In 1998, 24-year-old Sergey Brin and 25-year-old Larry Page founded Google. They met as graduate students in computer science at Stanford University, where they began working together on a web crawler, with the goal of improving online searches. What they developed was the PageRank algorithm, which returns the most relevant web pages more or less instantaneously and ranks them by how often they are referenced on other important web pages. A clear improvement over early search engines such as AltaVista, Overture, and Yahoo, all of which indexed by keywords, the PageRank algorithm is able to consider 500 million variables and 3 billion terms. What started as a homework assignment launched the two into an entrepreneurial venture when they set up shop in a garage in Menlo Park, California.

Today, Google is the world’s leading online search and advertising company, with some 70 percent market share of an industry estimated to be worth more than $50 billion a year, and growing quickly. Though Yahoo is a distant second with less than 20 per-cent share, in 2008 Microsoft’s CEO Steve Ballmer offered to buy the runner-up for close to $50 billion to help his company gain a foothold in the paid-search business where Google rules. Yahoo turned down the offer.

What haunts Ballmer is that Microsoft actually had its own working prototype of a Google forerunner, called Keywords, more than a decade earlier. Scott Banister, then a student at the University of Illinois, had come up with the idea of adding paid advertisements to Internet searches. He quit college and drove his Geo hatchback to the San Francisco Bay Area to start Keywords, later joining an online ad company called LinkExchange. In 1998, Microsoft bought LinkExchange for some $265 million (about one two-hundredth the price it would later offer for Yahoo). LinkExchange’s managers urged Microsoft to invest in Keywords. Instead, Microsoft executives shut down LinkExchange in 2000 because they did not see a viable business model in it. One LinkExchange manager actually approached Ballmer himself and explained that he thought Microsoft was making a mistake. But Ballmer said he wanted to manage through delegation and would not reverse a decision made by managers three levels below him, thus bringing an end to Microsoft’s first online advertising venture.

In 2003, Microsoft got a second chance to enter the online advertising business when some mid-level managers proposed buying Overture Services, an innovator in combining Internet searches with advertisements. This time, Ballmer, joined by Microsoft’s co-founder Bill Gates, decided not to pursue the idea because they thought Overture was overpriced. Shortly thereafter, Yahoo bought Overture for $1.6 billion.

Having missed two huge opportunities to pursue promising strategic initiatives that emerged from lower levels within the firm, Microsoft has been playing catch up in the paid search business ever since. In the summer of 2009, it launched its own search engine, Bing (an acronym for “Because It’s Not Google”). Microsoft and Yahoo subsequently formed a strategic alliance, and Microsoft’s new search engine will also power Yahoo searches. These two strategic moves helped Microsoft increase its share in the lucrative online search business to roughly 25 percent, up from just over 8 percent. It remains an open question whether this is sufficient, however, to challenge Google’s dominance. In particular, Bing’s increase in market share of online searches is obtained at the expense of Yahoo’s, and not Google’s, market share. Microsoft’s CEO Ballmer admits problems in Microsoft’s strategic management process: “The biggest mistakes I claim I’ve been involved with are where I was impatient – because we didn’t have a business yet in something, we should have stayed patient. If we’d kept consistent with some of the ideas, we might have been in paid search. We are letting more flowers bloom.”[1] In the summer of 2013, Steve Ballmer announced he would retire as Microsoft’s CEO by mid-2014.

Questions PLEASE DO NOT COPY FROM ANOTHER ANSWER

3. How did two college students successfully launch a business in online search and advertising that out-performs Microsoft, one of the world’s leading technology companies? Among other issues, consider the role of differences in organizational culture.

4. Why is Google successful in the online search business while Yahoo and Microsoft are struggling?

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