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MGMT002 – Technology and World

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Business Case: Google


Written Report

Prepared for:
Dr. Teo Kwong Meng

Prepared by:
LOH Yao Sheng
Michelle TING Mei Chen
Remi CHOONG Ciyuan
Roger KOH Fong Jit
Q1.
Google was a late mover in the internet search industry, entering the
market later than firms such as AltaVista and Inktomi. Being a late mover,
Google benefitted by learning well from the mistakes of its predecessors.

AltaVista and Inktomi were the first movers in internet search, providing
directory giant Yahoo! with algorithms which enabled automated search.
However, as with all first movers, loopholes and errors are unavoidable.
Both companies faced problems of “algorithm abuse” which resulted in
spam that frustrated its users.

Notably, both companies did not foresee this problem. This may be one
disadvantage of first movers - the potential problems are unknown.
Furthermore, in an attempt to be the first mover (which has its benefits to
be mentioned below), companies may “rush” out their projects and hence
overlook important details such as system integrity, potential abuses and
user friendliness.

Having said that, we cannot undermine the benefits of a first mover


advantage. Microsoft with operating systems and Creative with sound
cards are two good examples. A first mover establishes standards in
accordance with their expertise and new companies looking to enter the
market need to compete against their expertise. This poses significant
barriers to entry for new firms. Also, by the time a competitor arises, the
first mover would have secured a loyal consumer base. This makes it hard
for late movers to claw market share away from first movers.

Google, conversely, is a company that arises after witnessing the


inadequacies of its predecessors. As such, it has the advantage of
understanding and preventing the pitfalls its predecessors faced. Also,
being a late mover, Google can concentrate on improving currently
established systems instead of starting from scratch. In the case of
Google, the company improved search by creating an algorithm that
prevents abuse. By using algorithms instead of reinventing ways to
automate search, Google did not have to start from scratch (which is
obviously harder).
It was clear that by solving the problem of spam, Google has set a new
standard as Yahoo! soon replaced Inktomi with Google. However, this is
only effective if the standards established by the first mover are
significantly improved upon.

Q2.

In order to predict Google’s future market share, we need to address this


question from both advertisers and consumers’ point of view.

As consumers, we wish to find the required sites as quickly and as hassle


free as possible. This means that the company with the fastest and most
accurate search results will garner a greater consumer base than its
competitors. With regards to Google, its unique PageRank algorithm
ensures that users receive the most relevant search results; hence
consumers are more skewed towards Google.

In addition, Google’s corporate value of “don’t be evil” translates to


corporate social responsibility (CSR). Much academic research has shown
that CSR leads to increased competitiveness. In the case of Google, it
ensured that profits did not manipulate search results and users, who
continued to get the relevant search results they desired, stayed loyal to
Google for its relevancy.

Lastly, Google’s great diversification in other fields encourages users to


use Google out of convenience. For example, the Google Toolbar has a
search function which, obviously, uses the Google search engine.

For the advertisers, Google’s cheaper rates and greater degree of click-
through meant maximized efficiency and significant cost savings. It is
obvious for any smart advertiser to advertise on Google – lower costs yet
better results.

Furthermore, with a majority of search users preferring Google, smart


advertisers, in an attempt to capture a greater marketing mass, would
naturally advertise with Google as well.
Hence, coupling huge demand (satisfied users) with huge supply (smart
advertisers), Google serves as a middleman who satisfies both sides of
the equation. This is in contrast with it competitors, who merely satisfies
advertisers.

However, this does not mean that Google would certainly monopolize the
search market. For one, Google’s decision not to advertise for products
like alcohol and tobacco would deprive it of a huge market base despite a
positive portrayal of Google’s image to consumers.

Hence, Google’s market share would mostly likely fall at 80%, where the
other 20% consists of advertisers who are unable to advertise on Google
due to its CSR policy.

Q3.

AOL is a global Internet service provider (ISP) with a customer base of


10.1 million subscribers as of November 2007. It is also a subsidiary of
Time Warner – the world’s third largest media and entertainment
conglomerate by market capitalization. There are several reasons as to
why Google would want to acquire a stake in AOL – one of which is
because of the fact that it is an ISP.

Google supports virtual applications, many of which relied on AJAX which


required fast and reliable Internet connections. These connections
allowed a service provider to deliver fresh data and advertising and
enable behavioral tracking. Google, by aligning itself with AOL, will be
able to ensure that there’s a push for migration of dial-up connections to
broadband ones, complimenting the services offered by Google. Also,
since AOL is affiliated with Time Warner, it would provide Google with
access to yet even more Internet users – people who use the Internet for
media entertainment purposes.

No doubt the price that Google paid for its stake in AOL is above the
recent valuation by JPMorgan but we must understand that a valuation is
ultimately only an estimation of the company’s worth. Even if the price
Google paid is higher, any amount that was over and above the valuation
is meant to serve as a form of goodwill to Time Warner and AOL. Google
probably understands that in order to expand even further it will require
assistance from the other companies and thus it was important to lay the
foundation proper for such a scenario to arise.

However, our group feels that the 45% premium that Google paid to AOL
is too much; a price that is 25% above the market valuation would
probably be suffice.

Q4.

Google’s core capability is its ability to develop superior search solutions


– a key competence which drives many of its other services like Google
Maps and Google Desktop. As of August 2007, Google is the most used
search engine on the web with a 53.6% market share; to say that Google
is most famous for its ability to organize information, providing its users
with fast and accurate results would be nothing short of an
understatement. In fact, should Google fail to maintain its pole position in
the web search industry, it just wouldn’t be Google anymore. Moreover,
Google’s mission statement coupled with its founders who are committed
in blazing the trail in the web search industry, it’s needless to say that
Google will continue to develop and defend its core business of search
and organizing information. This is even more unlikely when one consider
that the market is predicted to grow at an average annual rate of nearly
20% for the years 2006 to 2009.

Google’s strength lies in its web search capabilities, thus any expansion
into other opportunities ought to play to its core capability. Having said
that, our group feels that Google should pursue portal and e-commerce
opportunities and scale back on its development of its software segment.

As shown in the case report, Google accounts for nearly 36% and 68% of
the all search queries in US and the world respectively. Given that Google
has such a large user base, it only makes sense to transform Google into
a web portal so as to broaden the reach of its other services – a portal
would allow Google to bundle its myriad of services into a one-stop
website. One obvious competitor in the web portal market would be
Yahoo!. Although Google may trump Yahoo! in terms of its web search
capabilities, Yahoo! is the veteran company in the web portal industry.
With the experience it has accumulated through the years, Yahoo!’s team
is very much capable of meeting any challenges whilst this is may not be
the case for Google. However, with a much larger user base than Yahoo!,
Google should be able to move over to the web portal market easily if its
team is capable of mastering the art of web portal hosting.

Google’s larger user base will also help compliment its e-commerce arm –
Base. As mentioned in the case, many of eBay’s sellers are also searching
for a vendor through Google. By setting up a unit that is similar to eBay’s
online auction system, Google would have a ready base of buyers and
sellers – its web search users. Coupled with its strength in churning out
accurate web search results, users will probably find doing e-commerce
on Google a much easier and friendlier experience as compared to other
online auction sites like eBay. However, Google lacks the experience that
eBay’s management possess and this may prove to be a significant
obstacle since there are many legal issues pertaining to online auctioning.
Moreover, Google’s online payment service, as it is not as established as
eBay’s PayPal, may be slow to gain trust with its online users. This too will
prove to be a weakness that Google will have to venture into e-
commerce.

One obvious pursuit which Google not ought to undertake is its venture
into the software market. The main competitor would be Microsoft’s
Office Suite. As Google does not have prior experience in this area it
would be imprudent to go head-to-head with Microsoft. No doubt Google
has a big ready-made user base, but the less developed interface of
Google Docs – Google’s online office suite – does not match up to
Microsoft Office. Also, its strength in web searches will not compliment
the online office suite, thus rendering Google without an edge in its fight
in the software market.