How can a business solve the dilemma to differentiate, while also leveraging maximum economies of scale in a commodity market? This case study of Google doesn’t focus on specific innovations, but instead looks at how and where Google chooses to innovate. We will explain what defines strategic value chain elements for Google, Google’s two strategies of dominating or commoditizing these elements, and how this approach affects product and service innovation as well as partnerships and strategic positioning. In our analysis we share lessons-learned of how and where telecoms can copy Google’s approach, what does not work and why, and how telecoms can leverage similar strategic approaches in their markets through orthogonal business models
A commodity, by definition, is a good without qualitative differentiation. It is fungible, meaning that it doesn’t matter anymore who produces the product. Its individual units are capable of mutual substitution. Most markets are near-commodity markets: price, brand, or quality still play a small role in customer decisions, and products are not completely fungible. Whether a product is a commodity or not is defined by markets, not by companies. In effect, one can influence markets in order to make products or services commodities. Why would you want to do that? Every company will try as hard as it can to protect its strategic value chain elements. There are two strategic options to do that, generally referred to as “rising above the playing field” and “leveling the playing field”:
● Dominate: If you want to rise above a commodity level, effectively becoming non-fungible, you need to differentiate yourself through either one of customer relationship management, product innovation, or infrastructure management: The first two will help you compete on brand and product, the later one on cost and price.
● Commoditize: You bring everyone else down to a level where their profit sanctuaries, operational advantages, or differentiations are annihilated. You can also level the playing field if that increases your total addressable market size and you can address that market better than anyone else. Or you can level the playing field to reduce a competitor’s advantage in its value chain positioning and wallet share. Operational advantages and uniqueness of services dwindle. You effectively created a commodity market.
Google’s Strategic Value Chain Elements
In 2009, about 97% of Google’s revenues came from advertising – $16b or 67% from Google web sites, and $7b or 30% from Google Network web sites. Everything that sits between an end user’s eyeballs on one end and advertisers dollars on the other end is strategic to Google.
For each of the value chain elements in between, Google is either A) trying to differentiate itself to rise above and dominate the playing field; or B) trying to commoditize a market and bring everyone down to a level where Google is in a better position to control the value chains of Google and its competitors:
Devices: Desktop hardware is already largely commoditized. Mobile hardware is not commoditized yet but either strongly connected to brands like Nokia, Motorola, RIM Blackberry, or LG; or tightly controlled by mobile telecoms through distribution channel management and availability of subscriptions and plans. Google Nexus showed other service providers how to create a device and market it directly to the consumer, without preferred carriers, directly through a website. While the number of sold devices lags far behind the number of Blackberrys or T-Mobile G1 phones sold, the Nexus had no stores to operate, no nationwide TV ads, and no call center and helpdesk staff. It showed the possibility of successful launch of a mobile phone based on Google’s heavily influenced Android operating system for mobile devices, effectively taking the first step towards...