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.

External Environment

Global

Internet search is applicable to most cultures all over the world freeing Google from geographic dependence. In fact, the company now has 20 offices in the U.S. and international locations in over 30 countries working on research, sales, and marketing (Google, 2008). Google offers a personalized search engine for more than 115 countries, and as language support improves, the company is likely to gain market share. As computers become more affordable, many people in economically disadvantaged countries are gaining access to the internet for the first time and Google would like to route them through its search and productivity products, like Gmail, Docs, and Sites. Google’s web applications are now bundled into the operating system on low-cost Linux-based computers (Blankenhorn, 2008).

Demographics

Google is well positioned in demographics because it has a relatively young userbase. This means that it will be less affected as the Baby Boomers age in comparison to other companies that depend on the 50 to 60 year-old demographic group. Internet search is also not a gender-specific issue, and would not be hurt by changes in the ratio of female to males. The company will however benefit when some traditional and paternalistic societies begin using the internet more frequently.

Technology

Technology is obviously always improving and Google has taken specific measures to make sure it does not fall behind. Google can use commodity computer parts (cheap components) knowing they will fail by ensuring that every component always has a duplicate. The components are attached to the computer with Velcro rather than screws which allows for quick swapping and upgrading (May, 2007).

Economic

The United States is currently in a period of 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. In fact, a recent Wired magazine article says that Google “looks particularly well-positioned to weather the downturn. Google’s focus on highly targeted, measurable advertising makes it more recession-proof than many other businesses in tech.” (Schiffman, 2008) The crucial need to stay informed and constantly connected keeps such services vibrant despite the parched surroundings.

Politcal and Legal

Formal institutions have not significantly affected Google’s operations, although Google has faced pressure from the Department of Justice to relinquish archived search terms (Buncombe, 2006) and from the Chinese government to censor search results (Liedtke, 2005). Google’s “Don’t be evil” mantra has been put to the test as users ask whether cooperation with governments undermines their privacy and freedoms. In 2008, Google responded to customer concerns when it added a privacy link to its home page. This link took users to a Privacy Center where they could learn about Google’s policies in regard to political and legal issues (Google, 2008).

Google has also faced concern on copyright issues because the company stores copies of third party web pages and images on their servers. They have responded to this criticism by releasing a copyright information page. The page provides the relevant information regarding digital information and provides links to notify both Google and the U.S. Copyright Office of suspected infringement (Google, 2008).

Socio-Cultural

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. As internet use increases among all age groups and across all cultures, we will become increasingly more dependent on internet search.
In addition, most new cell phones are internet capable devices. People will use these devices for driving directions, to locate restaurants, check sports scores, download music, and even quick research. Google stands to benefit from this with an increased number of search queries. To enable more people to access Google’s services from their mobile devices, the company has released its Android Mobile Phone Platform and Operating System as well as the Google Mobile App that can be downloaded on other platforms such as the Apple iPhone.

Stakeholders

Google has a responsibility to manage its operations for the benefit of its stakeholders. Stakeholders include not only the shareholders of the company’s stock, but also the employees, customers, suppliers, trade associations, and community. Google decisions may be influenced by the government, activist groups, and the media, all who have their own agendas and responsibilities to the people they serve. Each stakeholder has a relationship with Google and this relationship is the source of the stakeholder’s power to affect Google’s decisions. Google’s distributed business model ensures that no stakeholder has a level of importance that could singly change the direction of the company, but the way that the mass of web users, media, and governments interpret their activity could influence the company’s objectives.

It is Google’s management’s job to ensure the survival of the firm and the long-term benefits of the stakeholders. Litigation and politics often have an effect on both the short-term and long-term results and that is why it is important to be vigilant of the external environment. Some stakeholders have conflicting claims, such as the user’s right to information and the government’s responsibility to protect information – or consequently, the user’s right to privacy and the government’s right to access records. Management is tasked to weigh the seriousness of each claim and decide which outcome will best benefit the majority of their stakeholders.

Porter’s 5 Forces Analysis

Porter’s 5 Forces analysis is a framework for industry analysis and business strategy development relative to the competitors of the firm (QuickMBA, 2007).

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 highly competitive market. With that in mind, it must be recognized that when Google was founded in 1998, Yahoo, Excite, and Altavista dominated the search market and Google has since eclipsed them all (Viney, 2007). The market now, however, is more mature with a necessary path dependency to gather data on both the content of webpages and the search history of users. Therefore, the threat of new entrants in the internet search market is relatively low.

Suppliers

Google’s ad system is a reliable source of income because both the ad-making partner and ad-receiving individual are both 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% (Google, 2007). This number is the same for Yahoo (Google, 2007) suggesting that both companies are equally efficient at maintaining supplier-seller collaboration.

Current Competitors

Google’s stated goal is to “organize the world’s information” (Google, 2008), 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 years (Google, 2008).

Google’s main competitors, Yahoo, and Microsoft (operating under their respective brands – MSN and Live Search), posted revenues of $7.0 billion and $51.1 billion respectively (Google, 2007). There is a dizzying amount of money made in this industry.

Presently, Google commands 57% of internet searches in the United States (Agence France-Presse, 2008). This large market share enables them to improve the quality of their search results and targeted ads more quickly than their competitors. This creates 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 shares (Figure 3) (Agence France-Presse, 2008). The competitive rivalry is strong and ongoing in this industry because large amounts of advertising dollars flow to the website that has captured the largest volume of searches.

Customers

As of 2007, 99% of Google’s revenues are derived from advertising (Google, 2008). 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 site (Google Inc., 2007). This means that no single buyer has a controlling interest. In Google’s system many advertisers bid on keywords. Popular keywords like “Dallas Texas” are sold for much higher value-per-clickthrough than obscure topics (Google, 2008). This distributed approach allows Google to attract both large companies and small “mom-and-pop shops” keeping buyer power low.

Potential Substitutes

In 2008, the internet has become the mode chosen by millions of people all over the world to 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 complete these tasks as well as conduct searches. A substitute product may be invented in the future, but there are no obvious substitutes to organizing information on the internet.
Google has positioned itself well to weather each of Porter’s Five Forces of Competition as well as stay afloat in a turbulent external environment. Google’s ability to please its stakeholders will continue to define the success of the venture and the future of the company.

Works Cited