Google in ChinaBUS 230: Global Environment of Business Prof. Rubana Choudhry Nathan yaw Kwadade
Mission Statement“To Organize the world’s information and make it universally accessible and useful.”
Backrub – Stanford PhDFounders Larry Page and Sergey Brin met at Stanford University in 1995. By 1996, they had built a search engine (initially called BackRub) that used links todetermine the importance of a individual webpages.
Management Talent• Larry Page and Sergey Brin founded Google in September 1998. Since then, the company has grown to more than 30,000 employees worldwide, with a management team that represents some of the most experienced technology professionals in the industry.• Larry Page CEO As Google’s chief executive officer, Larry is responsible for Google’s day-to-day-operations, as well as leading the company’s product development and technology strategy.• Eric Schmidt has helped grow the company from a Silicon Valley startup to a global leader in technology. As executive chairman, he is responsible for the external matters of Google: building partnerships and broader business relationships, government outreach and technology thought leadership, as well as advising the CEO and senior leadership on business and policy issues.• Sergey Brin served as president of technology, where he shared responsibility for the company’s day-to-day operations with Larry Page and Eric Schmidt. Today, he directs special projects.
Google Culture• Despite recent cutbacks in budget like the employee amenity of an in-house gourmet Sushi bar, Google was Fortune Magazines #4 on 100 Best Companies to Work For in the US in 2009 and 2010.
Products & Services• Google has many popular apps such as Gmail, Google Voice, Google Talk, Google docs etc.
Challenges Facing Google• Deal with the growth of social networking giant Facebook.• Circumvent the obstacles that China is throwing in its path• Stay out of the cross hairs of antitrust regulators around the world.• Catch up with Apple on mobile innovation.• Make Google a good investment in the stock market.• Get people to trust it when it comes to privacy.• Hang on to its people in a talent war that is heating up• Learn how to deal with the news media.• Fix Google’s public image problems• Find a huge new business beyond search.
China Background• Formal name: Peoples Republic of China (PRC)• Capital: Beijing• Head of State: President Hu Jintao elected March 15, 2003.• National flag: Red flag with five stars.• National emblem: Tiananmen Gatetower under five stars, encircled by ears of grain and with a gear wheel below.• Population: China is the worlds most populous country with 1.28453 billion at the end of 2002, one-fifth of the worlds total. This figure does not include the Chinese living in the Hong Kong and Macao special administrative regions, and Taiwan Province.• The current Chinese government functions under the leadership of the Communist party.• China is currently the second largest economy in the world having a 2010 GDP of $5.8786 trillion. China is estimated to become the largest economy in the next twenty-five years.• China’s economy is expected to continue to grow due to an increase in minimum wage and therefore an increase in household spending. China’s economy began to grow substantially when barriers where removed to international trade in the late 1970s. Since then, the Chinese economy has grown tenfold. The current Chinese economy is 43% agricultural, 25% industrial and 32% service. China continues to compete internationally as their goods are substantially cheaper to export than other countries making it more beneficial for other countries to conduct business with China.
Porter’s five Industry analysis The Internet Search Engine and Advertising Industry in China• Potential Entrants – Extremely Low o The Chinese government follows a Constitution, which was written in 1982. The Chinese Constitution states that citizens have freedom of speech, press and assembly. However, this has not prevented the Chinese government from continually controlling what information citizens can obtain. o starting a business in China is more difficult than in most other countries. o Third, to run a competitive and successful online search engine or advertising firm in China requires a highly skilled and well- balanced assortment of professionals: well-connected businessmen, highly innovative computer programmers, software engineers• Bargaining Power of Suppliers – Low o In terms of Internet search engines backward integration with webmasters is a very credible threat, which lowers the power of such suppliers. In advertising, the ad-making partner and ad-receiving individual are usually both customers of the firm and therefore supplier power is not a concern.• Bargaining Power of Consumers – Low-Medium o The vast majority of revenues in this industry are derived from advertising. However, dispersion of revenues across consumers as well as concentration of revenue generation from network partners plays an important role in bargaining power. Dispersion means that no single buyer has a controlling interest. Although much like in the United States, many Chinese advertisers bid on keywords, popular keywords can also be sold for a higher value-per-click. This distribution attracts both large companies and small enterprises, keeping buyer power low.• Substitutes – None-Very low o At this juncture in history, there is no real substitute for search engines. The Internet is the primary mode chosen by people all over the world to request and retrieve information. Information can be organized in different ways including categories and sorted by date, but search engines provide tools to complete these tasks as well as conduct searches. A substitute product may be invented in the future, but there are no obvious substitutes to organizing information on the Internet.• Rivalry - Medium and Trending Upward o According to Porter’s theory, the intensity of the other forces at play will greatly affect the level of competition among existing players in the industry. In the sector there are currently a handful of major players of the size and depth of service that gainfully compete in China. As expected, comparable companies in the sector are large cap and reap sizable profit margins. However, Baidu is arguably the market leader because local companies may have a better grasp on the growth and development of the Chinese web resulting in crawls, indexes and better than Google – the distant second ranked engine. With few new kids on the block to shake up the establishment, the intensity of competition can easily be gauged by the volatility of market share among existing competitors.
The Great Firewall of China The Chinese government follows a Constitution that was written in 1982. The Constitution states that citizens of China have freedom of speech, press and assembly. However, this has not prevented the Chinese government from continually controlling what informationcitizens can obtain. The Chinese has done this through a variety of rules. One of these rules is the monitoring of the Internet by China’s Ministry ofPublic Security. The Chinese government blocks their citizens from seeing some overseas news reports and searching various words in search engines. The purpose of this is to keep China separate from the rest of the world.
Recommendations• Google is losing market share in China with its search engine and will likely continue to diminish its market presence with its refusal to censor. At present, the future of China censorship is unknown, but it is recommended that Google continue business within China. This recommendation stems from the consideration of two primary factors: investor confidence, ethics and Guanxi.• Investor confidence must be carefully considered, especially given the extraordinary size of the Chinese market – which rose to 338 million by the end of June 2009. From the share price perspective, a pull-out from the world’s second largest economy would signal to market that the present value of the company’s future cash flows will be smaller than anticipated in the future. While the market does not look favorably upon the current tit-for-tat relationship between Google and the government, the full effect of a complete withdrawal from the company has not likely been captured yet in the share price. Consequently, with a full-scale withdrawal Google can expect to see its expected cash flows, share price and investor confidence plummet. Google should not forgo that its 21.6% stake in this still underdeveloped market in which only 40% of the population is connected to the Internet. Although growth in market share may be slower than in other nations owing to regulations and other country characteristics, the upside potential in this two-horse race for new users is extremely attractive.• It is evident that leadership within Google has struggled with the moral conflict of operating their business within a more oppressive country. Google should not fully engage in a full-on moral battle with the Chinese government and its censorship. The debate over censorship in China is not new, and as noted earlier, it is presumptuous of a business to enter a country this powerful and assume its values upon the nation. Censorship is a debate that will certainly take more time to resolve and undoubtedly require a large role among governing bodies. However, Google can be vocal about its views on the matter given the nature of its business and philosophy.• It is apparent that censorship does not coincide with the beliefs of Google. Indeed, recent world events (for example Egypt) have demonstrated the vitality of information, and no doubt that censoring would make Google subject to much scrutiny. However, by working under China’s censorship conditions, Google is able to connect millions and afford them many opportunities otherwise impossible. In this situation, it is recommended that complying with China’s censors would be the lesser of two evils. It is better to provide as much connectivity and information as possible to the Chinese people, than none at all.• Finally, Google must consider Guanxi, a core concept that is rooted in thousands of years of Chinese ethics and business. Guanxi literally means “relationships” and is critical to business relationships within China. Google’s decision to defy censorship was damaging to the relationship Google had with the Chinese government and business community. It is imperative that Google seek to bolster and renew its fragile working relationship within China. Without Guanxi, Google cannot operate within China.
Conclusion• While Google has very successful business operations in most of the world, it is clear that special consideration must be taken when operating in China. Having relatively limited resistance thus far, providing services in China present new challenges for Google, particularly with its most prevalent search engine. A thorough study of the market climate and the unique aspects of China demonstrate that many obstacles remain. Yet, it is also evident that Google can play a role in the current and future market, and ethically should continue operating in China.