1

Chapter 1: The Business Enterprise in Focus

Google: from start-up to internet giant

‘Google is not a conventional company. Google’s founders have branched out,

We do not intend to become one.’ So investing in a wide range of new
spoke Google’s founders in 2004, in a technologies, including self-driving cars,
letter to prospective investors drones, robotics and even a biotech
(Schmidt, 2010). Founded in 1998 by company dedicated to anti-ageing
Larry Page and Sergey Brin, Google research. However, 90% of the
started life as a search engine company’s revenues derive from its
company, based in Silicon Valley in internet business, mainly through
California, the hub of technology advertising linked to its search
companies. Brin and Page saw their business, as well as the apps and
company as essentially an innovation services linked to its Android mobile
start-up, with a ‘quirkiness’ of spirit, platform. Observers might conclude
and mission of ‘don’t do evil’. Now that Google is more like a digital
worth over $400 billion and employing advertising company. A reorganization
55,000 people, it is one of the world’s of the company in 2015 reflected the
largest companies in market value, split in focus. A parent company called
making Page and Brin multibillionaires. Alphabet was created, and under it
Has Google retained its innovative spirit there are separate divisions. The
as a young start-up, or has it become internet business became a division on
simply a large organization that has its own, which takes the name Google
found a successful formula for Inc., while the many smaller businesses
generating handsome profits? were separated out into other
divisions. This rebranding might have
looked like a paper exercise, but the
2

company has said that these separate meeting (AGM). In practice, there is
divisions add transparency to the little difference between A and C
organizational structure. Investors shares, as neither can influence voting
inevitably focus on the profitable outcomes. The principle of one-share-
business of Google and its advertising one-vote is usually held up as good
platforms. The company was launched practice, reflecting an equal voice for all
on the stock exchange in 2004, with shareholders according their stakes in
shares priced at $85 each. By 2015, the company. After all, the
they had risen to over $700. They are shareholders take the risk associated
now transformed into shares in with share ownership, with or without
Alphabet. Transparency hardly extends a vote. As for share price, history
to the share structure, now comprising suggests that what goes up can come
three classes of shares. down. The financial crisis of 2007-8 was
a salutary warning that markets can be
At the outset, Google’s founders were unstable.
determined to retain control of the
company, and set up a dual share As Google’s power has grown, its
structure. Class A shares, which carry founders have become more engaged
one vote each, were offered to the in the big issues of policy that face the
public. Class B shares carry 10 votes company in the long term. One is the
each, and are owned mainly by Brin collection of private data of millions of
and Page. This gives the founders over users, which has aroused concern
50% of the votes, enabling them to among users. Largely in response to the
control corporate decision making. An success of Facebook, Google has made
example is a big purchase of another a number of forays into social
company, such as YouTube. A third networking, which yields considerably
class of shares was introduced in the more personal data than its core search
2015 restructuring. C shares have no activities. Data privacy is a matter for
vote at all in the annual general regulatory authorities everywhere.
3

European Union (EU) authorities have tax burden. In 2014, Google spent
accused Google of breaching privacy more money on political campaigns – a
laws. While the mission of ‘don’t do total of $1.43 million - than Goldman
evil’ suggested a purity of motives, Sachs, the American bank noted for its
Google has spent large sums of money generous political donations.
lobbying politicians in the US and EU. In
common with many other companies, Does Google increasingly look like a
Google has set up a political action conventional company, with controlling
committee (PAC) to channel is political owners, intent above all on conserving
funding, often funding campaigns of their wealth, or does it retain the
candidates that are pivotal in idealism of its early days? Page said in
legislatures. Areas of concern include 2014 that Google is still imbued with
policies on granting visas for skilled altruistic principles: ‘The societal goal is
immigrants, who are keenly sought by our primary goal…We’ve always tried to
technology companies. Also relevant say that with Google’ (Waters, 2014).
are policies on the collection of
personal data by US national security Sources: Waters, R. (2014) ‘A new Page’,
agencies. Taxation is another sensitive Financial Times, 2 November; Schmidt, E.
issue. Google deposits some $47 billion (2010) ‘How I did it: Google’s CEO on the
of revenues in foreign tax havens, thus enduring lessons of a quirky IPO’, Harvard
Business Review, May, 2010, at
avoiding US taxation. This is common
www.hbr.org; Dougherty, C. (2015)
practice among large US companies.
‘Google to reorganize as Alphabet to keep
Google, in conjunction with other its lead as innovator’, New York Times, 10
companies, has lobbied the US August, at www.nyt.com
government for reforms to lighten the

Questions for discussion

4

 How has Google shifted towards being a conventional company?

 What are the challenges facing Google?
 How do you view Google’s political lobbying – just doing what businesses do
everywhere, or engaging in money politics that is unethical?
 What criticisms can be levelled at the Google (now Alphabet) share structure?

How sustainable are South Korea’s global businesses?

be threatened by Chinese
South Korea had become an economic manufacturing, but the balance is now
powerhouse years before China shifting, as China is moving into
embarked on its opening up to market manufacturing that draws on higher
forces and economic growth. Back in technology. China has also seen the
the 1960s and 70s, South Korea was growth of globally competitive
building up expertise in innovations companies, such as Huawei and Xiaomi,
that would be crucial to industrial whose smartphones are competing
development, including microchip with those of Samsung. How well are
technology. It thus gained a valuable South Korea’s companies able to
lead on its huge neighbour, China, in respond, and where are the new South
technology and innovation. When Korean innovators?
China’s leaders started in earnest to
introduce market reforms in 1990, they South Korea’s economy is dominated
focused on large-scale manufacturing in by family-owned business groups, or
low-technology sectors, for which ‘chaebol’. The company names are
abundant cheap labour was available. familiar to consumers worldwide.
At that time, South Korea’s Samsung Electronics, Hyundai Motors,
technological strengths did not seem to and LG are all global brands. And so are
5

their products, which range from cars prefer hoarding profits to passing on
to smartphones. Each family group dividends to shareholders. The
consists of many separate companies unaccountability of the controlling
that make up sprawling corporate families give these vast groups a
empires, with a web of cross- reputation for poor corporate
shareholdings among subsidiary governance. When Hyundai paid out
companies. The effect is to perpetuate the equivalent of $10 billion for a piece
the power of the family dynasties that of land on which to build a new
control them. From the 1960s, the headquarters, some investors
families have spearheaded South expressed dismay, one referring to the
Korea’s economic development, aided extravagance as a ‘violation of
by favourable government policies and shareholder rights’ (Mundy, 2014). One
by the availability of government- explanation is that the families do not
funded loans to aid investments. Close take much account of non-family
links with political leaders have ensured shareholders, even ones with large
continued favoured treatment, and, at stakes: the families ‘feel like the whole
the same time, ensured that companies company is theirs.’ (Mundy, 2014).
outside the chaebol networks would
not be able to thrive. The ruling families South Korea’s president, Park Guen-
claim that their strengths derive largely hye, elected in 2012, campaigned
from their long-term vision, rather than strongly on a pledge to rein in the
a focus on short-term profits that chaebol, in order to make the economy
characterizes most capitalist more dynamic and innovative. In
companies. But the ordinary particular, she urged the creation of a
shareholders in these companies, many ‘creative economy’, in which SMEs
of them foreign investors, do not would be encouraged (Song, 2014).
always share this vision, complaining However, delivering on these goals has
about weakening growth and poor proved difficult in a business
dividends. The families would seem to environment which has long protected
6

ruling business families. Even when governance, particularly in light of

convicted of crimes, family members increased global competitive pressures
have been allowed by the justice (Powers, 2010).
system to carry on running companies,
and have even been granted pardons, Sources: Powers, C. (2010) ‘The changing
impliedly reflecting their importance to role of chaebol’, Stanford Journal of East
the national economy. The perception Asian Affairs, 10(2): 105-16 ; Song, Jung-a
that the business families are above the (2014) ‘S Korea chaebol growth model hits
limits’, Financial Times, 19 November, at
law gives little cause for hope that
www.ft.com; Mundy, S. (2014) ‘Sparks fly
South Korea can rejuvenate its
over the chaebol’, Financial Times, 3
industries through letting new November; Evans, S. (2015) ‘Can South
managerial talent emerge. It has been Korea’s chaebol retain their grip?’ BBC
argued that what is needed is greater News, 10 August, at www.bbc.com
transparency and improved corporate

Questions for discussion

 What are the business strengths of the chaebol?

 What are the corporate governance weaknesses of the chaebol?
 How sustainable are South Korea’s large businesses?
 What kinds of reform by government could dent the power of the chaebol?
7

Rescuing Tesco
marketing background would be valuable
When Dave Lewis took over as CEO of in his new role, faced the task of rebuilding
Tesco in 2014, he had plenty on his plate. the brand, as well as refocusing the
The UK’s largest retailer had been shaken company.
by a series of shocks, and urgently needed
to devise a rescue strategy. Tesco had In common with Walmart in the US and
plunged to a loss of £6.4 billion in 2014, the Carrefour in France, Tesco’s growth had
biggest loss ever recorded by a UK retailer. been built largely on large out-of-town
Accounting irregularities had emerged in hypermarkets, the Tesco Extra stores – vast
Tesco’s finances, leaving a black hole of warehouse-like stores that sell a wide
£263 millions, which was being range of food and non-food products.
investigated by the Serious Fraud Office. While it also operates many smaller
Tesco was also investigated by the grocery supermarkets, its expansion plans had
industry’s watchdog, the Grocery Code focused largely on the superstores. It was
Adjucator, and, in 2016, was found to have assumed that shoppers in the UK were
delayed paying suppliers in order to bolster wedded to the large weekly shopping trip,
its finances – a practice in breach of the not minding the fact that they might have
industry’s code of practice. The company’s to drive some distance to the out-of-town
reputation suffered from the stream of location. The company had not always
negative media stories. As the UK’s biggest been welcomed by local communities; in
supermarket chain, it had seen a fall in the particular, small shops fear losing business.
number of customers to its large In addition, Tesco introduced 24-hour
hypermarkets, the superstores in out-of- shopping in many stores, and met
town locations. Consumers were shifting to resistance in some locations. The company
smaller supermarkets including the continued to purchase land for future
discount chains. With his background in stores, even though it had no immediate
marketing at the consumer products plans to build them. This apparent
company, Unilever, Mr Lewis was the first hoarding of land has given rise to criticism.
outsider to take over the help of Tesco in It also added to the company’s woes when
its 97-year history, suggesting that the property values fell. But an overriding
board felt radical change was needed. His worry for its executives has been changing
8

shopping habits. Shoppers started to shun decided to sell the South Korean stores,
the large weekly shopping trip, preferring which comprised 140 hypermarkets, as
to shop more often and buy less, often at well as supermarkets and convenience
local stores rather than hypermarkets. stores. These were successful retail outlets,
They have also turned in greater numbers and the sale brought in £4 billion.
to the discount chains, Lidl and Aldi.
Although the two discounters have a By 2015, Lewis felt that the rescue plan
combined share of only 10% of the UK was starting to work. Inevitably, profits had
grocery market - compared to Tesco’s 28% fallen, largely because of price-cutting, but
- Aldi’s and Lidl’s sales are growing annually it seemed that the new offers and low
at rates of 17% and 16% respectively, while prices were attracting more customers.
Tesco’s have been falling by about 1%. At Retail analysts are not so sure. One has
the same time, the more upmarket said that Tesco, like the other big
offerings of Waitrose and Marks & Spencer supermarkets, ‘…are having an identity
are attracting customers. Tesco seems to crisis, and need to pick a side. They either
be stuck in the middle. have to push themselves to the premium
end of retailing or push themselves to the
In response, Lewis decided Tesco would discount end’ (Shadbolt, 2015). Mr Lewis
need to cut prices on basic goods and also would not agree. Despite the brand losing
improve the offering of quality products some of its lustre, he believes in its
that would excite customers. Cutting costs turnaround as a refocused business. Will
was a major priority. Assets had to be sold. shareholders agree? Tesco’s shares lost
Much of the land bank was sold off to 18% of their value in a year, but Mr Lewis
property developers. Some 43 Tesco stores remained optimistic. A resurgent Tesco
were closed, and plans to build 49 new might cheer up shareholders.
stores were cancelled. Lewis also turned
his attention to the company’s Sources: Butler, S. and Walsh, F. (2015)
international operations. Tesco had ‘Tesco profits tumble by more than half’,
suffered from the failure of its foray into The Guardian, 7 October, at
the US, having sold its US chain of loss- www.theguardian.com; BBC (2015) ‘Tesco
making stores in 2013. It had had more posts record £6.4 billion annual loss’, 22
success in Asia and Central Europe. It was April, at www.bbc.com; Shadbolt, P.
9

(2015) ‘How the discounters are beating (2016) ‘Tesco failed to treat suppliers fairly,
the supermarkets’, BBC News, 23 watchdog rules’, The Guardian, 26 January.
September, at www.bbc.com; Butler, S.

Questions for discussion

 What are the causes of Tesco’s declining financial performance?

 What aspects of the business environment that have impacted on Tesco are
mentioned in the case study?
 How sound has Lewis been so far in his turnaround plans? What would you
have done differently?
 Do you agree with the retail analyst who is convinced that Tesco has an identity
crisis? Give your reasons.

The rise of social networking sees Facebook soar in popularity

The founding father of the internet, Tim world’s second most popular website,
Berners-Lee, has said, ‘the web does behind Google. Facebook is the world’s
not just connect machines, it connects largest online network, with hundreds
people’ (Berners-Lee, 2008). The of millions of users accessing it in 50
phenomenal rise of social networking in languages. Seventy per cent of these
just a few years, allowing people to are outside the US. However, in the
keep in touch and share information fast-moving world of social interaction,
with friends, demonstrates the power companies can enjoy meteoric rise, but
of the internet as a social medium. In also precipitous falls. New competitors,
2010, Facebook, founded in 2004 by a such as Twitter, seem to spring up
youthful Mark Zuckerberg in his overnight, while MySpace, once
Harvard student days, became the considered the star of social
10

networking, saw its popularity innovations encourage greater sharing

evaporate with the surge of Facebook. of data. Facebook Connect, launched in
Is Facebook now threatened by 2009, lets users take their identity and
Twitter? Facebook and Twitter are network of friends to other websites
distinctive in their business models. and to other devices, such as games
Facebook allows people to keep in consoles. Facebook has also been
touch with their friends, and Twitter is skillful in tapping into the creative
a ‘micro-blogging’ site, allowing people talent of independent developers of
to speak via 140-character tweets to new applications, or ‘apps’. The
anyone who cares to follow them. developers benefit from gaining access
Twitter thus sees itself as more of an to the huge audience of users, and
information company than a social users enjoy a directory containing over
networking one, according to its 500,000 apps.
founder, Biz Stone (The Economist,
2010). Although the cost of hardware for
storing and processing data has fallen
sharply, investment in new
Facebook has become a global technologies is costly. Being relatively
business. Its technological expertise young companies started by
and innovativeness, while not enthusiasts, where are Facebook and
immediately obvious to users in the other social networks finding the
concrete way that an iPhone’s money needed to propel social
attributes are visible to its customers, networking to global success?
are nonetheless far-reaching. Its Developing a sustainable business
software engineers have been skillful at model, which will provide services that
building systems which can handle users desire and generate profits in the
increased volume quickly and long term, is the dream of every young
efficiently, allowing the network to add business. A social networking platform
millions of new users easily. Its such as Facebook, which holds huge
11

amounts of personal data and is widely amount of personal data Facebook

accessed globally, would seem to be in holds, advertisers can target particular
a commanding position to be a groups of possible customers precisely.
successful international business. But Moreover, users often recommend
translating popularity among users into products to friends, and this can be a
profits is a major challenge. Although powerful marketing tool – which costs
Facebook had not yet made a profit, far less than a traditional marketing
Microsoft invested $240 million in the campaign.
company in 2007, and a Russian
company, Digital Sky Technologies Although the business prospects look
(DST) invested $200 million in 2009. bright from the owners’ perspective, an
DST thus acquired a 1.9% stake, which international business strategy depends
would imply that Facebook is worth on numerous other factors – many
$10 billion. Although Facebook aimed external to the organization. As other
to take in $500 million in revenues in software and internet companies have
2009, it was spending more than that found, legal regulation must, sooner or
on its technology (Gelles, 3 July, 2009). later, be taken into account. Microsoft
Google has grown rich on selling the and Google were both founded by
targeted advertising which appears young, talented individuals with an
alongside its search results, but a site ambitious focus on building a global
such a Facebook faces hurdles in force. Both have encountered
attracting advertising. Because the regulatory hurdles and setbacks.
content is user generated, and possibly Facebook has soared to fame, but faces
in doubtful taste, many advertisers are down-to-earth regulatory hurdles, such
reluctant to sign up to advertising on as privacy laws which protect users’
social networks. On the other hand, the personal data. The company
Facebook audience is far bigger than encountered resistance from users
that of any television network in the when it relaxed its privacy rules,
world, and, because of the enormous allowing updates of personal data to be
12

viewed publicly unless the user chose

to restrict access. Mark Zuckerberg has Sources: The Economist, ‘Profiting from
said that privacy is no longer a ‘social friendship’, 30 January 2010; Gelles, D.,
norm’ (The Telegraph, 2010) However, ‘What friends are for’, Financial Times,
the imposition of stricter privacy 3 July 2009; Gelles, D., ‘Facebook draws
settings by regulators, such as the criticism for privacy changes’, Financial
European Commission, is a possibility. Times, 11 December 2009; ‘Facebook’s
The world of social networking is Mark Zuckerberg says privacy is no
helping to democratize the web, but it longer a “social norm”’, The Telegraph,
is also, perhaps paradoxically, 11 January 2010; Berners-Lee, T.,
concentrating power in the hands of speech before the Knight Foundation,
new corporate actors, presenting Washington, D.C., 14 September 2008,
challenges as well as opportunities for at www.webfoundation.org
the 25-year-old head of Facebook and
others following in his footsteps.

Questions for discussion

 Why has Facebook grown so rapidly and become an international force so
quickly?
 What are the risks to the continued success of Facebook?
 What are the impacts of social networking on international business?

2016 update:
Since 2010, Facebook has grown users. A milestone was Facebook’s IPO
dramatically, becoming a powerful on the Nasdaq in 2012. Mark
force among technology companies, Zuckerberg opted for a dual-class share
alongside Google and Apple. Facebook structure, in order to retain control of
now attracts over 1.7 billion active the company. The IPO was somewhat
13

fraught, technical glitches affecting majority of its revenues from

early trading. The stock price was slow advertising, especially mobile
to gain in value after the launch, advertising. Facebook’s revenues from
possibly deterring other technology advertising are in the region of $17
entrepreneurs who were thinking of billion annually. The mass collection
going public. At the time of the IPO, and transmission of personal data
Facebook was valued at a record $104 collected from users remain issues that
billion. give rise to questions regarding data
privacy regulation, especially in
Since the IPO, Facebook’s value has European contexts. Facebook has faced
seen spectacular growth, along with criticism over the rise in inflammatory
other technology stocks, and it is now and extremist content in social
worth over $360 billion. In 2014, networking. Also of concern for
Facebook purchased the messaging Facebook are its tax affairs, whereby
service, Whatsapp, for $19 billion. profits are ‘offshored’ to sidestep US
Facebook now generates the vast taxation.
14