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...
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