Introduction
Google Incorporation is an American search engine company, found by Sergey Brin and Larry Page in 1998. It dominates the market by handling over 70 percent of worldwide online search requests (Hall, 2014). It aims to organize the world’s information and make it universally accessible and useful. Besides, it has an unofficial mission “Don’t Be Evil”, which refers to do good things for the world even though forgoing short term gains (Farfan, n.d.). It successfully expands its business from an online search company to a diverse company. Nowadays, it provides over 50 Internet services and products, such as Gmail, Google drive, Android, operating systems, applications for mobiles and computers. Moreover, when it took over Motorola Mobility in 2012, it began selling hardware, including smart phones and tablets, like Motor X, Nexus 7,etc. (Monhan, 2014). Recently, Google has sold Motorola to Lenovo at a much lower price, $2.91 billion than its purchase cost, $12.5 billion (Pressmen, 2014). Outwardly, it suffers enormous loss on disposal and loss of revenue. Worse still, its third quarter revenue growth rate from July to September in 2014 is far lower than analysts’ anticipation (Guynn, 2014). It may imply that there is stagnation for Google’s earnings. As a result, we will analyze Google based on CVP analysis, cost structure analysis, ratio analysis, and ethical issues and provide recommendations to maintain its sustainability.
Financial analysis
The quarter report shows that the total revenue in this quarter is $16.52 billion, which has increase by 20% on a year-over-year basic. However, it still cannot meet the expectation which is $16.57 billion. Moreover, compared with the second quarter of 2014, the growth rate of total advertising revenue has decreased from 4% to 2%. Furthermore, the total cost and expenses have increased by 28% over the year. To compare with the third quarter of 2013, operating income has decrease from $3.76 billionto$ 3.72, and the net income also decreased from $2.97 billion to about $2.81 million. In addition, the operating margin and profit margin has decreased by 4% and 5.3% respectively. and the earnings per basic share also declined from $5.07 in second quarter to $4.15.
We found that this significant decrease in profit is due to three factors, which are unexpected slowdown in paid click growth, increased fixed costs and the loss from discontinued operations.
During this quarter, the number of paid clicks increased by 17% from a year ago, however, it cannot meet the forecasts for growth of 23.5%. Also, Google’s revenue per click continues to drop by 2%. It is because desktop search is shrinking, paid clicks on Google shift toward mobile devices. In 2014, US spending on advertising served to desktops and laptops will decrease by 2.4% to $32.39 billion, down from $33.18 billion. As for about 90% of Google’s revenue comes from its desktop search and advertising business, the unforeseeable slowdown in paid clicks and dropped revenue per click make a huge damage in Google’s profitability.
Moreover, the amount of fixed cost has increase remarkably during this quarter. For example, the research and development expenses have increased extraordinary by about 46%, and it is about 16% of the total revenue. Furthermore, the general and administrative expenses also increased by 20%. We deem that Google spending more in fixed cost such as research and development expenses aimed to improve the quality of their service, as to improve their revenues. Average fixed costs per click will decrease if the number of paid click increases. However, as we have mentioned above, the actual growth of paid click is 6.5% less than the expectation, therefore the incremental fixed cost would lead to a loss in operating income and profit.
Furthermore, Google suffer a loss in Motorola Mobile for $185 million during this quarter. We found that return on investment of Motorola Mobile is -5.98%, thus Loss from Motorola Mobile business reduced Google’s overall profit. In order to reduce loss, Google should drop the Motorola Mobile segment. However, we cannot know the amount of fixed cost can be avoid, but Google has held it for sale during the year, and has sold to Lenovo in 30th October 2014, it shows that the fixed cost savings and earning in disposal exceed the lost contribution margin.
Variable costing
Fixed cost and variable cost
To investigate the cost structure of Google, we assume the variable traffic acquisition costs (TAC) is variable cost, other cost of revenue, research and development (R&D), sales and marketing and general and administrative expense are fixed cost. However, no variable or fixed TAC has been given. Therefore, high low method has been adapted to distinguish the fixed TAC and variable TAC provided that assuming all TAC was generated from advertising revenues, and the variable TAC and fixed TAC was constant. It is found that the calculated Unit variable TAC was $0.069/paid click and total variable TAC was $1 016 081 313 and $2 292 081 313 in third-quarter, 2013 and 2014 respectively; fixed TAC was about $1 055 918 687.
Contribution format income statement
There is the contribution format income for the three months ended 30 September 2013 and 2014.
Cost structure - high fixed cost
Google has a high fixed cost structure. For quarter three ended 30 September, 2014, its total fixed cost was even over 60%. Being a company in intense competitive market, other than cost of revenue, Google have to spend a lot of money on R&D in order to enhance its competitiveness. Although spending money on R &D maintained the sustainability of Google, it also brings risk to Google.
Bad year
Having a high fixed cost structure, Google have higher risk in bad year such as third quarter ended 2014. The equilibrant average cost per click (unit selling price) kept decreasing for over 1 year. It dropped 2% compared to the third quarter ended 2o13 . Moreover, although the paid click (quantity sales) increased about 17% compared to the same quarter in last year, its growth was lower than the expected 26%. It was because there is more competitors such as the mobile advertising competitors; and the mobile advertising market expend which the cost per clicks on mobile market was historically cheaper than desktop website clicks( Larry Kim,2013) . So the paid click growth slow and average cost per click declined .
Profit downwards
As the cost per click was decreased and the paid click growth was slow, Google's quarter 3 2014 revenue ($16.52 billion) was not as good as expectation ($16.57 billion) (Karma Allen, 2014). Simultaneously, its fixed costs were increased. The decreased contribution margin was more difficult to cover the increased fixed cost. Therefore, in such bad situation, its net operating income ($2813 million) decreased by 5.6% compared to last year.
Ethical Issues
Code of conduct is established by Google regarding the guidelines for ethical behavior. It includes three major parts as guidelines which is related to the integrity, confidentiality and competence in order to achieve better business performance.
Also, Google has corporate social responsibility (CSR) that it considers different stakeholders’ needs when making decisions. The details will be mentioned as follows.
Employees:
Google provides employees with humane working conditions as employees can enjoy free food, fitness facilities, laundry rooms and onsite doctors in their office campus. Also, the company provides training opportunities to them as the average training hours that full-time salaried employees received is 23 hours per year according to the Fortune. Therefore, Google considers good working environment and training opportunities to encourage employees to innovate and create business ideas that achieve corporate social responsibility.
Community:
Google provides communities with resource supporting charities activities as annual donations are made to the non-profit organization by Google in New York. Therefore, Google considers the community support during its business operation that shows its corporate social responsibility.
Environmental advocates As the company uses 35% renewable energy to supply electricity to its data centers in 2013 and recycle all the electronic equipment left into the market since 2007, Google considers environmental protection when running its business that shows its corporate social responsibility due to its environmental advocates.
Customers
However, Google has unethical behavior regarding the customers’ privacy and service quality problem apart from the above positive performance. According to Yahoo News in 2014, nearly 5 million Gmail addresses and corresponding passwords disclosed to the public due to computer hacking. Apart from the security problem, the company also had privacy violation problem as Google was fined EUR 0.15 million for the violations of French privacy law regarding disclosing customers’ privacy from AAStocks Financial News in 2014 and it was fined in Germany due to the disclosure of users’ information from taking photographs for Street View (Zachary Stieber, 2014). As the company should provide customers with safe and high service quality due to its corporate social responsibility, Google fails in protecting customers’ privacy and providing safe and reliable service quality to customers that it has behaved unethical. To conclude, Google has corporate social responsibility due to its consideration for employees, communities and environmental protection. However, it should improve its security and privacy setting to deal with its unethical behavior.
Balanced Scorecard In the following, we are going to provide an in-depth analysis of Google Incorporation (Google) by using a balanced scorecard. Balanced scorecard is a management and strategic planning system. It can help managers to carry out business activities and operations corresponded to the vision and strategy of Google Incorporation. A balanced scorecard can be divided into four parts which are financial, customer, internal business process, and learning and growth. Therefore, Google Inc. will be analyzed in these four aspects in a detailed manner.
For the financial part, the revenue growth rate has been declining. The profits decrease from USD$4,115,000,000 in the first quarter of 2014 to USD$ 3,724,000,000 in the third quarter of 2014. This may be due to many reasons such as high costs, low productivity, and poor efficiency and effectiveness. Besides, as there are more and more research and development investments for maintaining the sustainability of company, there are higher fixed costs. This indicates that Google‘s financial performance was not-so-well and hence there are room for improvement.
For the customer part, there is a large proportion of people using the internet services and products of Google in the whole world. These may due to the successful operation of Google in the past few decades. Currently, the growth in number and profitability of customer is declining when compared to the previous quarter. It may be caused by the fall in revenue per click, like the unit selling price, and hence the paid click growth is slow. This declining trend is foreseen to persist in the near future. This implies that some strategic measures are needed to be carried out so as to improve this situation.
For the internal business process part, Google tends to hire more knowledge workers than before. These workers are usually highly-trained and difficult to replace. Hence their salaries are relatively fixed rather than variable. With more knowledge workers, the productivity and efficiency of business operations are enhanced. Hence the quality of products and services has been enhanced. However, with the decreasing number of workers, the remaining workers’ workload may become larger and hence the motivation of staff may fall.
For the learning and growth part, the size of business decreases greatly because Google Incorporation sold the Motorola segment to Lenovo on 31st October, 2014. This results in a stagnation in Google as the Motorola mobile segment was one of the major segments in Google. When this segment is dropped, the variety and services provided by Google Inc. is much narrowed. The choices offered to customers decrease. As a result, the learning and growth process become stagnant.

Recommendations
To address with the problem of revenues falling under expectation, we suggest Google modifying its sales mix to increase its overall revenue. Currently, Google relies on advertising revenue as the chief earning source. It not only generates high fixed cost, but also takes Google at risk without substitutes to offset the loss. It should focus on its sales revenues of hardware. Thus, even though the revenue growth rate in advertising drops, the sales revenue can offset the loss and increase the overall revenues. Furthermore, as sales of hardware incur less fixed cost and more variable production costs, it can relieve the negative impacts to the company during bad years. For the ethical problem of disclosing customers’ confidential information, there are two ways to handle the problems. Firstly, it should strengthen its computer security systems to prevent hacking. Apart from the physical settings, it should concentrate on corporate social responsibility in its organizational culture by establishing a code of ethics. It should encourage its employees act ethically and discourage them use customers’ confidential information illegally for extra profits. For instance, it can set up a reward system to reward ethical behavior and penalize employees who misbehave. Hence, it can provide quality service to its customers, restore their confidence on Google, maintain their loyalty and enhance the company overall sustainability.
Reference
Emarketer. (2014). Desktop Search to Decline $1.4 Billion as Google Users Shift to Mobile. Retrieved 3 November, 2014 from http://www.emarketer.com/Article/Desktop-Search-Decline-14-Billion-Google-Users-Shift-Mobile/1010668

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Guynn, J. (2014). Google shares fall as ad growth slows. Courier-Journal.com. Retrieved 3 November, 2014 from http://archive.courier-journal.com/usatoday/article/17359671

Google Annual Report 2013, Retrieved November 5 2014, from http://www.sec.gov/Archives/edgar/data/1288776/000128877614000020/goog2013123110-k.htm#sD639E991EBB55393BBAF2E71A87E5ECB Google fined EUR0.15M for violations of French privacy law. Retrieved January 9 2014, from http://www.aastocks.com/en/forex/news/comment.aspx?source=AAFN&id=NOW.583652&cur=N/A
«Gmail 500萬用戶資料被盜» (晴報). Retrieved September 12, 2014 from

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Karma Allen (2014), Google shares slide after Q3 earnings miss, Retrieved November 5 2014, from http://www.cnbc.com/id/102094576

Larry Kim (2013), News Flash: Google AdWords CPC Down by 6% Year-Over-Year in Q2 2013 - Here's Why!, Retrieved November 5 2014, from http://www.wordstream.com/blog/ws/2013/07/18/adwords-cpc-down

Monhan, M. (2014). Over 101 Google Products And Services You Probably Don’t Know. Minterest. Retrieved 3 November, 2014 from http://www.minterest.org/google-products-services-you-probably-dont-know/

Pressman, A. (2014). Google sells Motorola to Lenovo: Did Google really just lose $9.5 billion? Yahoo Finance. Retrieved 3 November, 2014 from http://finance.yahoo.com/blogs/daily-ticker/google-sells-motorola-to-lenovo--s mart-deal--125840781.html

Strategy Management Group (2014), Balanced Scorecard Basics http://balancedscorecard.org/Resources/About-the-Balanced-Scorecard https://hk.news.yahoo.com/gmail-500%E8%90%AC%E7%94%A8%E6%88%B6%E8%B3%87%E6%96%99%E8%A2%AB%E7%9B%9C-224633707.html Zachary Stieber (2014). Google Maps Street View Privacy Concerns Prompt $1.4 Million Fine in Italy. Retrieved April 16 2014 from Epoch Times, Website: http://www.theepochtimes.com/n3/624933-google-maps-street-view-privacy-concerns-prompt-1-4-million-fine-in-italy/

Appendix
1. Income statement of Google (the third quarter of 2014 )

2. Variable TAC computation

3. Fixed TAC computation

4. Contribution format Income Statement for three months ended 30 September, 2013 and 2014

5. Paid clicks of Google (third quarter, 2012)

6. Revenue per Click (Cost-Per-Click) and Paid Click growth rate

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[ 1 ]. Appendix 2 and 3
[ 2 ]. Appendix 4