Business School Perspective: Executive Summary of Google Strategy

Here is one business school Team's perspective on Google's Forward Looking Strategy:

Company Overview

Google began as “a new approach to online search” pioneered by Larry Page and Sergey Brin at Stanford University in 1996. Since then, Google has evolved into the world’s top internet destination with a 64% worldwide internet search market share. Incorporated in 1998 with an IPO in 2004, Google is currently led by CEO and Chairman Dr. Eric Schmidt as it continues on its mission: to organize the world's information and make it universally accessible and useful.

As a business, Google generates its revenues by delivering relevant advertising on its website and affiliated websites. Google accounts for 30% of the U.S. online advertising market and boasts an advertiser base of approximately one million companies (Exhibit A). Its closest competitors, Yahoo! and Microsoft, have several hundred thousand and 85 thousand clients, respectively. Like its rivals, Google provides advertising solutions to a broad range of companies. However, Google differentiates its product from the competition by generating simple, text-based ads rather than graphic or rich-media ads, which can seem obtrusive to Internet users (Exhibit B).

Google has historically focused on attracting web traffic and consequently advertisers to its acclaimed search engine, displaying ads alongside search results in a calculated order. Google generates traffic to its search engine by continuously improving its user-friendly applications and search technology. Google's PageRank technology uses several criteria to place more relevant sites at the top of the search results. More accurate results increase usability, which drives traffic. Advertisers are drawn to Google because of its large user base and cost-effective pay-per-click system, whereby advertisers only pay Google for ads that users actually click. This allows advertisers to control how much they want to spend and how often their ads appear, allowing businesses of all sizes to advertise with Google. In addition, Google now offers many products on which to display ads, including email, maps, video, instant messaging and comparison shopping (Exhibit C). Similar to its ads, Google’s products feature simple design, open platforms, a user-friendly interface and no pop-ups.

Industry Overview

A five-forces analysis indicates that the online advertising industry possesses average profit potential, as seen in Exhibit D. The industry is volatile and dynamic, as new innovations can drastically alter the strength of the five forces. With a myriad of new technologies and innovations, popular new products could emerge at any moment, from relatively unknown players. Although the threat of new products is extremely high, the industry is expected to grow 25% next year. Accordingly, the industry’s five-year average ROA of 17.67% is comparable to the economic average of 15.45% (Exhibit E).

Firm Performance

Google has produced a five-year average ROA of 23.01% which reflects its strong corporate strategy. The firm’s other financials are also positive: since its 2004 IPO, Google’s stock price has increased over 500% and currently trades around $700 per share (Exhibit F), resulting in a market capitalization of $200 billion that includes minimal long-term debt (Exhibit G). However, Google has a high P/E ratio of 52.69, which indicates that the stock may be overvalued and is perhaps experiencing a stochastic bubble. Despite this, 90% of Wall Street analysts covering Google rate the stock a “Buy” or “Buy/Hold.” They may be anticipating increasing earnings from current products, expecting future successes from the introduction of new products, or they may be comfortable with the level of risk associated with a technology-related stock.

Google’s earnings reveal the firm’s high level of operational effectiveness. Google’s year-over-year domestic gross revenues have increased more rapidly than the industry, and its strong operating and profit margins have historically outshined those of competitors (Exhibit H).

Competitive Advantages

The firm derives its competitive advantages from its internal resources (Exhibit I and J). Google’s complex algorithms allow Google to retain its 64% search engine market share while its patents and other products give the firm a broad advertising reach. Google’s unique approach and dedication to research and development, based on the 70-20-10 model shown in Exhibit K and open-source platforms, enables the company to remain innovative and yield new applications on which to display ads. The firm’s inspiring and accommodating culture helps attract and retain top talent, and its strong reputation and strong balance sheet, facilitate capital expenditures such as acquisitions of other firms.

Current Strategy

Based on these competitive advantages, Google is currently implementing a consistent strategy with four guiding princples: (1) continue to improve algorithms and focus on Internet search quality; (2) continue to introduce new products to broaden advertising reach; (3) increase advertising revenue via acquisitions and alliances; and (4) horizontal expansion into other forms of advertising such as print, video and radio via acquisitions and alliances (Exhibit M). For example, Google has an exclusive advertising alliance with MySpace. It has completed 48 acquisitions to date, including the pending acquisition of DoubleClick, which would allow Google to improve ad targeting and expand its ad-serving business.

Emerging Strategic Challenges

The online ad industry will be greatly affected by technological advances to the Internet. Google must continue to be forward-thinking and craft its strategy to address emerging trends. Three such trends are: (1) the transition away from the traditional operating system toward an Internet-based operating system. Programs are most commonly installed on a PC’s operating system and files saved to its hard drive; however, the number of programs available online is increasing, and soon more individuals will save files online in data warehouses. (2) As the Internet becomes more prevalent, consumers are also demanding access via mobile devices such as smart phones and mp3 players. (3) Additionally, Internet growth in emerging markets, most notably India and China, is occurring at tremendous rates (Exhibit N).

Recommendations

Understanding the increasing conversion toward online operating systems, Google should continue its acquisition strategy and purchase companies producing the most innovative online products, such as Google Docs and Picasa, which may become a key source of advertising revenue.

Furthermore, Google should follow a horizontal integration strategy to enter the mobile market. It should continue developing Android software for the Google Phone, a highly anticipated product, but it should not purchase the 700 MHz spectrum that is up for auction. Though the spectrum could bring the Android platform and other applications to more users and provide Wi-Fi to customers, this backward vertical integration would not be in line with Google’s horizontal expansion strategy. Operating a national network requires resources and capabilities that are inconsistent with Google’s core competencies, and the move might cause the firm to lose sight of its innovative business model.

Google should continue its aggressive expansion strategy in India, but slowly integrate products into China, where the government enforces strict media censorship. For example, it should wait to offer YouTube, which is currently being blocked by China. In addition, Google should continue its good corporate social responsibility practices in China as well as its philanthropic efforts in the U.S.

Other Challenges and Recommendations

Google also has legal issues to address, including click fraud (which artificially inflates a site's popularity and its ranking within search results), the Congressional debate over Net Neutrality and litigation risk from video content owners. If not addressed, each could reduce Google’s profitability. Google should continue to improve its code on a regular basis to decrease ClickFraud and reduce copyright infringement on its video service YouTube. It should also continue its coalition lobbying efforts against net neutrality.

Furthermore, Google needs to diversify its revenue streams by making its existing products more profitable and developing new product lines. The firm generates 65% of revenue through Google Search, while its other products remain less popular (Exhibit O). Google could perhaps increase revenue from these products by syndicating YouTube with its advertising program, increasing ads on Google Maps and Books and escalating its expansion into offline advertising. It should continue to sell its online office applications to business users and try to position its Orkut social networking service as a stronger competitor against MySpace and Facebook. Finally, Google could continue horizontal integration to develop a new operating system or web browser, which will create synergies across its vast product line.

Conclusion

Google’s search engine and user-friendly products have attracted a valuable base of Internet-users and advertisers worldwide. Given the firm’s resources and current position as the industry leader, Google’s future success depends on whether the company can continue to execute a forward-thinking corporate strategy focused on innovation in a dynamic era.

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Authors: Anne, Alex, Amee, Tracy, Ankit