Google is a company that has a mission of “organizing the world’s information and making it universally accessible and useful”. The company successfully manages to implement this statement through strategic decisions concerned with Android, AdSense, AdWords, Google Apps, YouTube, Motorola Mobility, Chrome, Google TV, Google+ and other business units and activities, all of which have been built around one of the world’s most popular search engines. Though the core of the business model is built around a cost-per-click basis, the company has discovered new opportunities and ways of enhancing its market share.
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Even though the company’s attempts to conquer the Chinese market failed, it continues its pro-active strategy developing products which are a major threat for iOS (Android) and Microsoft Office (Google Apps). Having used the best-cost provider strategy is what made Google over 50% market share at US Smartphone Platform market, leaving Blackberry behind, due to the open-source (and low-cost). In fact, this pattern is still used in many other industries.
Currently, the company is focused on differentiation and cost efficiency, while both are biased to innovation. It can continue helping Google to scale up their services and products which bring revenue streams from the advertisement. It also means that the company will strengthen its cloud services to increase its position as a cloud service provider. Moreover, the company will seek more opportunities to on-land and will develop more desktops with their software. This is evident from Google’s continuous attempts to build up competencies in hardware and manufacturing, expressed in the Google Glass project as an example.
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While Google maintains its strategic objectives as a dominating advertising service on the Internet it still has to reconsider the ways of attracting more traffic to its websites. Though YouTube, Google Maps, Gmail, Book Search, and Blogger have increased revenue streams through advertising, Google will still have to develop more of new products and features to sustain its competitive advantage. The best-cost strategy requires low cost for differentiated products, which means that more customers must be reached. The Android platform for the above-mentioned products proved to be successful reaching over 50% of the market share in 2013. However, since no license was obligatory for major mobile phone producers, creating Android’s market share, Google had to take the opportunity of establishing itself as a hardware company.
The situation implies that the acquisition of Motorola Mobile for $12.5 billion should become a decision that would significantly increase Google’s market share in the hardware industry. With $4 billion of revenue in 2012 from Motorola Mobile as an indicator of a good start, there is a major threat from Apple and the closed system that continues to grow to establish an almost 40% of the market share of desktop domination. While the focus for Google is not the hardware but the desktop, the inevitability of exploring the hardware industry leads the company to issues concerned with two aspects – the screen itself and the way it operates. The indefinite situation imposes some highly important strategic questions.
Strategic Issue Statement
Since the major goal of Google is to dominate the desktop of electronic devices connected to the Internet, how can the company keep the pace of sustaining competitive advantage, while reaching out to hardware industry without losing the focus on advertising revenues? Which new specific markets can be addressed? How to incorporate advertising exposure platforms into new products, like Google TV? Does Google+ have what it takes to compete with other social media platforms? What other strategic alliances are needed to achieve Google’s goals? How to manage the relationships between numerous business units in a growing company set in different industries serving various market segments?
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The industry in which Google operates is global, thus, there are different market segments with various needs, most of which are concerned with the digital. The global scale of the ICT means continuous growth and the 2 billion Smartphone users, who use their devices to access the Internet serve as a signal of the approach to an early maturity stage of the industry development. Another important fact is a relatively small amount of competitors, most of which own a tiny or medium fraction of the market. Innovation is extremely important and companies nurture their talented employees, making knowledge one of their most valuable resources. The socio-cultural situation is a perfect ground to grow; the political and legal aspect is not a major concern as well. The economic growth in emerging markets is a green light for the industry and technological advancement is on a quick pace as well.
All the external factors outside the industry indicate a low level of rivalry among the competitors. However, in this case, the opposite can be observed. The four forces around competition indicate the environment that creates opportunities for all competitors; therefore, their competition should not be fierce. However, this is not how the companies act. Each of the forces will be explored in more detail below to figure out what is the major factor that has made this industry so competitive and difficult to enter.
Porter’s Five Forces Analysis
A good way of assessing the industry for external analysis is through Porter’s Five Forces concept based on supplier bargaining power, buyer bargaining power, substitute products, new entrants, and competitive rivalry. Understanding the tension between these forces gives a broader understanding of the strategic issues and a general outlook on the attractiveness of the industry in making profits. There are some specific rules by which it is possible to indicate the degree of strength of each force, though there are some exceptions for some of the rules. The discussion of the five forces is presented below and depicted in a diagram in the Appendix to this paper.
Buyer bargaining power for the industry is considered weak due to a number of factors. Firstly, among those that weaken this force’s strengths, is the growing demand for digital products, both hardware, and software. While more people are able to afford electronic devices and new market entrants use low-cost strategy to leverage their market share, the availability of numerous opportunities of the Internet access creates demand in tools to use the Internet. Therefore, they are in a constant need for products that help them manage tremendous amounts of information. The estimates of $95 billion market in cloud services are proof of the growing demand. Time pressure does not let buyers consider all the propositions from competitors. However, what buyers considered, is the $50 Google Apps package subscription compared to $350 of Microsoft Office package. The fact that 5 million businesses bought the package from Google means that customers were price sensitive. It added to their bargaining power, but only in relation to Microsoft – a proven fact of Google’s offensive strategy. However, this case is rather an exception than a rulemaking buyer bargaining power weak.
Substitute products are considered weak and can be divided into two major categories hardware and software, making it more difficult to analyze the industry. As for software, substitutes may be the storage of the information offline, and offline communication systems. For the former category, it is obvious that any communication and information storage tools are limited in many senses. The value that digital communication introduced is not comparable to the old ways of communication. Moreover, cloud service means a major threat to flash drives, not mentioning the CD’s, etc. After iPad’s contribution to Apple’s revenue of $32.4 billion in 2012, the concept of all Internet-connected devices will have to be altered. No real substitutes can compete with the Internet.
Supplier bargaining power can be considered moderate if the hardware is taken into account. Most sellers tend to backward integrate and this is a symptom of a weak condition for suppliers. The industry competitors continuously learn the production side (like Google’s Motorola Mobile case) and the software development side (like Apple and Microsoft). They seem to be able to produce unique value and differentiated products for their buyers, protecting themselves with patents. The weakness here can be explained by the ambiguous relationship between software producers and hardware producers. Their products need each other and are interdependent. The acquisition of Motorola Mobile for $12.5 billion is good evidence of backward integration of hardware manufacturer. Another example is the acquisition of On2 Technologies, which enabled Google TV to become the fastest Internet TV, provider. The strategic move would not happen if the supplier was in a strong position.
The situation with new entrants can be viewed from the two sides. If the brand new companies that want to enter the industry are taken into consideration, their threat will be incredibly weak. There is little chance for them to “get the foot into the door”, due to a small pool of those, based on high barriers such as cost, brand loyalty, lack of innovation opportunities and fierce competition within the industry. A new entrant would require extensive financial and network support, which is difficult to acquire in a monopolized industry.
The second point of view is biased to the existing competitors who are trying to expand their market shares. In this case, the new entrants’ power will be moderate. Most companies, which are Google, Apple, and Microsoft, have resources to perform on a high level in both software and hardware. As has previously been discussed, companies tend to buy out opportunities in other markets and segments. Google+ is an attempt to reach out to the social media market, which is heavily dominated by Facebook. However, the lack of experience in the field and the importance of building up a sustainable brand as a social one can be one of the threats. In this case, if the brand new entrant has little to zero chances of success, big companies from related industries would have to take a risk and invest substantial efforts, time and finance to produce a high-quality product that will live up to existing standards.
Throughout the above discussion of the four forces, it is obvious that the system should be balanced by some force since the situation is not perfect. While the above-mentioned forces are weak and moderate, the last force is intense – rivalry among competing sellers. Though it contradicts general rules of the five forces, that the lower the strength of the forces the weaker the competition, in this industry it is possible to observe strategic moves that are offensive by default and there may not be an adequate explanation to that. It might be because of the decline in the sales rate; however, the early mature stage of the industry may signal the opposite. There is still a place to grow for all the competitors.
The fact that Google almost copies the products and decisions of its rivals only adds to the intensity of rivalry. The reason behind it might be Google’s ambition rather than a necessity. The $50 subscription for Google Apps and Android open-source, Nexus and Google Play – all of these are indicators of a rather ambitious plan. The company’s strategy may be the reason for rivalry in the industry. The shift to the Chinese market was an attempt to invade one of the most profitable markets in the world. This action is also a sign of the great desire of the company for global domination. Moreover, while companies collaborate with both suppliers and buyers, they use aggressive tactics to prevent each other from growth, just like Microsoft and Firefox prevented Google from collecting data, which was vital for targeted ads – the cornerstone of Google’s revenues. Nowadays, the latter has to do everything to eliminate browsers other than Chrome (see Appendix), since it is extremely dangerous for the business. Each next attack in the industry is more brutal than the previous one in the battle for desktops.
Knowledge and data are the most valuable resources in the industry. They provide metrics which, if properly used, can significantly boost the revenues. The digital has all the tools to gain information on both behavior patterns and numbers, which combined together, give a complete vision of the situation. And since those metric tools exist, the goal is to apply them to broader audiences. All of the competitors are doing that, producing more products to serve more customer segments. It does not really matter if their products are unique; the size of the market allows them to cut on the price to win the audience. They tend to copy each other applying best practices to their strategies.
The emergence of new supplementary markets may invoke the threat from new entrants. Realizing that, companies are establishing unique services and products for the cloud storage market. They are already a threat to other entrants since they have finance and talent. What they also have is competitive intelligence developed throughout years of expertise in the field. They are likely to predict each other’s next moves.
Key Performance Indicators
This section features some of the most important success factors that are essential for the industry. The paper will discuss three of the most prominent factors. They are:
· Expertise and talent
· Ability to reach scale economies
· Convenience and effectiveness of the product
The order of these factors may be not necessarily like the one presented, but expertise is the derivative of learning and knowledge. Ability to gather, analyze and produce information as a valuable resource is crucial. There is a trick as well while being an expert does not mean being innovative. Talent is what drives innovation since it is an ability to step out of the existing frames. The ones who are capable of bringing innovative products to customers in the age of “the next big thing” is a major part of what constitutes a company’s competitive edge.
The ability to scale the product is an economic factor which is important for the industry, while niche products tend to get lost in a great spectrum of substitutes with low cost and relative efficiency. This results in major investment losses since the cost of product development in the digital industry is rather high. The focus must be on perspective markets; otherwise, it is not worth it.
Convenience and effectiveness of the product is probably the most important success factor. Positioning a product as a solution for a particular need must be justified – it affects reputation. In the world where everyone has connected the word-of-mouth is one of the most effective marketing tools. Products that are not convenient to use or do not meet the customers’ expectations are bound to failure. It is the responsibility of the company to satisfy the need and do it effectively. The fact that knowledge in the field is continuously becoming the mainstream, businesses need to perform promptly and relevantly.
Industry Profile and Attractiveness
The 2 billion mobile phone users who use them to access the Internet is not simply a huge market for companies in the industry, it is a number that will continue to grow with the number of countries that are gradually getting out of the poverty pitfall. The business is worth doing it. The 97% share of mobile searches means that Google will continue to grow its revenues. For Google and Apple who dominate the operating systems market, it is an attractive market. However, there is a flip side to every coin.
For the new entrants, the industry is highly unattractive, while they have no resources to compete with giants like Google. Only real innovation technology might make a revolution to a certain degree. Those who will provide individual customer approach on a big scale will be able to enter the competition. The ability not simply to give facts when asked, but actually recommend a real-life solution to a specific customer problem might be a factor capable to challenge the giants.
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The life cycle stage of the industry can be measured by adding up the net income of the biggest competitors which are Apple, Google and Microsoft comprising almost $69.5 billion of net income. This is a sign of the industry settling in an early maturity stage, thus, more revenues can be driven by companies. Google has been increasing its revenue since 2001 to a point where they achieved 60 times more as compared to a previous decade. Though the numbers may be bigger than in previous years, not everything goes well in the company and the comparison between the years 2011 and 2012 is good evidence for that. The problem may be rooted in management decisions and ambition to organize the world’s information in “a coherent bouquet”.
For company analysis, the current paper will take into account the last two years (2011 and 2012) and compare Google’s performance in profitability, liquidity, leverage and activity ratios and observe the changes to explain the current situation of the company.
Profitability ratio indicates the following trends: the net profit margin has dropped to 4%, which means that strategic decisions in terms of activities may have switched the focus from advertising revenues to other more expensive activities, which are not necessarily in the company’s field of expertise; the same explanation may be applied to the trend of almost 20% decline in operating profit margin, so current liabilities need to be taken account of and the increased long-term debt is also a fact to be acknowledged; the 3% decline in return on assets is a sign of lack of attention to proper asset exploitation. The result is a 2% difference in return on stockholder’s equity and investment.
Liquidity ratios show a rather stable situation quite above the industry’s norms; though in 2011 the numbers were higher with 5.9 compared to 4.2 in 2012. The amount of current liabilities has increased, and this leads to the previously discussed concern about debt situation, however, this can be explained by the Motorola Mobile acquisition. Therefore, the situation is absolutely normal.
Leverage ratios provide a controversial outlook on the debt since the indicators do not give substantial reasons for concern with 0.1 debts to equity ratio. However, the trend in operating income section is a matter of concern, since it has dropped 1.5 times compared to the previous year.
Activity ratios show the present situation with inventory, which is 53.5 days of inventory turnover which is not of a big issue for the industry. The company continues increasing the days of inventory, though they could do it better.
The overlook of the financial situation leads to the conclusion that Google is performing satisfactory-to-good in terms of profits. Engagement in numerous activities needs more attention to them, while the major revenue streams need to be based on a better customer relations system. Google has all the chances to increase their profits, but they will have to overlook their strategy and introduce new policies, including pricing. They will need more cash if they want to compete in hardware since Apple is their major competitor there and this rather tough competition requires resources.
The SWOT analysis is a solid basis for understanding the overall situation and position of the company. While strengths and weaknesses can be considered the internal sides of the company, threats, and opportunities give insights into the environment on the industry level. With the help of the findings discussed in the previous sections, it is possible to understand and identify the most prominent attributes of Google.
Strengths are what makes Google’s business model unique and competitive. Profits from advertising make this company stand out and own the search engine market. One of the key strengths of the company can be the following characteristics. Differentiation – the services provided by Google are always unique and of high quality. They can be easily identified and constitute a whole new system, where they are all interconnected. This leads to the second important strength – brand image. Not only the products are recognizable because of the integration around the search engine platform, the brand of Google as the one who knows everything has become a verb. People actually use it as a verb which means “looking up on the Internet”. The third strength is pricing. Much of the products are free and advertising services are relatively cheap.
Weaknesses are also something this enormous company possesses. One of the major weaknesses is the lack of focus and great ambition. Google is big, and their desire to expand to new markets and industries is understandable, but there are still many markets in the advertising industry, offline as well. Though, their understanding of their weakness, which is dependence on hardware, is a good sign. The Internet is biased to hardware technology and dominating the web involves dominating the hardware. Another issue concerned with the search engine is the incapability of Google to address specific customer problems, where mere facts cannot help. The only thing that Google does is giving facts. If they manage how to help millions of people to resolve their specific problems through the Internet, their market share will increase thousands of times more.
Opportunities for Google are promising – they can enter the Internet TV market on a global scale within some years. The perspectives are tremendous in this niche. The Google Glass concept is also a signal of being on the right track. The company can step into the industry of new communications technology. They possess substantial resources to produce products to compete in the technology market. Their other opportunity is to take advantage of the rise of social media and produce applications for smartphones that would connect more people and the heavy exploitation of Android is also acceptable for that purposes. The goal is to introduce a compelling competitive advantage, which is not an easy task.
Threats, though considered in most cases an external factor, for Google is both external and internal factor. With severe competition inside the industry because of its attractiveness, Google has to consider its ability not only to increase market share but actually gain more profits. Apple and Microsoft as major rivals are capable of increasing their market share and it will be extremely difficult for Google to take over phones and tablets, as well as computers. The moves into this field involve great risks, in terms of reputation as well.
Since Google’s major goal is to dominate the desktop of electronic devices connected to the Internet, how can the company keep the pace of sustaining competitive advantage, while reaching out to hardware industry without losing the focus on advertising revenues? Which new specific markets can be addressed? How to incorporate advertising exposure platforms into new products, like Google TV? Does Google+ have what it takes to compete with other social media platforms? What other strategic alliances are needed to achieve Google’s goals? How to manage the relationships between numerous business units in a growing company set in different industries serving various market segments?
Since Google is a tool for users and has a clear competitive advantage over other search engines and online services, by using its brand the company should keep on using their best-cost provider strategy and manage to build more alliances around the Android. It will be reasonable to continue working with various hardware manufacturers, just as it has been done before. These strategic implications proved to be rather effective along with open-source. Though Google TV is an attractive venture, its competitive edge is temporary. It would be more reasonable to make computers out of televisions. If Google can convince TV manufacturers to create TV sets with the Android operating system it may integrate the TV market and ultimately alter the whole broadcast industry. The trick here is to make sure people are ready to have huge computers on their walls, with all those features readily available on a smartphone or laptop. To create high entry barriers in this market some exquisite marketing techniques will have to be developed.
With a strong brand image that Google currently has they can manage to accomplish their goals and fulfill the management’s ambition. As for Google+, it has severe competition and radical approach to changes in this product has to be considered. The automated system of profile creation does not necessarily bring traffic to the website. 6 minutes of user activity per month is a very weak result, so abandoning this particular unit may be relevant. However, if enough resources of time, money and effort are invested, it is possible to develop a new social media platform, while Google+ is continuously losing its appeal to customers. Another variant is to redefine the customer segments of Google+ and create a brand which will be accepted by large young audiences.
As for new customer segments and markets, the ability of Google to know what is where is an opportunity of becoming a logistics partner. This industry is within Google’s expertise, and insignificant skill acquisition will be needed to manage not only the ads and traffic, but also things, products, and places. The software team can develop a system that will be useful for almost everyone, while all people live on this planet, which is within the reach of the Internet.
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To implement the strategic objectives the management has to monitor such key performance indicators as talent management and product development. The people who will be in charge of producing new products and online services need to be aware of the goals. Human resource management will be called to boost creativity and appreciate talent as well as encourage the personal development of each employee. Also, the burden of the gradually growing company will fall on HR partially since mobility will be important, as well as readiness for change. Therefore, HR Practitioners need to sustain high motivation and performance culture. PR will have its role as an integration tool onside of the organization. The Value Chain will have to be revised and metrics for tracking intangible resources like learning and knowledge will have to be improved.
Any new ventures prove to be reflected in the financial statement of the company, so operating income has to be increased by 20%. This is possible through the establishment of tangible products, even expensive like Google glass, but they will have to be adapted to the existing customer segments. This also means that research and development expenses will have to rise; however, they will be definitely smaller compared to the ones spent on company acquisitions.
One of the explanations for Google’s ambitious behavior can be its uncertainty and the lack of the feeling of sustainability. With 90% of revenues coming from advertising the company realizes its potential, but still is afraid of competition. Growing big is inevitable for Google in a linear economy which can never provide stable long-term profits. As if Google is waiting for the system to collapse, still struggling the inevitable. The desire of going hardware is understandable. However, Google is not willing to change its business model – it would rather use other industries to sustain the system.
The success of the model lies in the fact that it is not difficult to “get in” and extremely difficult to “get out”, firstly, because there aren’t enough opportunities to look out for the competitors. This was achieved by providing everything a customer would need, and satisfying that need on a high-performance level, delivering high quality.
The benefits of the suggested strategic recommendations are as follows:
· Optimization of resources and the improvement of the value chain.
· The alteration of the business model will help Google stay focused on specific segments and its industry.
· Experiment is a way of learning. Knowledge makes profits when applied wisely.
· The expansion of the sphere of influence for Android is a good attempt to expanding the existing markets without the need to go too far abroad.
The counter-argument for the strategic recommendations can be destabilization brought by change and consumption of financial resource without short-term profitability. These changes work well in the long-term strategy and Google’s capability to manage change and adjust its value chain to it will be another success factor for the company. There is also a problem of integration that can lead to over control organizational culture. These conditions are never good for a company where innovation and creativity are extremely important. Certain management style needs to be adopted. Thus, changes in management approach impose the whole organizational structure architecture. The vertical scheme may not be suitable anymore and horizontal patterns will have to occur. New mechanisms of responsibility distribution will have to be adopted and control systems may have to change as well. The dilemma between the tendency of big companies going bureaucratic and the flexibility of small creative teams is what the company will inevitably face. Also, reaching out to new markets in new locations means that new offices will have to be established, maybe even production. The suggestion about Google becoming a logistics operator also invokes some radical questions: what kind of value proposition can the company add to the long list of existing successful products, and which particular value can Google propose to businesses and individual target customers? These are some of the most problematic issues concerned with strategy change and they involve many risks. It is, though, important to remember that high risk brings high profits and if Google does not develop a high-quality logistics service, some other ambitious company will, mimicking Google’s strategy the same as Google has been doing all these years with Apple and Microsoft (the latter suffered most). The open-closed system of Google product is what has made its success, and this model can still be adapted to the idea of the logistics quite efficiently. Nowadays, there are three major directions for Google proposed in this paper, which are new software, high technology or logistics. The choice is either to go into high tech or logistics operations for the world dominating company.