need for information crosses all borders.
9. You can be serious without a suit.
10. Great is not good enough.

(Source: http://www.google.com/corporate/tenthings.html, Accessed May 17, 2009).

Page and Brin placed heavy emphasis on providing a relaxed and fun work environment. They believed that employees should create their own hours and work them as they felt they were most productive. Google’s staff worked 80% of their hours on regular work and the other 20% on noncore projects (organizational slack). The company estimated that it developed 10-12 new service offerings every quarter. According to Marisa Mayer (2009), Vice President of Search Product and User Experience and the first female engineer hired at Google, “The 20% was one of the keys to our success. It gave the engineers the ability to work on whatever they were passionate about. You never know when you are going to create great products. That was why we gave them the opportunity to be creative. That was how Google News and Gmail were born. You have to try a number of different things. Certainly we are in the business of searching and advertising, but basically we are in the business of innovation. Our innovation strategy has been threefold: (1) allow small teams to work together, (2) allow ideas to come from everywhere, and (3) give employees 20% free time to work on any projects they have a passion for. These have all contributed to our success.”

Google prided itself on its open, social environment but many people felt that Google had turned increasingly “corporate.” The environment in which engineers were able to create their own products and services was decreasing since it had to go through a full review process that could take months before the product was released to market. Although engineers enjoyed being creative, they might as well create a product/service that they can monetize on their own.

Despite these factors, Google had problems related to the rapid growth of the company. As of May 2009, Google had over 20,000 employees. This had a negative effect on the company’s ability to maintain an entrepreneurial culture. The most often heard complaint was that the employees’ skills were not being utilized. As one Ivy League graduate stated, “I have an Ivy League education and I was hired to shuffle papers in Human Resources. I quit after six months.”

Small, Self-Managed Teams

The majority of Google’s employees worked in teams of three engineers when working on product development. Big products like Gmail could have 30 or more people with three to four people on a team. Each team had a specific assignment (e.g., building spam filters or improving the forwarding feature). Each team had a leader; however, leaders rotated on teams. Engineers often worked on more than one project and were free to switch teams. According to Shona Brown, Google’s VP for operations, “If at all possible, we want people to commit to things, rather than be assigned to things” (Hamel & Breen, 2007).

Reward Structure

Google was called a playground on steroids where there were 18 cafes staffed with seven executive chefs. Google was known for offering its staff incredible free perks: volleyball court, gyms, gourmet lunches, and dinners (although leaving after eating dinner was frowned upon), Ben & Jerry’s Ice Cream, yoga classes, employees could bring their dogs to work, onsite masseuse, office physician, laundry service, travel back and forth to work, etc. This made Google one of the most sought-after companies to work for. Google offered great perks to their employees because they wanted the brightest and most qualified employees focusing their attention on their jobs all of the time.

Google employees earned a base salary that was on par with, or slightly lower than, the industry average; however, the standard deviation around that average was higher at Google than it was at most other companies. At Google, annual bonuses amounted to 30% to 60% of base salary, but the financial upside could be much, much bigger for those that came up with a profit-pumping idea (Hamel & Breen, 2007).

Google understood that entrepreneurs were motivated by money. Therefore in 2004, they created the “Founders Awards.” These were restricted stock options (sometimes worth millions) that were given quarterly to teams that came up with the best ideas to increase the profitability of the company. The largest such award to date went to a team led by Eric Veach. His team created a new advertising algorithm, dubbed “SmartAds” and won $10 million (Hamel & Breen, 2007).

Decision Point

As Brin and Page sat through the concert they thought, “Look at Green Day. These guys have been successful for years and they still ROCK!! If Green Day can do it, so can Google.” But Brin and Page realized that in order to accomplish their goals they would need to figure out how to solve their corporate problems. Their primary problem was how to maintain their culture of corporate entrepreneurship and innovation in the face of flat net profits from 2007 to 2008. Additionally, a multitude of other issues faced the company: (1) a decrease in advertising revenue (2) the firing of several employees for the first time in the company’s history and the elimination of products that made no money, and (3) the loss of employees for a variety of reasons (e.g., lack of mentoring and formal career planning, too much bureaucracy, low pay and benefits, high cost of living in the area, desire to start their own business, etc.). If Google wanted to continue its main strategy of growth through innovation, it would have to find a way to recruit and retain the best employees.

Google had to figure out how to maintain its culture of corporate entrepreneurship and innovation in an era of stagnant profitability. Furthermore, the company had grown to over 20,000 employees. How could it maintain its culture with so large an organization?

Note to Instructors for Corporate Entrepreneurship and Innovation in Silicon Valley: The Case of Google, Inc.

The case examined the current situation facing Google during the heart of the financial crisis in May 2009. The economy was in its worst condition since the Great Depression. The S&P 500 index dropped 57% at its low point. Google was not immune to the problems that occurred in the economy. Its net income was flat from 2007-08. The company laid off employees and there were problems with existing employees.

The main problem that Google faced was how to maintain their culture of corporate entrepreneurship and innovation in the face of an economic meltdown.

The case began with a look at the current global economy. This was vital to understanding the situation that Google faced. The case then moved into the backgrounds of the founders Sergey Brin and Larry Page. This was followed by the chronological growth of Google, the strategies the firm used to grow, and the competition that the firm faced. The case also looked at Google’s philanthropic initiatives and keys to success.

Financial statements were provided so students could perform financial ratio analysis and evaluate the company’s financial disposition. Students were also required to make recommendations on what Google should do in the future based on the financial and strategic information in the case.

The case will be appealing to students due to the youth of the founders, culture of the firm, and the many products that the students use from Google.

Key Issues and Discussion Points

The case gives students the ability to see that they have the ability to create a new business even if they are in school. The case also serves as a benchmark for students to follow if they choose to create their own technology company. The case requires students to evaluate both the strategic and financial aspects of Google during one of the worst economic environments since the Great Depression. The following questions can be used to stimulate discussion.

Questions

1. What are the major problems facing Google in 2009?
2. Given the economic environment in 2009 as described in the case, what implications, opportunities and threats does this context pose for Google currently? What about in 2012?
3. Based on the content of the case, what was the primary Strategic Inflection Point for Google? Why did you select this point?
4. A. Calculate the key profitability, liquidity, and asset management ratios for Google over the past five-year period and compare them with Yahoo! Based on the financial ratios what advantages does Google have over Yahoo!? What vulnerabilities does Google have versus Yahoo!? B. Is Google financially healthy? Why or why not?
5. What were Google’s keys to success?
6. What recommendations would you make to Google? Why?

Potential Audience and Uses

Students will find the case interesting due to the nature of the company. Students will have used several of Google’s products (e.g., search engine, Google Earth, YouTube, Gmail, etc.) in some form almost every day.

The case can be used in undergraduate and graduate entrepreneurship and strategic management courses. The estimated time to read and answer the questions for the case is between 6 and 8 hours. Since the case covers material on financial statements, before teaching the case, students should be familiar with analyzing a company’s financial statements. Learning objectives in the case include:

1. to evaluate the strategies that Google used to grow the company from a small entrepreneurial startup to a company that went public;
2. to perform financial analysis on the company and evaluate the firm’s financial ratios and its overall financial disposition;
3. to evaluate and learn Google’s keys to success;
4. to make recommendations to increase corporate entrepreneurship and innovation.

Suggested Teaching Approach

The heart of this case is the ability to solve the critical problem of increasing corporate entrepreneurship and innovation within a depressed economic environment. A variety of other issues that contributed to Google’s troubles were facing the company.

It is recommended that the instructor take the students on a journey. What are the problems facing Google in 2009? How is this related to the current financial crisis facing the nation as discussed in the case (see Brandon, 2009; Buffett, 2008; Christie, 2009)? The instructor should then move on to examine the threats and opportunities that are available to Google in the face of the crisis. The instructor should ask the students what is the strategic inflection point for Google in the case. Once this is examined, students should perform a financial ratio analysis of the company to determine the financial health of Google. The case then outlines the various strategies that the firm has used to achieve success.

A review of corporate entrepreneurship and innovation (Guth & Ginsberg, 1990; Morris, Kuratko, & Covin, 2008; Zahra, 1991, 2005) should take place. The instructor should discuss the keys to success with the students. Hamel and Breen (2007) outline the methodology that Google used in the past in order to achieve success through corporate entrepreneurship and innovation.

Schmidt (2009) describes the success of Google quite well. There are excerpts of his interview located on YouTube.com (see http://www.youtube.com/watch?v=u02h9LYYmuc). Instructors can use this interview after discussing the recommendations to Google.