Why Google wants to grow

Companies often justify growth as a strategy to improve profitability. Growing allows companies to obtain economies of scale and rise on the learning curve. In addition, a larger market share will allow a company to influence pricing more effectively. In economic context it is assumed that companies are seeking to maximize profits. The motivation for growth however is not always as straightforward as managers would like it to be perceived. This paper will discuss several growth strategies and reasons for firms to grow. Once the different strategies have been discussed, these will be applied to Google, based on a recent article that discusses Google’s intention to purchase Motorola. The paper will reflect upon the views that this purchase may be anti-competitive, what Google’s motivation is and whether this strategy will yield the expected results.

A company can grow by doing more of the same (horizontal growth), reducing it’s trading relationships by taking over some of these functions themselves (vertical growth) or start operating in a different market (diversified growth). Depending on which strategy will generate the most profit, a company chooses one or more of these strategies. Growth can be organic, which means the company increases sales from within or growth can be acquisitive. Acquisitive growth is the opposite of organic growth, meaning that a company will buy (and sell) businesses in order to grow.

Organic growth is generally seen as more valuable, as there are some pitfalls with acquisitive growth. For example, DHL grew tremendously by acquisitions only to realize at the end that they were operating as individual companies across the globe, never taking advantage of the economies of scale. A merger or acquisition however does reduce the amount of competitors in the market by definition. This will most likely reduce the price elasticity, decrease the likeliness of price wars and thus lead to more chances of increasing prices.

Horizontal growth is generally related to reducing costs. When a firm increases its scale of operation by increasing capital, this usually leads to average costs to drop. This is often the reason companies decide to merge. As mentioned in the example above, sometimes companies become too large and lose this advantage by losing control and co-ordination. This effect of (dis)economies of scale is shown in graph 1.[i]  Other advantages from horizontal growth come from the learning curve, as shown in graph 2[ii]. As the firm produces more units, average costs drop because the company learns how to produce more efficiently.

Graph 1, (dis)economies of scale                                                          

  Graph 2, learning curve[iii]

       

Vertical growth is an attempt to integrate value-adding activities into existing activities, such as production of raw materials. This can reduce production costs by reducing transportation and costs affiliated with the transaction. Transaction costs are costs incurred by trading and organizing a transaction. Besides the cost effects, vertical growth can also be a strategic decision. In some cases there may be a hold-up problem, leading to an external producer’s unwillingness to invest in a production facility. This is often seen in the car industry, resulting in the manufacturer producing its own parts. Integration can also lead to a competitive advantage. A brewer can for example buy pubs and promote their beer in these pubs providing higher sales for the brewer. Owning the pubs also gives the brewer negotiating power with other brewers, leading to higher margins for the pubs and in turn again for the brewer. Vertical integration is mostly interesting when transaction costs are high, economies of scale are not of importance for the process or when it creates strategic advantage.

Diversified growth occurs when a company enters different markets and generally tries to obtain economies of scope. Google is a company that has very successfully integrated this concept into their business model. Since their servers and network is up and running for its’ search engine, adding Gmail, Google Docs, and many other services was a logical step. The cost for maintaining these networks together is lower than running these networks independently, and it binds its customers to the company. Diversification also reduces risk. If a company operates in one market, and this market becomes more competitive or irrelevant, than that could lead to serious distress for the company. If the company is also operating in other markets then it could potentially offset these loses by the profits in the other market. Coffee middlemen were an example of those who traded in only one field. When the producers of coffee started trading directly with the farmers, they lost all their business. It must be noted that even though diversification can lead to financial benefits for a company, this does not necessarily hold for the shareholders. Shareholders can easily diversify at low cost by investing in different companies that have a low correlation, following the modern portfolio theory.[iv]

Overall, growth in its different forms should be linked to profit maximization either in the short or long run and must offer revenue opportunities or cost reductions. Sometimes growth is a strategy to diversify against risk, however as stated before this is usually benefits the managers/employees more than the shareholders. Growth is also a tool to avoid ‘shrinking’. When the entire market around a company grows and the company does not, its relative size will be smaller. This may lead to competitors being able to make better use of economies of scale and gaining competitive advantage. A larger company will usually be able to withstand economic turmoil better, because of its stronger pricing influence. Generally, organic growth is preferred over acquisitive growth and management should choose the growth strategies that maximize a company’s profit.

The recent offer from Google to acquire Motorola follows Google’s diversification strategy. The synergy that may be created, if Google and Motorola integrate their businesses effectively, will help to maximize Google’s and Motorola’s profits. The purchase will enable Google to produce tablets & phones directly, overcoming their integration problems. The merger will allow Motorola to compete better with the larger competitors such as Nokia, Apple and Samsung. An article in the Economist substantiates this[v] claim. For the shareholders of Motorola the 60% premium on the stock price seems more than fair, as the average premium paid is around 20% to 25% in Europe[vi].

Reviewing the evidence on mergers and acquisitions[vii] in literature (D. Ward, D. Begg) the stock price for the buying firm often stagnates or even falls post-merger, and the results from the studies show that mergers are not always a good idea as the previous mentioned example of DHL proves. The reason behind the pursuit of this acquisition could be the interest of the managers of Google instead of profit maximization. Manager’s pay tends to increase after a merger. RBS and ABN AMRO are a famous example[1] where the Dutch, British and Belgian states later had to intervene to avoid bankruptcy. The fact that Google’s decision cannot be seen as ‘rationalization’, as it states it will run Motorola independently and thus not sharing any of the supporting functions, hints that the agency theory[viii] may hold here.

Google had been facing patent litigation and issues with the integration of the software with the hardware of the different producers. Motorola owns many patents, which may help Google in court, as Google had no patents before the acquisition[ix]. As mentioned before, owning a handset-maker will allow smoother integration of the hard- and software.[x] Motorola also produces other consumer electronics, suggesting that Google could further broaden its scope. The merger suggests that the integration of software and hardware is more important for tablets and smartphones than it was for the PCs. Apple has always used this approach, which has proven very successful.

An acquisition is by definition anti-competitive, as the number of competitors decreases with 1. In this particular case, it could become an anti-trust issue as Google provides the Android platform to several other producers of smartphones and tablets[xi]. By owning Motorola it will be competing directly with these producers. Google could choose to stop delivering the software or, less aggressively, favor its own hardware, similar to what Microsoft did with Internet Explorer. This way Google could create a monopoly position. Additionally their search engine can favorably show their products, reinforcing this monopoly. At the time of the offer, Google was being investigated by anti-trust authorities for similar actions involving its’ subsidiary, YouTube.

In conclusion, if the synergy between Google and Motorola is exploited, the purchase will enable Google to become a dominant player on the tablet and smartphone market by the vertical integration and economy of scope it stands to create. Google needs remain cautious to not create the impression of being anti-competitive, to avoid litigation and can use Motorola’s patents to settle current litigation issues. For Motorola the merger has specific strategic and competitive advantages. Finally, the merger will allow Google to further pursue its diversification strategy and continue growing.

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[i]  Geoff Riley, formerly Head of Economics at Eton College, http://tutor2u.net/economics/content/diagrams/mes.gif

[ii] LE Yelle - Decision Sciences, 1979 - Wiley Online Library

[iii] LE Yelle - Decision Sciences, 1979 - Wiley Online Library

[iv] Portfolio selection: efficient diversification of investments, H. Markowitz, ISBN 0-300-01369-8

[v] The Economist – Schumpeter - http://www.economist.com/blogs/schumpeter/2011/08/googles-purchase-motorola-mobility

[vi] Martynova, Marina and Renneboog, Luc, Mergers and Acquisitions in Europe (January 2006). ECGI - Finance Working Paper No. 114/2006; CentER Discussion Paper Series No. 2006-06. Available at SSRN: http://ssrn.com/abstract=880379

[vii] D. Begg and D. Ward, Economics for business, ISBN 978-007712473-1

[viii] Agency Theory: An Assessment and Review,  K. Eisenhardt, The Academy of Management Review, Vol. 14, No. 1, (Jan. 89), pp. 57-74, (http://classwebs.spea.indiana.edu/kenricha/Oxford/Archives/Oxford%202006/Courses/Governance/Articles/Eisenhardt%20-%20Agency%20Theory.pdf)

[ix] P. Gupta and B. Rigby, Reuters, http://www.reuters.com/article/2011/08/22/us-technology-patents-idUSTRE77L4IX20110822

[x] The Economist – Schumpeter - http://www.economist.com/blogs/schumpeter/2011/08/googles-purchase-motorola-mobility

[xi] B. Womack, Bloomberg Businessweek -http://www.businessweek.com/news/2011-09-28/google-s-motorola-takeover-faces-longer-antitrust-scrutiny.html

You're Probably a Micromanager

Recently read this article, which is really enlighting. Give it a try and you may realize that You're Probably a Micromanager!

Is unity the road to success..

One of the top hotels Los Angeles is revamping its wine list and the major supplier in the country offered a large incentive for taking over its suggestions of wines by the glass. The food & beverage (F&B) management team were debating and found that even though there were quite a few good references on the list, it were all wines that could be found all over the region.

Adapting the suggestions from the supplier would enable the operation to create more value for its stakeholders and possibly supply the funds to enhance the product itself.

The same F&B team had discussed recently that all the menus across the city are basically the same. One doesn’t have to look at what’s on the list, and in a culture where the middle class eats out 5 times per week (if not more) that is quite shocking.

Would this send the hotel down the same route, and if so is that something desirable for an upscale operation? The same situation has already occurred in the broadcasting industry, especially the So-Californian radio stations. The successful stations play the same songs, over and over again. It has become so annoying to the general public that even national comedians joke about it on TV. Yet it does not change and their ratings are through the roof. Why? Perhaps because there are no other options or perhaps because it is truly what the majority of consumers want.

Is this the road for the restaurant industry now? Simple dishes, well known inexpensive wines and mediocre service are the new ingredients to success?

Should a restaurateur take the risk and try something completely different, focusing on quality of the products, wines and ensuring that there is diversity it can be very successful. There are still a few restaurants in Los Angeles that do so, such as Terroni’s on Beverly Blvd, where no replacements are allowed and not a single wine on the list is known to the average guest. However the sommelier asks what you like, what you are having and finds a wonderful match to a dish the chef has decided is perfect for you.

This brings us back to the original dilemma… what will the F&B management team choose? Diversity, quality or incentive… Let us know what you think what they should choose and why that would be the best decision…

The pool at a top hotel in LA has several cabanas. These can be rented for day use, allowing non-residents to use the facilities and it gives a guaranteed seat to residents with a sense of privacy. In order to promote the packages more, last year the Spa Director together with the F&B* Director set-up a program where the cabanas could be rented in packages. 

The packages targeted different groups, included drinks, iHomes and spa treatments. It did not sell. With the new seasons underway new packages were developed. If they can do it in Vegas, it will work in LA too was the approach.

The new concept was segregated per user. One for the business user, one for families, one for party animals and one for the healthy. The entire Food & Beverage department was excited. The Spa Director supported the plans. The names were picked in line with the cocktail menu - cocktails were from different regions in the world and so the cabana packages were given city names. Now it was all about promotion. The plan was given to the PR director to proof read. Instead it was reevaluated by her and the Director of Sales and Marketing. 

They hated it. They did not understand why one package included dinner, a show and entrance to a nightclub. The way it looked was seen as childish. The names were irrelevant. The plans were very daring and out of the box and some resistance should have been expected. The excitement within the F&B department did not spread to S&M. Mostly to blame was the way the program was presented. Instead of setting up a meeting and explaining the idea, an e-mail was sent without much explanation for proof reading. An important lesson was learned; do not assume others who are not involved in  process will understand what you are doing. 

If the team that is to promote the product does not support it, the product won't sell. They will not pull out the same resources as for something they love & support. On top of that, subconsciously they will want to prove they are right that it was a bad idea. The Director of F&B requested for the entire plan to be redeveloped even though he supported it. The decision was based on the below theory:

"Quality X Acceptance = Excellence X Effectiveness"

The new program will be less exciting and less innovative. However it will be presented with passion and conviction. The lesson that everything needs to be sold internally before it can be sold externally was learned. In this case, the price was high. The S&M department no longer have an open mind but a set idea about what they would like to see presented. 

Being the main developer of the program and fond believer of the aforementioned theory, a new program is being developed and tailored to what the S&M department thinks will work. And next time, a formal meeting with a passionate presentation will be arranged before any proof reading occurs... 

* Food & Beverage

Pain, change, results & happiness

After attending a training on change in behavior, it was interesting to see that this had recently applied to myself.

I worked in food & beverage from early on in life and recently I felt it was time for change. Mostly because in my new work environment I could not implicate the passion I have for the product. Suddenly the sacrifices for the job became more and more obvious... It was a strain on my marriage as I was never free/home to do anything as a couple. 

So I decided to apply for business school and use this to open the doors to a different life. The pain from my job had gotten big enough to make a change, so I took the leap, took the GMAT, wrote essays and got accepted. 

Then I got moved to a different department. More food & beverage related, more passionate co-workers and interaction with guests as well as more responsibilities. I even had a regular schedule; starting at 8 AM daily. The pain was gone. My new boss was talking promotion and hinted towards a position that I would love... Was it the right choice to leave now?

A company I worked for loves "7 habits of highly effective people" and regularly trains their managers on the concepts in this book and I attended one too right when this was happening. This training made me realize why  I was motivated to make the change. I also realized that this initial motivation was no longer there, which fueled my doubt. Yet it taught me that even though my motivation for change was the 'sacrifice reward' balance. 

The 'pain' had pushed me to consider change - the fact that the situation changed and the pain was gone did not change the fact that the change stayed what is good for me, my wife, or marriage and our future lives together. Then a friend and co-worker, asked me what choice I had made. She told me to consider the implications of each decision and she asked me what my goals in life are. It was eye opening. I realized my goals had changed but I was still working towards my 'old' goals - I was on the verge of change and clinging on what I had built up. No matter how good I was at what I was doing, staying would not help me achieve where I wanted to go.

The key in this conversation was that she made me realize that in order to be successful you should evaluate your goals on a regular basis. If they have changed, evaluate what you need to do differently to obtain these new goals. Working backwards and inventing everything twice, like most of us do in our professional world, can easily be applied to our private life and will help obtaining that happiness. 

cobras & matadors - restaurant review

MONDAY, MARCH 21, 2011

cobras & matadors - restaurant review

Cobras & Matadors  

Categories: Tapas Bars, Basque
Neighborhoods: Mid-City West, West Hollywood

There's no wine list so bring your own. We had a Tignanello which was amazing.. Too bad they didn't have any nice glasses for the vino but hey, a wine like that for $8.00 and cost in a restaurant... Great food, very simple and straight forward. Very very crowded and nice atmosphere. The portions were large, so don't over order which is hard as everything looks very nice. 

We had:

Flat bread - great v. crispy and authentic - nice touch to add the roquet salad.
Green salad - refreshing and nice to keep the freshness
Roasted Chicken - good meat, tender and juicy nice sauce!
Patatas - served with ketchup and mayonaise.. the way a dutch man like it :)
Sacca w goats cheese and honey - great to finish of the meal. Ask for some mustard if you're having it before the end and make it even better!

Didn't do dessert - didn't look too tempting for us and the savory was just much more worth it...

Total check $72.44 (with $8.00 corkage)

Yes... Damn!

An article on a different blog recently got me thinking. It spoke of how many men have a 'Yes.. Damn!' moment. For instance, they will tell themselves that they will have more time later and then when later arrives, realize they do not have this free time. 

The article was ever more striking, as recently an employee indicated he wanted to retire. After a discussion, he came back stating he would prefer to work part time, but still 30 hours. This was a shock, so I asked why he would not just retire. He told me, that he could not afford loosing his benefits or income. This man had just worked 50 years of his life (and the worrying part is, that he is not the oldest member of the team) and cannot retire. As hard as it may be, he did not think it through when he was younger. And in the USA, you get punished for that.

Even though this spoke in favour of the article, I still felt compelled to disagree. If only to prove that not everyone let's life outlive them. Sometimes things get postponed until there is more time, and sometimes one runs out of time. It is the realization that a man does not have time but creates it, that makes a difference. There are several reasons for this, but I mostly it is because men don't understand it when they say Yes! and commit to something, until they reach the Damn! moment... that it requires effort and making time.

Misinterpretation of sayings that sound positive play a part in this process. Cease the day was never intended to make people act as a a 'cloud of white noise'... It was to prove just that point that one is traveling fast towards death and you have to achieve your goals now.  You can cease the day, as long as you are ensuring that you are still on the right track towards the goal in your life, whatever that may be, and it will make the journey worth it and pleasant.

It doesn't mean that you cannot change your goal and subsequently your path, as a thinking man changes his mind, but it means that a focus in life lets you enjoy the ride. To make the comparison with the trainride and the scenery; if you know where you are going and getting off, you can enjoy the scenery and the journey without worrying about the destination as you know you are on your way.

"For we are mistaken when we look forward to death; the major portion of death has already passed. Whatever years be behind us are in death’s hands." 

–Seneca

Foghorn Leghorn

A character from the childhood of many current parents, part of a gang called "the Looney Tunes". From Porky Pig, Bugs Bunny to Foghorn Leghorn, the Looney jokes were so subtle that as a kid they were often misunderstood. That did not stop them from laughing as there was a double meaning to the jokes. This made them funny for children as well as for adults.

The question is, do modern cartoons have the same effect? The adults barely seem to laugh, it is mostly flashing and a lot of impulses stimulating the children to buy merchandise. The goal of the cartoons seems to have changed; from being a tool to make people laugh and watch it again, to finding a way to keep the viewers watching. No longer does the writer sit down and think of a funny script, he is now joined by the marketeer who has analyzed children's minds and reactions to certain colors and movements to ensure they stay hooked. Sometimes, children don't even blink when watching! 

Should a parent let their children fly with the latest trend, which has been thought up by marketeers to hook them to a product for the rest of their lives? Or should a parent try and shield the child from these influences until they reach an age where they realize they are being influenced?

One thing is certain, completely shielding a child is impossible as soon as it starts acting on its own. This means that before that time, every parent should have a game plan to find the balance between shielding and educating. The danger lies in the often innocent appearance of the cartoon and the fact that where children get hooked by the colors, sounds and flashing light, they usually annoy the parents...

The solution can be one corporations love: buying high quality movies with the content a parent wants their children to see. Or banning TV all together, however cruel it may be on both the parent as they child!

Globalization makes better leaders

A manager walks into a room to discipline an employee. The employee is told in a direct manner what he did wrong. The employee leaves and thanks the manager for his honesty and promises improvement. The same manager disciplines another employee from a different cultural background. The conversation escalates and the employee files a harassment complaint. The manager is amazed as he used the same approach. What went wrong?

Having been employed in several first class hotels where strong hierarchical cultures rule, this phenomenon has been observed many times. Although even experienced persons seem to be aware of cultural differences that cause this type of events they seem to occur over and over. In the beginning of a person’s career where the level of experience is low, mistakes that related to cultural differences are made easily.

To avoid misunderstanding; the subject of this essay relates to cultural differences based on international or geographical backgrounds. Mistakes or misunderstandings caused by these differences can lead to both very defensive and very aggressive reactions of the persons involved.

One of the differences caused by different cultural backgrounds can be that some persons want to be approached peer to peer, while others consider themselves as being part of a group. Others could perceive what can be a very usual situation to discuss by some as an insult.

It works out that differences between countries and cities all over the world can be predicted and even can be managed. Coming from Paris to London, it proved that an approach based on coaching and giving opportunities to employees result in a good atmosphere. When management takes care that working conditions are optimal and fair this results in great loyalty from all parties. Here the team had the need for feeling united, as most of them came from different locations.

To create this bond, team incentives can be a powerful tool. Instead of individual effort, it rewards team effort. In turn this feeling pushed the individuals to perform, as they wanted to be part of a successful team.

A different situation was analyzed in California, USA. Most of the employees in this specific location have worked at the property for over 10 years and have no interest in progressing. In order to perform associates only expect a monetary reward. To get the employees to accept change, as management team we had to prove that our initiatives would increase revenue, as their tip is based on the revenue. Once the team believed that the changes would lead to higher personal gains, they started accepting the initiatives made.

Knowing what motivates an individual is one of the keys to success. This can lead to implications of personal nature. An example can be that of one of the servers offering to help clean up the pool area after another staff member has called out. That has a big consequence for a server, making minimum wage and not receiving his tip for this time. In this case personal motivation has to be very strong to make him supportive.

Personal experience made me realize that characteristics of a leader in one culture can be interpreted differently in another culture. A major question is how to deal with these types of interpretations? A good leader identifies cultural differences. He also will conclude each culture respects values such as fairness, empathy and integrity. In today’s global workplace, one needs to understand the professional goals and personal needs of the team as well as each individual team member. A great leader uses this knowledge to create an environment where the associates are empowered and committed to success.

Adhering to a set of core values and being trained in cultural differences are what set leaders apart. To better understand the impact of globalization a leader should experience it, which will facilitate him to understand that within culture individuals vary largely. Identifying team and individual needs and goals are what will enable someone to create a successful environment and be a great leader.

It is striking that all facts described above probably are known widely. At the same time mistakes that relate to this phenomenon are made constantly. All managers and leaders that have the ambition to work in a multi cultural environment should be obliged to study and practice this. They also should prove that they are able to handle these differences before they start building their international career.

Ronald W.