We believe that Google’s competitive advantage in both the online search and search-based advertising markets started by having better IP and underlying hardware/ software than its rivals, combined with an organizational competence that focused on experimentation, innovation, and problem solving. Over time, the firm translated these benefits and culture into structural advantages through economies of scale in network effects and workforce, which have in turn allowed the company to grow its market share year after year.

Google’s main early advantage was due simply to building a better mouse trap.  Google provided more relevant search results with their, at the time, revolutionary PageRank algorithm.  PageRank uses the number of documents that refer to a given result to weight that result relative to others.  Developed by Larry Page and Sergey Brin, the patent actually belongs to Stanford because the work was done while they were both at Stanford, however, Google licensed the patent.  By now, however, PageRank is well-known by its rivals, and cannot fully explain for Google’s success over time.

Another of Google’s key early advantages was its organizational competence that stressed experimentation and embraced technical problem solving, all the while maintaining an emphasis on fun. Google engineers are encouraged to spend one day of their workweek, or 20% of their work time, on their projects that interest them. Some of Google’s well known products, such as Gmail and Adsense, came from this 20% time.

In addition to experimentation, the Google culture also values fun, while maintaining a focus on the task at hand. Even from the beginning, the Google cofounders chose a logo that emanated playfulness and irreverence. Later on, as the company grew, it introduced lava lamps, exercise balls, even free food and dry cleaning, to help facilitate an enjoyable environment. The goal, however, was always to keep employees focused on their work and not to have them waste time with mundane chores.

What these advantages in IP and culture gave Google was a head start that it was then able to translate into the firmer structural advantages. The first structural advantage is in network effects with consumers. While Google had an early advantage in search result relevancy, its perceived lead persisted, even when Yahoo! finally narrowed that gap over time. We believe that this is because quality differences across search engines have become difficult to measure for the average consumer (instead of, say, restaurant quality), and that word-of-mouth in favor of Google is helping it maintain its lead. This advantage also helps in the advertising market, because search-based advertisers will flock to the site with the most traffic, assuming that the demographics of both sites are similar.

The second structural advantage that Google has built is economies of scale in its workforce. In 2007, Fortune named Google the number one place to work in the United States, featuring quotes from employees that explained that one of the largest draws at Google was the opportunity to work with other Googlers: “Hard-core geeks are here because there’s no place they’d rather be,” says a Google Webmaster; “You’ve got to ask yourself why these people are coming here… I think they come here to be energized by the people at Google,” says an engineer.

Source: Wikipedia http://en.wikipedia.org/wiki/PageRank

 

“In a [8/2/06] talk at Stanford University, Marissa Mayer, Google’s Vice President of Search Products and User Experience, stated that her analysis showed that half of the new product launches originated from the 20% time.” Source: Wikipedia.

 

The Google logo features the company letters in primary colors, save the letter “l”, which the founders wanted to color green (a secondary color) to show their irreverence. Source: “How Google Got Its Colorful Logo”, Sonia Zjawinski, Wired Magazine, 2/12/2008.