The Five Competitive Forces That Shape Strategy - Case Study Example

Google Strategy in 2010 Student’s Name Learning Institution 1. Discuss competition in the search industry. Which of the five competitive forces seem strongest? Weakest? What is your assessment of overall industry attractiveness? Porter was determined to provide organizations with a framework through which they could analyze the competition and also determine their strategies. The Porters five forces examine the power behind the five opposing competitive forces that usually determines the firm’s long-term successes as well as competition. The efforts of Porter with regards to the five forces are vital as far as the search industry is concerned. The following are the five competitive forces that can shape the attractiveness of the search industry; conflicting firms, threat of product substitutes, new market entrants and the ability of buyers and suppliers to exercise their bargaining power in the market. Porter’s Five Forces Source: 12manage.com Competitive rivalry Michael porter argued that the rivalry among firms inhibits an organization from achieving its objectives. According to him, rival firms normally allocates massive advertising budgets for their products and services, gives a high priority to innovation programmes, offer excellent services to their clients and give discounts in order to win the lace for market share and profitability. In the search industry, those firms that employ various competition weapons are more competitive, and this enables them to enjoy a greater market share. Currently, there are more than 20 firms, which compete for market share with Google. Google as one of the main search engine providers faces competition from five main companies that include Yahoo, Ask, AOL, Baidu and MSN. These companies have continuously launched new strategies with a view of gaining a larger market share and creating more sales. Advertising is the main source of revenue for search engine providers. In the face of global competition, search engine providers have been forced to improve as well as expand their search advertising services in order to realize their financial goals. Clients are therefore, switching to rival brands, and this is a major threat for Google. Researchers predict that the search industry will be saturated in the near future due to new entrants. Some of the factors that heighten rivalry in the search engine include the following: The increasing growth with regards to online actions is a major aspect that is strengthening rivalry. Organizations such as Microsoft are providing customer responsive services through innovation. Many new firms among them MSN have been issued with licenses and thereby heightening the rivalry significantly. Also, rivalry in the Search industry revolves around such aspects as quality of services provided, relationship with various stakeholders, and accessibility of information among others. Generally, the level of competitive rivalry in the search industry is high. Threat of Product Substitutes According to Michael porter, the threat of product substitutes is dependent upon the availability of other products or services outside the realm of the common product or service boundaries (Porter, 1980, p. 48). The internet has recently become the main source of queries and information gathering driven by search engines that return the results or information needed. This commanding presence of the internet gives Google a guarantee for success. As Niu and Liu, (2010, p. 6) note, there is no foreseeable substitute for the internet at the moment. The closest substitute would be search of information physically through publications, which would be more involving, time consuming and much more costly. Therefore, the threat of new substitutes in the search market is weak. New Market Entrants Any market in which the existing firms are earning high levels of returns attracts new entrants (Porter, 1980, p. 47). When many new firms enter into such a market, the profitability of all firms in the industry decreases. Unless barriers to entry are put in place by the existing firms, the high levels of profits will decrease. There is a high level of entry barriers in the search industry, thereby making Google to have a low risk of market entry threat (Niu & Liu, 2010, p. 6). It would require too much capital to build up a new search company with the necessary network infrastructure to compete with Google. It would also require massive capital to market such a new company in the internet to the extent that it effectively competes with the well established Google online products. However, a new company may compete with Google if it focuses on only on one of the products or services offered by Google and strives to make it more appealing to consumers. If the new company has the necessary talent and information, it can develop a better product than one of Google’s products. This implies that, the threat of new entry with regards to Google is moderate (Niu & Liu, 2010, p. 6). Bargaining Power of Buyers in the Market The bargaining power of buyers refers to the ability for consumers to put pressure to a company and the effect it has on their sensitivity to changes in prices ((Porter, 1980, p. 48). The bargaining power of buyers in the search industry is high. As Niu and Liu, (2010, p. 5) explains, this industry is relatively new, and there is potential for expansion for the Google and its numerous competitors. Most of the services offered by Google and its competitors are free and rely on advertising for revenue to be generated. If consumers may choose not to use one or more services of a given search engine, this could lead to a reduction in the number of advertising clients, affecting the ability for this search engine to generate revenue. In other words, buyers are able to switch easily from Google to other search companies, meaning that they can easily control pricing especially if they reach a consensus that the prices for Google services are too high. Bargaining Power of Suppliers in the Market The bargaining power of suppliers refers to the ability of suppliers of inputs such as raw materials, services (such as expertise), labour and components to refuse to work with a company for one reason or another (Porter, 2008). The bargaining power of suppliers is moderate. Search engines rely on talent people as suppliers. As Niu & Liu, (2010, p. 5) explains, it is not easy to find talented, knowledgeable and skilled persons. However, Google tries to provide a flexible working schedule and various benefits in order to attract and retain them. As well, Google uses an ad system where both advertisers and receivers are its clients. Suppliers of items such as the Android phone system have achieved great success mainly due to the dominance of Google. Thus, they also want to associate themselves with this company. Thus, as long as dominance of Google remains high in the market, the bargaining power of suppliers will remain moderate. This analysis shows that competitive rivalry and bargaining power of buyers are strong, the threat of new entrants and bargaining power of buyers are moderate, and the threat of new substitutes is weak. In short, the analysis of Porter’s competition forces shows that the search industry somehow unattractive. 2. Changes and forces expected to bring change in the search industry within the nest three to five years The search industry is going through tremendous changes. As Gamble (2010, p. 151) explains, search companies are innovating new ways that enhance smooth and faster transmission of the content. They have been increasingly trying to maintain strong relationships with internet users, websites and advertisers. They have also been creating partnerships with companies from other industries in order to reach more customers. For instance, Google had entered into a strategic partnership with numerous phone operators from different parts of the world by 2010. Search companies are also forming partnerships among themselves. Google formed a relationship with Yahoo in 2000 and has recently formed partnerships with many more online search companies. As Gamble (2010, p. 151) explains, many search companies are expanding their range of services in order to earn revenue from numerous sources. This industry is likely to continue changing within the next three to five years. One of the forces that are likely to drive this change is increased competition among search companies. Major search companies such as Google, Yahoo and Microsoft are expected to continue innovating new styles of search and to continue forming partnerships among themselves and with companies outside search industry. There are many other players that are emerging. Changes in user behaviour are another force that is likely to cause changes in the search industry. By 2010, for instance, users were already putting URLs into Google toolbar search box to try and access specific sites (Gamble, 2010, p. 151). This meant that users had started using search engines, not only as data harvesting tools but also as navigation tools. This heightened the need for partnering among search companies and developing good relationships with websites. Emergence of hand devices such as cell phones, which increase internet use, is also a major force behind the changes in the search industry. 3. Key factors, key competencies, capabilities and resources of successful search engines Success in the search industry is largely determined through profit as profit is the main goal of any business organization. The technological aspect of a search engine is another important factor in determining success of a search firm. According to Staudinger (2008), the quality of search results is also an important factor. In addition, the amount of searches can be used to determine the success of a firm since it indicates the number of people using the product. A successful search engine must have built a strong consumer loyalty and should also have strong technical competencies. The aforementioned technical competencies and monetization comprise the key competencies of a successful search engine. 4. Google’s customer value proposition, profit formula and strategies to achieve competitive advantage Value proposition refers to the promise given by a firm regarding the value that consumers will derive through consuming the firm’s product or service. Google promises users to provide a simple and clear interface, to ensure that pages load instantly and to ensure that advertisers provide relevant content. It promises to provide them with a wide range of products and services that suit their needs. As Gamble (2010, p. 139) notes, Google promises consumers to continue working on speed, to rank sites in terms of relevance during a search, to provide its products and services in and-held devices, to provide ways of making money online, to ensure that information is accessible in the language of the user and to address cases of dissatisfaction immediately as they occur. Google earns revenue through charging licensing fees to corporations, charging search capabilities on company websites and intranets and through placements on sponsored ads (Gamble (2010, p. 141). To build competitive advantage in the industry, Google has developed an infrastructure that enhances efficient and fast searching compared to competitors (Gamble 2010, p. 145). This company has also developed unique innovative tools such as Google earth, Google news, Google maps and Google toolbar which make it more competitive. As well, Google has expanded its products to wireless devices using its Android operating system. 5. Google’s business model and strategy are successful Google’s business model can be said to be successful. According to Gamble (2010, p. 145), the net income of Google in 2007 was about 40 times as much as 2003. Table 1.0 presents a financial analysis comparing the performance of Google, Microsoft and Yahoo between 2006 and 2008. Table 1.0: Financial analysis of Google, Microsoft and Yahoo between 2006 and 2008 Number Google Microsoft Yahoo Revenues (2007) 16,593.99 51,122.00 6,969.27 Total Operating Expenses (in $m) (2007) 11,509.59 32,684.00 6,273.86 Operating Income (2007) 5,084.40 18,438.00 695.41 Net profit margin 2006 0.48 0.34 0.25 Net profit margin 2007 0.42 0.35 0.16 Net profit margin 2008 0.32 0.354 0.003 The above data indicates Google’s revenue can be located between Microsoft and Yahoo. The performance of Google is quite impressive given that it recorded an operating income that was much higher compared to that of Microsoft and Yahoo during the same year. Further, Google recorded positive change in Net Profit Margins in the years 2006, 2007 and 2008 while Microsoft and Yahoo recorded a negative change. Generally, the performance of Google is impressive and rewarding to investors. 6. What are the company’s key resources and competitive capabilities? What competitive liabilities and resource weaknesses does it have? What opportunities exist? What threats to its continued success are present? The following are Google’s strengths, weaknesses, opportunities and threats Strengths Google is the leading search engine on the internet Has a high speed, reliable, simple to use and user friendly (Gamble, 2010, p. 137) It is the best known search engine among the public, making marketing process easy It provides numerous products ranging from hardware, web products, Mobile products and desktop products (Gamble, 2010, p. 137) The operating cost for Google’s products and services is low It hires talented, knowledgeable and skilled persons to enhance search engine algorisms which make the search more efficient, faster and relevant. Its search engine interface has more than 100 languages making it usable and helpful for locals in various parts of the world Its state-of-art technology helps in updating outcomes to users. Google has a page-rank technology which provides users with access to the most important information or pages first. The results are marked in a differential scale. In other words, it separates regular links from sponsored links provided It also provides localized searching, which enables users to receive results according to their regions It provides services such as Email, Citation, Directory, News and Groups (Gamble, 2010, p. 138). It has come up with solutions regarding personalized toolbars, devices and indexes Users are directly routed to WebPages without being required to access other sites for ad. revenues Its integration with YouTube helps to provide video services to users, which is regarded as the leading online video portal. It has AdSense and AdWords programs working as the main mechanism (Gamble, 2010, p. 144) Weaknesses Google is mostly dependent on its search-based advertising (Gamble, 2010, p. 154) It does not have a clear focus regarding the service of the engine Users often face dead ends. For instance, a user may find a citation but not find the whole text Spammers are able to create sites containing numerous links, which end up ranking high (Gamble, 2010, p. 154) The cost for the data centre has been increasing Google has no clear contraction strategy Its presence in social-networking is weak The integration between products and services is quite heterogeneous It does not have the ability to prevent YouTube from being monetized (Gamble, 2010, p. 154) Its localized search leads to errors sometimes Only about 50 percent to 60 percent of the queries answered by Google are accurate The contextual advertisement of Google is less effective in terms of revenue generation (Niu, Z. & Liu, 2010, p. 12) Opportunities Google has a good opportunity for reaching new contents and for reaching new segments/groups It has a good opportunity for attracting experts It has an opportunity to use high value content on the internet Google has an opportunity to increase its impact by acquiring other search companies Increasing internet usage can help to increase the usage of google.com It can offer more products and services on hand-held devices to capture more market It can use localized vendors to advertise its products and services on the localized search (Niu & Liu, 2010, p. 13). Threats There are cases of legal trials There are limits from indexing policies Competition from companies such as MSN and Yahoo Possibility of disappearance of informational skills Users may not access institutional subscription Library services are becoming less visible Possibility of censorship, which may render many services to become less effective (Niu & Liu, 2010, p. 13) 7. Recommendations for Google’s top-management team It is advisable for Google Inc. to strongly pursue growth and quality assurance initiatives for its search engine. For it to retain leadership in the search industry, it has to maintain the superior quality of its engine. It is advisable to include additional media and to increase searched document base. Google Inc. should continually monitor competitors and where possible, acquire them. It is also advisable for this company to come up with strategies to reduce its high operating costs. This can be achieved through making bulk deals with vendors of PC components and where possible, putting cables into the oceans to minimize traffic costs between regions or continents. The company should continually push for mobile search through making strategic alliances with cell phone contract providers and cell phone vendors in order to grow and secure a grater market share. Google Inc. should also ensure that its beneficial programs such as the Adsense have been continued by all means. The new services AdSense TV Ads in particular should be used to acquire more customers through the established advertising networks. The attainment and preservation of superior performance than competitors leads to achievement of competitive advantage, which is known to dependent of level of available resources. Knowledge has been recognized as one of the key resources for attaining competitive edge due its inability to be imitated easily, its acquisition through various learning processes widen the understanding of the peculiarities of the business environment in which Google Inc operate. Therefore, the ability to constantly acquire, assimilate, share, and apply knowledge appropriately is a key determinant to business success. Thus, Google Inc should adopt a continuous learning culture because, while a single instance of organizational learning may lead to the practices, processes, and skills that are relatively easy to duplicate, continuous organizational learning lead to deep-rooted skills capable of producing cumulative effects, which are much more difficult to duplicate by competitors. 8. Google vision statement. Google’s believes in an open web that benefits all publishers and users. However, this does not mean that its products and services offered on the web are free (Nieman, 2010, p. 1). Google believes that there is a need to support web content using various business models, including, content that is meant for users to subscribe in it. Though Google believes that the use of advertisement model will still remain the main source of revenue, there is also need to support it using a paid content model. However, the paid content model is not meant to replace advertisements opportunities but to enhance them. Google acknowledges that the paid content model has two main challenges. First, the content provided must be valuable to users, and this has to be addressed keenly by content creators. Secondly, the amount charged must be affordable and painless to the users. Google has experience in e-commerce products and services and has successfully developed appealing products and services to millions of users across the globe. Google also expects to use the same expertise to develop a successful and appealing e-commerce platform for publishers (Nieman, 2010, p. 1). Google is committed to developing ways to ensure that users know and understand the existing products and services. It is also committed to continued innovation and discovery of better distribution ways of both free and paid content. As well, it is committed to giving support to publishers to develop a scalable e-commerce system through its Checkout product and establish better ways through which users access this content via search (Nieman, 2010, p. 1). Google’s premium content ecosystem has the five main features stated below: It has single sign-on capability that enables users to manage subscriptions and access content. Subscriptions from different tiles are easily combined by publishers for one price. Publishers are able to develop more than one payment option and include/exclude content behind a paywall with ease. There are three main multiple tiers of access to search, namely, “first free click” access, access to preview pages and snippet views only. Advertising systems with relevant and quality ads (Nieman, 2010, p. 1). Google has made a step in realizing this vision as it is already working with several premium content providers. To allow for more flexibility for users and publishers, Google will ensure that its e-commerce system is well combined with advertising platform and search capability (Nieman, 2010, p. 1). 9. SWOT analysis for Google Strengths Google is the leading search engine on the internet Has a high speed, reliable, simple to use and user friendly (Gamble, 2010, p. 137) It is the best known search engine among the public, making marketing process easy It provides numerous products ranging from hardware, web products, Mobile products and desktop products (Gamble, 2010, p. 137) The operating cost for Google’s products and services is low It hires talented, knowledgeable and skilled persons to enhance search engine algorisms which make the search more efficient, faster and relevant. Its search engine interface has more than 100 languages making it usable and helpful for locals in various parts of the world Its state-of-art technology helps in updating outcomes to users. Google has a page-rank technology which provides users with access to the most important information or pages first. The results are marked in a differential scale. In other words, it separates regular links from sponsored links provided It also provides localized searching, which enables users to receive results according to their regions It provides services such as Email, Citation, Directory, News and Groups (Gamble, 2010, p. 138). It has come up with solutions regarding personalized toolbars, devices and indexes Users are directly routed to WebPages without being required to access other sites for ad. revenues Its integration with YouTube helps to provide video services to users, which is regarded as the leading online video portal. It has AdSense and AdWords programs working as the main mechanism (Gamble, 2010, p. 144) Weaknesses Google is mostly dependent on its search-based advertising (Gamble, 2010, p. 154) It does not have a clear focus regarding the service of the engine Users often face dead ends. For instance, a user may find a citation but not find the whole text Spammers are able to create sites containing numerous links, which end up ranking high (Gamble, 2010, p. 154) The cost for the data centre has been increasing Google has no clear contraction strategy Its presence in social-networking is weak The integration between products and services is quite heterogeneous It does not have the ability to prevent YouTube from being monetized (Gamble, 2010, p. 154) Its localized search leads to errors sometimes Only about 50 percent to 60 percent of the queries answered by Google are accurate The contextual advertisement of Google is less effective in terms of revenue generation (Niu, Z. & Liu, 2010, p. 12) Opportunities Google has a good opportunity for reaching new contents and for reaching new segments/groups It has a good opportunity for attracting experts It has an opportunity to use high value content on the internet Google has an opportunity to increase its impact by acquiring other search companies Increasing internet usage can help to increase the usage of google.com It can offer more products and services on hand-held devices to capture more market It can use localized vendors to advertise its products and services on the localized search (Niu & Liu, 2010, p. 13). Threats There are cases of legal trials There are limits from indexing policies Competition from companies such as MSN and Yahoo Possibility of disappearance of informational skills Users may not access institutional subscription Library services are becoming less visible Possibility of censorship, which may render many services to become less effective (Niu & Liu, 2010, p. 13) References Gamble, J. E. (2010), Case 9: Google’s strategy in 2010: Crafting and executing strategy. Ed 18. Nieman (2010). Google’s vision statement. Retrieved 3 July 2013 from, Niu, Z. & Liu, Y. (2010), Google Inc. Retrieved 3 July 2013 from, Porter, M.E. (1980) Competitive Strategy, New York: Free Press. Porter, M.E. (2008). The Five Competitive Forces That Shape Strategy, Harvard business Review, January 2008. Staudinger, U. (2008). Google's strategy in 2008. Retrieved 3 July 2013 from, Read More