There are several forces in the tech industry that affect the market position of businesses and their competitive strength. One of the simplest tools used throughout the industry and in academic circles for analyzing the competitive position of firms and the level of competition in a particular industry is the Porter’s five forces model. This analytical model was named after Michael E Porter.
“Michael Porter is the founder of the modern strategy field and one of the world’s most influential thinkers on management and competitiveness. The author of 19 books and over 130 articles, he is the Bishop William Lawrence University Professor at Harvard Business School and the director of the school’s Institute for Strategy and Competitiveness, which was founded in 2001 to further his work and research.”
In a 1979 article titled How Competitive Forces Shape Strategy, published in the Harvard Business Review, Michael E Porter noted regarding his five forces model that it is the collective strength of these forces that ultimately determines the profit potential of any industry and it can range from intense to mild. The profit potential grows with the weakening of these forces. In each and every industry, a different force may grow more prominent than the others. Porter offers three examples in his HBR article. In the ocean-going tankers industry, the buyers are the most important force whereas, in the tires industry, it is the powerful OEM buyers coupled with tough competitors. On the other hand, in the steel industry, foreign competitors and substitutes are the most prominent forces.
In Porter’s words,
“Every industry has an underlying structure, or a set of fundamental economic and technical characteristics, that gives rise to these competitive forces. The strategist, wanting to position his or her company to cope best with its industry environment or to influence that environment in the company’s favor, must learn what makes the environment tick.”
Michael E Porter in his HBR article, How Competitive Forces Shape Strategy.
Let us take a look at how these forces work in the digital advertising and the cloud industries and how Google can cope best with the level of competition in its industry environment.
GOOGLE’S FIVE FORCES ANAlYSIS
Bargaining power of suppliers: Mild
The bargaining power of Google’s suppliers is low. First of all the company operates in industries where traditionally, the suppliers have enjoyed moderate or low bargaining power. Google is not a hardware business like Apple. It is mainly a software business or a provider of key online services including digital advertising, search services and other online services. Most of the services it provides are built inhouse with the help of Google’s developers and the advanced technologies that Google already owns. So overall, suppliers play a very limited role in the provision of the main products and services created by Google. This also limits the costs of operations of Google and helps it achieve higher operating margins. If Google became the most cash rich company in the world, it is mainly because it does not have to spend a avst sum each year on sourcing raw materials. Overall, the bargaining power of suppliers who mainly supply the components for some of the hardware products Google makes like Chromebook or smartphones as well as some components for the provision of Google’s services worldwide is very low.
The bargaining power of suppliers is high in the cases where the number of suppliers is low and the threat of forward integration by suppliers is very high. However, this is not the case with Google. The bargaining power of suppliers also grows in cases where they do not have to depend on a particular buyer. Again, this is not the case with Google since its ability to pay makes it one of the largest buyers which limits the bargaining power of its suppliers. If the product that a supplier offers is highly differentiated, and switching costs are quite high for the buyer, even in that case the bargaining power of suppliers would be high. The situation favors Google in this case also. It holds more bargaining power as compared to its suppliers.
Bargaining power of the buyers: Mild
The bargaining power of individual buyers in the case of Google is very low. There are billions of users around the world that daily use Google’s products and services. Its services like Gmail, Chrome and search enjoy the largest market share as compared to the rivals. In digital advertising too, the company enjoys the largest market share of all in the world. Apart from some large brands that spend a vast sum on advertising and are among the largest buyers of advertising services, the smaller businesses or buyers hold little to no bargaining power.
The main reason that the bargaining power of buyers in case of Google is low is that the number of buyers is just very high. If there were fewer buyers as compared to suppliers/sellers like Google, the bargaining power of buyers would have been higher. However, apart from millions of businesses worldwide, there are billions of individual buyers that consume its services which has led to higher bargaining power for Google. The bargaining power of the buyers also grows higher in cases where the availability of substitutes is high and the buyer can easily obtain similar products or services from other suppliers. Apart from that if the product offered by a supplier is not so highly differentiated then in that case too the bargaining power of buyers would be greater than the suppliers. However, while Google’s products are highly differentiated, its substitutes are also low in number. Overall, the company enjoys significant bargaining power as compared to the suppliers.
Threat from substitute products: Moderate
The threat of substitute products is low for Google. There are very few businesses that offer similar products and services, and apart from that, the quality of the products provided by Google is overall significantly better as compared to rivals. Google is a highly innovative technology brand, and therefore, its products and services are not just of better quality but generally more suitable in terms of usage. The threat of substitute products for Google mainly comes from the four big tech brands, including Facebook, Amazon, Microsoft, and Apple. While Microsoft is a leading competitor in search, it still holds a much smaller market share than Google’s search engine. Facebook is one of the top competitors of Google offering substitute products in digital advertising. However, again Google’s share in the digital advertising revenue is much larger compared to Facebook. The threat from substitute products is higher in the cloud industry where AWS and Azure offer a broad range of substitute products and also have a large clientele compared to Google. This is the main area where the threat of substitute products is high for Google. To reduce the risk of substitutes further, the company must try diversifying into newer areas.
Threat from new entrants: Mild (very low)
The threat from new entrants is considerably low for Google. Any new player in the industry cannot gain a significant foothold or market share in the sectors where Google operates. It is only the leading and larger players like Microsoft, Apple, and Amazon, or Facebook that can compete with the size and scale of Google. For any new business, it is next to impossible to achieve a comparable or even significant size and scale against Google in the digital advertising and cloud industries. Any new player would need to make a large capital investment, and apart from that, it will take a lot of time due to the intense competition to win a significant market share. Finding growth in the technology industry also requires a substantial investment in human capital, and brands like Google are quite aggressive about protecting their market share and leadership position. The growing web of laws also acts as a deterrent for new players trying to enter the industry. Apart from that, gaining customer loyalty in the industry is not easy. So, while the entry barriers are high in the sector, the exit barriers are also high. Due to all these factors, the threat from new entrants before Google is considerably low.
Level of competitive rivalry in the industry: (Strong)
The level of competitive rivalry in the industry sectors where Google operates is high. Even if the number of leading players that compete with Google directly is low, these are mainly the largest players in the tech industry. As a result, the battle for market share grows fierce. While Amazon is the largest spender on research and development in the entire industry, the other companies also invest aggressively in research and development. Google is one of the most innovative tech brands, and its focus remains on continuously improving its products and services to provide a higher quality of service to its users. The other dominant players in the advertising, search and cloud industry are also very aggressive about growth and market share. The battle for market share in the cloud industry is particularly very intense, where Google faces a lot of competition from the two leading players Microsoft, Amazon, and other significant players like Oracle and Salesforce. The overall level of competitive rivalry in the industry is very high.