External Analysis of Google Inc.

Google Inc. is analyzed using Porter’s Five Forces: rivalry, the threat of substitutes, buyer power, supplier power, and barriers to entry.

Current Competitors

Google’s stated goal is to “organize the world’s information”³, and to merit they have created many complimentary products to their main internet search service. Targeted advertisements based on the information they collect with their products are Google’s primary source of revenue. In 2007, Google had revenues of $16.6 billion which grew an average of 115% annually in the preceding five years⁴. Google’s main competitors, Yahoo, and Microsoft (operating under brands, MSN and Live Search), posted revenues of $7.0 billion and $51.1 billion respectively⁵. There is a dizzying amount of money made in this industry.

Presently, Google commands 57% of internet searches in the United States¹. This large market share enables them to improve the quality of their search results and targeted ads more quickly than their competitors and therefore is a sort of self-perpetuating draw for customers as the search results constantly improve. Yahoo and Microsoft lag behind with 23% and 11% respective market shares¹. The competitive rivalry is strong in this industry because large amounts of advertising dollars flow to the website that has the largest volume of searches.

External Environment

The United States is currently in a recession and stocks are trading at 52-week lows. However, technology companies like Google are relatively isolated because search and consequently internet-based advertisements have become a staple to the world society and economy. The world is increasingly becoming more connected due to the means of communication available through the internet. And, for many people, the search giants like Google make the internet navigable.

Formal institutions have not significantly affected Google’s operations, although Google has faced pressure from the Department of Justice to relinquish archived search terms² and from the Chinese government to censor search results⁷.

Potential New Entrants

The barriers to entry in the internet search market are high. The current competitors have thousands of servers deployed in locations all over the world and have accumulated many years worth of data about user habits. A new entrant would need to provide better search results at very fast speeds to compete in this market. That said, when Google was founded in 1998, Yahoo, Excite, and Altavista dominated the search market and Google has since eclipsed them all⁹. The market now, however, is more mature and the threat of new entrants is low.

Suppliers

Google’s ad system is a reliable source of income because both the ad-making company and ad-receiving individual are customers of Google’s. So as long as Google maintains its market dominance with the search product, supplier bargaining power will remain low. Google’s cost of revenue as a percentage of sales in 2007 was 40% ⁵. This number is the same for Yahoo⁵ suggesting that both companies are equally efficient at supplier-seller collaboration.

Customers

As of 2007, 99% of Google’s revenues are derived from advertising⁴. However, no single account contributes more than 3% to net revenue, and less than 5% of the revenue is generated by any given network partner site⁶. This means that no single buyer has a controlling interest. In Google’s system many advertisers bid on keywords. This distributed approach keeps buyer power low.

Potential Substitutes

In 2008, the internet has become the way millions of people all over the world request and retrieve information. In light of this fact, there really is no suitable substitute for search. Information can be organized in different ways including categories and sorted by date, but Google provides tools to do these things as well as search. A substitute product may be invented in the future, but there are no obvious substitutes to organizing information on the internet.

Offensive and Defensive actions

Over the past five years Google has doubled the percentage of revenues that it spends on research and development⁸. In addition, Google is constantly churning out new products to aid in the creation and organization of many different types of media including text, images, audio, and video. These differentiated products raise switching costs as customers become comfortable using Google’s offerings and storing their data on Google’s servers. Google can ensure sustained profitability by continuing to diversify the types of people and companies who advertise on its website. Many small businesses have yet to place an online ad, and if Google can introduce them to the business they may gain a loyal customer. Better service in the future, such as phone help lines, may also help create loyal customers.

Works Cited

Posted by Ben on Oct 15, 2008

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