Case Study

IBM and Google are two of the most successful firms in the history of business. Since

the demise of Bell Laboratories following the breakup of AT&T, IBM has had the world’s

leading corporate research labs. Five IBM scientists have won Nobel Prizes in physics

(compared with 12 from Bell Labs), and every year since at least 1992 IBM employees

have been granted more patents than employees at any other firm in the world.1 More

importantly, some technology analysts consider IBM’s research more fundamental,

yet more practical, and its patents more valuable, than those of most competitors.

Google was founded in 1998 by two Stanford computer science graduate students,

Larry Page and Sergey Brin, at the start of the Internet boom. Google quickly became

the world’s dominant search engine and gained widespread fame for its corporate

culture. Google offered employees free healthy lunches and dinners, and snack

tables were spread throughout the firm’s offices. Google buildings included space for

bicycles, pets, pool and foosball tables, volleyball courts, and gyms. The firm offered

employees free massages, meditation classes, and yoga sessions. Employees were

encouraged to spend 20% of their time at work on projects of their choice, which led

to innovative developments and motivated employees.

profitability and soon transformed IBM from primarily a computer manufacturer into a

firm that provided information technology (IT) services throughout the world. In the mid-


data processing
became so complex that many large organizations outsourced

their entire IT departments. IBM was one of the few firms in the world large enough and

skilled enough to manage those projects. That work was highly profitable, but by the late

1990s IBM’s service operations faced severe competition, first from large Indian IT firms

such as Infosys Technologies and Wipro Limited and then from

Hewlett Packard

For at least the past 40 years IBM has been one of the world’s most respected com-

panies. However, because it faced various competitive challenges from Microsoft,

Indian IT firms, and Hewlett Packard, IBM was forced to take actions to reduce costs,

and many of those actions were widely criticized (see below). In July 2003, IBM in-

vited all 319,000 of its employees throughout the world to engage in an open “values

jam” on its global intranet. Tens of thousands of employees offered comments about

the company over a three-day period. That discussion produced IBM’s current corpo-

rate value statement (Exhibit 2).5 According to that value statement, employees were

brutally honest, and some of what they wrote was painful for management to read.

Exhibit 2 states that IBM’s stock price must increase by 10% before IBM’s 300 most

senior executives benefit from their employee stock options. In addition, the executives

must first invest their own funds in IBM stock before they can buy stock under IBM’s

executive stock option plan. The corporate values statement mentions that this require-

ment is unique in the computer industry and possibly in all of U.S. business. Although

IBM’s value statement is more restrictive than most values statements for U.S. compa-

nies, IBM has received criticism for some of its actions during the past 10 years.

Pension dispute

Like most large companies founded prior to the 1990s, IBM included a defined ben-

efit pension plan for all employees as part of its compensation package.6 IBM termi-

nated its defined benefit pension plan in 1999 and transferred all employees to a cash

balance pension plan.7 Employees filed a

class action lawsuit
against IBM claiming

the plan discriminated against older workers. In 2003, a lower court ruled that IBM’s

revised pension plan did discriminate against older employees. IBM appealed the

case, but to limit its maximum exposure it agreed to pay plaintiffs $320 million. If IBM

lost on appeal, it agreed to pay an additional $1.4 billion (i.e., plaintiffs agreed to a

$1.4 billion additional payment as a cap). In 2007, IBM won its appeal, although the

$320 million payment was not returned because of the contractual agreement.

Google’s 2008 revenues increased by 31% from 2007 but, partially because of a

$1.1 billion impairment charge for Clearwire and AOL equity investments, Google’s

2008 operating income exceeded 2007 operating income by only 3.2%.

Revenues for the first three quarters of 2009 were only 5.5% higher than the first three

quarters of 2008. However, because of firm-wide cost cuts, including Google’s first

ever employee count reduction (by only 2.3%), Google’s operating income before tax

increased by 22%. Like IBM, Google has recently been criticized for some of its actions.

Dual classes of stock

Google first issued stock to the public in August 2004. Google separated its equity

ownership into two classes of stock. The A shares, which were sold to the public, have

one vote per share; the B shares, primarily owned by cofounders Sergey Brin and

Larry Page—and CEO Eric Schmidt—have 10 votes per share. Dual class common

stock has been relatively common in the newspaper industry (The New York Times

and, prior to its acquisition by News Corp, Dow Jones/The Wall Street Journal). It has

also been used by some family-controlled firms, such as Molex Inc.

Google’s founders stated that they wanted to control the firm to avoid quarterly

earnings pressure from security analysts.14 In 2006, shareholders proposed that

Google eliminate its two classes of stock, but the founders rejected that proposal.

Many Google competitors worry that this will give Google a significant advantage

in targeting its advertising. The American Civil Liberties Union (ACLU) and various

other organizations objected to

the settlement
because of privacy concerns. They

worry Google Books will give Google unique insight into the reading habits of those



The U.S. Department of Justice, several European countries, and some members

of the U.S. Senate and House of Representatives are concerned that this legal settle-

ment circumvents U.S. and foreign government copyright laws. The U.S. DOJ stated

that the settlement would provide benefits to the public but also raises significant

issues regarding class action, copyright, and antitrust laws.17

The agreement has been widely criticized throughout Europe, including in a

speech by German Chancellor Angela Merkel, who said the German government

strongly opposed Google Books, a project so secret that Google will not allow any-

one to observe how it scans books.18

In response, Google cofounder Sergey Brin published an editorial, “A Library to

Last Forever,” in The New York Times on October 8, 2009.19 Mr. Brin passionately

argued that Google Books is primarily an altruistic effort by Google to make books

available to the public that would otherwise be lost forever. He strongly defended

the settlement because it allows payment to authors who would otherwise receive

nothing for their work and because it allows any other company an equal opportunity

to scan orphan books.

On December 18, 2009, a French court ruled that Google Books violates France’s

copyright laws. A French court fined Google €300,000 ($431,000), plus €10,000

($14,300) per day until it stops providing viewers with portions of the scanned books.

The lawsuit, brought by French publishing houses, accused Google of offering free

searchable portions of copyrighted books. In doing so, Google earns advertising revenues without adequately compensating copyright holders.

Please Answer

  • From the case study, explain whether or not you agree with IBM’s cost-reduction decisions regarding both the pension plan overtime for employees and the acquisition of a competitor to protect IBM’s competitive position in the mainframe business. Examine how IBM’s actions contradict its value statement.
  • Support or critique Google’s actions, as identified in the situations within the case study. Discuss the impact of Google’s actions on its reputation as an ethical and socially responsible firm.
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