Google's business model, organizational structure, and strategic opportunities

Google

Introduction and Description of the Company

Organizational Structure

Industry Analysis

Value Proposition

Financial Performance

Figure 1.1 Revenue and Net Income Growth

TOWS Strategies

BCG Matrix

Leadership

Alliances

Measures

Google is a highly successful Internet company that makes most of its money through online advertising. It has been able to achieve this success through a combination of leadership and culture. The company's many strengths are in general aligned with the opportunities that exist in the marketplace. As a result, Google has the opportunity to pursue most of its opportunities. The most recommended opportunity to pursue is to take the Android operating system and apply it to the PC industry. It is also recommended that Google addresses the threats that it faces in the political environment, both domestically and in China. It can do this by using its financial clout but also it will need to develop new capabilities in order to effectively manage the political environment.

Introduction and Description of the Company

Google is the owner of several of the world's top twenty websites, and the number one site in the world, Google.com (Alexa, 2012). The company has a number of different businesses. Its largest segment is its advertising business, operating systems, and other Internet software (2011 Form 10-K). The company describes its business as that of a "technology leader focused on improving the ways people connect with information." Google's stated mission statement is "to organize the world's information and make it universally accessible and useful" (Google.com, 2012). The company believes that if it delivers what the end user wants then "all else will follow."

By appealing to end users, Google is able to draw massive amounts of traffic to its web properties, and this in turn drives the company's core business. Users searching for things on the Internet do not pay Google, but their data is collected and used to help Google sell ads. The advertising business is the primary business of Google, and it contributed $36.5 billion of Google's $37.9 billion in revenues for the 2011 fiscal year (Google 2011 Form 10-K). Advertising, therefore, contributes 96.3% of all revenues. The other businesses, including the industry-leading Chrome browser and Android mobile operating system, are not significant revenue contributors to Google.

Google is a relatively young company, having started in 1998, and it is still in the growth stage of the business life cycle in online advertising. In its other businesses, Google is either in the infancy or growth stages of the life cycle. Internet traffic is still growing and the online advertising business remains subject to considerable innovation, much of it the result of Google's efforts. In a fast-paced and competitive industry, Google has always relied on innovation to drive its growth. The company offers a high level of service with its advertising business, and aims to deliver superior results for its advertisers in terms of both the quantity and quality of the eyeballs the advertisers will reach. Google also uses innovation to open up new business opportunities, and this innovation pipeline has put the company at the fore of many businesses. While it has yet to truly capitalize on the popularity of Android or Chrome, for example, the company is building market share in those areas and using those products to make its advertising business more effective, creating indirect revenue growth from its innovation. It has become a more innovative advertiser than rival Yahoo, which has seen its revenues and market share decrease in the past few years (Womack, 2011). Google still faces emerging threats from new advertising heavyweights like Facebook, which has seen its revenues grow rapidly (MSN Moneycentral, 2012). Google's innovation capabilities have also allowed it to gain share rapidly with Android, and it now dominates that space (Perez, 2012).

Organizational Structure

Google's organizational structure is based primarily on function, with product groupings taking a secondary role. The key functions at Google are Legal, Business Development, Knowledge, Communications People Operations, and Engineering. Product-based divisions include Advertising, Chrome and Apps, Google.org, Mobile and Digital Content, and Geo and Commerce. The most interesting thing about the organizational structure at Google is that the advertising business is subordinated to other aspects of the company, and is a product group on a par with many other product groups. Normally, a product group that constitutes 96% of the company's revenues would be given primacy in the organizational structure. This interesting quirk in the organizational structure highlights the unique approach that Google takes to its business -- knowledge and innovation are the primary objectives and the advertising business is basically a way for Google to finance its other endeavors.

Google's governance structure is designed to support the needs of the organization. There are three internal members of the board, and the remaining members come from a variety of disciplines. One of the company's early venture capitalists still has a seat on the board, as well as executives from Google's acquisitions over the years. Of some concern from governance perspective, however, is the lack of financial expertise on the company's board. It is generally recommended that a board should have experiences financial professionals to ensure adequate oversight of the company's financial activities and adherence to accounting standards. Google should adjust its board in order to ensure that there is more financial capability on its board (Uzun, Szewczyk & Varma, 2003).

Industry Analysis

Porter's model of the competitive forces in an industry helps to outline how attractive an industry is. The five forces are the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, the threat of substitutes and the intensity of rivalry within the industry. The most important industry for Google to understand these dynamics is the online advertising industry, since this is where Google draws almost all of its income from. The key inputs to this industry are the information that Google processes and the labor that Google uses to create its algorithms and sell its ads. The company does not pay anything to the end users (consumers) whose Internet searching provides the data that Google uses to target its ads. Moreover, there is no call from consumers to be compensated for this input -- they receive valuable information from Google in exchange. This information is derived from Google's efforts to gather the world's information and make it available. The company does this with top technical staff who develop the algorithms and other programs that allow for the development of the various Google sites and programs that feed into its advertising business. Labor has high bargaining power in this industry and Google wastes no effort or expense in making itself one of the most attractive companies in the business. Google is a top recruiter of talent but faces stiff competition from a variety of other leading technology firms in the area. All told, the bargaining power of suppliers is moderate -- Google only pays for talent, but it does not pay for the information it processes.

The bargaining power of buyers is moderate as well. Advertisers have a high level of information about their target markets and they will typically perform a cost-benefit analysis on any major advertising platform they are investigating. Google must not only be as well-informed as its customers in order to compete in this industry, but it needs to choose between offering superior results or lower rates than its competition. In order to avoid the bargaining power of buyers lowering the company's revenues Google relies on offering superior targeting of consumers. Google addresses the bargaining power of buyers directly by ensuring that it has the best service in the marketplace, so that it offers a superior cost-benefit equation to the buyers.

The threat of new entrants is moderate. Google is growing its share of search but any website that has a high level of traffic is a threat to make a splash in the business. Microsoft entered search with an eye to growing its advertising business and has made inroads with Bing, though more against Yahoo than against Google. However, such a well-financed competitor can continue to work on offering a superior service and eventually become a serious threat to Google. Arguably, the biggest threat to Google right now is Facebook, which is rapidly leveraging its high traffic level to grow its online advertising business. This company is only a few years old and only went public to raise additional financing in 2012. The rapid rise of Facebook mirrors that of Google. The rapid pace of change in the Internet business means that there is a possibility that every few years a new major competitor will emerge in the same way that both Google and Facebook did.

The threat of substitution is low. Ten years ago, it could be argued that advertisers would be willing to substitute offline advertising for online, but that is not the case any longer. Online advertising has become a mainstream part of the advertising industry. It is not viewed as an alternative to offline media, but a complement to it, and a mandatory complement at that. Thus, companies are not going to face a choice between advertising with Google and advertising with a television network or newspaper; they will only choose between Google and one of its competitors.

The intensity of rivalry in the online advertising space is high. There are only a handful of major competitors -- Google, Yahoo, Facebook, Microsoft and Baidu. There are significant stakes between these companies. Yahoo has faced the threat of Google for more than a decade and remains locked in an intense battle. Microsoft sees Google's business as an opportunity for it to grow. Google and Baidu have considerable direct corporate rivalry over the search business in China.

Overall, the five forces reveal that Google's industry attractiveness is only moderate. Intense competition and high bargaining power of buyers in particular make this a tough industry in which to compete. Margins are pushed downward in industry condition such as these. However, Google is uniquely positioned in the industry. It counters buyer bargaining power with technological superiority, and it uses this same superiority to outflank even strong competitors in the marketplace. The industry is positively unattractive for a new entrant unless that new entrant can capture the traffic volume and customer information needed to provide Google-level targeting. While Facebook has done this, there is question as to how many more competitors could possibly enter the industry. However, the Internet is still growing and rapidly evolving so there remains potential for this industry to become less desirable for Google over time. Its success thus far is a testament more to its abilities than to the attractiveness of the industry.

Value Proposition

Google outlines the value proposition of AdWords program as follows. Google argues that it "targets customers in ways no other medium can match." By doing this it can provide a good return on investment for advertisers. Google provides the superior results by providing the customers with the information that they need to make better targeting decisions. Google's ability to compile and disseminated information -- reporting, analytics and optimization resources -- is the primary driver of value for the company (Google.com, 2012).

Google views the core of its value proposition as relevance. In the advertising industry, reaching consumers is easy, but reaching the right consumers is not as easy. Most media forms are blunt instruments, able to reach the target audience only by reaching a broad audience. Yet the advertiser pays for the ability to reach all of the eyeballs, not just the ones in the target audience. What Google offers is more precision targeting so that advertisers can reach only their target audience. For advertisers, such ability offers value two ways. The first is that the advertiser does not have to pay to reach people who are not in the target market, allowing the advertising program to have better return on investment. The other is that the advertiser can create finely-tuned messages to match the fine-tuning of the target market. As an example, a company can target ads in local languages using Google's local sites, allowing it to reach even small markets. Using a blunter marketing instrument might require ads only in English or another dominant language. Any company with multiple unique and distinct target markets benefits from the ability to fine tune those markets.

Sundelin (2009) argues that Google also offers value propositions to a number of other audiences in order to maintain its advantage in advertising. The advertising business is driven by information and traffic, without which Google will have nothing to offer advertisers. In other words, it must appeal to consumers in order to appeal to advertisers. Thus, Google provides value to consumers by delivering superior information a timely manner. The company has a suite of websites ranging from Maps to Translate to Scholar to national websites, all designed to have unique appeal by offering different types of information in different ways. While these sites do align well with the company's overall mission of organizing the world's information and making it useful, they also provide consumers a reason to use Google sites. The result is that the consumers are also providing data that the company can use to build better advertising platforms. Thus, Google needs to have a value proposition for the end consumer in order to have a viable value proposition for the advertiser.

Financial Performance

In general, Google has experienced exemplary financial performance in the past five years. The company has a strong growth trajectory in both revenues and profits, a great balance sheet and an examination of its financial statements reveals no red flags. From a market perspective, Google's stock is priced at $660, a very high level, with a reasonable level of stability (? = 1.08) for a company in such a rapidly-changing industry. The company's latest earnings per share was $31.92, a very high figure that explains the high stock price.

An analysis of Google's income statement reveals an enviable track record of growth and liquidity. Revenues have grown 128% in the past five years, and net income has grown 131%. Figure 1.0 illustrates how Google's revenues and profits have grown in this time:

Figure 1.1 Revenue and Net Income Growth at Google 2007-2011

The graph shows that through the economic downturn, Google was able to maintain revneue growth, but that in 2008 its profits suffered a slight decline. The company rebounded however. In general, Google has been able to maintain healthy margins. Its gross margin today is 65.2%, compared with 62.6% in 2009 and 59.9% in 2007. This growth in the gross margin reflects the increasing strength of the company's bargaining power as it grows in size, increases traffic and improves its technological capabilities. The operating margin is currently at 30.6%, compared with 35% in 2009 and 30.6% in 2007. Part of the decline in operaing margin in the past two years reflects an unusual expense but part of it reflect significantly higher costs associated with selling, general and adminstrative expenses, perhaps as the company plows more money into projects like Chrome and Android without seeing any revenue benefits from those endeavors. It is also worth taking a look at thte statement of cash flows, to ensure that the operating cash flows are increasing in line with net income. This is the case with Google, as operating cash flows increased 152% from 2007 to 2011, from $5.775 billion to $14.565 billion. This can be taken as a good sign that the results on the income statement are in line with the cash flow results.

The company's balance sheet reflects its excellent financial performance. Google has maintained strong liquidity throuhgout the past five years. Today, the company has $44.6 billion in cash on the balance sheet. The current ratio is 5.9, compared with 10.6 in 2009 and 8.49 in 2007. These changes reflect that Google has in the past five years always been a very liquid andhealthy company, and there are some minor fluctuations over time of the specifics of this liquidity. Google has continued to plow back money into its business, as evidenced by continued growth in plant, property and equipment. One major implication of the cash that it has is that Google has the financail wherewithall to invest in any business it sees as having potential, but at present there are fewer such businesses in the world than the company has money to invest.

Google added long-term debt in 2011 for the first time in the company's history. It took out $3 billion in debt, which represents just 4% of the company's total balance sheet. Most of Google's total liabilities have always come in the form of current liabilites. Growth in these over the past five years may reflect changes to the ecompany's business, for example adding new product lines. The value of the equity in Google's balance sheet continues to increase, from $22.689 billion in 2007 to $58.145 billion in 2011, an increase of 156% in five years, and a faster increase than either reveue or net income experieinced.

Google's stock price has responded well to this superior market performance. The stock price was $661.15 and five years ago it was $714.87. The company's stock price declined from those late-2007 highs to $262.43 in November of 2008, but has increased steadiliy since then, moving in sympathy with the market. While the moves mirrored closely the performance of the broad market (hence the beta of 1.08), the reality is that Google would have been a screaming buy at the time. Its financial performance was much stronger than the decline in the stock price indicated. Figure 1.2 shows the progress of Google's stock price in the past five years:

Source: Yahoo Finance

Google's competitors have suffered more than Google has as the result of the economic downturn. The market clearly expected Google to suffer far more than it did. Yahoo is the main competitor and while the downturn did not have a significant adverse effect on that company's financial performance, Yahoo has suffered more recently from competitive pressures. Facebook did not suffer at all from the economic downturn, but then again its revenues during those years were miniscule. It is less possible to determine how the downturn has affected Microsoft's advertising business, since that company's earnings are skewed heavily towards its two main cash cows, Windows and Office.

For Google, charitable contributions are incorporated under general and administrative expenses. These increased by $64 in the last fiscal year according to the Form 10-K, but the total amount was not disclosed.

TOWS Strategies

The TOWS matrix emphasizes that strategy can be formulated by aligning the company's strengths with its opportunities in the marketplace, and using strengths to address threats. Weaknesses that are subject to external threats must be shored up in a defensive strategy. For Google, defensive strategy is only necessary in one area, that of the threat posed in the legal/political environment. This might not be the most important strategy that the company undertakes, but it should use its wealth, access to information and its reach with consumers to continue to fight against legislation that would threaten its business by restriction the flow of information and ideas on the Internet.

Another strategy that flows from the TOWS matrix is that Google can take advantage of any number of opportunities. The SWOT analysis identified the PC operating system industry as the most lucrative opportunity in the marketplace today. The TOWS matrix suggests that Google has the strengths it needs in order to exploit that opportunity. Technologically, Android is the market leader by far in mobile operating systems Both the Google and Android names resonate with consumers, and consumers are now familiar with the way that Android works. If Google can take some of its cash and its talent and apply it to developing a PC operating system, it can develop one that is superior to Windows. In addition, the Android venture gives Google a channel into the PC market, as it can work with a number of its existing vendors such as Samsung to develop the products.

The TOWS matrix also hints at how Google might address the China threat/opportunity. The company is failing there with consumers in part because of the problems that it is having with the government. Baidu might have more resonance with Chinese consumers, but it does not have a technological advantage. If Google competes on equal footing with Baidu, it will probably win. The challenge for Google is to use its capital to maintain technological advantage over Baidu while simultaneously using some of its leadership talent to work some political magic over the Chinese regime. This may be a challenge -- Google's leadership has specific and direct issues with censorship and Communism in particular (Brin coming from the U.S.S.R. originally). However, finding a way to solve the China problem and turn it into a major growth market remains a priority for Google.

BCG Matrix

The BCG Matrix features four different sections that describe where a company should put its resources. The sections are cash cow, dog, star and question marks. In a sense, the BCG Matrix is irrelevant to Google because the core assumption of the matrix is that the organization has scarce resources and needs to use those resources wisely. Google does not have scarce resources. However, the advertising business is the company's star, as it is a high market share business and a high growth rate. Android is another star, and so is Chrome. The difference of course is that advertising makes money, while Android and Chrome only have market share and growth rates on their side. Since Google can afford not to worry about profits for those products in the short run, it will continue to put resources into both of them, and into advertising as well to maintain competitive advantage. The search functions may not have as high a growth rate with the Internet itself showing signs of maturity in Western markets, but the search function and information sites support the advertising, so they are an investment in that business. China, interestingly, in one of the few businesses at Google that would not be considered a star. China is instead a question market, as the market itself is high growth but Google has a relatively low market share. Google has had trouble in recent years deciding whether it wants to grow that business or exit, but appears fully committed to growing the China business for the time being, despite the difficulties it is encountering in that market.

Strategies

Google's financial strategy is relatively simple in that it finances its ventures with retained earnings. The company's cash pile is so large it has no need to seek external financing for growth. It uses these funds in conjunction with its research and development (R&D) strategy to maintain its innovation pipeline. Google's R&D strategy is basically that has official projects that have been approved through company channels. These receive the bulk of financial support and human resources support. However, employees have the ability to join other projects within the company or to pursue their own projects. As a result, the company actively provides the resources needed for its people to pursue innovation outside of the company. The result of this is effort has been the strong innovation pipeline that Google has.

The company's marketing strategy is based on the differentiated generic strategy. Google understands that marketers are well-informed, savvy buyers and aims to exceed their needs in terms of access to information. As Google meets these needs, it is able to attract advertisers with a premium service, as measured by value proposition. Google competes by being better than anybody else both in terms of service and in terms of technology, and markets itself as the leader. Google's marketing is premium in nature in that the company works with its customers to understand their needs, in the process providing a high level of service that takes the company beyond simply being an aggregator of advertising slots. All of these strategies are aligned with Google's operations strategy. The company's emphasis on innovation and service excellence is supported financially as well as at the leadership and organizational culture levels. This high level of alignment is responsible for much of the company's success in recent years.

Leadership

Google has exceptional leadership. The company's leaders are its founders. Not only do they provide inspirational leadership, but they also have a high level of authoritative leadership, having been the ones who developed the original Google algorithms that brought the company to prominence in the first place. Their leadership sets the tone for the corporate culture and the way that the company handles the many challenges. By maintaining this leadership and blending in some professional management techniques from more classically-trained leaders like Eric Schmidt, Google has a good mix of leadership styles that suits its mission and strategies. The company's exceptional financial performance, much-admired culture and string of hit products is testament to the quality of leadership that it has received.

Alliances

Google occasionally engages in alliance and partnerships in order to enhance its business. It works closely with OEM smartphone markers, for example, in order to develop industry-leading products. Google for the most part however makes its money mostly by working with its clients. The company's strategic alliances are used to bring it access to new technologies and ideas that it can adapt and use. It runs its advertising business with a high level of independence and vertical integration.

Measures

Google utilizes the common financial measures to evaluate certain aspects of its performance, so it evaluates its revenues and costs carefully. It has other measures as well. There are operational measures in the form of operating statistics that the company uses to measures traffic and other operating variables. It measures a lot of its performance on being able to meet the needs of clients, because it can sell this track record to future clients. It benchmarks primarily against itself, but is aware of the performance of its competitors and does not hesitate to point out when its performance is superior. In addition, Google measures market share and other market performance attributes. As with any technology company that relies on innovation, the number of patents that it has is considered a key success measure as well. In general, Google measures just about every activity that it undertakes and uses these measurements to set benchmarks for future performance. It is worth noting that in general, Google does not reveal too much information about how it measures and to what it extent it measures its inputs and outputs, as this form of management is considered to be one of the company's sources of competitive advantage.

Recommendations

As far as the existing business is concerned, there are no serious recommendations that can be made to Google's strategy. Telling Google how to run an online advertising business is just silly. However, there are areas where the company's strategy could be improved in other ways. The first lies with its dependence on advertising. Google has aligned its business towards two things -- advertising and innovation -- but these strategies do not necessarily support the growth of other ventures to profitability. The company has succeeded with products that it knew from the outset were unlikely to be profitable. It needs to find another major revenue stream instead of pursuing unprofitable projects.

To that end, the first recommendation towards diversification is to dedicate significant financial and human resources to challenging Windows. This product is one that people love to hate -- they need it but the lack of success of Windows Mobile hints that consumers may not be terribly responsive to the Windows or the Microsoft brand anymore. The Android brand and Google, however, are popular. If Google can challenge Windows with a superior operating system, it can win tens of billions of dollars from Microsoft.

Another recommendation is that Google should work to improve its political capabilities. The company does not behave like most companies, and while that has clearly helped it to become so dominant, it must also recognize that many companies succeed specifically because they are able to manage the political environment. Google needs to shut down threats like SOPA before they even come to a vote by using its money and its untapped ability to be a media machine to promote its views on Internet freedom and liberty. Google also should improve its political capabilities in China if it insists on remaining in that market. The BCG Matrix put China as a question mark, and it is only because of the long-term potential of that market that Google wants to remain there. It also knows that Android is going to make inroads into the Chinese market as well, so there is impetus for the company's ongoing presence in China. However, it needs to address the overt hostility of the political environment in order to ensure that it stems the market share losses in China and is able to leverage its technological competitive advantage in that market.

These strategies can be rolled out over the next two or three years. Historically, this is about the longest time frame that Google has had, because of the young age of the company and the rapid pace at which its industry changes. The following GANTT chart, broken down into six-month increments, shows how the recommended strategies can be rolled out.

GANTT Chart

2013

2014

2015

Set up U.S. lobbyist team

Set up China lobbyist team

Push for reform of Internet in China

Set up OS team

Research OS market

Design OS

Integrate OS and Android

Bring OS to market

Expand OS market share.

Works Cited:

Alexa.com (2012). Top sites. Alexa.com. Retrieved November 26, 2012 from http://www.alexa.com/topsites

Google Form 10-K for the year ended 2011. Retrieved November 26, 2012 from http://www.sec.gov/Archives/edgar/data/1288776/000119312512025336/d260164d10k.htm

Google.com (2012). About Google. Google. Retrieved November 26, 2012 from http://www.google.com/about/

Lee, M. (2012). Google gets some rare good news in China. Business Week. Retrieved November 26, 2012 from http://www.businessweek.com/articles/2012-08-30/google-gets-some-rare-good-news-in-china

MSN Moneycentral: Facebook. (2012). Retrieved November 26, 2012 from http://investing.money.msn.com/investments/stock-income-statement/?symbol=FB

MSN Moneycentral: Google. (2012). Retrieved November 26, 2012 from http://investing.money.msn.com/investments/stock-price?symbol=GOOG&ocid=qbeb