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Internal Analysis of Google Inc.

Google’s mission, financials, value chain, and competitive advantages are discussed and illustrated.

Mission Statement

Google’s mission, “to organize the world’s information and make it universally accessible and useful” 1, speaks to their goals, but does not reflect the way they earn a profit. The statement definitely gives the company a future to strive towards, as it will be quite some time before all of the world’s information is easily accessible even though they have made great strides. The mission statement sets the company up as a resource that would be used by anyone who was doing research whether as part of a thesis or just a question out of curiosity. The mission statement doesn’t give a timeline, it only states the end result. The mission statement is broad enough that it allows for Google to use any means possible to organize information. This means that they are neither limited to search nor are they limited to using the internet in its current form.

The mission statement is graphic because it gives a sense of the scale of the endeavor in its bold declaration “to organize the world’s information” and become “universally accessible”. This definite goal with a strong focus gives the statement direction and flexibility as it does not specify the means, leaving lenient room in the respect of the physical products the company will produce. All the worlds information could never be made searchable or categorized because some data is private and other data is not defined in a computer readable form. However, even though the mission statement isn’t strictly feasible, it is desirable, motivational, and long-lasting. Google’s mission statement is quite distinctive and original because the scope of the project is much larger and more long-term than most other companies would aspire towards. It is complete in the sense that the goal is not just to organize information, but also to make it accessible and useful.

Figure 1. Home Pages
Figure 1. Home Pages

The statement is forthright in understanding the boon and the banes of advertisements to search engine users in its suggestions that “advertisements should not be an annoying interruption” 2 Figure 1 displays the difference between the homepage of the top competitors in the search industry. Google has long held a very human-centric point-of-view, and their mission statement reflects their dedication to user experience in their promise to “provide the most relevant and useful search results…independent of financial incentives” 2. Google is quick to recognize that customer faith will provide the basis for “increased traffic and strong word-of-mouth promotion” 2.

The mission statement will probably not change either through the actions of competitors or through a changing external environment. Information retrieval is likely to only become more important in the future and therefore Google has set itself up well with the long-term vision of their mission statement. This projected prosperity does not, however, include the discussion of the company’s stakeholders in the statement or specifics on the monetary value creation.

Financial Analysis

Google is a relatively young company that has been public since August 2004. At that time, a share of the stock sold for a paltry $85. By late 2007, the stock had reached a high of around $750, a whopping 882% return in 3 years 3. The shares have now dropped down to the high $300 range 3 due to the recession the United States is currently experiencing.

Google derives approximately 99% of its revenue from advertising 4. Most of its online products are free to use and are supported by text ads that are displayed within the interface 2. This begs the question of whether Google has a sustainable business model if in the future people begin to ignore internet-based advertisements.

Table 1. Primary Competitior Analysis (Yahoo!)

Google Yahoo!
Income Statement (in millions of USD)
Revenue 16,594 6,969
Ratio Analysis
Income Statement Common-Size Data
Income from Continuing Operations 30.6% 10.0%
Cost of Goods Sold 40.1% 40.7%
Balance Sheet Common-Size Data
Liabilities/Total Assets 10.4% 22.1%
Profit Ratios
Return on Assets 23.2% 5.9%

Financially Google is in much better shape than its main competitor, Yahoo. Google has about 2.4 times the revenue of Yahoo (Table 1), but common size ratios allow comparison of the two. Google has a much higher Income from Continuing Operations/Sales ratio (Table 1), which indicates that Google is more profitable than Yahoo. The two companies have a roughly equivalent Cost of Goods Sold/Revenue ratio at 40%, but Google’s Liabilities /Total Assets ratio is half of Yahoo’s indicating that Google is managing their debt better. Google’s Return on Assets shines as well at 23.2% versus Yahoo!’s 5.9% (Table 1).

Table 2. Ratio Analysis

Google Current Year Prior Year
Growth Ratios
Sales Growth 56.5% 72.8%
Income Growth 43.2% 76.0%
Asset Growth 37.1% 79.8%
Activity Ratios
Receivable Turnover 9.1 10.6
Fixed Asset Turnover 4.1 4.4
Profit Ratios
Profit Margin 30.6% 33.5%
Return on Assets 23.2% 24.7%

Keeping in mind the facts mentioned in the previous paragraph, Google slowed down by the end of the 2007 fiscal year. The growth ratios such as Sales Growth, Income Growth, Asset Growth were all down from 2006 (Appendix A). In addition the Activity ratios of Receivable Turnover and Fixed Asset Turnover were also down slightly (Appendix A). Profit margin and Return on Assets were also down, but still at healthy levels. These numbers do not mean that Google is in trouble; after all, they are still much higher than Yahoo!’s ratios. What they mean is that Google is moving out of its explosive, exponential growth and it will eventually settle at a more steady growth rate if their business model remains successful. No company can sustain a greater than 50% growth rate for too many years in a row.

Figure 2. Google's 5-year Revenue Growth
Figure 2. Google's 5-year Revenue Growth

Google’s spectacular growth is shown in the charts in Appendix C. In the past 5 years revenue has grown from $1.47 billion to $16.59 billion. In the Net Income Trend Graph, the revenue growth is pleasantly tracked by the net income.

Table 3. Quarterly Data (in millions of USD)

1st Q 2nd Q 3rd Q 4th Q Annual
Current Year Revenue 3,664 3,872 4,231 4,827 16,594
Last Year Revenue 2,254 2,456 2,690 3,206 10,605

Google is not a seasonal or a cyclical company, because its services are constantly desired. Table 3 shows that Google has not yet had a quarter where income or revenue was below the previous quarter’s reported numbers.

Figure 3. Quarterly Stock Prices
Figure 3. Quarterly Stock Prices

Since the fourth quarter has not yet been reported for 2008, the Current Year Quarterly Stock Prices table in Appendix D shows fiscal year 2007 numbers. As stated earlier, Google’s stock performed remarkably through the end of 2007 and the Quarterly Stock Highs and Lows graph showcases that continued growth.

Value Chain Analysis

Google’s primary activities in its value chain vary slightly from a traditional model where raw materials are processed into finished goods for sale to a customer, gaining value in each step of the process. Since Google doesn’t produce physical products, its value chain is a bit more nuanced. Google gathers all the web users it can (the raw material) by enticing them to use its stellar search product with highly relevant results delivered promptly. Then, through assorted “signs” (text advertisements) it directs these same web users in the form of traffic to its advertising partners who transform the traffic into “conversions” or sales on their sites (the finished good). Google adds value not only by directing a quantity of web users to specific sites, but also by sorting the pre-qualified visitors using keyword association and search history to recognize users’ interests 5. In this manner, Google ensures that the users who are directed to a partner site are more likely to purchase a product there.

Figure 4. Google's Value Chain
Figure 4. Google's Value Chain

Google’s primary activities in its value chain are heavily dependent on the support activities of administration and human resources (Figure 4). Google has always tried to hire the most qualified and competent individuals to ensure that it excels at the research and development of its technology and systems. In fact the company often gives aptitude challenges and tests to help recruiters sift through the massive amounts of resumes they receive 6.

Next to the employees, a large percentage of the cost structure is the infrastructure and systems. Google’s servers and internal software allow it to conduct operations, distribution, sales, and service. Each activity contributes to the value chain by increasing the profit of the firm. Google has locations all over the world1 to localize distribution, marketing, and service which in turn ensures maximum profit on a global scale. Profit is maximized by the company’s cultural awareness and social competence to tailor products to the regional needs of its users. By shifting activities geographically, Google can also take advantage of diversity from a human resources perspective and also perhaps lower salaries in countries other than the United States. Google has even begun outsourcing some of its copywriting to firms in India 7.

Google uses advanced analytics to measure the efficiency of its supply chain (the web users). This data about the history of its users is important because it helps Google improve its search algorithms and advertising interface. New technology and word-of-mouth promotion by its loyal users can bring in new customers and thereby increase the profit margin.

Competitive Advantages

Google has sustainable competitive advantages because the remarkable scores accrued in measures of value, rarity, imitability, and substitutability.

Value

Google’s search products bring value to their customers because they provide relevant websites promptly. Google has achieved the top market share in the search industry precisely because their product is rare. They are able to provide excellent links in the first few results for both well-known subjects such as “Dallas Cowboys” and uncommon, “long-tail” searches like “cerebrospinal fluid”.

As mentioned in the Value Chain section, Google excels at directing a large quantity of visitors to websites using its AdSense program. Many business are dependent upon the traffic AdSense brings to their website to generate income. For the advertisers this increased traffic translates into increased sales and directly helps the bottom line.

Rarity

Google’s search offerings are rare because of the relevancy of the results. Microsoft and Yahoo, Google’s main competitors, simply do not provide links that are as useful as Google’s.

Google’s website features a minimalistic design, which is uncommon. Most websites feature some sort of banner advertising and are littered with hundreds of words. The Google home page can only contain 28 words as a policy established Sergey Brin and Larry Page, the company’s founders. This keeps the clutter to a minimum which is a stark contrast to Yahoo and Microsoft’s search home pages.Google faithfully adheres to the provision in the mission statement which recognizes that “advertisements should not be an annoying interruption” 2. This rare service is testimony to their charge to never “compromise…user focus for short-term economic gain” 2.

Imitablility

Google’s results are not easily imitated because of the large infrastructure requirements to serve the relevant pages quickly. Google has servers all over the world all synced up and all running on a very large quantity of RAM, fast computer memory.

With each search Google refines its results so that the search engine gets “smarter” and caters to people’s individual preferences. Since Google has the largest market share, their search engine can effectively learn more quickly than competitors’ products.Google’s operations exhibit path dependency because it takes time to collect the data to provide results and even more time to analyze both the content and users reactions to the results. Without going through a process of refinement over a significant period of time, a competitor could not replicate Google’s search results. Google has used its analytics tools to help understand the social complexity of the meaning of keywords to specific groups of users. For example, one word like mouse has a variety of different meanings with each meaning being most important to certain people.

Google’s minimalistic interface is physically unique and has remained different because the competitors value advertising money more than user experience and devote larger swaths of screen real estate to graphical and motion ads.

Some of Google’s success is due to its strategic management or simply to the luck of being at the right place at the right time. This causal ambiguity leads to the belief that perhaps the time to start an internet search company was in the 1990’s and it would be vastly more difficult to gain market share in a competitive environment where users are used to the novelty of Google’s interface.

Substitutability

There are different ways of organizing and accessing information, and right now searching the internet is arguably the best for retrieving information efficiently. Google does not confine itself to the search product it is most well known for and has special applications for browsing different kinds of information such as its Shopping, Books, and Music applications.

Google consistently delivers relevant results at blazing speeds with minimal hassle. These three competitive advantages set its core search functionality apart from the competitors whose web portals simply can’t keep up. Google should be able to sustain its competitive advantages through the foreseeable future, but it will need to continue to innovate new ways to diversify its advertising business so the company is not dependent on solely the AdWords service.

Works Cited

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

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

3 Google. Historical Prices. October 20, 2008. Google Finance.

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

5 Levin, M. Google Value Chain. April 24, 2007. HitTail.

6 Kopytoff, V. How Google woos the best and brightest. December 18, 2005. San Fransisco Chronicle.

7 Baker, L. Google Outsourcing Copywriting to India?. September 21, 2006. Search Engine Journal.


Part of a series

Google's Success
by Ben Morrow

December 17, 2008
University of Texas at Dallas
School of Management

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the full paper, including the bibliography, as a PDF