Critical Thinking Corporate Strategy and Diversification

Critical Thinking: Corporate Strategy and Diversification

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Critical Thinking: Corporate Strategy and Diversification

Introduction

Google is the leading internet search engine in the world. It is one of the most successful companies in the world. Fortune Magazine ranked Google as the best company to work for six consecutive years between 2011 and 2017. However, in 2018, the company dropped out of the top 100 for the first time in more than a decade. Global 500, which drafted by Fortune Magazine to reflect the ranking of companies according to their revenues also ranks Google among the most valuable companies in the world. In 2020, Alphabet was ranked as the 29th most valuable company in the world with revenues of $161.8 billion, which was an improvement of 8 positions from the previous year. In 2019, the company was ranked as the 37th most valuable company in the world with revenues of $136.8 billion. The creation of Alphabet in 2015 as the parent company of Google and several of former subsidiaries of Google highlighted the need for a change in strategy of the company. This paper will provide a critical analysis of the corporate strategy of Google (Alphabet).

Google’s Corporate Strategy

Google is an American company that was founded by Larry Page and Sergey Brin in 1998. The company’s mission statement from its outset was “”to organize the world’s information and make it universally accessible and useful” (Grant, 2019, p. 589). As such, the initial business and corporate strategy focused on the search engine business with advertising being the main source of revenues. The evolution of the digital world, necessitated Google to adopt a multi-pronged approach to maintain its dominance in the search business. The company acknowledged the fact that search had started migrating across mediums – from desktop to mobile devices. To protect its position in the market, the company has positioned itself to dominate several adjacent sectors. These include digital ecommerce, content, and branded hardware products. In so doing, Alphabet is attempting to integrate its services into all aspects of the experiences of the digital user. However, diversification into different fields made Google feel like a company that is running in different directions.

This ultimately necessitated the creation of Alphabet, a parent company of Google. Google is the largest subsidiary within Alphabet. In 2017, it accounted for 99.7% of Alphabet’s revenues. In 2018, 2019 and 2020, it accounted for 99.7%, 99.3%, and 99.5% respectively of Alphabet’s revenues. Alphabet reports revenues from other businesses being reported as Other Bets. Other bets include Waymo and GV, two investment vehicles of the company, Waymo, a self-driving car venture, Verily and Calico, healthcare subsidiaries, Alphabet Access & Energy, which covers telecommunications and energy projects initiatives, DeepMind, AI research, and Project Wing, which involves the development of autonomous drone delivery service. Nevertheless, Advertising is still the main source of revenue of Alphabet. In 2017, 2018, 2019, and 2020, it accounted for 86.2%, 85.1%, 83.3%, and 80.5% respectively.

The creation of Alphabet enables the company to seek new revenue streams. For instance, it enables the company to acquire new revenue streams from large addressable markets in the enterprise side of digital user experience through cloud computing and related services. The creation of Alphabet also facilitates successful entry into industries that are ripe for disruption. These include transportation, logistics, and healthcare. These are undertaken by subsidiaries in Other Bets.

As such, the creation of Alphabet has enabled Google to provide an all-encompassing services for both consumers and enterprises. Diversification and introduction of new products and services regularly is one of the major elements of the Alphabet’s corporate strategy. The company has consistently expanded its product portfolio. As such, Alphabet offers a wide variety of products and services, which include learning thermostats, self-driving cars. Acquisition is also one of the major corporate strategy of Alphabet (Google). Alphabet has acquired more than 200 hundred companies since its formation in 2015.

The creation of Alphabet challenges the assumption that one big company has more efficient operations than many smaller companies. The creation of many smaller companies would provide Google with the ability to focus on meaningful projects and become unleashed from the complexity of running several divisions. Each subsidiary within Alphabet was also freed to be run by strong leaders who would pursue projects and initiatives that may previously have been perceived as being in conflict with Google.

Therefore, Alphabet has a clear vision of what it would like to become. The creation of alphabet has placed the company in a position to take advantage of being the first mover in various fields related to digital experiences of users.

Competitive Advantage

According to the Porter’s Essentials Test, the industry chosen for diversification should provide superior profitability. In essence, they industry attractiveness and the competitive advantage should be used to determine the diversification strategy. Porter’s Essentials Test comprises of three tests. These include the attractiveness test, the cost-of-entry test, and the better-off test.

Attractiveness Test

Diversification should enable a firm to access more attractive investment opportunities than those available in its industry (Grant, 2019). Diversification into other fields such as healthcare, self-driving cars, and logistics. These are young industries that are highly attractive to Alphabet. They have a huge potential especially if Alphabet can take advantage of its capabilities in artificial intelligence and machine learning (Clegg et al., 2019). The use of AI and machine learning would enable Google improve the range of products and services it offers digital users in the future.

Cost-Of-Entry Test

The attractiveness of an industry is insufficient to justify diversification if a firm faces a challenge in its quest to diversify. As such, the cost of entry may limit the ability of an industry regardless of its attractiveness. Firms that seek to diversify may acquire an established player to successfully venture into an industry.

Alphabet uses acquisition to diversify in industries that would provide innovative products and technologies into the marketplace. The company acquires firms that create products and services that match the skills and strengths of Alphabet. With more than $117 billion in cash reserves, Alphabet is the most cash-rich company in the world (Mulan, 2020). This provides the company with the resources to diversify into areas of strategic importance.

Better-Off Test

The better-off test is the most important criterion of evaluating the diversification strategy. Ideally, diversification should enable an organization become more profitable. There should be synergy between the firms under a single control and ownership. Synergy would exist if the value created by the firms working together is more than the value created when they work independently (Grant, 2019).

The importance of the Other bets in the future profitability of Alphabet is highlighted by the fact that their revenues have increased significantly in the past few years. Figure 1 shows the increase in the revenues of Other Bets segment of Alphabet in the past eight years.

Figure 1: Alphabet’s Other Bet revenues in millions of dollars (Source: Statista)

The increase in the revenues from Other Bets has also increased as a percentage of Alphabet’s total revenues. This highlights the importance of diversification on the future growth and profitability of Alphabet.

Threats

Google is still the major search engine in the world. However, the company should acknowledge the fact that the major players in the industry are not toppled in their own game. They are beaten due to changes in the rules of the game. This poses the major threat to Google. If Google’s search engine result pages do not provide the best answer to the digital user, the digital user may shift to other search engines such as Bing (Glowik, 2017).. Therefore, it is vital for Google to ensure its search engine results provide results that conform to the search quality perception of the digital user. Therefore, it is vital for Google to ensure it has a portfolio of strategic initiatives that puts an initiative on every risk that the company faces. This would help the company adapt and thrive in the face of increasing competition from other players in the industry. Google should ensure it is quick to adapt to the trends in the changes in the market needs and expectations.

Volatility is one of the main features that characterizes companies in the technology industry. According to Lowitt (2015), volatility leads to four types of disruptions – technological, ecological, geopolitical, and ideological. These forms of disruptions have led to the rewiring of the global economy. Therefore, these forms of volatility may lead to changes in the rules of the game, which would affect the Google’s operations in the future. These forms of volatility lead to disruptions in a relentless and unforgiving manner. The contemporary world is facing ever more complicated and ever larger challenges (Lowitt, 2015). Therefore, it is vital for Google to ensure it develops products that it is relentless in harnessing the ability of volatility to reshape the world and tackle the major challenges that world is facing. Otherwise, other companies that develop products and services that take advantage of volatility to tackle the major problems facing the contemporary world would eclipse the Google (Alphabet).

Is There Need to Refocus

Google needs to refocus if starts to charge the services it currently offers its customers free. The services offered by Google affect the society. Therefore, if starts charging a fee to access the services, it would violate the principles of net neutrality, which would have a detrimental impact on the society. Charging a fee for services that are currently offered freely would contravene Google’s mission of helping the society as a whole. Therefore, it is vital for Google to ensure it adheres to the principles of net neutrality and ensures there is data safety in relation of users’ data. The company should abandon business which do not add value to its main business, which involves generating ad revenue through technological solutions. Therefore, the company should continue investing in business that enable it to use its first mover advantages in artificial intelligence and machine learning and divest or abandon businesses that do not involve the use of artificial intelligence and machine learning.

Conclusion

Google is one of the most profitable companies in the world. The company’s business model is dependent on the ad revenue it generates. However, the company has accumulated sizeable cash reserves that require it to take advantage of opportunities that exist due to the volatility of the technology market to ensure it is the main driver of volatility. Being the first mover in the technology industry would provide Google with a competitive advantage over other firms that are late to conform to changes in the market trends. The creation of Alphabet enables Google to take advantage of these opportunities to drive the company to dizzying heights.

References

Grant, R. M. (2019). Contemporary strategy analysis (10th ed.) Hoboken, NJ: John Wiley & Sons.

Statista. (2021). Alphabet Other Bets revenue from 2013 to 2020. Retrieved from: https://www.statista.com/statistics/771766/alphabet-annual-revenue-other-bets/Glowik, M. (2017). Global Strategy in the Service Industries: Dynamics, Analysis, Growth. New York, NY: Taylor & Francis.

Clegg, S. R., Carter, C., Kornberger, M., & Schweitzer, J. (2019). Strategy: theory and practice. Thousand Oaks, CA: SAGE Publications.

Lewitt, E. (2015, August 18). The Volatility Behind Google’s Alphabet. Wharton Magazine. Retrieved from: https://magazine.wharton.upenn.edu/digital/volatility-behind-google-alphabet/Mullan, L. (2020, August 1). Alphabet has reportedly overtaken Apple as the most cash-rich company in the world. Technology Magazine. Retrieved from: https://www.technologymagazine.com/digital-transformation/alphabet-has-reportedly-overtaken-apple-most-cash-rich-company-world