May 6, 2019 in Economics

Company Name and Location

The subject of this report in the analysis of Google Inc. that is considered to be the world’s largest search engine provider. Google Inc. is a large technology company which maintains the index of websites, including other online contents for its online customers like advertisers and other online users. The automated search technology by the company assists the users in getting instant access to the information on the Internet directly from its online index. The company is known to provide online search solutions, targeting advertising and other online hosted applications. 

 

Google Inc., which is the company’s official name, is the reflection of large and immense capacity of existing information, with the company’s mission being to organize the information and make it useful and accessible universally. Google is located in the United States of America. The headquarters of Google Inc. is located in Mountain View, California.

Google’s Primary Industry and SIC Code

Google’s primary industry is Internet services and social media. Google operates in the technology sector with the symbol GOOG. Standard Industrial Classification (SIC) is a system which is used in the classification of industries, using a four digit numerical code. Google’s SIC code is 7370 with a NAICS Code of 517110. 

Customer Analysis

Google has three main customer groups: customers who are capable of organizing information in ways which are very useful, advertisers, and Google network members together with other content providers. There are also other extended segments which include developers and makers as well as mobile users. The customers of Google are very loyal to the firm’s products as compared to other search engine users. The market segments include:

  • The savvy student: This group of customers is comprised of well-educated undergraduates (18-25 years) and graduates (age 23-28), middle to upper-middle class representatives, and families. This is the youngest segment of customers who need to find information very fast. They also consider social media to be the most effective way of communication. Moreover, they are considered to be the most loyal customers of Google. This segment is most likely to have the same needs in their later years of life. This group is responsible for boosting Google’s revenues because it is the youngest segment. It shows that the group understands the importance of Internet-based services, and the majority of them know the real value of Google’s products, which gives an explanation as to why they would choose the products by Google and not any other product from the competing companies. The majority of these users have access to the Internet either at home or at school, and they highly depend on information from the Google sites.
  • The expanding entrepreneur: This segment is made of corporations and businesses. It is a group of customers who want to have an Internet-based, reliable, free, and cost-effective mode of conducting business. This segment has a liking for the true value of efficiency and a need for high speed information. Therefore, the businesses have a tendency to use Google.
  • The leisure fad-following family: This cluster of customer segment is made of middle and upper-middle class families with white and blue collar jobs or even service industry jobs. These customers use Google services mainly for leisure, communication, and entertainment purposes. The use of the Internet is frequent as the customers are mainly family-oriented, educated, technologically proficient, and have the capability to navigate the Internet without any difficulties. This segment has the liking for staying up-to-date with the newest technologies.
  • The poor household: This group of customers is made of customers from the low income families and the middle aged people with a high school education as the highest level of education. This cluster has very little time for leisure and does not often use the Internet. Such people are not loyal, and their impact on the company is very low. Some of these users being from low income families might not even be able to access the Internet and computers in their households since the majority of them are not educated enough to know the importance of the Internet. This type presents not frequent users although they might still use Google services and products at times, but not very frequently.

Google is a global firm which shows that it depends highly on international customers. This is because the company is Internet-based: many customers can access its services and products in any location over the world. The internal customers are very many as compared to the local customers, which gives an explanation as to why the majority of the customers are based internationally. Google is highly employed by the young generation who are the majority users throughout the world.

Major Determinants of Demand

The determinants of demand on the primary products of Google include the following: 

  • Income: an increase in the level of income will lead to an increase in the demanded quality. In case of income doubling, it does not mean that customers will double the purchasing of products, which gives an explanation of the marginal utility.
  • Prices of substitute goods: the prices of related services and goods are responsible for raising the costs of the goods demanded. An increase in the price of a substitute will lead to a decrease in the quantity demanded as the consumers will opt to go for the other close substitutes. This gives an explanation as to why Google updates its products very often: it strives to ensure that it can cope with the changes in the products of its leading competitor, Yahoo.
  • Prices of products: an increase in the price level of a commodity will lead to a fall in the demanded quantity, and a drop in the price level leads to an increase in the demand. Most people’s purchasing powers are based on the prices.
  • Tastes: this aspect refers to the consumer’s tastes and preferences: an increase in taste would further lead to an increase in the demanded quality. This gives an explanation as to why companies have to use brand advertising, like in the case of Google spending millions of dollars in an attempt to increase their consumer’s tastes toward their products.
  • Expectations: when people have an expectation that the value of a product is likely to increase, the demand increases as they would purchase more of it.
  • The number of buyers: an increase in the number of buyers would lead to an increase in the quantity demanded although the price might remain unchanged. For example, an increase in the number of research students would increase the demand for Internet services from Google.

The determinants differ greatly across different customer segments because customer needs differ from one segment to another. The observable variables that Google can use to detect changes in the determinants of demand are the observed purchasing patterns of consumers, the age of customers, customers’ occupation, the size of the household, etc. Google can track these observations over time to determine the changes in demand.

Google sales are cyclical because a change in the economic activity can cause a change in the company’s sales. If the economy is not performing well, the company’s sales would decrease as there would be very few people who would be using Google products. Such an economy would lead to reduction in people’s purchasing power as their disposable income would also have decreased. The sales of Google always tend to spike during the start of the school period in August as the young generation is the largest target segment. Therefore, the company experiences high growth rates in sales in August as compared to other months when the sales are much lower.

Price Elasticity

Elasticity is the measure of how one economic variable responds to the changes in another economic variable. Price elasticity is the responsiveness of the demanded quality to the price change. Moreover, it is a function that takes into account the number of substitutes available on the market, the price level of substitutes in regard to the budget of the customers, and the product durability. 

  • The number of available substitutes. The availability of substitutes is the most vital determinant in regard to price elasticity because if there are many substitutes to a product, then the demand would become more elastic. 
  • The price level relative to customers’ budget. The budget of a customer is very essential in determination of demand as the price changes have a strong effect on the customers’ budget in regard to elasticity. A change in the price level, which is most likely to affect the budget of the buyer, would lead to greater demand elasticity. The customer can be able to spend $2.50 instead of $2 to get information on the Internet concerning a book or other important information rather than spending $300 to $400 per month on car loan payment. The lower end products, which are termed as the most essential products, often give an allowance for adjustments in the price levels.
  • The durability of the product. The durability of a product determines the demand where necessities and essential products have a tendency to a less elastic demand than the products which are considered to be luxurious and discretionary. The more durable the product, the more elastic the demand is. If the customer of a company considers a product to be essential for pleasure or survival, the customer is most likely to purchase the product. If the price of the product which is considered to be optional is increased, it is likely to be less purchased. Advertisement can also impact demand since the customer can get a better perception of durability of the product and the firm’s reputation.

Based on this analysis, Google Inc. faces an elastic demand with regard to its primary demand. This is because the demand for Google products is very sensitive to any changes in the price levels. For example, if Google decides to increase the selling price of its products, then the number of units sold will be much lower. The firm would then become uncompetitive, and the demand would fall drastically. On the other hand, a decrease in the selling price would lead to an increase in the units sold.

Market Structure

The market structure within which Google operates is the oligopolistic market structure. In this type of market structure, only a few firms dominate the market although there are also other small firms which operate in the market. The firms which operate in this type of market can only be identified using the concentration ratios measuring the firm’s total market share which is controlled by the major firms in the market. In the Internet and social services industry, Google has a high market share as compared to other close competitors, like Yahoo.

Oligopolies have a high adoption level to a highly competitive strategy, thus being able to achieve more benefits in the competitive markets, like the low prices. Although there are very few operating firms in the market, their behavior is mainly characterized as being highly competitive. Price stability in this type of market can be very advantageous to the consumers as it can help them plan ahead and develop ways how they can be able to stabilize their expenditures, which can further stabilize the trade cycle. The main aim of companies operating in the oligopolistic market structure is mainly profit maximization.

  • The number of competitors. In the oligopolistic market structure, there are few companies that dominate the market although there are also other small firms which still present the competition. The leading competitor for Google is Yahoo. There are also other small firms operating in this market structure. These comprise other small competitors that include AOL, Facebook, Bing, MSN, Uurekster, Ask.com, Quintura, Rollyo, Imabe Search, and Wikiasari among many others.
  • Product similarity. The products offered in the oligopolistic market structure are very similar/homogenous or differentiated.
  • Barriers to entry. With Google operating in the oligopolistic market, the barriers to entry are extremely high. This is because of the high amount of capital that is required by new firms wishing to enter the market as the market is actually dominated by a few firms. This would make it too costly or even very difficult for any potential entrant. The economies of scale have already been exploited by the big dominating firms in the market, making it extremely difficult for new entrants to get into the market. The majority of the resources in this type of market have already been owned by the existing dominating firms, which also makes it difficult for new firms to enter the market. Some of the artificial barriers to entry include the predatory pricing: major leaders like Google can try to lower prices so as to force the rivals out of the market or limit pricing since lower prices can make rivals to miss the opportunity to make profits.
  • The importance of non-price competition. In an oligopolistic market structure, non-price competition is highly favored because any form of price competition in the market can cause destructive price wars. The companies operating in the oligopolistic market mainly use other aspects like marketing and advertising strategies to increase loyalty to the brand of the firm and raise the demand. Other policies that the companies like Google can use in order to increase the firm’s market share include producing high quality products, product upgrades, suppliers’ contractual relationships, and enhanced customer support.

This market is best described as being international. This is because the majority of the customers of Google services is found all over the world, being highly used as compared to other rival companies like Yahoo. Google, being one of the large companies which dominate the market, has a high pricing power in the industry. Oligopolies like Google are usually price setters but not price takers.

Economies of scale as a barrier to entry

Economies of scale are considered to be a barrier to entry in this market as they make the entry extremely difficult for new firms. The economies of scale are said to occur when there is an increase in the output which leads to the reduction in the average costs. New firms will find it extremely difficult to enter the market with a relatively low output as the average costs are very high as compared to the existing firms which have enjoyed all the benefits of the economies of scale. The high average costs prospects bar new entrants from entering the industry.

Google’s Sales and Profit Growth Rates

For a company like Google to be successful, it has to develop effective strategies which can enable it to generate profits as high as possible. These could be activities which are aimed at reducing the operation costs and other expenses by the company. 

The past year

During the past year, many companies in the U.S. experienced better firm performances, including Google. The revenues of Google increased greatly in 2014, with the net profits of the company increasing by $7, 162 million. The following is the analysis of the company’s key financial ratios which are in million USD.

Margin profit in 2014 for Google is calculated as:

Net income / revenue

14,444/66,001 x 100% = 21.9%

The past three years

The profits and sales growth rates for Google are displayed in Figure 1 and Table 1 as shown below:

 

Microeconomics

Figure 1. Google sales and growth rates for the past three years 

 

Table 1. Sales and Profit Growth Rates 

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From the analysis of Google’s key financial ratios during the past year, 2014, Google was financially stable and very profitable. Google has been able to match its rivals in the industry as the company has a relatively high profit growth rates as compared to its close rivals, Yahoo and AOL. With Google growing at a fast pace, it enjoyed a very good performance in the market. Over the last three years, Google has had a higher performance in regard to the company’s revenues with an increasing trend from the end of 2011. The gross profit was also fair at the end of 2011; the company recorded a profit growth rate of $24,717 million. The profits continued to grow until 2014 when the company experienced a gross profit of $40,688 million. As compared to other companies, Google is better positioned than Yahoo, which is the major competitor of Google. Having experienced high profits at the end of 2011 and in the next three years, the company’s profit has been on the decreasing scale. AOL, on the other hand, has experienced an increasing growth in the profit margins, matching the growth of Google. Google holds a large market share in the industry in the United States as compared to its rivals, Yahoo and AOL. There is a probability that the company may increase its revenues in the next five years to come. 

 

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