Googel's Strategy in 2008 -Case study

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CASE 14 Google’s Strategy in 2008 1. Discuss competition in the search industry. Which of the five competitive forces seem strongest? weakest? What is your assessment of overall industry attractiveness?

Search Engine Industry is built upon Search and also advertising. If we look at the latest data (for year 2009) there are beside Google 5 big players: •

Yahoo, which has a challenger’s and loser’s position

•

Bing, this is new brand name for MSN Live search

•

Baidu,

China

search engine •

Ask

•

AOL,

where

search engine is powered by Google At the figure, we can see that Google own 65% of U.S. Market and 85% of global Search Engine Market. Data from StatCounter Global Stats for Year 2009 shows that Bing market share was in start (june 2009) a little higher then MSN Live search had in past. In that time there is also a litlle decrease of Google’s market share. In the latest statistics there is a new competitor from China Baidu (2,8% of global market), which is right behind Bing (3,3%).

I can identify following five competitive forces of Porter’s model (figure on right side): •

Bargaining power of Buyers

In 2008 almost 97% of Google’s revenue was made by advertising. There are many single account contributing low percentage to net revenue (max. is 3%). They realize that selling popular keywords is valued.

•

Bargaining power of Suppliers

Beside Google’s big market share, suppliers trust Google’s ad system as reliable source of income.

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•

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Threat of substitute Products and Services

There is now other suitable substitute for search. Organizing information and conducting searches like Google do is for near future business with no threats. Beside that number of Internet users worldwide is rapidly increasing. On the other side internet advertising is 2nd best form of ads (just behind newspapers). If you add to this a search-based ads, then you have a wining solution.

•

Threat of new Entrants

If you want to enter in internet search market then you have to jump over a high barriers. Current big players exhibits a high technology and a lot of know-how. So that new entrant must provide better and quicker search results then others competitors. New entrant also does not have data on search history of users. Threats of new market entrants is relatively low.

•

Rivalry among Existing Competitors

All competitors have a similar services and products. Competition is based on non-price dimension like marketing, brand, search technology. Because this is relative new business there are good growth opportunities also for economics of scale in advertising.

As a strongest competitive force I can identify competitive rivalry, where the weakest is bargaining power of the buyers. Market is driven by innovations. As already stated before, industry has high overall attractiveness.

2. How is the search industry changing? What forces seem most likely to bring about major change to the industry within the next three to five years?

Cloud computing technologies are one of the trend which will have also a big impact on software market. Google is a big player in this field. Microsoft has identify this as a big threat to their business. This field is still going under great improvements. Second trend in industry is rising a competition in mobile search/advertising and importance of social networks is still in growth.

In the search engine market I can find following trends: •

Internationalization of the search market

•

China as a new prospective market and fight between Google and Baidu for market share in China

•

High possibility of further mergers in the search market

•

It can be expected that some of the search engines will be specialized for customer-based needs.

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3. What are the key factors that define success in the industry? What are the key competencies, capabilities, and resources of successful search engine companies?

Key factors of search engine industry success are: •

Consumer demand for innovative and interoperable products or services (platforms, internationality, interchangeability)

•

Net neutrality

•

Improved search algorithms (fast, accurate, impartial and easy to use)

•

Awareness of convergence in media, internet, broadcast and entertainment

•

Trust (user security, privacy concerns and protections)

•

Awareness of user habits and needs (supply solutions to anticipate and meet needs)

Google core competencies are: •

Constant Innovation of search algorithms

•

Impartial algorithms used to rank data weight

•

Open transparent organizational culture

•

Policies: Implement, then monetize; People-Profit

•

Corporate Reputation = Brand Trust

•

Back net-neutrality interoperability + open source

Google, Yahoo, and Microsoft have both similar and dissimilar capabilities: •

All are financially sound; in fact, they all have the financial clout to afford large acquisitions, or to invest significant financial resources in a R&D.

•

All are global; all are household names.

Currently, Yahoo and Microsoft must reassess their resources and capabilities to decide how to deploy them most effectively. In reality, they must leverage their current resources to develop new capabilities if they hope to compete with Google for the consumers.

Google has an advantage in efficient organization of information. By means of using an unbiased algorithm to rank data relevancy, Google’s impartial search algorithm is also the key to its popularity, because Google users have a greater level of trust. Yahoo has a number of social networks and content advantage. Microsoft’s advantage resides in their long reign of global market dominance in business by means of their market share of computer software and operating systems, although they also face risks from this due to global antitrust issues.

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4. Describe Google’s business model. What are the company’s revenue-cost-profit relationships? What strategies has Google relied upon to build competitive advantage in the industry?

Google business model generates revenue by

providing.

advertisers

with

an

opportunity to deliver online advertising,

AdSense

directly matched by keyword to a user’s search query. Google business model is based on three elements shown also on

AdWords

Search appliance

right-side figure.

The first one is the advertising when you search on Google, a program called AdWords.

AdWords is Google's advertising product and main source of revenue. AdWords offers pay-perclick advertising, and site-targeted advertising for both text and banner ads. The AdWords program includes local, national, and international distribution. Advertisements are short, consisting of one title line and two content text lines and/or image. The "content network" shows AdWords ads on sites that are not search engines. These content network sites are those that use AdSense, the other side of the Google advertising model. AdSense is used by website owners who wish to make money by displaying ads on their websites. User’s click on ad displayed on a Web page means that advertiser pays Google and Google give percentage of that amount to the webpage.

The third way in which they make money is through its Google Search Appliance which they sell to their customers. This Google’s search technology can be integrated into a third party’s Web page or intranet. This appliance delivers accurate search results throughout a number of documents. Meaning your company would have its own search engine and it would work just as well as google.com. Licensing fees ranged from $30.000 to $600.000. There is also Google Mini Search Appliance designed for small businesses.

Some of the most important strengths of the Google’s business model are: •

Reliable pricing system

•

Scalable architecture

•

Disruptive business model

•

Efficient ad system and relevant ads

Figure presented Google’s revenue-costprofit relationship is displayed here. Google has grown rapidly; from 2004 to 2007 its

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revenue growth slowed, but still increased by more than 50% every year (average is 71,6% per year). The company reported a year-over-year growth of 31% for 2008. Beside constant growth of total revenue, net income has also constant growth (average is 109,1% per year) accept maybe in year 2008, where increase was not as high expected. In parallel there is also a growth of market share. By the year 2009 I can say that Google has almost monopole position in a search engine market. The company generated 97% of its 2008 revenue from advertising, the inventory of which is sold both directly to customers as well as in conjunction with advertising agencies serving large clients. Google's two primary advertising products are AdSense and AdWords, both paid search products.

To support further growth of Google they are relaying on this strategies: •

Differentiation “Deliver the most relevant, objective data in the shortest time”

•

Focus on user experience and anticipate user needs

•

Develop personalized user products and services

•

Innovate advertising solutions for business sector

•

Protect key talent by investing in culture

•

Explore & develop internet video / wireless frontiers

•

Innovate services / interfaces for wireless sector

That it is why Google need to: •

Invest in R&D (innovations, search for algorithms and communications)

•

Pursue strategic alliances (integration and interoperability)

•

Manage the Google brand (avoid marketing)

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5. Have Google’s business model and strategy proven to be successful? Should investors be impressed with the company’s financial performance? How does the company’s financial performance compare to that of Microsoft and Yahoo? Please conduct a financial analysis to support your position—you may wish to use the financial ratios presented in Table 1 of Chapter 4 as a guide in doing your financial analysis of the company.

Total Revenue Structure From the figures we can see that the growth of the Google Total Revenue is constant. In 1st quarter of year 2009 we can observe first negative growth, which can be related with recession. Search based advertising is the main revenue source. Since 2007 there is also a new source of revenue, that is licensing revenue.

Cost Structure From the cost point of view we can see that largest part of cost are represented by cost of revenues. Cost for R&D are little increasing, but in general they represent significant level of total cost (company which investments a lot of mony in R&D). Other cost are at low level.

Liquidity/Cash Ratio Google has better liquidity then Yahoo.

We can notice that there was some affect of recession. Yahoo had bigger problems with liquidity in year 2007, but now it is improved.

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Profitability/Operating Profit Both companies has been affected by economic downturn in year 2008. Google clearly runs it’s bussines more effective with better cost management.

Profitability/ROE Google gain higher profitability level then Yahoo.

Debt ratio Google reflect lower debt ratio then Yahoo. Google’s growth is organic, while Yahoo took some measures to decrease debt

in 2008 (and converted some

coupons in stock).

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6. What are the company’s key resource strengths and competitive capabilities? What competitive liabilities and resource weaknesses does it have? What opportunities exist? What threats to its continued success are present?

The best way to answer this question is by Google’s SWOT analysis.

Strengths •

•

•

Opportunities

Large leader in the global search market •

Increase in internet users

with more than 85% of the searches •

Increase in search advertising

conducted

New market growth (China)

•

Leader in the global search advertising •

Larger definition of search marketing

market

including new forms of advertising such as

Superior search (relevant and objective

some sorts of social media

algorithems) •

•

Superior

•

advertising

algorithems

nad

Increase in wireless subscribers worldwide will embrace local mobile search services

methodologies

by 2013

High brand awareness: users' trust with the •

Integration, strategic alliances and joint

famous "Google it" (consumer trust)

ventures with suppliers

•

Significant infrastructure base

•

Financial stability (low debt, large cash

and interface for wireless)

reserves, exponential growth in revenues •

Market power in value chain

and net income)

User

•

•

Investments in R&D innovation (service

demand

for

convergance

and

interoperability Weaknesses

Threats

•

Interruption or failure of Google's services

•

Competitor

strategic

actions

•

(social •

Privacy concerns Antitrust and Copyright infringement suits

networks)

against Google

Inability to hire or retain key people (high •

Increase global competition

cost of highly skilled people)

•

Disruptive innovations

•

Inability to scale operational processes

•

Internet security

•

Top management issues

•

Open source's ecosystem threats

•

Lack of product integration

•

Recession impacts on search marketing

•

Possible slowing of high revenue growth

•

and online advertising trends (global economic slowdown) •

Foreign exchange risk

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7. What recommendations would you make to Google’s top-management team to sustain its competitive advantage in the search industry? How should it best capitalize on its strategic initiatives in mobile search, cloud computing, and its auctioning system for traditional media ads?

Here are some recommendations for Google: 1. Invest in R&D - Stimulate innovation Constant search for improved algorithms and communications. Implement new innovation very quick. Try new solutions with real people.

2. Search for strategic alliances (integration and interoperability) Seek alliances with like-minded companies that promote open source standards. Extend the reach of Goole’s search into the wireless sector (seek alliance with wireless network provider or create a Google wireless network). Maybe seek alliance with Apple (combining iPhone, WiFi Network and Google’s mobile search capability).

3. Mobile Operating System Mobile industry is one of the important goal in Google strategy. Open platforms (devices, services, networks and applications) are already in Google strategies.

4. Cloud Computing Further improvement of Google’s web browser in a way of supporting cloud computing. Attract Microsoft’s customers, first by Google search, well established services and then also with cloud computing.

5. Manage the Google brand Keep on avoiding marketing. Anticipate, support, expand user’s bond with the Google brand by anticipating their needs, and developing tools that meet them. Allow users to have interactive access and control over their own personal information, increasing its usefulness and building trust in Google’s brand.

6. Support public education: critical issues impacting Internet access Net neutrality, open access and interoperability across platforms is very important. Reduced cost of personal training.

7. Invest also in internet security Safe (without viruses,…) information, applications can become more and more important and valued.