Financial Management:
Microsoft and Google
BUS508 Contemporary Business
December 12, 2011

The purpose of this paper is to compare and contrast Microsoft’s and Google’s business model and financial management. Microsoft and Google don't share a stage often, being increasingly fierce competitors in areas such as Web search, mobile, and cloud computing, but both are big names in internet technology.
Since 1975, when Bill Gates left college to start Microsoft with his friend Steve Ballmer, the company has been responsible for some of the biggest changes in the world of software and technology. Over nearly four decades, Microsoft has developed a broad range of products and services, and the company continues to focus on growing markets for its most popular creations, as well as the new products it launches. Microsoft is perhaps best known for its popular operating system, Windows. It was revolutionary when it was launched, and the many developments and improvements that have been provided by all the subsequent versions have cemented it’s position as the number 1 operating system in the world. Windows 7 is the latest offering, and looks set maintain the software’s popularity, even in an increasingly competitive market.
Windows isn’t the only product designed by Microsoft that significantly improved the productivity of the personal computer; their Office suit of products has also become one of the most popular pieces of software in the world. Individually, or as a complete software package, the different versions provide the flexibility that makes Office affordable for the home user, yet powerful enough to be used as a business solution.
One of Microsoft’s most popular products represents quite a departure from their core business of PC software and associated hardware, but it provided the company with a great opportunity to move into a new market. Against competition from much more established manufacturers, the X-box range of games consoles has grown in popularity with gamers since it was launched in 2001.
In recent years, the development of the personal computer market has been eclipsed by the incredible growth seen in the mobile phone sector. With most manufacturers providing a range of smart phones, consumers are looking for the models that offer the most features and greatest functionality. With the ability to combine the best of the PC and the mobile phone, Microsoft’s Windows Phone is set to become one of the more popular choices with tech-hungry users.
Bing, Microsoft’s internet search service, is perhaps not one of their most popular products in terms of something you can buy, but it has the potential to be a huge success. With Google’s dominance of this market having seen off a number of other competitors (including Microsoft’s previous attempts), Bing not only seems to be holding its own, but also looks to be increasing in popularity and growing its share of the lucrative search market.
Since starting out in 1975, Microsoft has continued to improve and develop it most popular products. At the same time, they remain committed to delivering new products in other markets, in order to create even more popular products and services for the future.
Microsoft has eight core business divisions. They are: * Online Services Division: Microsoft’s search, portal, advertising and personal communications services, including online information offerings such as Bing and the MSN portals and channels. * Server and Tools Business: Microsoft infrastructure software, developer tools and cloud platform, including products such as Windows Server, SQL Server, Visual Studio, System Center and the Windows Azure Platform. * Microsoft Business Solutions: A portfolio of Microsoft Dynamics products and services, as well as Microsoft Health Solutions. * Microsoft Office Division: Productivity products and services, including Office, Exchange, SharePoint, Lync, Project, Visio, and Microsoft’s speech technology investments. * Interactive Entertainment Business: Key entertainment experiences that span gaming, music and video across multiple screens, including Xbox 360, Xbox LIVE, the controller-free Kinect for Xbox 360, Zune Music and Video, and Mediaroom, as well as PC and mobile interactive entertainment. * Windows Phone Division: Microsoft software and services for Windows Phones worldwide. * Windows & Windows Live Division: All Windows businesses, including Windows, Windows Live and Internet Explorer. * Skype: A division of Microsoft, transforming communications for computers, mobile devices and the connected living
Control is basic to Gates' nature and his management practice. He has an obsession with detail and with checking up (he even used to sign expenses for his right-hand man, Steve Ballmer). Thanks to the Microsoft anti-trust case, the Internet and other developments, Microsoft's predictability has vanished. So, in theory, has the egocentric system by which the company was managed. Under the previous dispensation, groups (deliberately kept small) were continually formed and reformed to carry out specific tasks. Tight financial controls were applied, but the true organizational cement was Gates himself (backed up by Ballmer).
Walk the halls of Microsoft Research labs and you’ll find some of the world’s finest computer scientists, social scientists, mathematicians, physicists, biologists, economists, communication scientists, and engineers. They are charged with a job that constantly evolves: advancing the state of the art in computer science. Given the freedom to pursue our passions, Microsoft look for gaps in current technologies and dedicate ourselves to filling them. As diverse as their research and accomplishments may be, they share the motivation to see their ideas and innovations tackle the world’s toughest challenges and improve the lives of people everywhere.
Microsoft provides a rich research environment, an open publications policy, and close links to top academic institutions worldwide. Most of their researchers hold PhDs and have track records of published papers and participation on program committees, editorial boards, and advisory panels. And throughout their labs, there are software engineers turning ideas into prototypes to transform technology into Microsoft products.
In 1996, twenty-one years after the start of Microsoft, Larry Page and Sergey Brin, Stanford computer science grad students, begin collaborating on a search engine called BackRub. BackRub operated on Stanford servers for more than a year—eventually taking up too much bandwidth to suit the university. Page and Brin decide that the BackRub search engine needs a new name. After some brainstorming, they go with Google—a play on the word “googol,” a mathematical term for the number represented by the numeral 1 followed by 100 zeros. The use of the term reflects their mission to organize a seemingly infinite amount of information on the web. When Google began, people were pleasantly surprised to enter a search query and immediately find the right answer. Google became successful precisely because they were better and faster at finding the right answer than other search engines at the time. But technology has come a long way since then, and the face of the web has changed. Recognizing that search is a problem that will never be solved, Google continues to push the limits of existing technology to provide a fast, accurate and easy-to-use service that anyone seeking information can access from any location. Google’s strategy of empowering site developers and owners with free and valuable tools has proven to be effective in garnering a fair bit of geek love for the company. But this affinity to Google by technology enthusiasts is not without warrant—they really do make products that can be instrumental in building, maintaining, and improving websites. What’s more, they’re all usually free. The majority of Microsoft’s products are offered consumers for a price.
Google also maintains an index of Web sites and other online content for users, advertisers, and Google network members and other content providers. It offers AdWords, an auction-based advertising program; AdSense program, which enables Web sites that are part of the Google Network to deliver ads from its AdWords advertisers; Google Display, a display advertising network that comprises the videos, text, images, and other interactive ads; DoubleClick Ad Exchange, a real-time auction marketplace for the trading of display ad space; and YouTube that provides video, interactive, and other ad formats for advertisers. The company also provides Google Mobile that optimizes Google’s applications for mobile devices in browser and downloadable form; and enables advertisers to run search ad campaigns on mobile devices, as well as Google Local that provides local information on the Web; and Google Boost for small businesses to participate in the ads auction. In addition, it offers Android, an open source mobile software platform; Google Chrome OS, an open source operating system; Google Chrome, a Web browser; Google TV, a platform for the consumers to use the television and the Internet on a single screen; and Google Books platform to discover, search, and consume content from printed books online. Further, the company provides Google Apps, a cloud computing suite of message and collaboration tools, which includes Gmail, Google Docs, Google Calendar, and Google Sites; Google Search Appliance that offers real-time search of business and intranet applications, and public Web sites; Google Site Search, a custom search engine; Google Commerce Search for online retail enterprises; Google Checkout to make online shopping and payments streamlined and secure; Google Maps Application Programming Interface; and Google Earth Enterprise, a firewall software solution for imagery and data visualization. Google Inc. was founded in 1998 and is headquartered in Mountain View, California.
Google has invested in several programs which, while not directly related to their core business, are designed to encourage innovation in areas they care about. These programs are: * Google Ventures: A diverse team of investors, entrepreneurs, and specialists who believe in the power of great companies to change the world. * Google.org: Uses Google‘s strengths in information and technology to build products and advocate for policies that address global challenges. * Green Initiatives: Sustainability is a core value that comes directly from the founders, and Google believes being green makes business sense.
In contrast to Microsoft’s management style which involves strict management control, Google, Inc., thrives on the edge of chaos and an anything-goes spirit. It's a place where failure coexists with triumph, and ideas bubble up from lightly supervised engineers, none of whom worry too much about their projects ever making money.
Google is always looking for the next great innovation, the next way to make something you never thought better or easier to use. Sometimes their work will result in a tiny improvement you may not notice, like a new way of displaying some part of a search result. Other times, they tear up all we‘ve learned in order to start from the beginning.
Sometimes they combine a few technologies to make them even more useful. Google Translate, for example, is the largest machine translation engine in the world, with more than 50 language pairs; using voice recognition, the mobile version of Google Translate can transcribe your voice, translate what you’ve said into another language, and then speak it back to you in another language. This is just one example of the things that are becoming increasingly possible. And they are always looking ahead for more.
When deciding to invest, analyzing financial statement information is one of, if not the most important element in reviewing the financial status and sustainability of a company.
Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.
Some examples of profitability ratios are profit margin, return on assets and return on equity. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios.
For instances, some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season. Therefore, it would not be too useful to compare a retailer's fourth-quarter profit margin with its first-quarter profit margin. On the other hand, comparing a retailer's fourth-quarter profit margin with the profit margin from the same period a year before would be far more informative.
Using the companies’ most recent annual report, calculations were performed to obtain specific financial ratios for Microsoft and Google. These results are in Appendix 1 and 2 of this paper. Google’s calculations were based on annual report figures for the year ending December 31, 2010. Microsoft’s calculations were based on annual report figures for the year ending June 30, 2011.
The current ratio is used to test a company’s working capital position by deriving the proportion of the current assets available to cover current liabilities. The higher the current ration the better. Google has a current ratio of 5.0 and Microsoft’s is 2.1. This means that Google’s short-term assets are more readily available to pay off its short-term liabilities than Microsoft.
Profitability indicator ratios, return on assets and return on equity, give a good understanding of how well the company uses its resources in generating profit and shareholder value. The return on assets ratio indicates how profitable a company is relative to its total assets. The return on assets (ROA) ration illustrates how well management is employing the company’s total assets to make a profit. The higher the return, the more efficient management is in using its assets base. Microsoft, Microsoft at 23.7% is more efficient in using its asset base than Google whose ROA ratio is 17.3%
The return on equity ratio indicates how profitable a company is by comparing ites net income to its average shareholders’ equity. The return on equity ratio (ROE) measures how much the shareholder earned for their investment in the company. The higher the ratio percentage, the more efficient management is in using its equity base and the better the return to its investors. Google’s ROE is 20.7% and Microsoft’s is 44.8% indicating that Microsoft is more efficient in using its equity base and providing a better return to its investors.
The debt ratio compares a company’s total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on the leverage, i.e., money borrowed from and/or owned to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. The higher the ratio, the more risk that the company is considered to have taken on. Google’s debt ratio is 20.1% and Microsoft’s is 47.5%, indicating that Google’s equity position is stronger than Microsoft’s.
Based on these three primary financial-based guidelines, Google is more financially stable and would make a better company invest in than Microsoft. *

Appendix 1
Google’s Financial Ratios
Liquidity measurement ratio: Current ratio – 5.0
Profitability indicator ratios: Return on assets – 17.3% Return on equity – 20.7%
Debt ratio: Debt ratio – 20.1%
Operating performance ratio: Fixed asset turnover ratio – 4.7
Cash flow indicator ratio: Dividend payout ratio – Google does not pay a dividend
Investment valuation ratio: Price / Earnings ratio – 3.2

Appendix 2
Microsoft’s Financial Ratios
Liquidity measurement ratio: Current ratio – 2.1
Profitability indicator ratios: Return on assets – 23.7% Return on equity – 44.8%
Debt ratio: Debt ratio – 47.5%
Operating performance ratio: Fixed asset turnover ratio – 8.9
Cash flow indicator ratio: Dividend payout ratio – 23.4%
Investment valuation ratio:
Price / Earnings ratio – 8.6

References http://finance.yahoo.com, December 2011 http://microsoft.com, December 2011 http://investopedia.com/university/ratios, December 2011 http://electronicscraze.info/computers-and-technology, December 2011 http://internetbusinessmodels.org/googlebusinessmodel, December 2011 http://investopedia.com/articles/04/022504.asp, December 2011 http://investopedia.com/articles/04/031004.asp, December 2011