STRAMAN K34 Dela Cruz, Laurence Jeffrey Perez, Sam So, Eunice Diorelle 10915109 Case #10: Googles

Strategy in 2011

August 5, 2013

1. Discuss competition in the search industry. Which of the five competitive forces seems strongest? Weakest? What is your assessment of overall industry attractiveness? In order to answer this question, we first perform a Five-Forces Analysis. Bargaining Power of Buyers: Weak The buyers of Googles search services are actually the advertisers. These are composed of businesses that want to display ads related to particular search terms of Google users. Such advertisers have weak bargaining power since Google serves roughly 65.1% (as of July 2011) of total online searches, so it the companies that scramble to get the precious ad space on Googles search results in order to reach Google users. Threat of Substitute Products: Weak The threat of substitute products is weak in the industry. There is really no good substitute product that can deliver what online search engines deliver. Physical references like encyclopedias, dictionaries, and the like are vastly inferior to search engines in terms of scope, speed, and accessibility. Only online search engines can search through all kinds of websites in a fraction of a second, arrange them by relevance, and be accessed anywhere with an Internet connection. Thus, the search industry does not face much threat from substitute products. Bargaining Power of Suppliers: Weak Not much information is given on Googles suppliers; however, one can deduce that Googles primary suppliers would be those that provide servers, power, and human capital that can provide technical knowhow. These supplies are not rare, especially given the surge of interest in technology; many suppliers can provide these supplies, so bargaining power shifts to Google. Threat of New Entrants: Weak The threat of new entrants is weak in the search industry because certain barriers to entry exists. First, established players like Google already hold key partnerships and relationships with advertisers, users, and websites. Moreover, products like Google apps or Yahoo! Messenger allow established firms to have a good hold of users even if a better standalone search engine enters the industry. The large established companies also hold economies of scale because they can improve their search services quickly and more easily with the intellectual property they built over the years and the capabilities of their research teams. These all pose strong barriers to entry for any potential new entrants.

Rivalry among Competing Firms: Moderate Compared with the other competitive forces, the rivalry among competing firms is moderate. Other search providers like Yahoo and Microsoft hold a combined 30.5% of total searches, which is significant though still far from Googles industry-leading 65.1% (in July 2011). Only these larger rivals have the capacity to pose a threat to Googles dominance because they do have the ability to innovate products that can attract users, including proprietary products like Microsofts Windows 7 or differentiated ones like Yahoos all-in-one homepage. However, Google has consistently been more aggressive in innovating a wide variety of products in order to attract the most number of users. As a result, Google has maintained and even strengthened its dominance over the years. Overall, the strongest competitive force seems to be the rivalry among firms, while the weakest seems to be the threat of substitute products. A technology giant that makes a great innovation (like Google Earth or the iPhone) can suddenly leapfrog rivals and gain a large number of users. On the other hand, no strong substitute product exists that can provide the same service that online search engines can provide. We also see that four of five competitive forces are weak, pointing to a very high overall industry attractiveness. 2. How is the search industry changing? What forces seem likely to bring about major change to the industry within the next three to five years? The strongest forces for change in the search industry are economic factors and the need for greater convenience, both pointing to the efficiency and ease of cloud computing and development of mobile devices. Cloud computing would move computing from being based on local hard drives to a cloud using a service from a server provider. Mobile device development will bring the need for search engines to match the speed, efficiency, and convenience of computer searching on mobile devices.

3. What are they key factors that define success in the industry? What are they key resources and capabilities required of successful search engine companies? How do these compare to the key success factors of the smartphone industry? Technology- related KSFs expertise in technology and scientific research such as Internet applications, mobile communications and most high-tech industries to provide the best search engine with having the most information to customers Marketing- related KSFs a well-known and well-respected brand name to build consumers confidence when using the product clever advertising through media, print ads, and Internet to attract more users Skills- and capability- related KSFs product innovation capabilities to better serve the needs of high-technology consumers

strong e-commerce capabilities- skills in using Internet technology applications to streamline internal operations Other types of KSFs a strong balance sheet and access to financial capital to be able to have new acquisitions patent protection so that other countries will be able to freely use the search engine These key success factors are more or less similar for the smartphone industry. Since Internet is one of the most important tools in a smartphone industry, technology and skills- and capability- related KSFs will be useful in the success of Google in the said industry. On the other hand, the following are the key resources and capabilities of successful search engine companies: Tangible Resources: Financial Resources- cash equivalents which may pave way to new developments for the search engine and other web or mobile applications Technological Assets- patents and technologies that would enable activities for any type of consumer Organizational Resources- proven quality of control systems, information and communications systems (ex. servers) Intangible Resources: Human assets and Intellectual Capital- has technical expertise in the field of technology and capable of improving searching capabilities that rivals may not know of through research and development Reputational assets- search engine must be very reliable for all the information a consumer would want to search 4. Describe Googles customer value proposition and profit formula linked to its business model. What strategies has Google relied upon to build competitive advantage in the industry? The customer value proposition of Google is that its search technology could be integrated into a third partys website or intranet of search functionality was important to the customer. Its Site Search allowed enterprises, small businesses to public companies, to license Googles search appliance for as little as $100 per year. The Search Appliance was designed for use on corporate intranets to allow employees to search company documents and it included a variety of security features to ensure that only employees with proper authority were able to view the restricted documents. On the other hand, the profit formula of Google is generating revenues through advertisements on their page and search results. From here, Google was able to target its ads to specific users based on the users browsing history which gave other companies the opportunity to place more advertisements. The strategies that Google has relied upon to build a competitive advantage in the industry was multiply acquisitions and innovation. Its multiple acquisitions paved way for the company to diversify its Internet advertising beyond search ads and innovations led to serving the needs of different type of consumers.

5. Have Googles business model and strategy proven to be successful? should the investors be impressed with the companys financial performance? How does the companys financial performance compare to that of Microsoft, Apple, and Yahoo? Please conduct a financial analysis to support your position - you may wish to use the financial ratios presented in the Appendix of the text as a guide in doing your financial analysis of the company.
2010 Gross Profit Margin Operating Profit Margin Net Profit Margin Net Return on Total Assets Return on Stockholders Equity 64.47% 2009 62.61% 2008 60.44% 2007 59.93% 2006 60.16% 2005 58.02% 2004 54.78% 2001 83.72%

35.40%

35.14%

30.43%

30.64%

33.47%

32.86%

20.07%

12.79%

29.01%

27.57%

19.39%

25.33%

29.01%

23.86%

12.51%

5.14%

14.70%

16.10%

13.31%

16.59%

16.66%

14.26%

12.04%

N/A

18.39%

18.11%

14.97%

18.53%

18.06%

15.55%

13.62%

N/A

Table 1. Profitability ratios of Google

2010 Operating Profit Margin Net Profit Margin Net Return on Total Assets Return on Stockholders Equity 28.18%

2009 27.36%

2008 22.21%

2007 18.37%

2006 12.70%

21.48% 18.64%

19.19% 17.34%

16.32% 16.92%

14.56% 14.05%

10.30% 11.56%

29.50%

26.02%

27.44%

24.06%

19.92%

Table 2. Profitability ratios of Apple

2011 Operating Profit Margin Net Profit Margin Net Return on Total Assets Return on Stockholders Equity 38.83%

2010 38.57%

2009 34.85%

2008 37.23%

2007 36.23%

33.10% 21.30%

30.24% 21.79%

24.93% 18.74%

29.26% 24.29%

27.51% 22.26%

40.55%

40.63%

36.83%

48.73%

45.23%

Table 3. Profitability ratios of Microsoft

2010
Operating Profit Margin Net Profit Margin Net Return on Total Assets Return on Stockholders Equity

2009 5.99% 9.26% 4.00% 4.79%

2008 0.18% 5.81% 3.06% 3.72%

2007 9.98% 9.17% 5.23% 6.70%

2006 14.64% 11.39% 6.35% 7.99%

12.21% 19.47% 8.25% 9.81%

Table 4. Profitability ratios of Yahoo

Based on the profitability ratios of Googles performance for the last 7 years, it can be concluded that Google has been performing well financially compared to its other competitors. Values show upward trends except the dip in year 2007, which as shown in tables 1-4 was experienced by all companies. Although if compared to other companies such as Apple and Microsoft, return on stockholders equity is lower for Google. This may not sit well with stockholders because theyre not receiving as much money as stockholders in Apple and Microsoft.

6. What are the companys key resources and capabilities? What competitive liabilities and resource weaknesses does it have? What opportunities exist? What threats to its continued success are present? Tangible Resources: Financial Resources- a vast cash reserves to make strategic acquisitions that might lead to the development of new Internet applications offering advertising opportunities Technological Assets- customized search features, tools and web applications and mobile applications Organizational Resources- proven quality of control systems through acquisitions made and server has been built and continuously improved for years Intangible Resources: Human assets and Intellectual Capital- founders were computer science graduates in Stanford University showing that they have a collective learning in the web-based field Reputational assets- search engine can easily send out information needed by the consumer and has ads that are very useful for the user Competitive Liabilities and Resource Weaknesses: similar approach to competitors in terms of offering search capabilities generating revenues (financial resources) through advertising which rivals do the same Opportunities: serving additional customer groups or market segments through strategic acquisitions in order to create more search features tools and web applications for any type of Internet user expanding companys product line to meet a broader range of customer needs like expanding to television, not only web and mobile applications Threats: increasing intensity competition among industry rivals restrictive trade policies on the part of foreign governments like in the case of China

7. What recommendation would you make to Googles top-management team to sustain its competitive advantage in the search industry? How should it best capitalize on its strategic initiatives in smartphones, cloud computing, emerging markets, and other ventures? The Group recommends that Googles Top-management team focus on the key success factors of the industry and utilize both their tangible and intangible resources. There is increasing competition among industry rivals and there are competitors that use the same approach in terms of offering search capabilities. The Top-management team should take the KSF in consideration along with their resources to innovate and sustain competitive advantage.