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Illustration by Lars Leetaru |
This decade’s most remarkable business story has been the rise of Google from the dot-com ashes. The company didn’t even exist 10 years ago — it was incorporated by its founders, Stanford University graduate students Larry Page and Sergey Brin, on September 7, 1998 — but it is today a juggernaut that is as feared as it is admired. The company’s growth has been dizzying, its revenues shooting up from less than US$500 million in 2002 to more than $10.5 billion in 2006. And despite a prolonged hiring binge, an aggressive acquisition program, and a multibillion-dollar investment in building data centers, Google remains robustly profitable, earning a net income of $2 billion on $7.5 billion of sales through the first half of 2007. Since the company’s initial public offering in August 2004, its stock price has risen fivefold.
Whenever a company becomes wildly successful in a brief span of time, it naturally becomes an object of fascination for corporate executives and even the general public. More than that, it comes to be presented as a new model for business success. Reporters and scholars scour its history and its practices, looking to distill general lessons for other firms to copy. Google is no exception. Over the last two years, the workings of the company’s “idea factory,” as Business Week describes it, have been dissected in cover stories in all the major business magazines, and business school professors have published studies documenting how the company organizes and manages its product development efforts. In his new book, The Future of Management, London Business School professor Gary Hamel calls Google “a modern management pioneer” that “has much to teach us about how to build companies that are truly fit for the 21st century.”
That’s heady stuff, and it’s hard not to get caught up in the hype. But business executives have at least two reasons to think twice before leaping aboard the Google bandwagon. First, for all its success, Google is still a young company, and it has yet to be tested by adversity. We don’t even know whether its approach to management, and in particular its approach to innovation, is a cause of its success or a product of its success — a crucial distinction. Second, we don’t know how well Google’s example applies to other businesses. Google is certainly a different sort of company, but is it so different as to be anomalous? Is the company an exemplar or a freak?
It’s probably too early to answer such questions definitively. But by taking a close look at Google’s business model and innovation program, we can discover important clues. And we may even gain a few insights into how our ideas about business innovation are shaped.
Complementary Advantage
“Some say Google is God,” Sergey Brin once said. “Others say Google is Satan.” The confusion about Google’s identity may not be quite that Manichean, but it does run deep. Despite all the media attention the company has received, it remains an enigma. People can’t even agree what industry it’s in. The many businesses that see Google as an actual or potential competitor include software houses, advertising agencies, telephone companies, newspapers, TV networks, book publishers, movie studios, credit card processors, and Internet firms of all stripes. Even financial advisors, doctors, and librarians eye the company warily.
The sheer breadth of Google’s influence and activity can easily be interpreted as evidence that it is indeed an entirely new kind of business, one that transcends and redefines all traditional categories. When you boil down Google’s business model, however, you find that it’s not quite as mysterious as it seems. The way Google makes money is actually straightforward: It brokers and publishes advertisements through digital media. More than 99 percent of its sales have come from the fees it charges advertisers for using its network to get their messages out on the Internet.