Google's Business Strategy - Case Study Example

Google’s Business Strategy Introduction This case study report provides a critical analysis and evaluation of the strategic directions that Google Inc has pursued through its business strategy. Since it foundation in 1996 by Larry Page and Sergey Brin, PhD students at Stanford University, Google has provided a gateway for the rapidly growing number of individuals who use the internet for information as well as other commercial transactions. Whereas there existed other search engine companies that provided users with search facilities, Google utilized its superior page ranking and its simple design to offer users with an exceptional experience. Search engine industry The growth in the number of the internet users have led to the expansion of the search engine industry (Gamble 2008). As one of the search-marketing firms, Google offers a blended search through a mix of information from various sources and displaying them in a single page. For competitive advantage in this information industry, Kim, Nam, and Stimpert (2004) argues for companies’ need to incorporate innovative technologies that enrich the users’ search experience. Such a revolutionary approach will ensure a quicker and effective finding and retrieval of information from independent vertical searches, press release as well as social networks. Google, Microsoft and Yahoo are the big names that steer the search engine industry. There exist other search engines such as Ask.com, Dogpile MetaCrawler, Wikia search and Lycos although they own a little share (SEO, 2008). Porter’s Generic Strategies framework Grant (2010) argues that competition in an industry eliminates the differences in profitability between competing organizations and thus competitive advantage serves a disequilibrium phenomenon that arise as a result of change. These changes can either be external (i.e. changing customer demand, technological change, changing prices) or internal (i.e. some firms having greater innovative and creative capability). According to Grant (2010), there are two ways in which a firm can respond to the changes and achieve a higher rate of profit; by supplying an identical product or service at a lower cost (cost advantage), or supplying the products or services in a differentiated manner such that the customer will be willing to pay more (differentiation advantage). A firm that wishes to become a cost leader in the market or market segment will pursue a cost advantage strategy. This strategy requires the firm to find and exploit all the possible sources of cost advantage and sell a standard (no-frills product). On the other hand, through differentiation, a firm may choose to provide something unique that customers feel is valuable beyond offering a low price. The figure below presents the ways in which competitive advantage can be achieved. Similar product At lower cost Price premium from Unique product Figure 1. Source: Grant (2010) A firm pursuing a cost advantage strategy competes on low cost while the one pursuing a differentiation strategy competes through differentiation in terms of resources and capabilities, market positioning, and organizational characteristics (Johnson, Scholes and Whittington 2010). Appendix B illustrates the characteristic features of cost and differentiation strategies. Michael Porter has defined three generic strategies: cost leadership, differentiation, and focus by combining the two types of competitive advantage with an organization’s choice of scope-broad market verses narrow segment (Kim, Nam and Stimpert 2004). Porter views differentiation and cost leadership as mutually exclusive strategies and any organization that may attempt to pursue both will be “stuck in the middle”, and consequently achieve low profitability. The Porter’s three generic strategies are illustrated below. TABLE 1: SOURCE OF COMPETITIVE ADVANTAGE LOW COST DIFFERENTIATION COMPETITIVE industry-wide SCOPE Single-segment Figure 2. Source: Porter (1998) In strategic management, porter’s generic strategies framework can be used in analysing an organization’s business strategy to ascertain its competitiveness in relation to other players in the industry. Johnson, Scholes & Whittington (2010) suggest that a given strategy must be evaluated using the criteria of suitability, feasibility and acceptability before it is implemented. This evaluation determines whether the strategy will actually give the company a competitive advantage in the industry. Google’s strategic analysis Product differentiation Google’s strategy has been founded on their complementary product differentiation. Besides internet advertising, Google has offered other unique provisions (see appendix E) to increase traffic to Google sites giving the company more opportunities hence serving the ads to internet users (Google case 2009). The differentiation strategy has enabled the company to effectively compete with other technology giants such as Microsoft and Yahoo who draw much of their revenues from their respective internet properties (Google case 2009; Google, 2011). The company has, however, maintained a strong brand image in all their products. According to Chaffey (2011) and Google case (2009), Google’s use of PageRank technology and text matching techniques enabled the internet users to easily access any information in the digital database because these technologies are able retrieve results that are highly relevant to the search queries. Evaluation of Google’s strategy Suitability of the strategy Google’s differentiation strategy has been effectively utilized in defending against the five competitive forces in the market: threat of potential entrants, supplier power, threat of substitutes, buyer power, and rivalry among existing competitors (see appendix C). It is the effective response to these forces that has enabled Google to attain its differentiation advantage. The revolution in the 21st century is characterized by relentless quest for knowledge and information by man. Considering its opportunities (as illustrated in the SWOT analysis-Appendix F), Google has a huge user base to which it can introduce new products or services that can generate traffic to their ads. Just as they have acquired companies like Picasa, the Google strategy will enable it make similar acquisitions to increase their customer base. Technology giants, Yahoo and Microsoft, are the leading competitors to Google’s work strategy (see appendix F for Google’s threats) (Google case 2009). However, with its broadest reach, Google will effectively implement its strategy and thus staying abreast of the crowd. Together with Double click (the image banner advertising firm of their ads) the company has drawn vast majority of unique users. Ad server Monthly unique users Market share Unique domains Market share Google 1,107,489,739 35.30% 91,462 77.28% Double click 1,079,203,140 34.39% 6,748 5.70% Yahoo 362,201,931 11.54% 5, 147 4.35% MSN 309,290,121 9.88% 8,099 6.84% AOL 156,109,326 4.98% 1,976 1.67% Adbrite 73,446,676 2.34% 3,575 3.02% Figure 3. ad Server Market Share (attributer corporation, 2008). Implementation of the strategy will enable the company expand internationally, providing premium search services in various countries and in different languages. In addition, the company’s use of great organizational skills to deliver advertisements put it in the position to receive more advertisers, and a consequent increase in the revenues. By exploiting on the existing resources and capabilities, the differentiation strategy adopted will enable Google make the search work very. The strategy goes hand in hand with Google’s corporate culture of maintaining the already established brand name, in which users trust. With Google’s strategy, it will be possible to incorporate all the services offered by the competitors on a sparse and minimalistic homepage. Acceptability It is Google’s responsibility to manage its operations so as to benefit all its stakeholders (see Appendix D). Each of the stakeholders has their own expectations from Google and this will determine the company’s decision making process. With the differentiation strategy, Google recognizes that every stakeholder has a role to play, and therefore seeks to provide high quality user experience in the search, technology and important areas of information organization (Google case 2009). Google’s management has been committed in ensuring the company’s success is maintained, and at the same time the stakeholders’ expectations have been met. Sometimes conflicting claims may exist between different stakeholders, and since the claims from the environment are critical in determining the long-term results, the management is forced to weigh them out and see the seriousness of each before deciding the one that would benefit many. Although the company gets most of its revenues from the advertising programs (AdWords and AdSense appliances), it strategically offers other services in their business model to improve the experience for both the person seeking information and the advertiser who is generating the relevant ads. This strategy will, therefore, enhance the growth of the company’s business since it meets most of the needs of the stakeholders. Profitability of the ad services is illustrated in table 2 of appendix G. Google’s strategy receives much acceptance from the stakeholders and this serves as it main motive for its expansion across the world. However, this growth may result into challenges of management in the international environment to which they are expanding. This pose a potential risk of understanding the cultures, legal systems, alternative dispute systems, commercial infrastructures and alternative dispute systems present in the host countries (Google case 2009). Feasibility Successful implementation of differentiation strategy requires an organization to acquire enough resources and capabilities. The financial boost realized from Google’s IPO in 2004, together with the funding from venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital, has enabled the company to rapidly develop its business (Google case, 2009). With a market capitalization of $23 billion, Google had the financial strength to develop additional products and services (see appendix E), most of which are offered for free but with an intention of creating traffic to the web search that generates 97% of income through advertising (Google case 2009). Based on their mission “....to organize the world‘s information and make it universally accessible and useful,” Google will continue to utilize the available resources and capabilities to develop new products and services with the intention of growing beyond their core web search business. From the financial analysis of the organization, there is an increase in their revenues over the previous years (Appendix A) meaning that it is possible for them to invest in technology and human resources to ease the implementation of their business strategy. The “70-20-10”rule has stipulated a culture of creativity and innovation in the organization. According to (Google case 2009) Google devotes “70% of its engineering resources to developing the core business, 20% to extend that core into related areas, with 10 % allocated to fringe ideas” (p. 348). As a radically decentralized organization, the Organization encourages employees to contribute to the intellectual independence of the company. If well addressed, the coordination of the organization’s revenues and the increasing number of employees in different countries will greatly foster the success of Google’s strategy and consequently open the doors to limitless expansion. In enhancing the company’s phenomenal growth and culture of creativity, Google recruits individuals who they believe are exceptionally talented, something that gives the company a sustainable competitive advantage. The organization’s rapid growth may have significant demands on the management, financial and operational infrastructure (Google case 2009). Therefore, there is need for continuous improvement of the financial, operational and management controls as well as the reporting systems and procedures for effective implementation of the business strategy. Conclusion The analysis of the external environments in which Google operates suggests that the company operates in a very turbulent environment with rapid technological changes. With their strong brand and available resources, Google has managed to withstand the great competition in the industry. By offering numerous products and services to the customers, the company has achieved sustainable competitive advantage over its competitors. In fact, its success is attributable on how they treat their customers while staying focused on the implementation of their unique vision. Google’s business model is so brilliant that it will continue with its differentiation strategy in order to gain competitive advantage in the search industry. List of References Chaffey, D., 2011. Google case study- covering Google business strategy and technology case study. DaveChaffey.com: Your Guide to Digital Business [online]. Available at: [Accessed 28 November 2011]. Fabos, B., 2006a. “The Commercial search engine industry and alternatives to the oligopoly,” EastBound, 1, pp.188-200. Fabos, B., 2006b. Search engine anatomy: The industry and its commercial structure. In C. Kapitske and C. Bruce, Eds. 2006. Libr@ries: Changing Information Space and Practices, Mahwah, NJ: Lawrence Erlbaum Associates. Ch. 13. Gamble, J., 2008. Cases in crafting and executing strategy. Alabama: University of Alabama. Google, 2011. Company overview. Google Inc. [online] Available at: [Accessed 28 November 2011]. Grant, R.M. 2010. Contemporary Strategy Analysis. 7th ed. Chichester: John Wiley and Sons Jan Eldring, J. 2009. Porter’s (1980) Generic Strategies, Performance and Risk: An Empirical Investigation with German Data. Hamburg: Diplomica Verlag. Johnson, G., Scholes, K., & Whittington, R. 2010. Exploring Strategy – Text and Cases. 9th ed. Harlow: FT Prentice Hall. Kim E, Nam D, Stimpert JL. 2004. “The applicability of Porter’s generic strategies in the digital age: Assumptions, conjectures, and suggestions,” Journal of Management 30(5), 569-589. Morrow, B., 2008. External analysis of Google Inc. Ben Morrow. [online] Available at: [Accessed 28 November 2011]. Porter, M., 1998. Competitive advantage: Creating and sustaining superior performance with a new introduction. New York, NY: Simon and Schuster. SEO., 2008. How search engine industry is changing. SEO Internet Marketing Inc. [online] Available at: [Accessed 22 August 2011]. Young, R., 2011. The cost of Google’s “Strategy of everything.” Search Engine Watch. [blog] 28 June, Available at: [Accessed 28 November 2011]. APPENDICES Appendix A: Google’s Revenues   Three Months Ended   Twelve Months Ended   December 31,   December 31,   2007   2008   2007   2008 Advertising revenues:                    Google web sites  $  3,121,539    $  3,811,166    $ 10,624,705    $ 14,413,826      Google Network web sites      1,635,836        1,693,405          5,787,938          6,714,688 Total advertising revenues      4,757,375        5,504,571       16,412,643        21,128,514 Licensing and other revenues            69,304           196,333             181,343             667,036 Revenues  $  4,826,679    $  5,700,904    $ 16,593,986    $ 21,795,550 APPENDIX B: Generic strategy Key strategy elements Resource and Organizational requirements Cost leadership Scale efficient plants Design for manufacture Control of overheads and R&D Process innovation Outsourcing (especially overseas) Avoidance of marginal customer accounts Access to capital Process engineering skills Frequent reports Tight cost control Specialization of jobs and functions Incentives linked to quantitative targets differentiation Emphasis on branding advertising, design, service, quality and new product development Marketing abilities Product engineering skills Cross-functional coordination Creativity Research capability Incentives linked to qualitative performance targets. APPENDIX C: Porter’s Five Forces Force Issues Impact Internal Rivalry Google’s primary competitors include Yahoo and Microsoft which operate on their respective brands of MSN and Live search respectively (Fabos, 2006a). Other competitors include AOL, Ask among others (SEO, 2008; Fabos, 2006a). However, Google remained to hold the largest market share of 61.1 % in 2008. Although the large market share has enabled the company to improve its performance, Google should be very much aware of that large amount of the advertising dollars goes to the company that captures a larger volume of searches. Therefore, they should be on toes in checking the competitors strategies they may outwit them. HIGH Bargaining power of suppliers Google depend on its ad system as their main source of revenue (Gamble, 2008). The ad-making partners are the both the suppliers and customers for Google. Their bargaining power is low because their ad-receiving customers are also Google’s and so they cannot switch to other search engine firm since they will lose their customers (Google, 2011). This power will remain low as long as Google continue dominating the search market. LOW Bargaining power of buyers Although most of the internet users prefer Google, the bargaining power of consumers seem to be moderate since there are other firms such as yahoo or Microsoft to which they can switch to. However, Google’s system of advertising involves making bids on keywords and thus being sold for a higher value attracting higher companies as well as those arising (Gamble, 2008). This keeps the consumer power low. On contrary, the internet users are becoming more sophisticated to an extent they demand some services for free (Morrow, 2008). By considering all these factors, the force can be said to be moderate. MODERATE Threat of substitute products and services Internet search has become the most popular mode of requesting and retrieving information by millions of people throughout the world (Morrow, 2008). The trend is even increasing and thus indicating the possibility that there is no suitable substitute for search services. With the internet search, the information is organized systematically in accordance to the various sorting categories. Google has provided tools that ensure these tasks are completed depending on the user’s needs (Google, 2011). There may be a possibility of invention a substitute product in future that organizes information, but it is not obvious whether it will organize information in the internet. Therefore, this force is not a threat in the industry. LOW APPENDIX D: Google’s stakeholders APPENDIX E: Google’s products APPENDIX F: Google’s SWOT analysis Strengths Established a brand name and is thought to be the global technology leader. The simplicity and speed of its search engine is user friendly and reliable. Has a strong market capitalization of $23 billion. Uses text-matching and ranking technologies to determine relevant pagess and a priority to access the important ones. Provides a localized search according to regions Sponsored linked are separated from the regular ones It offers additional products and services, some of which are free Made numerous acquisitions in attempts to improve their services Hires best talented individuals to foster innovation Offers searches in differ in different languages Weaknesses Mostly depends on the serch based marketing Sometimes the localized search results in erroneous searches. Although a top player in the searcgh industry, it offers 50-60 % accuracy; it has been difficult for the search engine to check for credibility of all the information it displays. It offers most of its products for free hence the fear that users will ignore the ads displayed Some of its products such as Google mapd, picnic, etc are not known to all users. Opportunities It has the potential for reaching new market segments as well as new contents Able to integrate their simple specialist search using an open url Can add localized adverts in the localized searches Able to display higher value content on the net Ability to merge with other cmpanies to cover more ground in regard to its users The adsense and AdWords and AdSense advertising programs earn the company major revenues Threats Less visibility of library services Users at times end up paying for institutional subscriptions High competition from companies such as Yahoo and MSN Their contracts with portals such as AOL may make Google end up losing substantial amount of revenue. The cost-per-click policyowner may disappoint their clients and the company may lose them Privacy issues in regard to content ownership may be an issue. Appendix G: Results of Operations (extracts from Google, 10-K Report for 2008) Table 1: Historical operating results as a percentage of revenues for the periods indicated:        Year Ended December 31,     Three Months Ended        2006     2007     2008     September 30, 2008     December 31, 2008                          (unaudited)   Consolidated Statements of Income Data:            Revenues    100.0 %   100.0 %   100.0 %   100.0 %   100.0 % Costs and expenses:            Cost of revenues    39.8     40.1     39.6     39.2     38.4   Research and development    11.6     12.8     12.8     12.7     12.9   Sales and marketing    8.0     8.8     8.9     9.2     8.9   General and administrative    7.1     7.7     8.3     9.2     7.2                                  Total costs and expenses    66.5     69.4     69.6     70.3     67.4                                  Income from operations    33.5     30.6     30.4     29.7     32.6   Impairment of equity investments    —       —       (5.0 )   —       (19.2 ) Interest income and other, net    4.3     3.6     1.5     0.4     1.3                                  Income before income taxes    37.8     34.2     26.9     30.1     14.7   Provision for income taxes    8.8     8.9     7.5     6.8     8.0                                  Net income    29.0 %   25.3 %   19.4 %   23.3 %   6.7 %                                Table 2: Google’s revenues, by revenue source, for the periods presented (in millions):        Year Ended December 31,    Three Months Ended      2006    2007    2008    September 30, 2008    December 31, 2008                     (unaudited) Advertising Revenues                Google web sites    $ 6,332.8    $ 10,624.7    $ 14,413.8    $ 3,672.1    $ 3,811.2 Google Network web sites      4,159.8      5,787.9      6,714.7      1,679.9      1,693.4                                    Total advertising revenues      10,492.6      16,412.6      21,128.5      5,352.0      5,504.6 Licensing and other revenues      112.3      181.4      667.1      189.4      196.3                                    Revenues    $ 10,604.9    $ 16,594.0    $ 21,795.6    $ 5,541.4    $ 5,700.9                                    Table 3: Google’s revenues, by revenue source, as a percentage of total revenues for the periods presented:        Year Ended December 31,     Three Months Ended        2006     2007     2008     September 30, 2008     December 31, 2008                          (unaudited)   Advertising Revenues            Google web sites    60 %   64 %   66 %   67 %   67 % Google Network web sites    39     35     31     30     30                                  Total advertising revenues    99     99     97     97     97   Google web sites as % of advertising revenues    60     65     68     69     69   Google Network web sites as % of advertising revenues    40     35     32     31     31   Licensing and other revenues    1 %   1 %   3 %   3 %   3 %   Read More