Google's Approach to Business Strategy and its Sustainable Competitive Advantage
Google has created the most popular search engine and organized the information in such a manner that it has created a sustainable competitive advantage as is clear from the fact that although the search engine was started in 1997, the company is still having TTS domination in the search engine market with a market share of 67. 5% in Feb.. 2013 as per the data released by commerce, the leading.
Company has created a first mover advantage by aggressively building its search engine by adding to it Google Books, Google Scholar, Google Finance, Google News, Google video, Google Images etc. Which helped the user search with specific keywords. The company has been able to sustain its competitive advantage as is also clear from the fact that General Sentiment, a social analytical company has ranked Google topping the list of brands with a brand value of $756. Million even surpassing Apple's brand value.
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This is a result of its innovative products and heavy expenditure on sales and marketing. Google invested $6. 143 billion in 2012 on sales and marketing which is 12. 2% increase over investment of $4. 589 billion in 2011 on sales and marketing. There was addition of advertising expenses of $288 million in 2012 which is a reflection of how the company invests in brand building of its products. The diversification move undertaken by the company is the result of innovation at Google ND extensive research and development with R&D expenses continuously increasing from $3. Billion in 2010 to $5. 2 billion 2011 and $6. 8 billion 2012. Although there were initial problems with the company as the company experimented through Google Labs and the result was development of Gamma, Google Earth, Google Maps etc. But the company announced in 2011 that the company is going to close down Google Labs as the strategic focus of the company will be different and although Research & Development will be promoted throughout the organization but the company will also grow through acquisitions.
Google labs had its mix of successes and failures but certain products have been very successful such as Gamma and Google Earth. Besides this the company's successful acquisitions include Picas in 2004, Android in 2005 and youth in 2006. Therefore, taking risk and developing innovative products and acquiring new products through acquisitions thereby diversifying into new businesses may not be much profitable initially but it can be a long-term investment as the competitors such as Microsoft and Yahoo may diversify and get into the core businesses of Google.
Describe Google's core products and business model-the basis upon which the firm makes money. Analyze the dual strategy that Google employs to execute its business model. Google provides the information to its internet users for free but the revenues are generated by targeting advertisers who are interested in reaching the online users through their advertisements and the company's Towards is a self-serve auction based advertising program and the advertisements appear near the search results and most of the advertiser pay for it on a cost per click basis. Through its Deceased program, Google advertises through its Google Network members who in return get a share of revenues and the advertisements are featured in the form of videos, text, images and interactive advertisements and the displays may appear on youth, Google Finance and Google network websites. Besides search, Google has developed its Android based mobile phone operating system and developers can create applications for the mobile devices using it.
Google is serving the enterprise market using hosted web-based applications such as Gamma, Google docs, Google Allendale and Google sites. Google has its own web browser Chrome and is working with various Original Equipment Manufacturers (Memos) to install chrome in their computer systems. The company has developed global sales and support infrastructure and a support team that will help Google Network members and advertisers generate maximum value out of its offerings.
The costs of the company can be divided into four broad categories: Data Center operations, Traffic Acquisitions and Sales & Marketing. Google also ventured into hardware by developing Google Nexus 7 tablets and smartness which the company is continuously upgrading. Although Google Search is still the core product of Google with its Gamma chat, Google Talk and its Deceased business, the company has been blamed of polluting its search engine with its own inferior products such as Google Plus and the company is promoting its own other products on Google search. Google is explaining its core product not as Google search but it is actually Google which is larger master. Google adopted the 70-20-10 Strategy which means that 70% engineering resources would be devoted to its core products, 20% to extending the core to the related areas and 10% to fringe areas. Although this strategy has been used but its core product is not Google search, it is broader than that with other businesses being Google Android and Google Nexus.
Though the company has been quite successful in certain applications and its major portion of advertising the Nexus 7 Phone is facing stiff competition from Apple and Samsung and the company only commanded 0. 9% of the market share and although the company is growing strongly with an 8% market share of the total Android tablets (Sherman, 2013: Jan. 28), there is still a strong competition from Apple and Samsung but the development is Just a vertical integration done by the company to reach more users by promotion of its operating system and through its own tablet and smartened.
- Analyze how Google applies the strategy and principle of options valuation to create shareholder value
Google's Mission Statement is as follows as described in the case: "Our mission is to organize the world's information and make it universally accessible and useful. We believe that the most effective, and ultimately the most profitable, way to accomplish our mission is to put the needs of our users first. We have found that offering a high- quality user experience leads to increased traffic and strong word-of-mouth promotion.
Our dedication to putting users first is reflected in three key commitments: "We will do our best to provide the most relevant and useful search results possible, independent of financial incentives. Our search results will be objective and we do not accept payment for search result ranking or inclusion. " "We will do our best to revive the most relevant and useful advertising. Advertisements should not be an annoying interruption.
If any element on a search result page is influenced by payment to us, we will make it clear to our users. " "We will never stop working to improve our user experience, our search technology and other important areas of information organization. " "We believe that our user focus is the foundation of our success to date. We also believe that this focus is critical for the creation of long-term value. We do not intend to compromise our user focus for short-term economic gain. How We Provide Value to Our Users We serve our users by developing products that quickly and easily find, create, organize and share information. We place a premium on products that matter to many people and have the potential to improve their lives. " Some of the key benefits we offer include: Comprehensiveness and Relevance "Our search technologies sort through a vast and growing amount of information to deliver relevant and useful search results in response to user queries. This is an area of continual development for us.
When we started the company in 1998, our Web index contained approximately 30 million documents. We now index billions of Web pages and strive to provide the most comprehensive search experience possible ... " Although Google has been successful to achieve its mission to the users by providing value to the users by building more than one million servers and satisfying one billion search requests every day with targeted ad words to reach the right user every day but the company is also accused of polluting the search engine with the promotion of its own products thereby restricting the first page access of important and relevant articles. Since the ajar portion of its revenues comes from advertising, its focus on advertising without disturbing users and providing them information in an organized manner is relevant. The company's core business has evolved from not Just providing information but value addition in different ways.
The company is attempting to create a shareholder value by not only innovating in different ways but also diversifying its businesses so that the company is not shareholders by identifying the lucrative opportunities such as Android operating system in which the company commands a major share of market and as per the ATA provided by International Data Corporation, Android commands a 75% market share of mobile phone operating systems worldwide in the third quarter of 2012. Google attempts to create shareholder value by providing the employees stock options using "Black-Schools-Morton option pricing model to determine the fair value of stock options on the dates of grant wherein restricted stock units are measured on the basis of fair market values on the date of grant and the shares are issued on vesting dates net of minimum tax holding requirements paid by Google on behalf of employees. For the year ending Deck. 1, 2012, Google has recognized stock based compensation expense for its employees at $2649 million and related tax benefits worth $591 million. Analyze how Google is competing. Conduct a high-level financial review. Synthesize how the dual strategy is implemented in the user base, core market (search engine) and movement into adjacent technological areas. Google has commanded a major 67% market share of search market.
The other competitors are far behind Google in the search engine market with Microsoft having only 16% market share which is around one-fourth of Google's share, followed by Yahoo with 1 1. 6% market share, Ark Network with 2. 6% market share and AOL with 1.7% market share. But apart from Microsoft and Yahoo being the leading competitors, now Amazon and Apple's Sir search are new competition in the search market for product searches.
The user base of Google is very strong with 1 billion in searches every day and it is difficult to compete with an established brand like Google but the company is proactive in identifying competition and this is the reason that the many decided to enter into the areas where competitors like Microsoft and Yahoo have their core competence as the company entered into the market of operating system with its Android operating system to compete with Microsoft and entered into e-mail market through its Gamma and Google Talk to compete with yahoo.
Since Apple is the new competition, the company has entered into tablet PC and smartened space with its Google Nexus. Since Amazon is the new face of competition, Google has entered into the cloud computing service which has been dominated by Amazon. Therefore, this dual strategy which has worked on 70-20-10 principle now is shifting other areas such as Google Talk, Gamma and others into its core areas of business.
Although Amazon has diversified with Kindle Fire and there applications but since, it is having low margins due to the higher level of capital expenditure and other players have already achieved economies of scale. Google has a higher Inventory turnover ratio of 70:1 as compared to an ideal ratio of 5:1 which shows that Google has been able to create a huge consumer pull with its innovations as compared to Microsoft and Amazon whereas since Yahoo is not diversified and most of business is services, it does not have any physical inventory.
Although yahoo has the highest return on invested capital due to its lower level of capital expenditure, Microsoft has earned a higher 32. % average return on invested capital in last 5 years. Due to its relatively smaller size, Amazon had to take more debt and therefore, its Debt Equity ratio is highest at 0. 38:1 and leverage ratio being 4:1. Google seems to have a good working capital management with working capital per share of as high as $139. 89. Analyze Google's industry environment using Porter's Five Forces Model. Consider Grant's postulation of a sixth force.
- Identify the forces Google leverages to gain competitive advantage and/or alter the industry structure
Google's Industry Environment
Six Forces Analysis
The five forces that are operating upon any industry which determines the intensity of competition are as follows (Porter, 1998):
- Intensity of rivalry among competitors
- Threat of New Entrants
- Threat of Substitutes
- Bargaining power of buyers
- Bargaining power of suppliers
A six force that was added to these 5 forces is complementary products called "Complementary".
Let us analyze all these forces in context with Google's competitive environment as follows:
Intensity of Rivalry among the competitors
The industry is highly concentrated with the three players Google, Microsoft and yahoo commanding 95. % market share as per commerce data. Google has already created a competitive advantage by being the first mover in the industry establishing around 1 million servers. The stronger brand preference towards Google with a brand value of $756. Million makes it difficult for other players to compete. Since it is an oligopoly situation, new product innovations are essential for Google to sustain itself.
Threat of new entrants
The new entrants in the search industry is Apple with its Sir search and Amazon and a potential new entrant can be Faceable and these impasses are already established in their areas as Apple is leading smarten, Amazon is a popular trading site and Faceable is the most popular social media. Google has to be concerned about this form of competition as lead to a strong competition for Google in the long run.
Threat of Substitutes
Porter (1998) has described that "the substitutes that deserve the most attention are those which are subjected to trends improving their price performance trade-off with industry product it produced by industries earning high profits. There seem to be no strong substitute to the search engine because Google is available to the consumer for free and the only potential substitute can be the targeted search by the consumers on social networking sites like faceable or in certain published sources such as newspapers and magazines but these cost some money whereas Google is available to users free of cost. For advertisers, the substitute can be the newspapers and magazines or other published sources or social networking sites like faceable because these published and online sources can provide value proposition to advertisers at a lower price.
Bargaining Power of Suppliers
Google has a strong bargaining power due to its deeper pockets as the many is not only a software and services companies, it has gone for an extensive vertical integration developing its own server capabilities and with acquisition of Motorola Mobility, the company has become one of well known company in designing servers and giving competition to companies like Cisco and HP
Bargaining Power of buyers
Google has a commanding market share with fewer substitutes available as the company has created a stronger brand loyalty with nearly 80% of all web searches being done on Google and 98% at mobile device. Therefore, although advertisers can always bargain due to substitutes like faceable more for targeted promotions but if masses have to be reached, advertisers have a relatively poor bargaining position.
The complementary are those which have to be used with the core product.
The core product search engine requires not complementary products but with evolution of targeted search Google Images, You Tube, Gamma, Google Drive and Calendar have been used as complementary by Google along with its search engine. This is a result of Google's envisioning of providing consumers a value proposition. Identify and analyze Google's key resources and capabilities. Consider their core products and management capabilities.
- How does Google leverage its technical resources to achieve new product development leadership capability?
Google's Key resources and capabilities include the following: Google has strong cash flows of $16,619 million from its operating activities. Google has a strong brand name with a brand value of $756. 6 million. Google has a strong team of more than 30,000 employees working worldwide. Google has a strong capability with more than 1 million servers available relied.
Google has an excellent innovation driven work culture with its People Operations department replacing the HRS department and its People Innovation Lab conducting experiments to provide the best to its employees and evolve creativity Google has also developed capabilities to make some of its own networking gear. Google leverages its technical resources in such a way that it is able to achieve economies of scale, a proper work culture is created and more authority and responsibility is provided to the team most innovative company in the world.
Articulate one or more strategic issues related to the degree to which Google has aligned its mission and capabilities to its business strategy and its ability to create a sustained competitive advantage. Google's mission has been to organize the world's information and make it universally accessible and useful and they believe that the most effective, and ultimately the most profitable, way to accomplish mission is to put the needs of the users first.
The major strategic issue which arose was that the company was not earning much profitability by diversifying and therefore whether the company would have gone for diversification to attain a sustained competitive advantage. The company wished to put its users organizing the world's information and making its universally accessible and useful and this should also make the operations profitable for the company. But the company has been focusing in doing the same thing which is improving user experience. Gamma was a result of satisfying the communication needs of the users.
Google Maps was aimed at making a location traceable across the world. Youth was to satisfy the needs of users to upload and download videos. Similarly various other applications were developed by the company. But the company has also been blamed to pollute the web with the promotion of its own products on the web search engine thereby cluttering it and making it difficult for the users to search the relevant articles, people and products Just to arrive at its own products such as Google plus to find those people and products and due to this reason it may lead to diversion of traffic from Google.
But its business model has been very useful with data center management and having a very strong infrastructure, brand value and work culture will help the company in sustaining its nominative advantage in future also. Describe and evaluate the effectiveness of Google's corporate strategy-that is, where is Google focusing to sustain its competitive advantage? Google is attracting huge amount of advertising revenues and its corporate strategy is to vertically integrate and diversify into new products and applications which will also help the company in reaching the appropriate market segments and targeted promotions to the users.
The competitive advantage of Google lies in innovation. The theory of sustainable competitive advantage supports that there should be a nominate advantage which will become the core business for the company and there will be supporting advantage that will help a company in sustaining the dominant advantage (Porter, 1998). And Google has exactly done it maintaining its core advantage into Google search and building the related advantages by diversifying into various other applications. The heavy R expenditure done by Google which accounts for around 13% of its revenues is focusing on building Google's core businesses, the core being advertising revenues and Google search is considered by the company only one media to promote the advertisers products, operations is reflected in the fact that it has not still been able to match the revenues earned by Microsoft and therefore, the company can visualize the difference between company's actual position and expectations and therefore, the company is going for vertical integration and diversification as is evident.
- Address how functions within the company are organized differently and identify the organizational theory that drives organizational design changes in response to industry changes.
The organization structure used by Google is a Flat Organization structure as any Google (Google's employee) can directly interact with the top management including founders Eric Schmidt, Larry Page, and Sergey Bring.
Google revised spare time to the engineers that leads to delegation of authority and empowering them as they dream their own ideas in the spare time and the teams are automatically constituted around the best ideas which receive funding on the bases of market based principles and although there were some problems with best of the ideas not attracting management that led to attrition due to which these employees formed separate companies like Twitter. When recession occurred it became a Google's moment of truth as it was realized that the company's growth has been slowed down. It became essential for the company to retain key talent. This led to Google's culture czar who needed to maintain the core values of the company to promote innovation, do good and not evil and maintain certain ethical standards along with ensuring happiness of the employees throughout the company. The company also appointed a Chief Culture Officer which was a special position created to accomplish this purpose.
Stacy Savvies Sullivan took the responsibility of working with employees and finding out ways in which the company can maintain, stimulate and develop the ultra at Google despite keeping the core values established in beginning of having a flat organization, lack of hierarchy and a collaborative environment. To have a creative work culture and to boost employee motivation within the organization, the company appointed social scientists at its People Innovation Lab which experimented on people at Google to find the best ways to keep the motivated, retaining them and training them to live up to the standards. People from diverse cultural backgrounds were appointed and were provided
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