Google's differentiation strategy through innovation and data sophistication

Google is an information services company that makes most of its money in online advertising. The company owns the world's #1 website by traffic (Google.com) and several other top websites in Blogspot and its nation-specific search sites (Google.de, etc.). Google has a number of different product/service offerings including online advertising, the Chrome web browser and the Android mobile operating system. Revenues last year were $37.9 billion and net income was $9.7 billion (MSN Moneycentral, 2012). Almost of all of this revenue came from online advertising (2011 Google Annual Report). The company's guiding philosophy is that it wants to "organize the world's information and make it universally accessible and useful (Wojcicki, 2012). The company also leverages its focus on innovation to create new products. Even though Chrome and Android do not make money for the company, they are industry-leading products that contribute to advertising revenue streams.

Corporate-Level Strategy

Michael Porter outlined in his book Competitive Advantage the different corporate-level strategies that lead to success in the marketplace. These are cost leadership, differentiation and focused versions of those two ideas. Google's competes as a differentiated provider in all of its main businesses. Google's main business is online advertising. The company's approach to this business is to provide fine-tuned information about customers to advertisers, on the theory that this information will allow advertisers to better target online consumers. This superior information will not only attract more customers but will also allow Google to charge more for its online advertising, because the information it provides is more useful to advertisers than the information provided by its competitors. Google executes this strategy with its sophisticated mathematical models to collate and organize data. Google's models identify specific characteristics about customers, largely based on search terms, and then advertisers work with those characteristics and search terms to promote their products, in a highly-automated system.

The industry in which Google operates evolves quickly, and a major competitor can be left behind within a couple of years. The industry leader when Google arrived was Yahoo, and that company made $2 billion less in revenue last year than it did the year before -- it has entered into steep decline. A similar phenomenon occurred in smartphone operating systems, where Blackberry was an industry leader in 2009 but Google's arrival in the industry with Android leapfrogged the Blackberry technologically and that company has not yet been able to catch up, and is fading into irrelevancy. This pace of change in the industry has forced Google to adopt as the main driver of its differentiation a strategy of constant innovation. Wojcicki (2012) notes that this innovation is part of the company's culture. Google is willing to enter new markets with groundbreaking ideas, for example. This innovation philosophy has also allowed Google to continue to adjust the way it manages information, and these constant adjustments are the main source of sustainable competitive advantage and ongoing differentiation. In other words, innovation ensures that Google maintains the technological superiority that differentiates it from its competitors.

The business-level strategy of differentiation is a good choice for Google, for a number of reasons. The first reason is that differentiation has always been critical to driving business in online information. When Google first launched, there were many Internet search engines. Google needed to outperform in search in order to drive traffic, and that traffic in turn provides the information that Google processes in order to sell ads with better targeting. Thus, a differentiated strategy has always been required to succeed in the online advertising business. While one could potentially make the case that online advertising is a commodity product, the reality is that the ability to reach one's target market has unique value, and any company that outperforms with helping advertisers to reach their target market is going to be more successful.

In addition, the differentiated strategy allows for Google to charge premium prices. The result is that the company now has $45 billion in cash on its balance sheet (MSN Moneycentral, 2012). Firms that have a cost leadership strategy do not make the margins required to sustain that level of operating cash flow. This cash, combined with the culture of innovation, allows Google to expand into new products and services. This expansion will provide Google with revenue diversification over time. It is essential that Google has a number of different revenue streams in case there is a challenger to its search dominance at some point. Yahoo is an example of what happens when the firm does not differentiate enough -- eventually it is overtaken by a superior competitor and has no alternate revenue streams to fall back on. By developing Chrome, Android and other products, Google is hopefully going to develop new revenue streams, which is strategically desirable in the long-run. Therefore, it is evident that the differentiated strategy not only supports the generation of superior operating cash flows but also supports the company's long-term survival by facilitating the development of alternate revenue streams.

Business-level strategy

Google has sought to define the online advertising business, and this innovation leadership characterizes its approach to business-level strategy. The company has a number of different approaches to business-level strategy that will be addressed. Google describes some of the different approaches to the advertising industry. It seeks to foster relationships with all types of advertisers, including major agencies. The company makes a point to gain feedback from its customers to determine how it can better serve them. This approach to customer relationship management has resulted in a number of innovations, such as programs for advertisers to train them on how to use AdSense with high proficiency, for example. Another example is the way that Google puts more power in the hands of its major advertisers through programs like Partner Search. Google also allows developers to build applications that directly incorporate the AdWords platform. All of these initiatives help Google to build stronger relationships with its customers, and to offer them services that are superior to the services being offered by the company's competitors (Price, 2010).

The company also makes a point to directly undertake strategies that foster innovation. Google's human resources strategy allows for its employees to spend a certain amount of their time working on projects with other work groups, and a small portion of their time is allotted for their own projects. By allocating a set amount of company resources to innovation, Google has been able to maintain its innovation pipeline. The company also has a sophisticated hiring process and actively encourages hiring only the best people. The company's innovation program and its track record of excellence is attracting to the best people. The result is that Google is able to have the personnel that it needs to execute on its plans. The company knows that if it wants to build a better mobile operating system, it can, because it has people good enough to do it.

The company's business-level strategies support its corporate mission. The time and effort Google spends to work with its customers supports the premium positioning, as does the time it takes to foster relationships. Google could simply rest on its laurels as the dominant player in search with the best information, but its strategy to foster continuous improvement has led it to a variety of value-added services. The innovation in HR strategies supports corporate-level projects, but they also support business-level projects as well. A new innovation is not just something like Android; it could be something as simple as a new interface for small advertising partners.

It is critical to business success that there is a high level of alignment between the company's business level strategies and its corporate level strategy. At Google, this alignment has always been strong. Part of the reason is that the company still makes most of its money from a single business, which means that Google has a relatively simply structure and business model. However, Google has not lost sight of this alignment even when dabbling in what would become major projects like Chrome and Android. Focus on the part of senior management, as well as the fact that the company's overall mission is a strong unifying factor, contributes to this alignment. It is believed that Google will remain aligned to strategies that leverage the link between superior knowledge and business value, such that its business-level strategies will continue to be highly successful in the future.

Business Cycles

The online advertising industry is a high cycle industry. Both of these companies evolve quickly, and long-term success in the industry demands that any company that wants to succeed in the long-run must be able to move quickly in order to compete. Yahoo is struggling because it has not been able to keep up with the pace of innovation -- Google outperforms it and now it must also compete with a different model in Facebook. The high cycle favors companies that move quickly, and in that Google has the best business model in the industry. As a result, Google is the superior competitor.

If the online advertising industry was a low cycle industry, the strategies would still favor Google for a couple of reasons. The first is that Google has a superior service component. It has more experience and better knowledge of the unique needs of its customer base. It has the ability to provide a valuable service over the long-run. Another advantage that Google would have in a low cycle is that it is well-positioned in terms of sustained traffic. Facebook has a business model that could be replaced. While its critical mass is an advantage, there are other social networks that are popular as well. Facebook's ability to continue to offer value to advertisers depends on its ability to maintain a positive customer experience at its site. By contrast, Google has a number of different websites, and provides a lot of different types of content. By being able to do this, Google has far superior reach around the world than Facebook does. While social networking might get old or be replaced, the question for information online will never get old or be replaced. As a result, Google's model is more sustainable in the long run even if the industry does not change very quickly.

Overall, Google is the best competitor in its field. It has a strong business model that features a high degree of congruence between its corporate-level strategies and its business-level strategies. The company's emphasis on innovation makes it a formidable competitor in a high cycle market, but its size and expertise make it a formidable competitor in a low cycle as well.

Works Cited:

Google Form 10-K for the fiscal year ended December 31, 2010. Retrieved November 18, 2012 from http://investor.google.com/documents/20101231_google_10K.html

MSN Moneycentral. (2012). Google Inc. Retrieved November 18, 2012 from http://investing.money.msn.com/investments/stock-income-statement/?symbol=GOOG