Impact of Corporate Culture on IT Company Growth and Profits

The Impact of Corporate Culture on the Growth and Profitability of IT Companies: The Case of Google

Abstract

In today’s global economy, companies from different industries are trying to create a unique competitive advantage to stay in business and maximize their shareholders’ equity. In doing so, companies should analyze their largest expenses and try to minimize these costs while utilizing their resources in order to make the most from these expenditures.

The largest operating expense in U.S. companies is salary. To maximize this expenditure, businesses should devise ways in which to motivate their employees to be more productive. Controlling employees to come to work is easy, but how can companies motivate their employees to work to their full capacity? One way in which this can be accomplished is by creating a suitable, attractive, and tension-free working environment for employees. In doing so, companies can create a strong corporate culture which could offer a competitive advantage. As an example, Google has become one of the largest IT companies in the world in fewer than two decades from its establishment. Not only has Google grown to be one of the largest IT company in the world, it has also developed unique and innovative products, a high job growth, and a secure position as one of the top five companies for which to work. Google has managed to achieve this not only by developing appropriate business strategy, but also creating a strong corporate culture that concentrates mainly on employees and customers. In this research, I will try to analyze Google’s achievements. I will conduct a small survey to examine the adaptability of Google’s flexible corporate culture in IT companies located in Utah.

Introduction
Statement of the Problem

The old saying, “You can lead a horse to water, but you can’t make him drink” may hold true for employees as well; you can make employees come to work, but it is not easy to make them work to their full capacity. Companies may use different methods to control their employees to make them work to their fullest working capacity, but this does not always succeed.

To understand employees’ work satisfaction and engagement in their work, it is useful to analyze a survey conducted by the Gallup Management Journal (GMJ) (Houser, 2009). The GMJ surveyed U.S. employees to understand how engaged they are in their work and their attitudes toward their managers. According to the study, there are three types of employees:

1. Engaged employees: Those who work with passion, motivation, and have deep feelings toward their company. These people are the ones who move the organization.

2. Not-engaged employees: Those who are physically present in the company but mentally absent. These employees are not motivated, and they don’t care about their company. They come to work simply to put in hours. The survey refers to them as “walking through their workday.”

3. Actively disengaged employees: Those who are not only unhappy, but they express their unhappiness in different ways. They may undermine what their engaged coworkers accomplish.

The study results showed that 26% of respondents are engaged in their work, 56% of the respondents are not engaged in their work, and 18% of the respondents are actively disengaged in their work. The following chart illustrates the finding of this study.

The respondents of the survey were asked if they would fire their manager, given the opportunity. Respondents indicated that 24% would fire their manager if they were given the chance. Of this number, 6% of those respondents were engaged in their work, 23% of the number were not engaged in their work, and 51% of the respondents were actively disengaged in their work. Therefore, less engaged employees tend to dislike their managers, and would fire them, given the opportunity.

According to the study, this lack of productivity costs companies billions of dollars. Approximately 24.7 million employees age 18 and over are actively disengaged; this represents 18% of the total workforce. From 2000 to 2007, actively disengaged employees in the U.S. cost the country’s economy from $334 to $431 billion every year in low productivity.

The Cost Of Disengagement

In this study, I will analyze the different reasons why employees are disengaged from their work, and I will suggest recommendations to solve this problem by taking as an example a successful company in the U.S.

Purpose of the study

Today, different companies are trying to find a unique competitive advantage. One competitive advantage that was overlooked for many years is an attractive organizational culture. Not only will a superior organizational culture help in attracting and retaining the best employees, it can also be used to create a loyal customer base.

In this paper, I will investigate the organizational culture of Google, Inc. in the information technology (IT) industrial sector. I will analyze how Google has capitalized on its organizational culture to become one of the largest search engines and IT companies in the world. I will conduct a small survey on organizational culture on IT companies located in Salt Lake City, Utah to determine useful recommendations by analyzing the results of the survey and comparing these to Google’s organizational culture.

Before analyzing organizational cultures, it would be beneficial to answer some questions as to why this topic was selected as well as other related issues.

Why I Focused on Organizational Culture

Many companies have tried to come up with a competitive advantage to maximize the shareholders’ profits. For years, an attractive corporate culture was not considered as vital to the success of an organization. Unlike external factors of business, which are not directly controlled by organizations, corporate culture is an internal environmental force which can be manipulated by organizations in their favor.

Why I Emphasized the Employees

Employees are the executers of the plans and strategies of the organization. Most companies consider employees as their asset, but, in my opinion, employees are much more than this. According to a study conducted by the United States Census Bureau, companies’ largest operating expense is salary. (U.S.CensusBureau, 2000) (See charts below). By taking care of their employees, organizations can get the best results from them. The following charts show the breakdown of operating expense for different industries in 1997 as it was studied by the U.S. Census Bureau under the Economic and Statistics Administration in the U.S. Department of Commerce. Even though, this study was conducted more than a decade ago, I have included it, because I believe it shows the general trend of the breakdown of operating expenses within U.S. industries.

Merchant wholesale companies have five major operating costs. Of these, payroll was by far the largest operating expense. If payroll expense and fringe benefits, which are operating expenses toward employees, are combined, more than half of the total operating expenses go toward employee salaries.

The breakdown of operating expenses of retail trade has the same tendency as that of the merchant wholesaler. In fact, the only difference is that the expenses for rent by retail trade businesses are a little bit higher than that of the merchant wholesaler.

The breakdown of operating expense for business services, which include IT industries, shows a larger expense toward employees. Payroll, consisting of 51% of total operating expense, contract labor, consisting of 5% of total operating expense and fringe benefits, consisting of 8% of total operating expense makes up a total of 64% of the total operating expense.

The breakdown of the operating expenses for legal services follows the same trend as for business services.

The following chart compares payroll expenses of different sectors of business

According to the above chart, business services, health services and legal services pay the highest portion of operating expenses to payroll. Clearly, if companies are paying the majority of their operating expense toward the salaries of their employees, they should try to get the most from their workforce.

Another study conducted in 2007 by the AmericanTimeUseSurvey through the U.S. Bureau of Labor Statistics (AmericanTimeUseSurvey, 2007) showed that of the total working people in U.S., those who were between the ages of 25 to 54 living in households with children under the age of 18 spent most of their time either working or in work-related activities. The survey was provided from data taken on non-holiday weekdays. Out of the total 24 hours, those between the age of 25 to 54 living in households with children under the age of 18 spent 8.7 hours working or on work-related activities, 7.6 hours sleeping, 2.6 hours on leisure and sports, 1.2 hours caring for others, 1.1 hours on household activities, 1.1 hours in eating and drinking and the remaining 1.7 hours on other activities. The following chart illustrates these hours in percentiles.

Based on this survey, people with children between the ages of 25 to 54, who were part of the labor force, spent the majority of their time at the workplace or doing work-related activities. If companies created a suitable and stable environment, this labor force would be motivated to work harder to help companies maximize their profits.

This study will research and analyze how companies could create a competitive advantage by attracting and retaining the best employees through a superior corporate culture.

Why I focused on IT

IT, by any comparison, is the fastest growing industry in the world. Companies are spending billions of dollars every year, which has made the IT industry one of the most profitable industries in the world. According to a study conducted by the U.S. Census Bureau in 2005 and published in 2007 (U.S.CensusBureau, Information and Communication Technology: 2005, April 2007), the information industry by itself contributes 52.4 billion dollars to the IT industry through purchases of hardware and software annually. The finance and insurance sectors spent $44.2 billion; the manufacturing, professional, scientific, and technical services sectors spent $32.5 billion; the health care sector spent $27 billion; and the social assistance business sector spent $19.9 billion on IT hardware and software components in 2005 alone. Based on this study, more than $200 billion was spent on IT hardware and software by different business sectors in 2005.

According to this study, the noncapital and capital expenditures for computer software were higher compared to IT hardware. It is a general assumption that if companies are investing more on computer software, the software industry is generating a lot of money. In 2005 alone, the noncapital expenditure for computer software was $54.2 billion, whereas the capital expenditure for the same sector was $49.8 billion. Therefore, this research will focus on computer software companies.

Why Focus on Google?

Google is one of the fastest growing companies in the world. It has grown sevenfold over the last decade. According to Fortune, Google was listed as the fourth best company to work for in 2009 (100 Best Companies to Work for 2009: Google – GOOG – from Fortune, 2009).

Even though Google was listed as the fourth best company to work for in 2009 by Fortune, it has the highest job growth rate when compared to the other companies listed in the top ten. While Google has a 40% job growth rate, NetApp, which was listed in first place, only has a 12% job growth rate. Edward Jones and Boston Consulting Group, listed second and third, have only a 9% and 10% job growth rate respectively (100 Best Companies to Work for 2009: Google – GOOG – from Fortune, 2009).

Google has shown tremendous growth over the past few years. As the following chart indicates, from 2004 to 2008, the net income of the company increased tenfold. Even when the world economy was in a recession at the end of 2007 and 2008, Google managed to secure a high net income (GoogleInc, 2008).

Google has an interesting workforce distribution. As of December 31, 2008, 40% of Google’s total workforce was in sales and marketing, 36% in research and development, 15% in general and administrative positions, and the remaining 9% in operations (Google Inc., 2008). According to this data, Google places nearly as large an emphasis on research and development as it does for sales and marketing. Having a large staff in research and development will ensure a strong future market when it is supported with an appropriate corporate strategy.

Even if it is difficult to conclude that Google will have a bright future based on the distribution of its workforce, it is certain that this strong contingency of Google’s research and development team has proven to be valuable by developing new and exciting technologies, making it difficult for competitors to catch up.

Literature Review

In today’s globalized and integrated world, change within industries and organizations occurs rapidly. Understanding the impact of an organization’s environment could assist organizations in coping with this change. The organizational environment includes all elements existing outside the boundary of the organization that have the potential to affect the organization (Daft, Organization Theory and Design, 8th ed., 2004).

The organizational environment consists of the external environment and the internal environment. The external environment is made up of those forces that exist outside of the organization’s boundaries and have an effect on the organization. The external environment is further divided into the general environment and the task environment. The general environment is the outer layer that is widely dispersed and affects organizations indirectly (Daft, Management, 7th ed., 2005). The general environment includes technological, socio-cultural, economic, legal/political, and international factors. On the other hand, the task environment is closer to the organization and includes the sectors that conduct day-to-day transactions with the organization and directly influence its basic operations and performance (Daft, Management, 7th ed., 2005). The task environment includes customers, labor market, suppliers and competitors.

The internal environment includes the elements within the organization’s boundaries (Daft, Management, 7th ed., 2005). It includes employees, management and culture of the organization. In this paper the focus is on the culture of the organization and its affect on the performance of the organization.

A corporate culture is defined as the set of key values, beliefs, understandings, and norms shared by members of an organization (Martin, 2002) (Kilmann, Ralph H.; Saxton, Mary J.; Serpa, Roy, 1986) (Smircich, 1983). It could also be defined as an “interdependent set of beliefs, values, ways of behaving, and tools for living that are so common in a community that they tend to perpetuate themselves, sometimes over long periods of time. This continuity is the product of a variety of social forces that are frequently subtle, bordering on invisible, through which people learn a group’s norms and values, are rewarded when they accept them, and are ostracized when they do not” (Bemowski, 1995) (Wilhelm, 1992).

Corporate culture is derived from both the management and the organization itself. The management, through its philosophy, values, actions and the organization through its roles, structure, systems and technology comprise the corporate culture. Feedback is received from the corporate culture to the management and organization. The following illustrates this process.

Classification Schemes

There are different classifications of corporate culture defined by different authors. The different views of four authors will be considered in the following:

1. Henry Migliore

After studying 24 organizations, Henry Migliore included 20 cultural factors, which he referred to as the “Corporate Culture Index” (Migliore, Henry; R.T. Martin; Tim Baer; and Jeffrey L. Horvath, 1989). These factors include the following characteristics.

* Member Identity: the degree to which employees identify with the organization as a whole in their type of job or field of professional expertise

* Team Emphasis: the degree to which work activities are organized around teams rather than individuals

* People Focus: the degree to which management empowers the employees within the organization

* Autonomy: the degree to which departments within the organization are encouraged to operate in a coordinated or interdependent manner

* Control: the degree to which rules, regulations, and direct supervision and used to control employee behavior

* Risk Tolerance: the degree to which employees are encouraged to be aggressive, innovative, and risk-seeking

2. Geert Hofstede

Geert Hofstede believes the behavior of organizations is affected by a national and regional cultural grouping. To study this point, he looked for a national difference among over 100,000 of IBM’s employees in different parts of the world. He came up with five dimensions of culture that influence national regional groupings (Hofstede, 1980). These are:

* Power distance: the expectation of society on the levels of power an individual possess in the society. A high score of power distance reflects the expectation of the society that some individuals possess more power than others. A low score of power distance reflects the expectations of the society that all people have equal rights

* Uncertainty avoidance: the degree to which a society accepts uncertainty and risk

* Individualism vs. Collectivism: the degree to which people stand up for themselves or act as part of a group

* Masculinity vs. Femininity: the degree to which the society gives value to the male or female

* Long vs. Short-term Orientation: the degree to which a society values long term or short term orientation

3. Deal and Kennedy

According to Deal and Kennedy, organizational culture is the way things get done in an organization (Deal & Kennedy, 1982). They measured an organization’s culture using different elements. These elements include:

* Feedback: response from the organization

* Risk: the degree of uncertainty in the organization

Using these two elements, Deal and Kennedy suggested four classifications of corporate cultures (Deal & Kennedy, 1982). These are:

* The Tough-Guy Macho Culture: The feedback, which is the response from the organization, is quick and the reward is high.

* The Work Hard/Play Hard Culture: Few risks are taken, but the feedback, which is the response from the organization, is rapid.

* The Bet Your Company Culture: This involves high risk, but it may take a long time to know the outcome of the decision or action.

* The Process Culture: This is associated with bureaucracy in the organization. It is common in organizations where there is little or no feedback.

4. Charles Handy

Charles Handy developed Roger Harrison’s work of 1972 which linked organizational structure to organizational culture (Handy, 1985). According to this idea, there are four types of culture. These are:

* Power Culture: A few will rule the organization from the middle.

* Role Culture: Employees have clearly delegated authority and the structure of the organization is highly defined.

* Task Culture: Teams are formed to solve particular problems; this is a common organizational culture for a matrix structure.

* Person Culture: Employees focus on individualism rather than team work. These organizations will face a hard time staying above water.

A corporate culture has two levels, visible and invisible. The visible level of culture can be seen at the surface level. It includes symbols, stories, heroes, slogans and ceremonies. The invisible level is deeper values and shared understandings held by organization members who include expressed values, assumptions and deep beliefs. The following illustrates the levels of corporate culture.

It is difficult to express the invisible level of corporate culture since it cannot be seen as compared to the visible level of corporate culture. The visible level of corporate culture has different entities. These include:

* Symbols: an object, act, or event that conveys meaning to others. Symbols can be considered a rich, non-verbal language that vibrantly conveys the organization’s important values concerning how people relate to one another and interact with the environment (Pratt & Rafaeli, 2001).

* Stories: narratives based on true events that are repeated frequently and shared among organizational employees (Daft, Management, 7th ed., 2005).

* Heroes: s who exemplify the deeds, character, and attributes of a strong corporate culture (Daft, Management, 7th ed., 2005).

* Slogans: a phrase or sentence that succinctly expresses a key corporate value (Daft, Management, 7th ed., 2005). Companies use slogans to convey their core values and missions. Examples of slogans are Google’s “Don’t be evil,” and Microsoft’s “Our passion, your potential.”

* Ceremonies: a planned activity that makes up a special event, and is conducted for the benefit of an audience (Trice & Beyer, 1984).

According to research conducted at Harvard on 207 U.S. firms (Kotter & Heskett, 1992), corporate cultures can be divided into adaptive and unadaptive corporate cultures. The study found that a strong corporate culture by itself does not guarantee company success. However, when strong corporate culture adapts to the external environment, it will bring success to the company’s business.

In both adaptive and unadaptive corporate cultures, there are visible behaviors and expressed values. In the adaptive corporate culture, managers are concerned with their customers (external environment) and employees (internal environment). On the other hand, in an unadaptive corporate culture, managers are concerned only with themselves. Therefore, they don’t want change or risks. A strong corporate culture should always be adapted to the external environment (Kotter & Heskett, 1992).

Table 1: Adaptive and Unadaptive Corporate Culture

Adaptive Corporate Cultures

Unadaptive Corporate Cultures

Visible Behavior

Managers pay close attention to all their constituencies, especially customers, and initiate change when needed to serve their legitimate interests, even if it entails taking some risks.

Managers tend to behave somewhat insularly, politically, and bureaucratically. As a result, they do not change their strategies quickly to adjust to or take advantage of changes in their business environments.

Expressed Values

Managers care deeply about customers, stockholders, and employees. They also strongly value people and processes that can create useful change (e.g. leadership initiatives up and down the management hierarchy).

Managers care mainly about themselves, their immediate work group, or some product (or technology) associated with that work group. They value the orderly and risk-reducing management process much more highly than leadership initiatives.

Types of Cultures

There are four types of corporate culture, which can be further classified into two matrixes. These are the needs of the environment, which could be flexible or stable, and the strategic focus, which can be external or internal. The four categories associated with this are adaptability, achievement, involvement, and consistency (McDonald & Gandz, 1992) (Denison & Mishra, 1995).

The four types of corporate cultures are:

1. Adaptability culture: A culture characterized by values that support the company’s ability to interpret and translate signals from the environment into new behavior responses. It emerges in an environment that requires fast response and high-risk decision making. Managers encourage values that support the company’s ability to rapidly detect, interpret, and translate signals from the environment into new behavior responses. Employees have autonomy to make decisions and act freely to meet new needs, and responsiveness to customers is highly valued. Managers also actively create change by encouraging and rewarding creativity, experimentation, and risk taking (Daft, Management, 7th ed., 2005).

2. The achievement culture: A results-oriented culture that values competitiveness, personal initiative, and achievement. It is suited to organizations that are concerned with serving specific customers in the external environment but without the intense need for flexibility and rapid change. This is a results-oriented culture that values competitiveness, aggressiveness, personal initiative, and willingness to work long and hard to achieve results (Hooijberg & Petrock, 1993).

3. The involvement culture: A culture that places high value on meeting that needs of employees and values cooperation and equality. It has an internal focus on the involvement and participation of employees to rapidly meet changing needs from the environment. This culture places a high value on meeting the needs of employees, and the organization may be characterized by a caring, family-like atmosphere. Managers emphasize values such as cooperation, consideration of both employees and customers, and the avoidance of status differences (Daft, Management, 7th ed., 2005).

4. Consistency culture: A culture that values and rewards a methodical, rational, orderly way of doing things. It has an internal focus and a consistency orientation for a stable environment. Following the rules and being thrifty are valued, and the culture supports and rewards a methodical, rational, orderly way of doing things, since there is no stable environment. It is rather difficult to have this kind of corporate culture (Daft, Management, 7th ed., 2005).

The Start of Search Engines

Most people agree that the first pre-web search engine was Archie created by Alan Emtage in 1990, while he was a student at McGill University. At that time, the Internet was used by learning institutions to store different kinds of documents on shared machines. Since there were no search engines at that time, if one did not know the exact machine address and file name, it would not be possible to find the document. Emtage created an interface for the search engine, calling it Archie, and used an indexed filing system. In order to use Archie, a user would log in to an Archie server via a command line interface and type in keywords that matched the file title being searched. The result from Archie would display the possible machine locations in which the file could be found. The user then had to log in to each machine and look for the individual file. Archie provided the machine name where the file could be found, but the user had to know a keyword in the title of the file being searched. This may seem useless today, but it was the best technology available at the time.

In 1993, students at the University of Nevada created another search engine similar to Archie, which they called Veronica. The main difference between Archie and Veronica was that Veronica’s search results showed the possible document names. As the Internet started to grow larger, from 130 sites in 1993 to 600,000 in 1996, the glory of Archie and Veronica also faded.

Matthew Gray, a researcher at the Massachusetts Institute of Technology, created a web based search engine known as WWW Wanderer. The Wanderer had a list of indexed sites at the back end and a search interface that allowed users to search the index at the front end.

In 1994, Brian Pinkerton, a researcher from the University of Washington, developed a more powerful search engine by the name of WebCrawler. WebCrawler could index the full text of a web document it found and also use a linking of different web pages, just as Google’s PageRanking algorithm does.

Alta Vista was the next stronger search engine invention. Unlike other search engines, Alta Vista was created to test the performance of the superfast Alpha processor. After Digital Equipment Corporation (DEC) made a superfast Alpha processor, the company was looking for a way to test its performance. One of DEC’s researchers, Louis Monier, was working at Western Lab in Palo Alto, California, and came up with the idea of building a search engine that could load the entire Internet onto the Alpha computer to show the processor’s speed. Not only did Monier come up with the idea, he also built the search engine. However, the management of DEC did not realize the magnitude of this discovery. Some believe that the management could not understand the marketability of Alta Vista, because they considered DEC to be a hardware, not a software company.

In January 1998, Compaq purchased DEC for $9.6 billion dollars. Compaq recognized the marketability of Alta Vista and started to invest more into it. Rod Schrock, a Compaq executive, was given the responsibility of Alta Vista, and developed the site to look like Yahoo. In June 1999, Compaq sold Alta Vista to CMGI, an Internet holding company, for $2.3 billion dollars, mostly in stock. CMGI could not hold on to Alta Vista for long since it lost 90 percent of its value. In 2003, CMGI was forced to sell Alta Vista to Overture Services, Inc. for $140 million. Yahoo acquired Overture Services, Inc., and Alta Vista became owed by Yahoo, its former fierce competitor.

Yahoo had opened its doors two years prior in March 1995. Yahoo was started as a project to win a fantasy basketball league by two Stanford PhD candidate students, Jerry Yang and David Filo in the early 1990s. Both were studying electronic design automation, which was a popular field when they began studying but the subject got cold when these students reached their fourth year of their doctoral work. “The prospects of finishing and getting on with life were pretty grim. The real story is that we were bored with our PhDs and we did everything we could to avoid writing our thesis,” (Battelle, 2005) Yang recalls. To win a fantasy basketball league, Filo came up with an Internet crawler that collected data from basketball sites using protocol and compiled the data based on different categories like players’ performance, trade amount, history, etc. Yang and Filo won the fantasy basketball league using their project (Battelle, 2005).

After the first browser was released in 1993, Yang started surfing the Web and maintaining a list of sites he was most interested in. Filo continued to develop software, and later wrote “Jerry and David’s Guide to the World Wide Web,” which helped to automate the list of sites Yang was collecting. Yang created a home page for the software Filo developed and called it Akebono, named after a famous sumo wrestler (Battelle, 2005). “Jerry and David’s Guide to the World Wide Web” became quickly famous, first among Stanford graduate students and then throughout the Web.

In 1995, Yang and Filo realized the potential of “Jerry and David’s Guide to the World Wide Web,” and decided to invest more time into it. First and foremost, they wanted to have a catchy name for the site. Both, Yang and Filo, were inspired by computer science acronyms that started with “YA” for “yet another.” They began to search the dictionary, and when they got to “Yahoo,” they knew they had a winner (Reid, 1997). The dictionary defined the term as “a rude, unsophisticated, uncouth person,” but the word also lent itself to reverse engineering by way of an acronym: Yet Another Hierarchical Officious Oracle (Battelle, 2005).

Filo and Yang tried to sell their project, Yahoo, to different companies. However, they were unable to find