Alphabet Strategic Analysis

Author- | Posted- | Updated: December 9, 2018 |

– Alphabet Inc Strategic Analysis –

 

Alphabet Strategic analysis

Introduction:

Till now Google has been known for everything unconventional. This has also been the spirit behind its foundation. Apart from its search engine, the brand has brought several more unconventional things to our world including  Android and Google maps and will continue to bring more in future. Alphabet is the parent company of Google and Google is the largest of the several businesses it owns. However, apart from Google, Alphabet also owns several business unrelated to its main internet products Access, Calico, CapitalG, GV, Nest, Verily, Waymo, and X. These businesses operate as independent businesses with their own leaders and strategies. The main source of income for Google is advertising. Its online advertising solutions have helped millions of businesses grow their brand and offer several formats across various devices and screens.

However, the IT and technology industry is highly competitive and the challenges are growing with time. Microsoft, Amazon, Facebook, Baidu and several such more competitors continue to pose  formidable challenge before Alphabet. The brand is also known for its excellent culture and work environment and has continuously remained one of the most preferred employers in the technology industry. Its revenue has seen rapid growth during the past five years. Alphabet is a relatively young company but among the most remarkable in terms of innovation. In the recent years, privacy  concerns have made its challenges grow. Particularly, EU has been very strict in its stance on user privacy and Alphabet is facing legal challenges in this area.

SWOT Analysis of Alphabet

STRENGTHS:

Brand recognition and equity:

One major strength of the Alphabet company is its brand recognition. Google search engine has accorded it as much popularity as can last for centuries to come. Apart from Google, its Chrome and Adsense are also popular products as well as Google maps and several other products for developers. Overall, Google is a household name for billions around the world who use one or more of its products on a  daily basis. This level of brand recognition is in itself enough to inspire jealousy in the hearts of rivals. Google’s search engine, browser and several other products like its maps are considered highly reliable. If the brand’s position in the IT industry is unshakable then it is because of the high level brand equity it has been able to generate.

Focus on continuous innovation:

Google started as an unconventional brand that was founded to do things innovative and unconventional. Google has continued on its track since then. Despite its being a young company, the brand has excelled in several areas and proved itself matchless. Innovation is an important focus at Google and not just in terms of technology but in other areas like HR too, it is among the industry leaders. Every year Alphabet spends billions on Research and development. This year the brand increased its R&D spending from 14 Billion dollars last year to 16.6 Billion dollars. Its R&D expenses are around 15% of its entire revenue which makes it one of the leading spenders on R&D in the entire industry. Apart from that the brand owns several patented technologies, trademarks and trade secrets. Between 2013 and 2017, it filed 186 patents alone in healthcare which was higher than the filed by Apple and Microsoft in the same period in this area.

Financially strong:

Alphabet is financially strong and its net revenue has around doubled in last five years. from 55.5 Billion dollars in 2013, its revenue has increased to 110.8 Billion dollars in 2017. This is a sharp jump in a small span of time. Net  income of the brand however, fell from 19.5 Billion in 2016 dollars to 12.7 Billion dollars in  2017. Advertising is the largest source of revenue for the brand which has increased from 67.4 Billion dollars in 2015 to 95.4 Billion dollars in 2017.  Google’s market capital is valued at around 750 Billion dollars.

International growth:

Google’s global presence is also a major strength of the brand.  Its headquarters are located in Mountain View California. Apart from that the brand has owned and leased office space as well as research sites around the world in in North America, Europe, South America, and Asia. While Google has reached the world mainly through its internet based products and services but it has also spread out through regional data centres, offices and research sites.   

Leading position in the IT industry:

Alphabet is a leading brand in the information technology industry. It has brought several market leading products from the smartest search engine to browser as well as advertising platform Adsense. Adsense apart from being the largest ad platforms is also the leading source of revenue for the brand. Google’s  dominant position in the web world has also been a sore in the eye for several competitors and government agencies. It had to face several  major legal tussles in this area for trying to dominate the web world and online advertising landscape. However, google’s formidable position in these areas has helped it face these challenges with might.

Weaknesses :-

Weak position in the cellphone industry:

Alphabet entered the smartphone industry with its Pixel phones. However, its position in this industry is very weak because of relatively higher popularity of the other brands like Samsung, Apple, Xiaomi, Huawei, Oppo etc. These are the brands ruling the smartphone industry and the market share of Alphabet is comparatively very small.

Comparatively lagging in clouds:

In the cloud industry, Google has not been abel to take the lead position which is currently held by Amazon, IBM and salesforce.com. Google is continuously focussed on innovation to move ahead in the cloud industry. However, the challenge from the leading players has made the game quite tough.

Privacy and Legal issues:

Growing privacy concerns has led to higher legal scrutiny and legal action against large and leading players like Google. EU has taken the strictest action and applied fines as well as strict laws to avoid misuse of user data by Google or Facebook. This has made the online advertising game challenging because Alphabet depends upon user data to offer advertisements and advertising services.

Dependence on key markets:

Alphabet depends highly on some key markets for  a major part of its income. This makes it vulnerable to the economic and legal changes taking place in its market environment. United States is its largest market which pays for nearly half of its revenue.

Dependence on Ad income:

Online advertising is the largest source of income for Alphabet. It accounts fir nearly 90% of the brand’s revenue. However, the brand must build new channels of revenue as well so that  it can reduce its dependence on just one source of income.

Opportunities:

Diversification:-

Diversifying into new areas of technology and business can help the brand find faster growth. While Alphabet has already invested in new areas of technology, this field holds greta potential and being in a  financially strong position it can invest in new areas for faster growth.

Growth through acquisitions:-

Alphabet can acquire other businesses to find faster growth. Smaller businesses that can help strengthen the brand’s core business can ensure quicker growth for the brand.

Innovation in AI and cloud business:-

AI and cloud business are the future of the IT industry and Alphabet must continue to invest in these areas so as to find stronger growth.  While innovation is a core focus of Alphabet, it must try to strengthen its position in the cloud industry.

Threats:

Competitive threat:-

The threat from competition in the IT industry has grown over the recent years. Alphabet has several competitors including Microsoft, Facebook, Yahoo, Apple and so on. This leads to higher pressure related to innovation and higher expenditure on both research and development as well as marketing and sales.

Legal & Regulatory pressures:-

Legal and regulatory pressures in the IT industry have also grown manifold. Privacy concerns and other issues have made the pressure on the brands in this industry grow. EU has applied stringent measures that  prevent large businesses from misusing user data and intruding into their privacy. According to news sources EU slapped more than 5 Billion dollars in fine upon Alphabet over Android antitrust issues. the legal and government environment has kept heating up. Overall, this is one of the most troubling challenges faced by large technology companies like Alphabet.

High expenses of R&D as well as marketing and sales:-

Rising competition and other factors have led to brands aggressively pushing the line of innovation. Alphabet too spends heavily on research  and development and is among the top spenders in the industry. Its R& D expenditure rose past 16 Billion dollars in 2017.

PESTEL Analysis:

Political:

Political forces have acquired a greater role in the 21st century and are having a significant effect in how large businesses operate internationally. Worldwide governments and government agencies are highly aggressive about the level of political and government control over businesses. the image of large businesses has always been somewhat predatory and this has led to higher political scrutiny. While government oversight to a certain extent is not bad for the health of businesses, still the need for regulation overhaul has been felt time and again. This is particularly true about the United States. EU on the other hand has also mounted higher level of oversight and control. Not just Alphabet but other technology giants like Amazon and Microsoft have also been at the receiving end there. Political forces affect the growth of large and international businesses like that of Alphabet in several ways. A stable political environment is absolutely essential if businesses have to prosper. Unstable political environment leads to chaos and uncertainty which can harm the sales and growth of international businesses. The overall role of political factors in the growth of international businesses is now very important and political winds are directly affecting businesses worldwide.

Economic:

Economic forces have always been central to business. The role of economic factors can also be understood from the fact that  the fluctuations in the global economy and regional economies can have a direct impact on sales and revenue of businesses. The world economy has been through a recession just some years ago. This period saw the income of businesses and people declining leading to lower spending. Alphabet depends on ad income which comes from businesses laying ads through its advertising program. When businesses spend less on advertising, Alphabet’s income can fall. As the recession passed and people started spending money online, businesses saw revenue growing. The online advertising industry also saw higher expenditure on ads which led to fast growth in revenue for Google. In this way, economic forces and economic environment are important factors having a direct impact on businesses’ profitability. In the times of economic downfall, employment and people’s income level can fall leading to lower spending. This directly affects Alphabet’s business model. Thus, the central role of economic forces in the business industry is evident.

Social:

Social factors are also playing an important role in the growth of the technology industry. Society has always remained central to business because after all businesses are for society and this has been accepted time and again. Businesses with a good social image have always been a winner in the market. A good social image means higher recognition, popularity and brand equity. Moreover, socio-cultural factors have a deeper role in entire scenario. Brands have to see their sales and marketing strategy in the context of sociocultural forces as well. These factors affect how much your marketing strategy will affect an end user. It is why businesses create different marketing strategies for different markets/regions. Society, culture and language are everywhere and play a decisive role in how much acceptance your brand gains.

Technological:

Technology has emerged as the main game changer in the 21st century which is more powerful and effective than any other force. It has generated higher efficiency and reach as well as driven the productivity of firms much higher. Technology is everywhere from production to marketing and sales as well as HR and finance. Alphabet is a top player in the technology industry and so technology is among the most important forces in its context. It focuses a lot on research and development. the brand spent higher than 16 Billion dollars on R&D previous year. It has a large number of patents and trademarks to its name. Moreover, its core strength its search engine is considered no less than a marvel in itself. A very large part of its business which is around 90% or more takes place in the online environment. This can help you understand the central role of technology in Alphabet’s business model.

Environmental:

Environment is now an important force related to business and how businesses affect environment is affecting their brand image. Around the world, governments have enacted strict laws related to environment. As a technology business, Google has a pretty small effect on the environment and still the business has made large investments in this area. This has benefits for the business, society as well as the environment. From creating sustainable and safe workplaces, Google has invested in the environment in several areas. It also works actively on reducing its carbon footprint faster. The role of  environmental forces has grown bigger as governments have grown serious about how businesses are affecting the  environment in their production, supply chain and other processes.

Legal:

Legal and regulatory forces are affecting businesses more than ever. Compliance is now a major concern for businesses. Noncompliance in any area can result in large fines running into billions. Large technology brands like Microsoft, Alphabet and Amazon have already bore the brunt in the EU. EU slapped fines over 5 Billion dollars on Google over Android antitrust issues. Such fines can now be a larger part of any brand’s revenue in future. From labor to environment, privacy and patents, there are several areas where law can be highly strict while dealing with businesses. The technology industry is facing very high level of control and oversight.

Alphabet Five Forces Analysis:

Bargaining power of suppliers:

The bargaining power of suppliers is low for Alphabet because of several reasons. At the core of the Alphabet’s business model is its search engine which drives the largest part of its business and revenue. Google does not need help from suppliers in this area apart from its own engineers and the slight role that internet providers play, no external supplier can exert any significant control on its core business.  The same is true about Adsense which is the driver of largest part of its total revenue. In other areas too Google exerts higher clout than its suppliers given its large size, brand image and financial power.

Bargaining power of customers:

The bargaining power of customers in case of Google is moderate. While the bargaining power of customers has grown higher in the 21st century, Google has established itself as a reliable firm. Its high popularity and technological capabilities work to moderate the bargaining power of the customers. Its customers are mainly businesses that  lay ads on the Adsense advertising platform. the rise of Facebook and other advertising platforms has led to some competition and growth in the bargaining power of customers. Still, Adsense is the largest platform which gives it a leverage. The overall bargaining power of customers is still moderate. The number of options before them in the industry has grown with the rise of social media.

Threat of substitute products:

The threat of substitute products is moderate for Alphabet. It has git he fastest and most efficient search engine and the largest advertising platform. Its search engine has a far larger market share than any other. While Microsoft’s Bing and other local search engines like Yandex offer some competition, Google still rules the market. Moreover, some new arrived search engines also rely on Google’s algorithms. However, the rise of Facebook and Facebook ads has brought some competitive threat. Business owners are using social media for laying ads and to advertise to their chosen demographics. So, social media and some other sources offer substitute products. The threat from them gets moderate because of the scale and size of Google’s business and its efficiency.

Threat of new entrants:

The threat from new players entering the technology industry is low. There are several factors that act as barriers to entry and exit. First the technology industry requires both capital investment and skilled labor. Apart from technological infrastructure you also need to hire highly skilled engineers and other staff to run a technology brand. Apart from that marketing and branding are also some areas requiring major investment. the legal and regulatory structure is also making it difficult for new brands to enter the field.

Competitive rivalry in the industry:

The level of competitive rivalry in the industry has grown very high. Brands like Apple, Alphabet, Microsoft and Amazon invest heavily in research and innovation. In the cloud industry too, brands like Amazon, IBM, salesforce.com etc have pushed the bar very high in terms of technology and customer service. The technology giants invests billions every year in research and development. The overall level of competitive rivalry in the tech industry is very high.

Alphabet Core Competencies:

Technological capabilities:

Alphabet is one of the largest technology brands of the world. Google search engine forms the core of its business model. Apart from that it has other excellent technological capabilities like analytics, maps etc. Overall, it has some excellent technological strengths that form the core of its business. The Adsense advertising platform is also one of the most critical strengths of the brand.

Large portfolio:

The brand has a large product portfolio of internet based services starting from a search engine to other cloud based services. Advertising services are also one of its core products. Apart from that browser, docs etc are also a part of its service portfolio. A large portfolio also means large customer base .

Innovation:

Consistent focus on innovation is also a source of Google’s popularity. The brand spends a large sum on research and innovation every year. It is also a reason that it has been able to bring several unconventional things to the market. Its search engine is considered several years ahead of the competing search engines. Other innovative products it has brought to the market include the Google analytics, Adsense, Maps and more.

Brand image:

Google’s image is that of a highly innovative brand. The brand is highly popular in all corners of the world and has grown into a household name because of its search engine.  Apart from that it has also brought several other products that  are free to use like analytics, browser and docs that  have led to higher popularity and customer loyalty.

Customer loyalty:

Google has got billions of loyal customers around the world if we consider the users of Google search engine as customers. Even if the brand has faced flak over anti trust issue, its popularity and market share have not reduced. the reason is the level of customer loyalty it enjoys.

Alphabet VRIO Analysis:

Alphabet Resources and capabilities:

  • Innovation and technological capabilities: Technological capabilities of Google are a major source of advantage for it. It has always focused on innovation and has invested a large sum every year in Research and development.
  • Global presence – Global presence of Google is also a key strength and a source of advantage for it. Wherever there is internet, one can easily access a large number of its services. Worldwide availability in this case becomes a source of advantage for the brand.
  • Popularity and customer loyalty : Alphabet is a highly popular brand throughout the globe. Its popularity and customer loyalty are a source of advantage for the brand.
  • Skilled Human resources : Skilled human resources are highly sought after in the technology industry and also a source of competitive advantage for the brand.

Alphabet VRIO ANALYSIS

 

Value Chain analysis:-

Primary activities:

Inbound logistics:

Google relies on external suppliers for several things like for the manufacturing of its assemblies and finished products, third-party arrangements for the design of some components and parts, and third party distributors, including cellular network carriers. However, here is pretty little evidence that the brand spends much on inbound logistics.

Outbound logistics:

Alphabet delivers a large part of its services online and through the internet. To keep its products running 24/7, the brand relies on data centers that  are scattered around the world from Americas, Asia and Europe.

Operations:

Alphabet is headquartered at Mountain View, California. The brand also has office/building space and research and development sites around the world, primarily in North America, Europe, South America, and Asia at several locations.

Marketing:

Alphabet relies on marketing for brand recognition as well as for driving product sales higher. Its marketing and sales expenses reached 12.9 Billion dollars in 2017.

Support Activities:

Firm Infrastructure:

Alphabet has managed a huge infrastructure globally. It is led by its founders with Sunder Pichai as the CEO of google. The various businesses of Alphabet apart from Google operate independently as separate businesses.

HRM:

HRM is a strategic focus at Google and the brand pays some of the most enormous salaries in the entire industry. Alphabet has established one of the most attractive corporate cultures focused at employee empowerment and welfare. Not just fat salaries, the brand has made major perks available to its employees.

Technology:

Google is one of the technology giants and at the core of its business model is Information technology. Its business is centred on the most efficient search engine. Apart from that Alphabet also invests a major sum in innovation every year. It also offers cloud based services.

Procurement:

Alphabet has entered several long term contracts with its suppliers for procurement. Timely available of raw material is important for consistent delivery of its products and services.

Financial Analysis:

Google financial data
Source: Alphabet Annual Report 2017

The revenues of Alphabet have increased consistently over the past five years. It has risen from 55.5 Billion dollars in 2013 to 110.9 Billion dollars in 2017. However, the net income of Alphabet fell from 2016 to 2017. This was due to the high costs of revenues, higher spending on R&D as well as increased sales and marketing costs. The costs of revenue for Alphabet rose because of the growth in traffic acquisition costs. Total cost of revenues equalled 45.6 Billion of which 21.7 Billion dollars was TAC or traffic acquisition costs. Advertising is the main source of revenue for Alphabet and even in 2017, it constituted higher than 85% of its entire revenue. Net income of Alphabet was $12.7 billion with diluted net income per share of $18.00. US was the main source of revenue for the brand at 52.6 Billion dollars.

Conclusion:

Alphabet is  a leading technology brand with a global presence and a very high level of popularity. The brand has remained focused on innovation since its foundation. However, the challenges have increased in the recent years. Apart from growth in competitive pressure, legal pressures have also started causing troubles for technology brands. There are a few areas that  Alphabet requires focusing upon. One is to find new channels of revenue since dependence entirely on one channel can become a weakness in the long term. Another is to strengthen its cloud proposition. Cloud industry  is growing fast and can become a leading source of revenue. Facebook has emerged as  leading rival of Alphabet in mobile ads and apart from that a lot of panic is brewing related to privacy issues. However, despite the large size of the challenge Alphabet is a strong brand and can find new channels of growth through acquisitions and diversification.

Sources:

Alphabet Annual Report 2017

https://www.forbes.com/sites/michelatindera/2018/03/13/alphabet-has-filed-186-health-care-patents-watch-out-world/#125256e51baf

https://www.businessinsider.in/Microsoft-just-surpassed-Googles-parent-company-Alphabet-in-market-cap-for-the-first-time-in-three-years/articleshow/64376566.cms

https://environment.google/projects/environmental-report-2017/

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.