Risk Management Analysis Of Google Inc Economics Essay

This report will analyse the business model, risk exposure and risk management strategies of Google. To identify the company risk, it is important to begin by understanding the company’s current business and its business model. With these insights, major risks that Google is exposed will be discussed. The risk exposure analysis will be divided into identified and unidentified risks. Then, Google’s risk management strategies will be assessed. These strategies will be divided into explicit and implicit risk management strategies. Finally, a set of recommendations will be provided to further improve the reduction of risk exposure.

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As the market leader in the internet search engine services industry, Google owns the leading internet search engine, Google.com. The Business model of Google is derived from its mission statement: “to organize the world’s information and make it universally accessible and useful.” (Google, 2010a). This mission is an encouragement to lead the way for Google to target its ultimate goals. To achieve its mission and gratify its goals, Google has created an advanced and revolutionary business model, which is to become an extremely large and diversified information provider beyond the meaning of an online search engine. Google has turned its business model into the business blueprint via key assets. The key assets of business model bring both strengths and vulnerabilities to Google. The business models’ weaknesses expose Google to risks of macro-environment factors, industry factors and firm factors.

The key assets of Google are its diversified products and services, “market position” and brand value, “significant infrastructure base” and customer relationship (Datamonitor, 2009).

Google delivers diversified products and services based on a large base of products and services, such as “Google.com, Communication, Collaboration and Communities, Downloadable applications, Google GEO, Google AdWords, Google AdSense”. “Adwords and AdSense”, the most important assets, contribute to nearly all the revenues Google accomplishes (Datamonitor, 2008). Google AdSense was initiated in 2003 (Datamonior, 2008). Google launched “Adwords” in the following year, (Google, 2010b). The company primarily generates revenues via these two corresponding services networks, Google AdWords and Google Adsense (Google, 2010c). In fact, AdWords is the corporation’s worldwide advertising project that is broadly identified as the web’s most capable advertising tool. Through AdWords, advertisers are able to reach end users who are browsing for needy information relevant to what certain advertisers have provided through “41 different interface languages”. At the same time, Google Adsense program helps the company to deliver advertisements for presence on the third parties web sites, which are part of Google network members. The complimentary and powerful AdWords and AdSense business model create business profits through offering services to 160,000 global advertisers and millions of daily end users. The strong revenues and profits prepare the company to invest in potential future opportunities, incorporating new products innovation, global expansion and positive acquisitions in multi markets and multi regions. (Datamonior, 2008)

Another significant asset of the business model is market position and brand value for Google. As a global leading internet search engine, Google serves search results in 160 realms with more than 117 languages (Datamonitor, 2008). Hence, Google has shaped a vigorous market position in its diversified markets it operates. For example, Google has three worldwide markets, embodying U.S, Europe and the rest of the world. Specifically, according to total number of exclusive surfers, “Google is the leading search engine in Argentina, Australia, Belgium. Brazil, Canada, Denmark, France, Germany, India, Italy, Mexico, Spain, Sweden, Switzerland, the UK and the US.” In addition, YouTube internet video, incorporated in Google services has grown to an internet media traffic leader, holding strong market share in the social network platform (Datamonitor, 2009). Furthermore, dominant market position has driven Google develop into top valued internet brands in the world. According to market research firm Miillward Brown, Google has been ranked for the third successive time as the globe’s most valuable brand in 2009, continuing to overshadow Microsoft and other well-known brands like General Electric Company, Coca-Cola, Wal-Mart Stores and IBM. At the same time, Google has turned into the global first $1000 billion brand. Dominant market position and premier brand reputation of the company consolidate investor interests and customer brand loyalty as well as employees confidences. All the factors above generate revenue growth (Datamonitor, 2009).

As an information technology pioneer, information technology becomes an essential asset for Google. In fact, Google has “proprietary technology and technological infrastructure.” The search engine in the company originates from its exclusive “PageRank technology,” which links the search request to the highly relevant contents on Google’s web pages and displays. This patented “PageRank technology” will approach expiration by 2017. Moreover, “Googlebots, web-crawling robots” are applied by the firm to search the websites in order to establish an overwhelming database used by Google online search engine. By building up the index, Google ranks the largest searchable catalogues, overtaking all the other search engines (Datamonitor, 2008).

Additionally, Google has set up a powerful “technological infrastructure”. To reach a worldwide user base of substantial visitors, Google has accumulated 450,000 servers, mainly centring in the “US (Mountain View, California; Virginia; Atlanta, Georgia, and The Dalles, Oregon), Ireland (Dublin).” These servers are allocated to serve Google search engine, Gmail, Blogger and its web-based word processor. Therefore, they offer the most efficient performance to global customers via geographically divided data hubs and servers. Ultimately, the advance technology and strong technological infrastructure locate Google in a leader position with competitive advantages by keeping launching innovative products and services (Datamonitor, 2009).

Major Identified Risks

The major assets components have mainly dedicated to progressive revenue growth and gowning market share. In particular, based on the FY 2009 report, Google has gained $6,520,448 million net income that is much higher than FY 2008’s $ 4,226,858 million (Google Inc, 2009). However, this does not indicate that Google’s money earning logic is perfect. The key assets are also exposed to certain risks and damage the firm profits and growth.

Political Risks

Google operates towards universal users in multi regions with a considerable customer base. Similar to other multinational corporations, it faces cross country risks upon governmental laws and regulations. Because its products and services are available worldwide, although Google does not have certain local entity, staff or infrastructure, some “foreign jurisdictions” have required Google to obey their laws and regulations. The differentiated explanations and understandings on “data protection laws” and their enforcement on internet in Europe and other “foreign jurisdictions” are vague and contradictory. These laws or regulations pose risks for Google to comply with these various cross border requirements due to inconsistency with Google data protection applications (Google Inc, 2009). This will cause operational cost and customer disloyalty. Not only is personal data protection relevant, but also national data interest is involved, such as censorship. For example, On Mar. 22, 2010, Google decided to quit its mainland Chinese Google search services to switch to a Hong Kong website due to disagreement with internet censorship policy with the Chinese government. The absence of Google in world’s largest internet market will make a potential loss in the financial environment and the market share in the Chinese market (MacMillan, 2010).

Economic Risks

Economic uncertainties, in particular, economic downturn triggered by global economic crisis have placed risks on Google advertising revenue accomplishments. Google ‘s business model is an online advertising model by generating revenue almost wholly from distributing related, useful online advertising. Statistically, advertising revenues was 99% of Google’s total revenue in 2007 and 97% in 2008 and 2009 (Google Inc, 2009). The economic slowdown has encouraged online advertisers to restrict advertisement spending. Consequently, the “average cost-per-click” made by the advertisers fell as advertisers have tightened advertisement costs in reaction to the global economic recession. Additionally, advertisers have reduced their bids on keywords due to the lessening in sales through “per paid click.” Accordingly, if key advertisers decrease or stop displaying advertisements on Google due to financial budget concern, the negative damage on Google business and revenues could be severe and fatal. For instance, even though Google web sites and Google Network members’ advertising revenue has grown from increasing paid clicks on advertising projects, the ads revenue was also offset by decreasing “average cost -per-click” reimbursed by advertisers to a large extent (Datamonitor,2009).

Social and cultural risks

Social and cultural trends upon growing public awareness towards personal privacy and identity security issues have certain risks. These risks are particularly confronted by information technology based corporations, like Google. Applying these risks to the Google case, the risks are data privacy and security issues. Google’s success has been developed significantly through brand identity and reputation. To preserve and uplift the Google brand is vital for global expansion on end user, advertisers, Google Network members and other business partners. As a result, the exposure to data privacy and user security will affect unfavourably on Google business operating outcome and financial results and ultimately damage Google brand image (Google Inc, 2009). For example, the company invented the “street view function” for Google Maps and Google Earth, proposing 360 degree street-level city views and authorising users to view chosen cities’ and surrounding urban areas. This invention has lead to some privacy issues. For instance, the mayor of North Oaks, Minnesota complained Google has broken the “trespassing ordinance” in the city. Similar issues in culture and privacy can result in harmful impact on its brand reputation, which will further affect its growth (Datamonitor, 2008).

Technological risks

The launch of new technology is required for an innovative company. The new technology will come with lots of intellectual property, like patents, trademarks, and copyright and in order to protect the exclusive technology. However, if the outside situations are out of control, they will pose threats or risks to intellectual property. To take Google as an example, any important harm to Intellectual property (IP) rights could hurt Google’s business. For example, Google’s multinational operations could worsen difficulties with satisfactory IP rights defence since IP laws, like patent laws and IP rights circumstances vary cross countries. With a great deal with IP, it is easy for it to get involved in litigation of intellectual property rights violations. The failure of the lawsuit will cost a large amount of compensation fees for Google and increase total costs. Also, Google trademarks are facing threat. Specifically, “Google” may change to a highly used term equivalent to “search”, resulting in loss of trademark protection and demise of brand recognition. This could happen to trade secrets property. The secrecy might be ignored by Google personnel or outsiders, bringing about less importance from these trade secrets (Google Inc, 2009).

Major Unidentified Risks

Technological risks

Technological uncertainty plays a fundamental role in the information technology age. The exceedingly developing technology put risks on information technology (IT) oriented companies, such as Google. Google is heavily dependent on IT and has set up a complicated IT infrastructure. To achieve the steadily growing technological infrastructure, according to yearly financial statements, Google has invested considerably in Research and Development (R&D) with annual growth rate of 120% from period 2003 to 2009 (2843 million) and its R&D employees grew to from 5,788 in 2007 to 7443 in 2009 (Google Inc, 2009). Even though, frequent technology innovation has produced lots of competitive new products and services which become key assets in business model, inefficient products amalgamation has not made all new products reach customers effectively. For example, most Google users have to employ the Google search engine to find new products due to unrecognition of new products rooted in Google’s websites. This time-consuming procedure could make customers switch to other quicker search engines, leading to disadvantage in customer relationship. Moreover, if a competitor, like Yahoo has launched better bridges between diverse products by exhibiting most products available on its homepage, it is possible of for Google to be defeated in the online battle (Datamonitor, 2009).

Operational risks

Customer relationship is the most significant asset in a customer-centric corporation. Being unable to deal with customer relationships successfully will put most serious risk on the firm. Google focuses on users including search users and Google Network members, providing the best probable experiences. Particularly, The Google Network members have contributed 31% of total revenues in 2008 and 30% in 2009 (Google Inc, 2009). However, Google did not identify that the network participants are capable of from consumers to competitors. The heavy dependence on Google Network members will initiate future operational losses. For instance, if some of the members end the contracts with Google and then transfer to rivals or their own search engine, the online competition will be intensified and operational performance will be adversely affected (Datamonitor, 2008).

Internal workforce risks

One of the most popular social and industrial trends is located in rising importance on human capital resource. Due to limitation of qualified human capital, the competition for highly competitive employees is getting fierce. The risk of being unable to keep and update qualified staff will eventually bring a stop to growth and corporate value demise. Google has not realized the value of skilled personnel which injects talents and contributions to originality and novelty of future tools and applications. Even if Google has introduced “equity award programs” to benefit employees, the effort on attracting prospective and maintain current individuals are far from very sufficient and effective. The corporate core culture is based on innovation, creativity and collaboration. If Google cannot appreciate the human power in the firm, the tangible and intangible benefits and values spurred by intelligent employee populations will be difficult to retain or obtain. In the end, the corporate culture will lose meaning and future growth will be hard to achieve (Google Inc, 2009).

Risk Management Strategies

Different types of risk have been managed differently by Google. Hence, explicit risks which refer to the recognised and disclosed publicly in business reports are spurred from macro-environmental risks and are asking for continuous developing strategies in response to those risks. To analyse Google risk management strategies, the tactics towards different risks are categorized into explicit and implicit risk management strategies.

Political risk management strategies

There are a variety of laws, regulations, and policies in different nations. The complexity and volatility in political fields have put political uncertainty to Google. Google has implemented a couple of risk management approaches to solve the risky problems. To adapt to the specific investment and operation environment, Google devotes plenty of time and money to negotiate with foreign governments. Furthermore, Google flexibly adjusts products and services delivery by blocking and eliminating sensitive and offensive contents which could influence significant people and issues in certain states. For example, the nationalised censorship in China has pushed Google to leave Chinese mainland search market. However, as an alternative, Google convinced the Chinese government to authorise Google to switch its search engine from mainland China to Hong Kong. In fact, Google redirected its mainland user to its uncensored Hong Kong server. It is an appropriate strategy to transfer its mainland market share to Hong Kong site temperarily. Nevertheless, in a long run, Hong Kong web is still subject to censorship through a “licensing system for internet content providers” monitors and block sensitive political key words (Fletcher, 2010). Strategically, Google advertisers will stop partnership and defect to home-developed search engine Baidu. Over the time, Google will lessen its market share to near zero in China if Hong Kong server is blocked and advertiser will shift to local competitors (Womack, 2010). Consequently, the various political and regulatory uncertainties can increase negative implications for Google’s performance.

Economic risk management strategies

On one hand, to prevent suffering economic crisis, Google has the most superior advantage by offering free products and services to end users. Following gift economy trend, Google’s “free lunch” strategy has kept customer loyalty via integrating abundant resources well. Additionally, to deal with the uncertainty with end users, Google applied marketing strategies and R&D innovations. For example, search bellwether Google purchased Postini, a private Web communications security provider, for $625 million cash in 2007. This application aims to inhibit users’ email security from virus or hacker attacks (CNNMoney.com, 2007). To retain loyal advertisers, Google never stop taking effort to optimize end user and Group Network member’s online experiences and achieve long-term customer values. These contributions have kept Google’s stable earning growth. On the other hand, long term focus forces Google to neglect short term financial earnings. Insufficient quarter profits will delay the planned acquisitions and global expansions. For instance, the company’s 2010 first-quarter performance did not meet anticipations. The cost per click dropped about 4 percent from the fourth quarter of last year. The market share has fallen by 1% in January of 2010 from December of 2009 and also has decreased by 0.4% in March from February of 2010 (The Nielsen Company, 2010). These monthly decline could do harm to its expected acquisitions and capital spending on the future display advertisements and wireless telecommunications. In the end, the yearly profit margin could drop to a large extent (Womack, 2010).

Social and cultural risk management strategies

To manage threats of cultural and private issues, one meaningful strategy is to avoid the risks from staff and partners. For example, Google has signed a “confidentiality and invention assignment agreements with their employees, consultants and third parties” to minimize violations on o its intellectual property rights. (Google Inc, 2008). Also, to deal with public crisis, the public relations is necessary. For instance, when Google became aware of Street view cars problems, Google immediately disconnected the accessibility to data and ended gathering WIFI network data through Street View cars holistically. Beyond the operational reaction, Google formerly negotiated with relevant domains and made official apologies. By fixing the problem, Google does not only concern appropriateness of contents to countries’ regulations, but also regards public trust maintenance as a crucial consideration (Eustace, 2010). The endeavour to preserve brand loyalty also has adverse impact on aspiration and encouragement to carry out new technologies on displays and application. Google relies extensively on technologies’ innovation and frequently launches novel products and services. It is inevitable that these technologies will come with national or personal involvement of privacy since high technologies with high profit are regularly associated with high risks of privacy policies.

Technological risk management strategies

To reduce the stress on IP rights and protect the value of products, Google enforced policies to prevent mining the internet for video clips and enable video clips that merely were assigned by the producers. To put it simply, Google constricted the Video Viewer, which was rooted on the open-source VLC player, to simply make payment on files that were applicable on its servers (Kuan, 2009). The policies well guard IP rights in certain fields. Facing the existing or potential lawful and regulatory insecurity on IP rights worldwide, Google has put useful policies and processes into practice with legal obligations. For instance, Google has compliance with “Digital Millennium Copyright Act” to mitigate legislative violations (Google Inc, 2008). Unfortunately, the regulatory risks can not be totally prohibited due to unpredictable global situations. Also, exposing to becoming a generic term equivalent to “search”, Google has prepared lawful defensive system, including legal documents and lawyers (Google Inc, 2009). If the trademark is offended illegally, Google is able to fight back harshly and announce powerful warnings to the public who purposely make use of free trademarks. However, this action will lower the trial-out wish from future internet surfers and make it quite expensive to do business and will hurt operating income (Kuan, 2009).

Problems and Recommendations

As the unidentified risks analysed above, these unrecognised risk have not been managed at all. Some recommendations and suggestions will be discussed to help Google alleviate these potential risks.

Firstly, regarding firm technological risks, Google did not realize the significance on integrity of existing products and services which are independently organized. With inefficiently interconnected products and services circumstances, misconduct and misfunction are possible. To reduce the operational risks that Google is involved with, Google is supposed to always monitor and supervise the interrelations among current applications and tackle the new relationship between produced and updating products by the strong R&D teams. It is vital to look after the storage of inventories in the information technology warehouse instead of seeking out new productions. The substantial R&D investment should be used more economically to obtain cost efficiency. Also, to defeat competitors, Google needs to learn from challengers with regard to how the opponents manage their online displays and tools successfully in order to make fastest and the most helpful information to users. Furthermore, the highly organized websites can appeal to large number of advertisers and improve paid click income on the basis of high click rates on sites (Datamonitor, 2009).

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Concerning the risk of downsizing of end users and uncertainty of Google Network member’s partnerships, one of the solutions is to develop non-PC devices’ accessibility to PC internet information. Google has already operated and introduced alternative search applications to offer search, email, map and other website services which used to be applicable on PC, like Google Mobile which can transfer online products and services to mobile phones and Android which is open-source mobile-based software (Google Inc, 2009). Nevertheless, Google just noticed the mobile phone’s increasing popularity as a new technology carrier and did not realized mobile is truly the fifth media except newspaper, radio, television, and internet as news and information platform. To catch new customer’s clicks in new age, it is necessary to equalize the importance of traditional and alternative search devices. At the same time, for advertisers, AdWords and AdSense business model are required to be applied to mobile or other platforms to make advertisements feasible on multi access bases. Particularly, advertisers who have ample financial budgets and great willingness on advertising spending are prioritized.

Google is heavily relying on highly skilled staff, especially like engineers and developers. To solve the problems of lack of or losing of suitable employees, Google is supposed to take efforts in four aspects. Firstly, with increasing acquisitions, localised experts are put on top priority since they are familiar with local cultural and institutional backgrounds. Secondly, monetary rewards can satisfy individuals based on proper managerial policies and strategies. For instance, yearly bonuses can be assigned to people who have constructive performance on company’s tangible and intangible gains. Thirdly, as the most well-known search leader, the valuable brand value and reputation are intangible strengths to recruit talented persons. Fourthly, Google always attempts to shape a free and active environment for personnel to realize their own dreams on creativeness, development and self-actualization. This corporate culture could compliment with materialistic awards to cause the employee satisfaction and loyalty. This competitive advantage cannot be imitated by other rivals.

Conclusion

In overall, Google seems to address many main risks both explicitly and implicitly through implementing various strategies. While some of those strategies are effective in the short run, others perform well in the long term. It is believed that none of these strategies will provide the prefect solutions to overcome the risks associated with key assets and partners due to the business model vulnerabilities. Moreover, some unrecognized uncertainties will pose threats on Google. Therefore, some recommendations and advice on risk management strategies are proposed above as well.

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