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A business analysis project on Google Inc.

A market leader running into mischief?

Research Paper (undergraduate) 2011 37 Pages

Business economics - Company formation, Business Plans

Excerpt

Content

1. Objectives to Introduce

2. Auditing the Online Advertising Market

3. Analysis of Google’s strategic issues

4. Benchmarking: Yahoo and Microsoft on fast lane?

5. Limitations and Critique

6. Conclusion

7. Recommendations

Appendix

Literature

1. Objectives to Introduce

Imagine that: it is raining and Google reminds you to pick up an umbrella. You are bored and Google suggests you what to explore. Your girlfriend is angry and again, it’s Google telling you what she desires most (Maatz, 2010). Scary? Imposing? Opinions differ when it comes to Google and its vision for the future.

Google Inc. (Google), founded in 1981 by Larry Page and Sergey Brin, two Stanford students, has shortly turned into a global technology leader, overruling its global competitors in providing search engines: Yahoo, Baidu and Microsoft (Business Insights, p. 32, 2010). Above, Google has scarcely been rated as most valuable brand worldwide (Berger, 2010). Financial data are fairytale-like: from $ 85 (IPO, 2004), share price rose by 800 percent up to $ 642; margins of 36,8 percent, annual revenues of $ 29,32 bn and an EBIT of $ 10,8 bn strengthen the picture of high profitability and economic well-being (Google Inc., p. 27, 2010; Osiris, 2011).

Delivering online advertising which is significantly adjusted to the customer primarily generates revenue for Google: together with licenses for its search engine technology, Google AdWords, an auction-based advertising program, and Google AdSense, distributing ads in the Google Network, are main sources of income (Stross, 2008). Today, Google holds market share in global search advertising of 74,3 percent (Business Insights, p. 12, 2010); longing for even more awareness, content such as YouTube, Google Earth, Google Enterprise or Google Maps is only a precise of what Google additionally offers - all services being positioned online (Google Inc., p. 4f., 2009).

Downside of the global success story is that Google keeps walking on the edge of ethics and legality, as detractors arraign (Hintermeier, 2011). Further, the company is already under the weather of internal alterations and legal denunciations (Fleischmann, 2011). Though analysts foresee further growth in 2011/2012 (Moran, p. 20, 2011), increasing rivalry as well as internal and societal debates might harm the company in the author’s opinion.

Along with an external and internal review focusing on the online advertising market, benchmarking two main competitors will provide a detailed view upon Google in order to identify threats and benefits particularized. The aim of this paper will be to analyze and evaluate Google’s strategy in terms of quantitative and qualitative data, providing an elaborated basis for recommendations on how to defend market leadership, observe strategic goals, and cope with obstacles. Relevant recommendations will be modeled in a spreadsheet to prove financial outcomes.

2. Auditing the Online Advertising Market

Before the competitive context shall be analyzed, the external market environment is stated briefly, helping to keep external deviances in mind. Prefixing, the following reviewed online advertising market shall be defined: according to Gabler (2010) and for the purpose of this paper it is understood as an attempt to attract customers to specific products or marketing messages accessive by online communication; e.g. by using contextual ads, banner ads, advertising networks, email marketing or even spam.

Online advertising is strongly affected by our business cycle; for advertising is one of those spendings usually being cut first when financial shortage occurs. In 2009, ad spending decreased by 12.7 percent in the US and by 7.8 percent throughout Europe pushing income rates back to the level of 1995 (Reschke, 2011; Schneller 2011). For online advertising doubled its market share since 2006, up to one fifth of the total advertising market by the end of 2010, further shifting from conventional to online advertising is foreseen,1 acting as positive buffer in case of further financial shortages (Reschke, 2011). Overall, an annual growth rate of 10.2 percent is forecasted for the online advertising market in 2011 (Business Insight, p. 21, 2010).

Second, online advertising is affected by the online market overall, still impacted by the increasing number of people holding online access and extending time spent online (Schneller, 2009), growing at a rate of 13.7 percent to reach 2,6 billion people being connected to the Internet by the end of 2011. Yet, global Internet penetration rate reached 28.7 percent in 2010, constantly rising (Business Insights, p. 11, 2010).

Third, rising e-commerce spending is regarded as the key performance indicator, for e- commerce and online advertising are directly related as online sales are driven by online ads. So far, global e-commerce revenues increased from $ 183 bn in 2004 to $ 501 bn in 2009. After slow-down due to recession, increase at a CAGR of 20.2 percent, up to $ 870 bn is predicted from 2009 to 2012 (Business Insights, p. 75, 2010). So far, the external environment seems to be quite stable, for business cycle, increasing online access and growth in e-commerce support attractiveness of online advertising.

Focusing on the competitive context, the adapted framework of Porters’ Five Forces (Porter, 2008) interestingly points out that truly alarming threats appear when looking at forces apart from the common forces Porter identified. Initiating, the main five forces identified by Porter are identified below:

According to the threat of profitability overall the threat to profitability is medium in the global online advertising market: low to medium product differentiation in terms of perceived functionality, high information and a huge number of users able to change providers within a click lead to relatively low bargaining power of publishers compared to users. Also, technical suppliers providing hardware and software mostly offer standardized products, holding low bargaining power. Oppositely, regarding enterprises paying for ads acting as buyers, brand and market share heighten bargaining power of publishers, for buyers cannot easily switch in the current quasi-monopoly commanded by Google. Though, short-term contracts offer customers the opportunity to switch within weeks, loose contracts lower bargaining power of publishers. Depending on continent and country, breakdown among publishers differs to more or less concentrated oligopoly. Overall, supplier’s and buyer’s bargaining power is medium.

Regarding possible new entrants, high capital requirements in terms of strong brand and possible scales is needed. Though, because product differentiation is relatively low and access to distribution channels is easily given, the possibility to compete with new entrants is given. In case Google gambles away trust, possibly through data safety problems or strategic megalomania, doors would be open for new cooperation heading for market share. Currently, the threat to profitability from new entrants is low. Regarding substitutes, libraries, friends or academics help finding information, though main online competitors dominate searching information professionally; threat to profitability through substitutes is low.

Further, knowing that the online advertising market is the fastest growing channel among all advertising segments, it makes it a highly attractive market. After heavy increases of 26 percent in 2010 up to $ 7.5 bn sales volume, further double-digit growth is forecasted in 2011 / 2012. While the Onlinesalesgroup forecasts growth of 16 percent for online advertising overall with expected pre-tax volume to overcome first time $ 8.5 bn, online advertising is expected to reach spending in TV ads in 2011, currently spearheading advertising channels (Moran, p. 22, 2011). Analysts like Schneller (2009) and Reschke (2011) foresee growth of 11.5 percent in 2011, followed by 11 percent in 2012. Aligning this, “Business Insights forecasts that the size of the online advertising market will almost double from $ 42 bn in 2007 to $ 72 bn in 2012, growing at a CAGR of 11.4 percent“ (2010). While search2 advertising will grow a CAGR of 15.6 percent over 2007 to 2012, display3 advertising is forecasted to grow a CAGR of 9.9; classified is registering a negative CAGR of 3.4 percent (Business Insights, p. 28, 2010).

Market attractiveness being constrained through high concentration and already well- partitioned market decreases in the view of any ’non-Googles’ while looking at the quasi- monopoly Google commands: holding 67.4 percent of the global market share - 74.3 percent in global search advertising itself - followed by Yahoo (7.8 %), Baidu (7 %) and Microsoft (2.9 %) the market is relatively well-arranged in Google`s view. In case Yahoo and Microsoft’s Bing chase up by strategically occupying niches, users could easily switch, leading to a strong duopoly worldwide (Business Insights, p. 12, 2010). Also substitutes like Facebook - not in sight distance within the online advertising market yet - could claim to market share on the long run.

According to Porter (1981), the online advertising market can be described as being medium attractive, highly partitioned market, offering the possibility to grow and gain market share. Margins are according to medium threat to profitability among rivalry pleasingly high (2010: Google 36.8%; Yahoo 16.9%; Osiris, 2011).

Salient threats occur when the adapted framework including globalization, digitization and regulatory are taken into consideration; because societal trends play an important role as well, a forth force is introduced below. The most harmful threats are marked in red:

[...]


1 Newspapers` market share is expected to fall from around 23 to 20 percent from 2009 to 2012. Also, print magazines are expected to lose market share to become mere 8.9 percent of the total in 2012, down from 10.3 percent in 2010 (Business Insights, p. 24, 2010).

2 In search advertising, advertisers pay fees to internet companies to link or list their company`s site domain name to a specific search word or phrase (Business Insights, p. 29, 2010).

3 Display advertising includes animated and static images and interactive video or audio media, seen in the banner ads on the tops or sides of many websites (Business Insights, p. 30, 2010).

Details

Pages
37
Year
2011
ISBN (eBook)
9783640960750
ISBN (Book)
9783640960996
File size
1.9 MB
Language
English
Catalog Number
v175231
Institution / College
Anglia Ruskin University
Grade
1
Tags
Google Google Inc. Business Analysis MBA benchmark benchmarking yahoo microsoft

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Title: A business analysis project on Google Inc.