Question 1: Evaluate Google using the competitive forces and value chain models.
Five forces affecting competitive strategy:Harvard Business School Professor Michael Porter identified five forces that drive competition within an industry:1.Threat of entry by new competitors -Many new entrants effectively decreases profitability2. Intensity of rivalry among existing competitors – Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.
3.Pressure from substitute products -The more substitute products, the more customers can put the firm under pressure to lower their prices4.Bargaining power of buyers – Buyer concentration to firm concentration ratio5.Bargaining power of suppliers – Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources. (Porter, 1979)This model is beneficial to new and existing companies who are trying to be competitive. According to the strategy, as the intensity of competition grows, margins and returns are driven down. An organization may require a change in strategy to compete and stay in business.
Porter’s 5 Forces diagram: Source: Porter, 1980The forces determine the competitiveness and attractiveness of a market. Attractiveness refers to the overall industry profitability. An “unattractive” industry is when the forces drive down overall profitability. A very unattractive industry would be one approaching pure competition. A change in the forces normally requires a change in the company’s strategy. The overall industry attractiveness does not imply that every firm operating in the industry will return the same profitability. Firms are able to apply their uniqueness in resource, business model or network to achieve a profit above the industry average.
Evaluation of Google Using Competitive ModelMicrosoft is being threatened by Google’s power in the search engine industry as well as Google’s entrance into the software arena. Microsoft’s profits are being threatened and they are scrambling to change strategies (Laudon and Laudon, 2006). Thus far, Microsoft has been able to deter competitors by bundling their products. Google has changed its strategy by offering their products for free and by passing Microsoft’s operating system through offering web-based programs that do not require an MS operating system. Microsoft has failed to develop a satisfactory counter to Google. Google’s creativity has provided consumers with more options as they began to substitute Microsoft products like Word and MSN with web-based word processors and Google Search. This shift in Google’s power makes the industry much more attractive leading to pure competition.
This 5 forces analysis is just one part of the complete Porter strategic models. The other elements are the value chain and generic strategies. The value chain, also known as value chain analysis, is a chain of activities. Products pass through all activities of the chain in order and at each point in the chain gain value. The events in the chain add value to the product. For example, cutting a diamond may have a low cost, but the activity adds most of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond.
Its ultimate goal is to maximize value while minimizing costs. The manner in which the chain activities are carried out determines costs and affects profits. Organizations complete many activities (even thousands) called primary or support activities in the process of converting inputs to outputs. According to Porter (1985), the primary activities are:1.Inbound Logistics – occurs between suppliers and include all the activities required to receive, store, and disseminate2.Operations – activities required to transform inputs into outputs (products and services)3.Outbound Logistics – activities required to collect, store, and distribute the output4.Marketing and Sales – activities inform buyers about products and services, leading to buyers purchasing and the facilitation of that purchase5.Service – activities required to keep the product or service working after sell and deliverySecondary activities are:
1.Procurement – acquisition of inputs, or resources, for the firm2.Human Resource management – hiring, training, developing, compensating and (if necessary) firing activities3.Technological Development – equipment, hardware, software, procedures and technical knowledge4.Infrastructure – serves the company’s needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.
Porter’s Value ChainSource: Porter, 1985Evaluation of Google Using Value Chain ModelGoogle has met the value chain’s goal of minimizing cost. Google has grown so much that it handles almost half of all Web searches. According to estimates Google has handled more than 25 billion searches at 1/3 of the cost of its competitors. Google accomplishes this output by inbounding and customizing various out of the box software products and inexpensive servers. Google maintains its loyal customer base by giving away portions of their products and making others accessible via the web regardless of the consumer’s operating system. Unlike Microsoft, Google does not pigeon hold its customers by forcing them to buy and use bundles.
By disseminating products as web-based and resisting bundling, consumers can choose which products they purchase and which they do not purchase. This provides customers with more choice and power. Consumer’s respect that feature and have remained loyal to the company. In turn, the company has continued to provide excellent customer service. Secondary activities are not ignored. Google procures fast inexpensive servers. They attract innovative programmers to improve technology. One such innovation was the 2000 launch of Adwords. In addition, they introduced Spreadsheets (web-based spreadsheet application) and acquired Writely (web-based word processor) (Laudon and Laudon, 2006).
Question 2: What are Google’s sources of competitive advantage? How does it provide value to its users?Google’s chief economist, Hal R. Varian said that “the source of Google’s competitive advantage is learning by doing” (Howe, 2008). The company focuses on learning from experience and its scientists constantly work to improve the importance of search results for users of Google as well as the effectiveness of its advertising system for both advertisers and publishers (Howe, 2008). Google has decided that for long term success infrastructure is a competitive advantage and that Google uses commodity hardware and open source software but that when it comes to being ahead, they do their own thing which often places then on top of existing technology (Deepok, 2007).
Google’s IT infrastructure is a closely guarded secret because it is part of its competitive advantage (Laudon & Laudon, 2007). Google has thousands of servers that are spread out into at least 25 different locations throughout the world. These servers are used to fund inexpensive hardware that runs customized versions of operating systems. They create custom software which simplifies processing and creates large data sets allowing for group queries. They are scheduled for distributed processing and keep copies of data in several places so that the data will be available even if the server fails. “Google’s gigantic infrastructure is the big barrier to entry for its rivals, and will remain so, as long as the company keeps spending billions on it” (Malik, 2007, para. 14).
Stephen Arnold with ArnoldIT.com says that Google has the requisite engineering and infrastructure in place and up and running. Google’s Web search, video, and map applications don’t choke the as-is Google system which makes it defeat its competitors because none of them can match the cost and scale that Google has accomplished (2008). Google designs its own hardware and codes its own hardware and software which keeps it ahead of their competitors. Even if Google’s competitors start to close the gap, Google remains ahead in the game.
Their competitive advantage provides value to the customers because it allows Google to focus on them before they focus on giving more to their shareholders. Google being ahead of its competitors only spends $1 for every $3 its competitors spends which allows them to provide its users with a vast array of Web-based services and software tools that are searchable in a speedy manner (Laudon & Laudon, 2007). This also allows Google to focus on remaining ahead of the game and provides a value to its users that none of its competitors can provide that include interfaces that are clear and simple, pages that load instantly, and placement in search results that are never sold to anyone. This helps provide users the best experience possible and helps Google maintain the most loyal audience on the web (Google, 2008).
The services and software tools that are used by the consumers create a demand for vendors to want to place their ads on Google’s sites because Google allows for millions of variables which correlate with millions of potential ads that are more relevant to each particular user who performs a search through Google. This creates about a 70 percent demand for vendors to want to use Google’s sites for their ads (Laudon & Laudon, 2007).
Google’s overall source of competitive advantage is its capabilities to maintain secrecy within its organization about its infrastructure. The organization of its infrastructure has allowed it to create a large amount of Web-based services and software tools that provides users interfaces that remain clear and simple to use. Clear and simple is what consumers demand. This creates a need for Google to continue its creativity and allows them to stay ahead of the game because of consumer demand for their services.
Question 3: What problems and challenges does Google face in this case? What management, organization, and technology factors are responsible for these problems and challenges?Google faces many problems and challenges like all businesses do, but what are the major challenges that good will face? Google is known as a search provider for the most part, but now is giving Microsoft a run for their money in software and leaving the previous search engine leader Yahoo in their dust. However, competition from other software and internet search engine companies will be one of the largest challenges facing Google in the short run. Microsoft is the 800 lb gorilla and they are used to getting their way and are now going to try with help from Carl Ichan to get a group of directors voted to the Yahoo board to approve the merger.
Microsoft is getting desperate to make this deal happen because of the increased disparity in web searches among the top three. Google owned a 62% share in U.S. web searches for April 2008, with Yahoo coming in at 17.5%, and Microsoft rounding out the top three at 9.7% (Greene, 2008). The combination of Microsoft and Yahoo would be a shock to the industry and the combined companies would have the top software company along with the previous leader in the search engine market. This combination could cause major problems because economies of scale would improve even more for the new company, and they would be able to combine their expertise and concentrate on catching up to Google.
Google’s management team has designed a product mix their customers want. This mix has been developed by both acquisitions and in house software developing which has given their competitors reason to feel threatened. Management and the organizational design has contributed to Google surpassing Yahoo in the search engine sector and is helping them challenge Microsoft in the software market. Competition may be Google’s biggest threat, but responding to the market and continuously offering their customers more and more options has allowed Google to rise to the top and will continue to allow the company to succeed in this very competitive business. Google must continue to offer their vast array of products that customers can pick one by one, and continue to operate at a lower cost than their competitors to be successful.
Another problem that Google faces in the future is the globalization. China has 162 million users and those users spend about twice as much time online as their American counterparts (Huang, 2007). Google must continue to dominate in the U.S. market, but they must expand and grow in China and other developing countries to stay on top. Baidu.com being the largest internet company in China has a 60% market share compared to Google’s 20% (Huang, 2007). Google operates in a tough environment in China due to their lacking privacy laws and for the time being this gives Baidu an advantage.
Google must improve the Chinese word search portion of their website to help improve their ratings in China along with finding new ways to appeal to the young internet hungry Chinese population. China is not the only fast growing market place that Google needs to increase their performance in and expand their market share. Google must leverage their business model in other countries besides the U.S. and China, and may need to make acquisitions of small companies to get a foothold in some expanding markets. The management team at Google is well aware of the global economy and has laid claim to a large portion of the Chinese market. This team must continue to expand into these markets because of the growth potential and utilize their competitive advantages to increase their global presence along with fending off other rivals.
The final problem that Google faces in the future is dealing with the integrity of their cost-per-click pricing. By maintaining and developing their protection software that detects when fraudulent clicks are made, Google can eliminate clicks that did not provide the advertiser with an actual customer. These fraudulent clicks can be costly for businesses, and if Google can prove that their system works, they have the ability to draw customers over to them because they know they will get better value from Google compared to a rival that lacks the technology to combat fraudulent clicks. With ethics lacking in China concerning business practices and copyright laws, Google will be competing at a disadvantage unless the Chinese value ethics more than they do now.
Google must also be aware of privacy issues they can create while trying to offer their users quality and useful tools. For instance, with Microsoft Virtual Earth’s capturing a detailed image of the propeller on a U.S submarine and was available for others to copy, even though they are to be kept hidden when above the water line. This may have given another country enough information to bring their fleet up to the level of ours, which causes a loss in competitive advantage for the U.S. Navy. Google’s Street View option on Google Maps allows for users to get street view pictures for many addresses in the U.S. and can give terrorists the top-notch detail they need to carry out an attack (Weinberger, 2008).
Google’s management team will need to continue to keep privacy of individuals and their searching habits private along with other important information about their customers. Consumers must be able to trust a company, and Microsoft has been given a bad reputation due to antitrust violations. Google must maintain an ethical and privacy focused business model to be a leader in the industry. By doing this it will give them a better public image than their counterparts and allow them to continue to fend off the stiff competition in this industry.
Question 4: Does Google’s business strategy effectively address these challenges? Explain your answer.
Challenge: CompetitionOne major challenge or threat is competition from Microsoft and Yahoo. Although Google is the leading search engine in the world offering search results in 158 domains and in more than 100 languages (Google Company Profile, 2007), Google needs to be concerned with its competitors. Yahoo! is searching for new ways to interpret its data on consumers in order to understand their behavior better. Yahoo! is hoping to increase its market share and revenues from advertisers by offering its customers a better target. According to Eglin and Greene, when Google released its first public financial statement some time in 2004, Yahoo jumped into action by hiring engineers and pouring research dollars into an overhaul project of every aspect of its search-ad business, including underlying hardware and software to the methods and algorithms used to select the most profitable ads (2006, p. 1). Yahoo is increasing its number of servers and software and has been working on ways to improve ranking of ads.
Microsoft, the number 3 search engine, has a huge advantage of knowing a very large customer base it has been serving for years. Its operating system is the most widely used system in the world and its software is used by professional organizations, academics and practitioners of all sorts. This is a huge advantage for Microsoft. “Microsoft’s adCenter, for instance, will incorporate a wealth of user demographic data into its ad-matching equations” (Eglin & Greene, 2006, p. 1). Microsoft holds a lot of data and they will have to turn that data into useful information which they have been doing for a long time. This of course can be very attractive to advertisers who like to pay for eyeballs and ears. According to Laudon and Laudon, there are two other areas where Microsoft can vault ahead of Google: contact-aware searches and deep web searches. Both allow for a more precise match to queries (2007). Microsoft has the working capital to purchase copyrights and the digital know-how on digital rights.
Google’s business strategy of providing web-based software applications for free that do not require a Microsoft Windows operating system is a good strategy to keep Microsoft at bay. Since Google is so far ahead in market share on the search engine wars, it has the capital and breathing room to concentrate on other aspects of its services. By not limiting consumers to bundled packages and allowing them to cherry pick the platforms they need, Google can gain a niche in the software market. Although it is possible for them to gain ground in this area, it is highly unlikely that they will be able to surpass Microsoft in this arena due to brand awareness alone. But how can one refuse when it is free? “Google is giving its Linux-based programs over the Internet for free” (Laudon and Laudon, 2007). Google also offers free web-based word processing software and a spreadsheet programs that can be stored online and accessed anywhere and shared with anyone. It also recognizes most existing file formats so you can upload existing files for editing and sharing.
Challenge: Click fraudClick fraud has been an issue that has concerned advertisers. Advertisers are paying a fee every time their ad is clicked on and they do not want to waste their advertising dollars on fraudulent recycled clicks. Google claims that they are able to prevent a certain percentage of the fraud and are sure to credit their client a refund for the “false” clicks. According to Laudon and Laudon, Google doe s not disclose how it is able to prevent click fraud to its clients for security purposes (2007). This is understandable; however Google must be sure to control the margin of error to prevent frustrated advertisers from getting leery.
In 2006, Google paid out $116 million to settle a click-fraud case where an advertiser claimed click-fraud was taking place all the way back to 2002 (Nguyen, 2006). Google claims to have transparency when it comes to this activity and even documents the percentage of invalid clicks on a customer’s invoice. It is difficult for an organization release its trade secrets so Google must continue to be as transparent as possible in order to maintain good business relations with its advertisers.
Challenge: GlobalizationThe United States, which is Google’s largest geographical market, accounted for 56.9 % of its total revenues in 2006. The United Kingdom accounted for 15.1% of its total revenues while the rest of the world accounted for 28% (Google SWOT Analysis, 2006). Currently China is Google’s biggest challenge as it is being outperformed by Baidu. Baidu, an organization that formerly received investment funds from Google and is now a rival, has 62% of the country’s search traffic (Lemon, 2007). Baidu basically received its popularity in 2002 when the Chinese government hijacked the Google domain for censorship purposes and then rerouted users to the Baidu website. Since that time, Baidu has leaped out in front of Google and is the most visited Chinese language website in the world.
One major problem with Baidu is click fraud. According to Peter Lu, a longtime observer of China’s Internet search market and managing director of IntelliConsulting Group, states that nearly half the advertisers on Baidu are discouraged by a high percentage of fraudulent clicks (Lemon, 2007). Google may be able to take this market over if it can assure advertisers a high success rate in preventing such fraudulent activity. Google may want to open the door to negotiations for the purchase of Baidu. The loyalty of the Baidu’s users coupled with the technological savvy of Google could be a winning relationship. Google’s strategy to grow web-based software and services positioned in a price sensitive market such as China may benefit the company tremendously.
Question 5: How successful do you think Google will be in the future?There is no doubt that Google will be around for a long time. Google has so much more to explore and make available to the public on their search engine. Google is now the world’s most powerful website, and if it continues to make available the best information, then its young founders, Larry Page and Sergey Brin, will continue to be successful. Their company has already cracked its biggest problem, which is how to make pots of money from selling advertising space without carrying any banner ads. And while there are other places to search the web, most websites are now dependent on Google for a large proportion of their new visitors. Google is a superb page, and is one of the best search engines and Internet resources on the web.
Google has been an outstanding company in the marketplace ever since its arrival and it continues to deliver exceptional services to the global market. The move into public ownership brought about more benefits to all people involved in the company. Google’s team wants to preserve this aspect of the organization, so they implemented a corporate structure that is designed to protect Google’s ability to introduce and retain its most distinctive characteristics. Google will be around for a long time. According to Eric Schmidt, Google’s CEO, “Google will need 300 years to organize all of the information in the world” (Laudon & Laudon, 2007, p.310).
Brin sees the success of Google in broad terms. “To me, this is about preserving history and making it available to everyone,” he says. Meanwhile, Page refuses to stop and reflect, claiming that the work is never done. “In a couple of years, I may be blown away by it, but now I’m just involved and worry about it,” he says. “I don’t want to be too complacent” (Carmichael, 2008). It is good to hear that the minds behind this bright idea have their minds on the future of the company.
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