19/03/2011 External Analysis of Google Inc.

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External Analysis of Google Inc.

By Ben Morrow on October 15, 2008

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.”

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(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

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Figure 1. Stakeholder Importance

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
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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).

Figure 2. (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.
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Figure 3. (Agence France-Presse, 2008)

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
1 Agence France-Presse. “Revamped Ask.com searching for more market share”. 6 October 2008. AFP.

2 Buncombe, Andrew. “Google resists demand to hand over search records.” 15 March 2006. The Independent.

3 Google. “Company Overview.” 2008. Corporate Information.

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4 Google. “Financial Tables.” 30 June 2008. Investor Relations.

5 Google Finance. 31 December 2007.

6 Google Inc. 10-Q. Corporate Filing. Washington D.C.: Securities and Exhange Commission, November 2007.

7 Liedtke, Michael. “Google Agrees to Censor Results in China.” 24 January 2005. Breitbart.

8 Reuters. “Annual Income Statement.” 31 December 2007. Reuters Business & Finance.

9 Viney, David. “Search Engine History – Web Search Before Google.” 14 September 2007. SEO Expert Services.

Posted in Research | Tagged Advertising, Business, Google, Search

Ben Morrow
An entrepreneur from Texas who loves to build things, Ben is currently starting up
myMoney360, a company that will revolutionize the way you think about your personal
finances. Read more about Ben's bio and motivations.

Articles in this series

History of Google Inc.
Leadership & Culture at Google Inc.
External Analysis of Google Inc.
Internal Analysis of Google Inc.
Google's Strategic Direction

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