Marjan Suban POSLOVNA STRATEGIJA 24.01.

2010

CASE 14 Google’s Strategy in 2008

1. Discuss competition in the search industry. Which of the five competitive forces seem
strongest? weakest? What is your assessment of overall industry attractiveness?
Search Engine Industry is built upon Search and also advertising. If we look at the latest data (for
year 2009) there are beside Google 5 big
players:
• Yahoo, which has a challenger’s and
loser’s position
• Bing, this is new
brand name for
MSN Live search
• Baidu, China
search engine
• Ask
• AOL, where
search engine is

powered by Google
At the figure, we can see
that Google own 65% of
U.S. Market and 85% of
global Search Engine Market. Data from StatCounter Global Stats for Year 2009 shows that
Bing market share was in start (june 2009) a little higher then MSN Live search had in past. In
that time there is also a litlle decrease of Google’s market share. In the latest statistics there is a
new competitor from China Baidu (2,8% of global market), which is right behind Bing (3,3%).
I can identify following five competitive forces of Porter’s model (figure on right side):
• Bargaining power of Buyers
In 2008 almost 97% of Google’s revenue was made by
advertising. There are many single account contributing
low percentage to net revenue (max. is 3%). They
realize that selling popular keywords is valued.
• Bargaining power of Suppliers
Beside Google’s big market share, suppliers trust
Google’s ad system as reliable source of income.
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• Threat of substitute Products and Services

There is now other suitable substitute for search. Organizing information and conducting
searches like Google do is for near future business with no threats. Beside that number of
Internet users worldwide is rapidly increasing. On the other side internet advertising is 2nd best
form of ads (just behind newspapers). If you add to this a search-based ads, then you have a
wining solution.
• Threat of new Entrants
If you want to enter in internet search market then you have to jump over a high barriers. Current
big players exhibits a high technology and a lot of know-how. So that new entrant must provide
better and quicker search results then others competitors. New entrant also does not have data on
search history of users. Threats of new market entrants is relatively low.
• Rivalry among Existing Competitors
All competitors have a similar services and products. Competition is based on non-price
dimension like marketing, brand, search technology. Because this is relative new business there
are good growth opportunities also for economics of scale in advertising.
As a strongest competitive force I can identify competitive rivalry, where the weakest is
bargaining power of the buyers. Market is driven by innovations. As already stated before,
industry has high overall attractiveness.

2. How is the search industry changing? What forces seem most likely to bring about major
change to the industry within the next three to five years?
Cloud computing technologies are one of the trend which will have also a big impact on software
market. Google is a big player in this field. Microsoft has identify this as a big threat to their
business. This field is still going under great improvements. Second trend in industry is rising a
competition in mobile search/advertising and importance of social networks is still in growth.
In the search engine market I can find following trends:
• Internationalization of the search market
• China as a new prospective market and fight between Google and Baidu for market share in
China
• High possibility of further mergers in the search market
• It can be expected that some of the search engines will be specialized for customer-based
needs.
Marjan Suban POSLOVNA STRATEGIJA 24.01.2010

3. What are the key factors that define success in the industry? What are the key competencies,
capabilities, and resources of successful search engine companies?
Key factors of search engine industry success are:
• Consumer demand for innovative and interoperable products or services (platforms,
internationality, interchangeability)
• Net neutrality
• Improved search algorithms (fast, accurate, impartial and easy to use)
• Awareness of convergence in media, internet, broadcast and entertainment
• Trust (user security, privacy concerns and protections)
• Awareness of user habits and needs (supply solutions to anticipate and meet needs)
Google core competencies are:
• Constant Innovation of search algorithms
• Impartial algorithms used to rank data weight
• Open transparent organizational culture
• Policies: Implement, then monetize; People-Profit
• Corporate Reputation = Brand Trust
• Back net-neutrality interoperability + open source
Google, Yahoo, and Microsoft have both similar and dissimilar capabilities:
• All are financially sound; in fact, they all have the financial clout to afford large acquisitions,
or to invest significant financial resources in a R&D.
• All are global; all are household names.
Currently, Yahoo and Microsoft must reassess their resources and capabilities to decide how to
deploy them most effectively. In reality, they must leverage their current resources to develop
new capabilities if they hope to compete with Google for the consumers.
Google has an advantage in efficient organization of information. By means of using an unbiased
algorithm to rank data relevancy, Google’s impartial search algorithm is also the key to its
popularity, because Google users have a greater level of trust. Yahoo has a number of social
networks and content advantage. Microsoft’s advantage resides in their long reign of global
market dominance in business by means of their market share of computer software and
operating systems, although they also face risks from this due to global antitrust issues.
Marjan Suban POSLOVNA STRATEGIJA 24.01.2010

4. Describe Google’s business model. What are the company’s revenue-cost-profit

relationships? What strategies has Google relied upon to build competitive advantage in the
industry?
Google business model generates revenue
by providing. advertisers with an
AdSense
opportunity to deliver online advertising,
directly matched by keyword to a user’s
search query. Google business model is Search
AdWords
based on three elements shown also on appliance
right-side figure.
The first one is the advertising when you search on Google, a program called AdWords.
AdWords is Google's advertising product and main source of revenue. AdWords offers pay-per-
click advertising, and site-targeted advertising for both text and banner ads. The AdWords
program includes local, national, and international distribution. Advertisements are short,
consisting of one title line and two content text lines and/or image. The "content network" shows
AdWords ads on sites that are not search engines. These content network sites are those that use
AdSense, the other side of the Google advertising model. AdSense is used by website owners
who wish to make money by displaying ads on their websites. User’s click on ad displayed on a
Web page means that advertiser pays Google and Google give percentage of that amount to the
webpage.
The third way in which they make money is through its Google Search Appliance which they
sell to their customers. This Google’s search technology can be integrated into a third party’s
Web page or intranet. This appliance delivers accurate search results throughout a number of
documents. Meaning your company would have its own search engine and it would work just as
well as google.com. Licensing fees ranged from $30.000 to $600.000. There is also Google Mini
Search Appliance designed for small businesses.
Some of the most important strengths of the
Google’s business model are:
• Reliable pricing system
• Scalable architecture
• Disruptive business model
• Efficient ad system and relevant ads
Figure presented Google’s revenue-cost-
profit relationship is displayed here. Google
has grown rapidly; from 2004 to 2007 its
Marjan Suban POSLOVNA STRATEGIJA 24.01.2010

revenue growth slowed, but still increased by more than 50% every year (average is 71,6% per
year). The company reported a year-over-year growth of 31% for 2008. Beside constant growth
of total revenue, net income has also constant growth (average is 109,1% per year) accept maybe
in year 2008, where increase was not as high expected. In parallel there is also a growth of
market share. By the year 2009 I can say that Google has almost monopole position in a search
engine market. The company generated 97% of its 2008 revenue from advertising, the inventory
of which is sold both directly to customers as well as in conjunction with advertising agencies
serving large clients. Google's two primary advertising products are AdSense and AdWords,
both paid search products.
To support further growth of Google they are relaying on this strategies:
• Differentiation “Deliver the most relevant, objective data in the shortest time”
• Focus on user experience and anticipate user needs
• Develop personalized user products and services
• Innovate advertising solutions for business sector
• Protect key talent by investing in culture
• Explore & develop internet video / wireless frontiers
• Innovate services / interfaces for wireless sector
That it is why Google need to:
• Invest in R&D (innovations, search for algorithms and communications)
• Pursue strategic alliances (integration and interoperability)
• Manage the Google brand (avoid marketing)
Marjan Suban POSLOVNA STRATEGIJA 24.01.2010

5. Have Google’s business model and strategy proven to be successful? Should investors be
impressed with the company’s financial performance? How does the company’s financial
performance compare to that of Microsoft and Yahoo? Please conduct a financial analysis to
support your position—you may wish to use the financial ratios presented in Table 1 of Chapter
4 as a guide in doing your financial analysis of the company.
Total Revenue Structure
From the figures we can see that the
growth of the Google Total Revenue is
constant. In 1st quarter of year 2009 we
can observe first negative growth, which
can be related with recession. Search
based advertising is the main revenue
source. Since 2007 there is also a new
source of revenue, that is licensing
revenue.
Cost Structure
From the cost point of view we can see
that largest part of cost are represented by
cost of revenues. Cost for R&D are little
increasing, but in general they represent
significant level of total cost (company
which investments a lot of mony in
R&D). Other cost are at low level.

Liquidity/Cash Ratio
Google has better liquidity then Yahoo.
We can notice that there was some affect
of recession. Yahoo had bigger problems
with liquidity in year 2007, but now it is
improved.
Marjan Suban POSLOVNA STRATEGIJA 24.01.2010

Profitability/Operating Profit
Both companies has been affected by
economic downturn in year 2008. Google
clearly runs it’s bussines more effective
with better cost management.

Profitability/ROE
Google gain higher profitability level then
Yahoo.

Debt ratio
Google reflect lower debt ratio then
Yahoo. Google’s growth is organic, while
Yahoo took some measures to decrease
debt in 2008 (and converted some
coupons in stock).
Marjan Suban POSLOVNA STRATEGIJA 24.01.2010

6. What are the company’s key resource strengths and competitive capabilities? What
competitive liabilities and resource weaknesses does it have? What opportunities exist? What
threats to its continued success are present?
The best way to answer this question is by Google’s SWOT analysis.
Strengths Opportunities
• Large leader in the global search market • Increase in internet users
with more than 85% of the searches • Increase in search advertising
conducted • New market growth (China)
• Leader in the global search advertising • Larger definition of search marketing
market including new forms of advertising such as
• Superior search (relevant and objective some sorts of social media
algorithems) • Increase in wireless subscribers worldwide
• Superior advertising algorithems nad will embrace local mobile search services
methodologies by 2013
• High brand awareness: users' trust with the • Integration, strategic alliances and joint
famous "Google it" (consumer trust) ventures with suppliers
• Significant infrastructure base • Investments in R&D innovation (service
• Financial stability (low debt, large cash and interface for wireless)
reserves, exponential growth in revenues • Market power in value chain
and net income) • User demand for convergance and
interoperability

Weaknesses Threats
• Interruption or failure of Google's services • Privacy concerns
• Competitor strategic actions (social • Antitrust and Copyright infringement suits
networks) against Google
• Inability to hire or retain key people (high • Increase global competition
cost of highly skilled people) • Disruptive innovations
• Inability to scale operational processes • Internet security
• Top management issues • Open source's ecosystem threats
• Lack of product integration • Recession impacts on search marketing
• Possible slowing of high revenue growth and online advertising trends (global
economic slowdown)
• Foreign exchange risk
Marjan Suban POSLOVNA STRATEGIJA 24.01.2010

7. What recommendations would you make to Google’s top-management team to sustain its
competitive advantage in the search industry? How should it best capitalize on its strategic
initiatives in mobile search, cloud computing, and its auctioning system for traditional media
ads?
Here are some recommendations for Google:
1. Invest in R&D - Stimulate innovation
Constant search for improved algorithms and communications. Implement new innovation very
quick. Try new solutions with real people.
2. Search for strategic alliances (integration and interoperability)
Seek alliances with like-minded companies that promote open source standards. Extend the reach
of Goole’s search into the wireless sector (seek alliance with wireless network provider or create
a Google wireless network). Maybe seek alliance with Apple (combining iPhone, WiFi Network
and Google’s mobile search capability).
3. Mobile Operating System
Mobile industry is one of the important goal in Google strategy. Open platforms (devices,
services, networks and applications) are already in Google strategies.
4. Cloud Computing
Further improvement of Google’s web browser in a way of supporting cloud computing. Attract
Microsoft’s customers, first by Google search, well established services and then also with cloud
computing.
5. Manage the Google brand
Keep on avoiding marketing. Anticipate, support, expand user’s bond with the Google brand by
anticipating their needs, and developing tools that meet them. Allow users to have interactive
access and control over their own personal information, increasing its usefulness and building
trust in Google’s brand.
6. Support public education: critical issues impacting Internet access
Net neutrality, open access and interoperability across platforms is very important. Reduced cost
of personal training.
7. Invest also in internet security
Safe (without viruses,…) information, applications can become more and more important and
valued.