Strategic Management - Google Inc - Assignment Example

Strategic Management: Case Study of Google Inc. 2007 1. Google’s Strategic Tools and External Environment Background, evolution and growth: Google Inc. has been one of the fastest growing companies in the recent global corporate history. The company was founded in 1998 by Larry Page and Sergey Brin, then Stanford graduates, who developed the search engine product. In 1999, the founders got their first round of venture capital from Sequoia and Kleiner Perkins, two of the leading angel funding companies (Mangalindan, 2005). By 2003, the company had captured a major market share in web searches and advertisement earnings through paid listings. When Google entered the internet market, the trend was that of earning revenues through banner advertisements on web sites. But Google did not carry any advertisements on its web site and offered nothing but search results. For its revenues, it depended only from licensing revenues on its search technology to Yahoo! and other third-party sites (Eisenmann and Herman, 2006). When the dotcom boom was in its full form, the heaviest users of the internet were ecommerce firms. For these users, search results were important as a source of information as well as for marketing their products and services. In December 1999, Google followed the business model engineered by Overture (acquired by Yahoo! in 2003) of paid listings that marketers had already shown a preference for over banner advertisements. Most users were known to use web searches for commercial purposes and marketers preferred to buy paid listings from search engines rather than post banner ads on web sites. The paid listing revenue model was founded on “cost per click” (CPC) and users tended to click on the topmost listings. Marketers bid high on key words since they had the potential to increased sales, the principal beneficiary of the system being the search engines that earned on the number of clicks and price bid for each click. At the time, the market for paid listings was controlled by Overture that in turn supplied the listings to the largest portals of the time, that is, MSN, Yahoo! and AOL. Google entered the market through innovation of this product. It introduced the weighted CPC bids, that is, the ratio of the ad’s real click through ratio (CTR) to the statistically derived CTR. The result was that the most clicked listings would come up on top so that the user had the possibility of clicking on the most popular ads. This also ensured that the marketers who had the highest CPC as well as the highest CTR would be ranked on top giving value to the most effective ones. This ingenuous initiative by Google catapulted it to the ninth rank among websites in 2001 with 24.5 million visitors every month. In 2002, AOL signed with Google for paid listings and algorithm search results. Since then, the market for paid listings has been shared between Google and Overture. Both companies have made significant spending on technology, creating entry barriers for prospective competitors. At the same time, the companies have vied with each other in developing new products – like Overture’s software tools to improve product quality on content and Google’s contextual paid listings – that were displayed on the web sites rather than on the search results – and Overture too adopted the product (Eisenmann and Herman, 2006). By 2003, Google controlled 75 percent of the searches through its own web site and its licensees, Yahoo! and AOL in the United States. The company finally announced its Initial Public Offering (IPO) in 2004, with the provision of a dual equity structure in which Class B stockholders had 10 votes to one share while Class A stockholders had one vote per share (Eisenmann and Herman, 2006). By this mechanism that was predominant in the media industry while a novelty in the technology sphere, the owners maintained their control over the company and effectively prevented a hostile takeover. Despite being a public company, the company has steadfastly maintained its organization structure in which all decisions are taken in consensus by the two founder-owners and the CEO. Google has grown over a short span of half a decade through creative innovations – in terms of its business model as well as management style – and continuous investments in research and development. Many companies that have innovative products, however, have not been able to sustain the growth path because of lack of creativity in the management style. For example, companies like Reynolds, DuPont, Ford and Enron failed to keep up the growth momentum because of lack of creativity (Khan and Ansari). A creative organization ‘leads’ the industry instead of being ‘managed’. Innovation is a continuous dynamic process and is not a one-off episode in a company’s life cycle. For this, the organization’s mission needs to be well-defined and communicated through the entire hierarchy. Google has, however, recently hit the roadblock to further growth. Although revenues are still growing, the rate of growth has fallen short of analysts’ expectations. According to market estimates, Google has a market share of the search engine market of 44 per cent, Yahoo has 28.7 percent share and Microsoft has 13.7 percent. Even the management has accepted that they may encounter difficulties towards further growth (Keptyoff, 2006). SWOT analysis: Strengths and weaknesses: Google’s strengths and weaknesses both hinge on the company’s origin and nature of functioning. Its core competence is in developing a sophisticated and innovative technology. Battele observed, “The company’s founders are, upon first impression, strikingly similar to the persona that Google projected during [its] early years – aloof, supersmart, dismissive of unsolicited advice. They are… first and foremost engineers. And engineers are not the best communicators, nor do they make the best diplomats or business development executives. They tend to trust technology before human beings, leading to a culture of a limited information sharing” (quoted in Eisenmann and Herman, 2006). This more or less sums up Google’s organization structure that has resulted in the company’s phenomenal success as well as the formed a structure that is symptomatic of its pitfalls. From the very beginning, the company has unabashedly had an unconventional management structure that was intensely closely held and secretive. This was evident from the company’s “Owners’ Manual” that refused to share earnings guidance to Wall Street and the dual equity structure offered in the IPO. At the same time, however, technology innovations have been considerably democratic. Many of its recent initiatives, like the social networking site Orkut or Google News that used algorithms to compile stories, were developed from a bottoms-up approach. Google chooses the smartest engineers, who work in small groups, and are encouraged to spend 20 percent of their office hours on projects of their choice. The value chain of a company, the concept introduced by Porter (1985) is its entire product flow from the suppliers to the customers and managing the information flow seamlessly such that the customer derives maximum satisfaction while the company maximizes its profits. Originally developed in the context of a manufacturing company, the theory of value chain may also be used to describe the core competency of a web search engine company like Google. The primary activities of the company involve value addition of the paid listings on web searches and other new ancillary products. The product interrelationships involve the numerous projects that the software engineers continuously are involved with. The market interrelationships of a web search company are closely interlinked with the product interrelationships since the products need to be monetized in the process. In Porter’s model, the firm’s infrastructure, human resource department, technology development and procurements comprise the tertiary activities. However, for a company like Google that has its core in technology, human resources are crucial. The company’s key strength is in its technological capabilities and the innovations continuously being developed by its engineers. Over the more recent years, there is concern over Google’s diversification into associated technologies other than web searches, like Gmail, Orkut, etc. that might dilute its core strength. The acquisition of AOL’s 5 percent share or that of YouTube is also seen as diversifications that are not essentially related to its core operations. These might soon turn out to be the company’s key weaknesses. Since 2005, Google’s customer satisfaction has suffered as many advertisers now feel that Google is growing less responsible to customer needs (Eisenmann and Herman, 2006). However, Google publicly claims to focus on its 70-20-10 rule by which it concentrates 70 percent of its engineering time on its core strength of ads and web searches, 20 percent on related products like Local Search, Google Earth, Gmail, Google Talk, Google Video, Enterprise, Book Search, AdSense, Desktop Search and Mobile and 20 percent time on other products like Orkut, Google Suggest, AdSense Offline, Google Movies, Google Reader, Google Pack and Wifi (Google Inc Analyst Day Presentation, 2006). The various related products have in fact garnered more users for Google’s search engine and strengthened its core product. For example, Orkut has been lapped up by the young generation because of the youth friendly nature of social networking sites while the silver generation’s enthusiasm for searching for maps and atlases has increased Google Earth’s search manifold. Hence, Google’s diversification in related and apparently unrelated areas is not haphazard but follows a design that enables its growth. Opportunities and threats L’ PEST analysis, that is studying the political/legal, economic, social and technological environment, is concerned with analysing the business environment that a company faces (tutor2). When Google was launched in 1998, the web search market was in its infancy. However, the internet has grown phenomenally over the years and Google is now one of the top brands in the world, cutting through industries ranging from manufacturing to services. The technological environment was definitely favourable, with the discovery of the enormous potential of the world wide web and access to information through web searches. Google capitalized on this potential through its technological capabilities. The economic, social and political environment supported its growth with advertisers, particularly those from the small and medium enterprises were looking for cost-effective selling avenues in the new media. During the more recent times, the internet space is getting more widespread than it was earlier. The internet is becoming a way of life for a wide spectrum of people who use it for a variety of purposes ranging from social network groups to downloading maps and atlases. Hence, it is now anticipated that the internet will not only be a standard feature in all homes, which it has in the developed world, but also enter the living room as an entertainment tool. Google, as a creative innovator in strategies, has already gauged the change. In the competitive market place of the internet, Yahoo and Google are two companies that are most equipped to make a transition to this change. According to Porter’s (1980) theory, the level of competition in an industry is defined by the five forces: 1) the threat of entry of new competitors (new entrants), 2) the threat of substitutes, 3) the bargaining power of buyers, 4) the bargaining power of suppliers and 5) the degree of rivalry between existing competitors. The business environment depends on the level of industry competition and the intensity of rivalry, which in turn depend on the threat of new entrants into the business and that of substitutes as well as how well the company can manage its buyers and suppliers. The intensity of rivalry between players also depends on the number and size of players, cost structure of the industry, level of product differentiation, customer-switching costs, level of aggression exhibited by players and exit barriers. The threat of new entrants raises the level of competition in the industry. The intensity of competition to a large extent depends on the threat of substitutes. The number of buyers for the product increases the opportunities for the company while its competitiveness vis-à-vis the suppliers of products determine the margins. The web search market has continued to be dominated mainly by Google and Yahoo. The two companies were the early entrants when the industry was still in its nascent stage. They have the first mover advantage and have already spent enormous amounts on technology and manpower that raise a barrier for new entrants. However, Google faces the threat of substitutes launched by innovative products. As the internet environment becomes more sophisticated and the information-entertainment bifurcation becomes hazier, there may appear, a greater number of smaller but more effective players in the market that provide some of the products that Google provides. However, Google has the potential to create innovate products as it has done in the past. A case in point was the contextual listing when the market for paid listings was found stagnating. Thus, Google can turn threats into opportunities by either acquiring smaller companies that have innovative products – like it has done by acquiring YouTube – or by innovating on existing products of competitors – as in the case of launching contextual listings while Yahoo, the initiator of paid listings continued with the same model. 2. Competitive Advantage of Google Google has developed the intangible capabilities which, according to the VIRO (Valuable, Rarity, Immitability, Organization) model, developed by Barney (2005), are required for it to maintain strategic competitive advantage. In a short span of about half a decade, the company overthrew the reigning might of Yahoo! in the search technology. Users shifted to Google because of its superior search technology. However, in the more recent years, there are doubts raised over its sustainability. For example, the value that the company derives through its unique paid listing model based on the weighted cost per click model has so far worked on its uniqueness. However, it opens up the possibility of new search engines following Google’s example even though the organization is still strong enough to continue on its growth path on the basis of its innovations. Although in the first phase of its growth, Google concentrated mainly on the search engine, it is increasingly diversifying into more areas and becoming like the competing portals on the internet, MSN and Yahoo. Since 2004, Google has also refined its search engine technology and provided innovated offerings along with web searches. For example, the Desktop Search is a downloadable product that searches the computer desktop for all types of files, including Word Documents, PDF, JPEG, mails, etc. This product was not supported by paid listings, like most of its other offerings, but it had the option of advertising on the basis of keywords. Google has launched a number of personalized services like Gmail, Google Alerts, Google Groups, Google Personalized Homepage, Froogle Shopping List, Google Maps, Google Talk and Google Personalized Search, piggybacking on its success in search engine and paid listing revenue model. All the services have a unified sigh-on service with Google Accounts. This is the main competitive advantage of Google over Yahoo although the latter too has many services like search engine, advertisements, paid listings and email, all the services are on separate platforms. Gmail, launched in 2004, offered a gigabyte of storage space, much higher than any of the competitors. In addition, the mail was supported by paid listings, the company’s core revenue model that appeared along the side of the account, after scanning the content of the mail. The Google management has organized the variety of innovations on the basis of 70/20/10 rule, that is 70 percent of the engineering time of the company is devoted to its core products (web searches and paid listings), 20 percent to the extended products like Gmail and 10 percent to possible new businesses (Eisenmann and Herman, 2006). Typically, a company develops its value through its resources that include assets, skills and capabilities. The success of a company’s multi-business strategy depends on its positioning in terms of its specialization. Examples of different companies, the authors show that the strategy may not be suitable for all and many companies fail because of misaligned corporate strategies. Google’s diversification into various activities other than web searches has the pitfall of such misalignment. Galpin (1997) shows that the dynamics between the corporate strategy and employee behavior are the keys to success of strategic planning. 3. Google’s Recent Strategic Initiatives Corporate level: Since its inception in 1998 to date, Google has followed an aggressive growth path purely through strategic innovations in search engine technology and creative revenue models. However, the current internet environment is greatly different from the time when Google entered the market. The internet is now transforming itself from being a functional tool for information and knowledge, as it was five years back, to an entertainment-led one. More than ecommerce, the main driver of Google’s growth in the first phase, social networking and entertainment are the main drivers now. The recent strategic initiatives, like taking 5 percent stake in AOL or buying YouTube are steps in the direction to acquire more traffic towards itself through these avenues. The diffusion of innovation was first theorized by Rogers (1962). He defined innovation as a product, service or idea perceived as new by the customer. The innovation is adopted on the basis of relative advantage, compatibility, observability, trialability and complexity. While adoption is positively relative to the first four factors, the last factor has a negative impact. The innovation is adopted by consumers in five specific phases – by the early innovators who are a small group of people who initiate the innovation, the early adoptors, who are the initial purchasers, early majority and late majority when more customers take to the innovation and laggards who enter into the market at a late stage. Rogers (1995) found that customer behaviour in general formed a bell-shaped curve in adoption and diffusion of innovation. In the internet sphere, Yahoo and Google may be categorised as the early innovator who initiated the search engine product. Typically, innovators are younger, have higher income, risk-prone (as were the founders of Google) and pass on information to others. Also, they usually experiment with alternate product. However, the market is now in an early majority phase when a large number of customers have taken to the product. Now is the time for the next phase of creative innovation. Google’s growth strategy can be analyzed with the Ansoff (1965) matrix presented below. Risks are lowest when market penetration is attempted by present or existing players. Market development by a new player and product development by the existing player lies at the next levels of risks while diversification has the highest risks involved. Typically existing financial services players include internet banking as the product development strategies or new players attempt to enter into the market through this avenue by either tying up with an existing player or capitalizing on synergic products, it is a moderately risky business. Business level: Google has continuously upgraded its advertising products, its key revenue earner. It endeavors to refine the keyword searches and has launched the click fraud detection tool to combat the practice by some advertisers to resort to click on competitors’ listing in order to raise the latter’s listing costs. The contextual listing was found useful for marketers who were now provided with a more targeted advertisement model. These resulted in Google’s increased revenues through monetizing its searches. By the end of 2005, Google’s revenues from paid listings through clicks was double that of Yahoo’s. Google Base, the ecommerce tool, has encroached into eBay’s territory as well. Since many of the advertisers on Google are also eBay sellers, they find it cost effective on advertising directly on Google. Customers too often search for a vendor of a product through Google search rather than go to the eBay site. A host of new services like the Local Search, Google Map, Book Search, Virtual Search, Google Video, Picassa, etc. have individually added value to each segment of customers. From the SWOT analysis, we have seen that Google’s main strength is in its capability towards innovation and “out-of-box” thinking in terms of management and business strategies. It has been able to innovate on existing products of competitors and initiate new products that have strong customer requirements, e.g Orkut or Gmail. Abraham Maslow developed the hierarchy of needs as follows: 1) physiological needs, 2) safety needs, 3) needs for love, affection and belonging, 4) need for esteem and 5) need for self-actualization. Based on this, customer hierarchy of needs for an IT product may be laid out as 1) products that work, 2) rapid resolution of technical issues, 3) understanding and ability to increase profit, 4) recognition and expansion of horizons and 5) mutually beneficial partnerships (Phelon Group). The internet users are now used to products that work and now demand for new products. Hence, internet companies now need to expand their horizons to meet customer requirements. Functional level: The functional level of Google is organized around the company’s core engineering skills. All hiring is done through consensus, just like the company takes most of its decisions. A series of interviews for possible candidates are taken by the management and potential colleagues to be sure of the aptitude of the person as well as his compatibility. Google provides the best facilities to all employees, with the top salaries and benefits, along with encouragement towards creativity and innovation for all employees. As a result, Google engineers have developed the capability to innovate new products. 4. Google’s Possible Future Directions In view of the changing internet market, when customer needs are changing from purely functional to a more lived-in environment, in which search engines and other internet products have become a way of life, the players need to create new products or acquire companies that offer such products. For example, since it is almost a given fact that the internet has entered the living room, Google could acquire a cable company that offers online solutions – a company perhaps like TiVo that sells video on the internet. It is now believed that internet television will replace broadcast television in 10 years. Although TiVO is a small company, it has over 4 million subscribers (PVRWire). Google has already taken a step towards this by buying 5 percent stake in AOL that has video initiatives. The company should enter the internet television market in a more aggressive manner at this juncture. Some analysts predict that after its phenomenal success in the search engine sphere, Google would next target the market share of Microsoft in the entire range of retail software products (Eisenmann and Herman, 2006). Although there has not yet been any confirmation on this possibility from the Google management, it is not an unlikely even for the future. In particular, Google’s initiatives of linux-based server applications, it seems a logical next step. In fact, Google is working towards contributing engineering software to OpenOffice.org, an open-source initiative. There are also rumors that Google might offer wi-fi connections across America that would boost its overall positioning in the internet sphere. Cringley described Google’s possibilities and ambitious goals as this: “There will be the Internet and then there will be the Google Internet, superimposed on top. We’ll use it even without knowing. The Google Internet will be faster, safer and cheaper. With the advent of GoogleBase… there’s suddenly a new kind of marketplace for data with everything that’s a transaction in the most literal sense as Google takes over the role of the trusted third-party info-escrow agent for all world business. That’s the goal” (quoted in Eisenmann and Herman, 2006). Fern (2004, cited in Archibald, 2006) has used the Boston Consulting Group (BCG) Matrix developed in the 1960s and Hammel and Prahlad’s (1989) theories to categorize product launches in terms of market share and strategic intent of the player. The BCG Matrix correlates market share with market growth and categorizes the product as successively the Problem Child, Star, Cash Cow and Dog. The BCG matrix is demonstrated in the following figure. Source: Archibald, 2006 Hammel and Prahlad (1989) categorizes the strategic intent as technological excellence (TE), operational excellence (OE) and customer intimacy (CI). Products are launched with high technological costs when it is done with TE. The margin requirements at this stage are extremely high to cover development costs. At the OE stage, reverse engineering is often taken resort to. Additional features may be provided at much lower costs. At the CI stage, customer requirements are incorporated into the technology. Combining both the theories, TC-PC stage produces products in fast growing emerging markets with little concern for customer requirements as was during Google’s initial years of search engine and paid listings; at the S-TC stage, additional features are added to increase market share as it is for Google now when it is launching a whole lot of new projects; CC-TE stage is one when cost reduction is attempted; D-TE stage is when business, processes or technologies of competitors are merged or acquired; at the PC-OE stage, competitors imitate product while also attempting operational innovations. Google has not yet reached the last three stages but should take care that its ambitious plans do not force it to begin cost-cutting exercises. In view of the current trends in the internet market, it is recommended that Google continues its innovation momentum. However, it is no longer the case that Google needs to innovate new products all by itself. There are many smaller players that have launched innovative products, like for example TiVo, or podcasting companies. Google could capitalize on the new products by acquiring some of these innovative companies without the need to reinventing the wheel. Following the Boston Consulting Group Matrix of product innovation, it should enter into the CC-TE and the D-TE stages by controlling costs (primarily engineering costs) and acquiring new technologies and processes by acquiring other competing or complementary companies. The company has reached a stage when it does not necessarily require to innovate new products itself but may acquire these from other companies. Works Cited Porter, M.F. (1980) "Competitive Strategy", The Free Press, New York, 1980 Barney, Jay B., Gaining Sustainable Competitive Advantage, 2nd Edition, Prentice Hall; 2 edition, 2001 Porter, Michael, Competitive Advantage: Creating and Sustaining Superior Performance, New York, Free Press, 1985 Mangalindan, Mylene, Google CEO Offers Management Strategies, The Wall Street Journal, April 2005. http://startup.wsj.com/howto/management/20040405-mangalindan.html Eisenmann, T R and K Herman, “ Google Inc.” Harvard Business School. 9-806-105 Rev. February 21,2006. Khan, Rashid M and Mohammed Al-Ansari, Sustainable Innovation as Corporate Strategy, http://www.triz-journal.com/archives/2005/01/02.pdf Galpin, Timothy J, Making Strategy Work: Building Sustainable Growth Capability, Jossey-Bass, October 17, 1997 Ansoff, H I., Corporate Strategy: An analytic approach to business policy for growth and expansion, McGraw Hill, New York, 1965 Google Inc Analyst Day Presentation, 2006, retrieved from http://www.shareholder.com/visitors/event/build2/ Keptyoff, Verne, Google’s growth hitting a wall, Comments by CFO send stock falling, but analysts say some slowing is expected, San Francisco Chronicle, March 1, 2006, http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/03/01/GOOGLE.TMP&type=business http://www.tutor2u.net/business/strategy/PEST_analysis.htm Rogers E M (1983). Diffusion of Innovations, 3rd Ed. New York: The Free Press. Newcastle (2002). Internet Banking causes biggest shake up in 400 years. Retrieved from http://www.ncl.ac.uk/press.office/press.release/content.phtml?ref=1031565182 PVR Wire, Who will buy TiVO? Google, MSN or Yahoo? October 27, 2006, http://www.pvrwire.com/2006/10/27/who-will-buy-tivo-google-yahoo-or-microsoft/ The Phelon Group. A Critical Tool for New IT Enterprises: A Consumer Hierarchy of Needs. http://www.phelongroup.com/pdfs/CMO-Viewpoint-Hierarchy-of-Needs.pdf Ansoff, I. (1989), Corporate Strategy, rev. edn, Penguin, Harmondsworth. Archibald, R D (2006). The Purpose and Method of Practical Project Categorization. PM World Today. Vol VIII Issue 10 Fern, Edward, “Strategic Categorization of Projects,” http://www.time-to-profit.com/TTPcategories.asp Hamel, Gary & C. K. Prahalad (1989). Strategic Intent, Harvard Business Review, May-June Read More