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The Business Operations Of The Google Company Economics Essay

Introduction

When we talk about Google, we will think about search engines. It is not wrong because the company first and basic business is a search engine. Google was formally founded in 1998 following a successful research project by Larry Page and Sergey Brin in the previous two years. A history of innovative product developments and acquisitions, most notably YouTube and DoubleClick, has seen Google grow into the world’s largest search engine provider (Google 2009b), and diversify into a number of related industries. Now just over 10 years old, Google offers a huge range of open source products and services including office tools, video and photo sharing, online book viewing and maps (Google 2009c). A history of legal issues and accusations relating to censorship, anti-trust, monopoly, and intellectual property has somewhat tarnished Google’s reputation as a small and popular organisation. Nevertheless, Google remains the world’s largest internet services company and is ranked 423 in the Fortune 500 (CNN 2009).

Google generates revenue from its two core advertising functions: Google AdWords and Google AdSense. AdWords is Google’s main source of income, allowing organisations to utilise a pay-per-click system whereby they incur costs only when potential customers interact with their advertisements. This is complemented by AdSense, which places relevant adverts in web pages based on its content and provides the publisher with a share of the generated revenue (Google 2009d). In 2008, these services generated $21,128,514, nearly 99% of Google’s total revenue (Google 2009e). At time of writing, Google has continued to post year-on-year revenue growth of around 5% in 2009 despite the global economic recession.

Literature Review

Porter’s 5 Forces Analysis

Porter's five forces is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. It uses concepts developing, Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition".

Three of Porter's five forces refer to competition from external sources. The remainder are internal threats. It is useful to use Porter's five forces in conjunction with SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats).

Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally, requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.

Porter's five forces include - three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers.

This five forces analysis, is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies.

SWOT Analysis

SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective. The technique is credited to Albert Humphrey, who led a convention at Stanford University in the 1960s and 1970s using data from Fortune 500 companies.

A SWOT analysis must first start with defining a desired end state or objective. A SWOT analysis may be incorporated into the strategic planning model. Strategic Planning, including SWOT and SCAN analysis, has been the subject of much research.

Strengths: attributes of the person or company that are helpful to achieving the objective(s).

Weaknesses: attributes of the person or company that are harmful to achieving the objective(s).

Opportunities: external conditions that are helpful to achieving the objective(s).

Threats: external conditions which could do damage to the objective(s).

Identification of SWOTs are essential because subsequent steps in the process of planning for achievement of the selected objective may be derived from the SWOTs.

PESTEL Analysis

There are many factors in the macro-environment that will effect the decisions of the managers of any organisation. Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples of macro change. To help analyse these factors managers can categorise them using the PESTEL model. This classification distinguishes between:

Political factors. These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system.

Economic factors. These include interest rates, taxation changes, economic growth, inflation and exchange rates. As you will see throughout the "Foundations of Economics" book economic change can have a major impact on a firm's behaviour. For example:

higher interest rates may deter investment because it costs more to borrow

a strong currency may make exporting more difficult because it may raise the price in terms of foreign currency

inflation may provoke higher wage demands from employees and raise cost

higher national income growth may boost demand for a firm's products

Social factors. Changes in social trends can impact on the demand for a firm's products and the availability and willingness of individuals to work. In the UK, for example, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staff are living longer. It also means some firms such as Asda have started to recruit older employees to tap into this growing labour pool. The ageing population also has impact on demand: for example, demand for sheltered accommodation and medicines has increased whereas demand for toys is falling.

Technological factors: new technologies create new products and new processes. MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances. Online shopping, bar coding and computer aided design are all improvements to the way we do business as a result of better technology. Technology can reduce costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organisations providing the products.

Environmental factors: environmental factors include the weather and climate change. Changes in temperature can impact on many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider. The growing desire to protect the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel and the success of hybrid cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities.

Legal factors: these are related to the legal environment in which firms operate. In recent years in the UK there have been many significant legal changes that have affected firms' behaviour. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organisation's actions. Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be developed) and demand (e.g. if the law affects the likelihood of customers buying the good or using the service).

Economic Analysis

Porter’s 5 Forces Analysis

Internal Rivalry

In terms of the search engine market, competition is relatively low. There are only a few major rivals (Yahoo!, Bing, Ask Jeeves) and Google has the majority share of the market. There is little or no cost to the user in switching between the alternatives however, and choice often comes down to convenience due to the lack of user awareness of the differences between the various search engines.

Google’s leadership in search engines naturally translates into dominance in the online advertising market. Although there are many small competitors in pop-ups and banner ads, Google AdWords and AdSense have provided an arguably monopolistic share of the market, and as such Google may be subject to a monopoly investigation (Guardian 2009).

Subtitution and complement

Generally there is little or no alternative to the classic concept of the internet search engine, therefore substitution is almost impossible.

Within the broad market search engine market, switching between rival products bares negligible costs to the user and therefore the threat of substitution is very high.

Should another product arise that is categorically and publicly known to be better than Google’s, it is highly probable that Google would lose a lot of users as they themselves rely heavily on word of mouth promotion for their success.

Due to the direct relationship between number of users and advertising revenue, a drop user numbers would translate into a large loss in revenue for Google.

Entry

Large levels of investment are required to develop competitive technology and brand identity in this market, and as such the threat of entirely new entrants is low.

The threat from established high-technology firm on the other hand is fairly substantial. The potential will always remain for companies in similar industries, such as Apple, to develop their own search engine technology in the future.

Similarly, there is a strong patter of re-entry by existing players in the market, such as Microsoft replacing Live Search with Bing, and this continues to be a serious threat to Google.

Buyer Power

There are such a vast amount of Google users that the loss of a small number of these would have a negligible effect.

There is no real vehicle for canvassing public opinion on search engines other than internet forums and independent reviews, which reduces the power of buyers.

There are no switching costs associated with rival products, which means that should a large number of users become disillusioned they could easily boycott Google with no negative effect on their own utility. The impact of this on Google’s revenue would be severe, and it is therefore in their interest to continually innovate and provide more services free of charge.

Supplier Power

If defining Google’s suppliers as the individual advertisers or websites that it links to, there is very little bargaining power for suppliers. Google has an almost infinite number of potential suppliers, the majority of which would inflict no great loss to Google if they no longer existed

When viewing the suppliers as the web browser software creators, Google’s position is far less secure. There is little to stop Microsoft or Apple, for example, developing browsers that hinder the performance of Google. It is not in their interest to do so however, as Google has an extensive collection of users that would be dissatisfied with such a product. Because of this, Google and its suppliers are mutually dependant. Suppliers such as Microsoft are limited to tentative actions such as providing their software with their own product as the primary search engine tools.

SWOT Analysis

Strengths

By far the largest search engine in terms of users, accounting for 87% of the UK search market in 2008 (BBC News 2009b).

Owner of the most effective search engine technology based on speed and accuracy. A simple product that is globally scalable and requires very little operating costs (Google 2009a).

Offers and continues to develop a wide range of services that complement the core products, such as maps, office tools, video and photo sharing services.

Most recent (July 2009) figures show that despite the recession, year-on-year revenues increased by 3% between 2008 and 2009. Earnings per share increased by $0.74 over the same period (Google 2009f). This is an indication of truth in the claim that Google has the strength of being “recession-proof” (Quittner 2008).

Weaknesses

Offers a range of products that is very narrow and lacking in diversity in terms of industry. Revenue is very reliant on the internet and in particular online advertising.

Difficult to retain users other than continuing to develop the product and offering additional services for free

Reported problems in hiring and retaining key members of staff (Softpedia 2007).

Opportunities

Google’s search algorithms aren’t 100% accurate and errors sometimes occur in local searches. Many queries are also answered incorrectly and users often complete several searches on the same topic. Addressing these problems would provide a large competitive advantage.

The launch of Caffeine could potentially further Google’s hold on the market if successful (Techtree 2009).

Emerging economies will provide huge opportunities for growth when their internet access levels rise.

Potential for the Android mobile system to gain a greater share of the large and growing mobile market.

Threats

Google’s image has changed in recent years from a popular, small search engine battling against successful companies such as Microsoft to the giant of online advertising. This has brought with it more responsibilities, controversy, and legal issues (Business Week 2008).

Microsoft’s Bing, Wolfram Alpha, and a revamped Ask Jeeves search engines have recently entered the market with improved products (24).

Facebook acquired FriendFeed, which has the strength of real-time searches, and Google has already fallen behind other real-time services such as Twitter (Shiels 2009).

Adding additional services and capability to the search engine may harm its simplicity, which is one of its major strengths

PESTEL Analysis

Political

The general decline in oppressive states over recent years has been, and will continue to be, beneficial for organisations involved in information sharing. A global increase in freedom of speech and learning combined with a shift in many countries towards more Western forms of administration will almost certainly see organisations such as Google thrive through government support for technological innovation.

Despite this general trend, Google continually faces pressure to do more to fight censorship and support human rights, no more so than in China. Over the last 4 years Google has been attempting to break into its huge market potential, but due to local laws Google China is required to filter searches for a wide range of politically sensitive issues and entities (Reuben 2008).

Recently, Google has come under public criticism from a Chinese government agency who has accused them of providing links to pornography (Time 2009).

The US Government has planned to tighten tax loopholes on US multinationals; this is likely to see Google incur larger tax costs (Sahadi 2009). Recent corporation tax cuts in the UK won’t affect Google as they operate out of Ireland in order to benefit from substantially lower corporation tax rates.

Google is governed by US as well as standard international trade laws. The trade sanctions currently employed by the US Government restrict the products and services that Google can provide to countries such as Iraq, Iran and North Korea.

Economic

With the global economy now widely regarded as being in the midst of a recession, advertising spend is likely to be reduced as the majority of organisations seek to reduce costs. With almost all of Google’s revenues coming from advertising services, conventional wisdom would suggest they will be negatively affected.

However, Google’s 2008 earnings saw 31% year-on-year growth (Time 2008). Reasoning has been levelled at the fact that AdWords provides a relatively inexpensive form of advertising when compared to television, radio, and print media. It is likely that in times of economic pressure, companies will switch to cheaper forms of advertising rather than withdraw advertising altogether.

Google also benefits from providing many products and services open source and free of charge. These offerings will naturally be subject to increased demand as consumers seek value for money.

On top of this, reports suggest that mobile internet browsing will be largely unaffected by the recession and will continue to provide substantial growth potential for Google. These factors in combination have prompted Google’s Chief Economist Hal Varian to claim that the recession could help rather than hinder Google (Time 2008).

Into the long term, levels of wealth and development should continue to experience high growth in emerging markets such as Latin America once the global recession has subsided (PwC 2009). Computer manufacturers continue to target these economies for growth in personal computer sales, and should they succeed this will translate into an increase in demand for related services, such as those that Google provide (Next Billion 2008).

Social

Particularly in Western economies, there is a trend towards the requirement of information on demand and services on the go. As a result, the reducing demand for desktop computers will directly relate to an increased demand for mobile computing, and these trends are favourable to Google as a pioneer of web based software as an alternative to desktop applications.

Google have also become incredibly active in mobile technological innovation, an area that they are targeting as one of their key areas of future growth.

People are becoming more technologically aware from a younger age, and overall numbers of computer literacy and internet access continue to grow globally. Google should therefore experience natural growth in their number of users.

Technological

Google continue to be a leading innovator in search engine technology, web and open source applications. They are particularly pioneering in the use of open source technology, encouraging users to put the browser ahead of the desktop. As a result, Google tends to be the driver of its own technological environment (Shiels 2008a).

In recent times, mobile internet browsing has grown dramatically; 25% between the second and third quarters of 2008. These figures are likely to grow further as smart phones, mobile computers, and free internet inclusive tariffs become more widely available. (PC Pro 2008)

Kelsey Group predicts that the interactive share of global advertising spending will grow from 7.4% in 2007 to 21% by 2012, a market in which Google will remain a leading force (Kelsey Group 2008).

Environmental

Being a company that largely operates in intangible products, Google is to some extent exempt from the criticism that other major businesses have faced in recent times, particularly in relation to the manufacturing, packaging, and delivery of goods.

However, general concerns over the environmental impact of computer use and disposal are indirectly relevant to Google, even though they claim to be at the forefront of green computing (Nunn 2007).

Conversely, reports have suggested that searching Google for several minutes generates the same amount of carbon dioxide as boiling a kettle (about 7g) due to the vast amount of energy used by Google data centres around the world, which are required by the way its search engine operates (Times Online 2009).

Legal

Search engine providers have been suggested to aid illegal activities as they make content such as child pornography and terrorist materials more easily available. However, Google has actively sought to filter out such content and has worked with the National Centre for Missing and Exploited Children amongst others to develop technology that will help find illegal material and those who access it (Shiels 2008b).

Until recently Google CEO Eric Schmidt was also on the board of directors of Apple, and therefore arguably in breach of anti-trust laws that forbid a person from being on the board of two rival companies simultaneously if it reduces competition between them (Business Week 2008).

Similarly, the online advertising partnership between Google and Yahoo has been under investigation amid claims that the agreement breaches anti-trust laws; it is argued that Google has too much power in online advertising, and this deal therefore obstructs fair competition in the market.

Conclusion

Google is the leader of search engine because :

Unique business model

Diversification

Problems

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