5. May 2016

"Learn from Google"

What is the right way - internally developed innovations or M&A activities? Google's semi-organic growth strategy works!

 

DIGITALIZATION DEMANDED BUSINESS MODELS and puts banks under immense pressure to innovate. Are internally developed innovations or - through the acquisition of start-ups - externally acquired innovations the right way to go? The concept of semi-organic growth describes a promising middle course that the technology group Google has been successfully pursuing for years.

There is no doubt that digitization is changing large parts of modern life and thus also the global economy. Companies need to find an answer to the question of how they react strategically to changing business models. A pronounced uncertainty is inherent in this question, because it is difficult to predict exactly how digitization will affect customer behavior in the future - also and especially against the background of its own development. What is certain, however, is that various start-ups are attempting to erode formerly established business models with the tailwind of digitalization and are attempting to break open their value chains with innovations at critical points. How and with which growth strategy should established companies react to the constant change? How to arm yourself against new challengers and innovations that threaten your core business:

  •     Sit out the development and build on your own strengths (fortification strategy)?
  •     Keep up with developments organically, i.e. through internal innovation activities (organic growth strategy)?
  •     Inorganic, i.e. bringing innovations into the company through mergers and acquisitions (inorganic growth strategy)?

This decision-making pressure is not only weighing on industrial companies, but also on financial institutions and banks: Digitization and FinTechs are among the major current strategic issues in the financial services industry. The pressure on established banks is increasing noticeably.

On the basis of the case study of the growth strategy of the technology group Google, action theses for the digitization strategy of banks can be derived. Google is one of the most important technology groups in the world and above all has extensive experience in the field of growth strategies in the field of digitisation, the Internet and innovation. It is important to understand that Google (just like established banks) is more challenged than a challenger. The following questions are central:

  1.     Which behavioural patterns can be derived from Google's growth strategy?
  2.     How did Google proceed in the post-merger integration of start-ups?
  3.     Which action theses can be derived for banks from the example of Google?

Google's growth strategy and innovation

Google attaches great importance to organic growth and thus to internally developed innovations, especially in products and services. Nevertheless, M&A is an essential component of Google's growth strategy in the area of conflict between digitization, the Internet and innovation. Since 2001, Google has acquired more than 1801 companies " 1. These include acquisitions of larger companies such as the online video portal YouTube (acquired by Google in 2006 for $1.65 billion) and the online advertising marketer Doubleclick (2007 for $3.2 billion), but also a significant number of small companies and start-ups such as Applied Semantics (2003 for $102 million) and Android (2005 for $50 million).

Not only many of the larger companies acquired by Google were to play an important role in Google's growth strategy - an example is AdMob, which Google acquired for $750 million in 2009 and which enabled Google to make a quantum leap in mobile advertising marketing. Rather, it was a series of smaller acquisitions that were to play a significant role in Google's success story in the future. The takeover of Applied Semantics - at that time a 45-man start-up from Santa Monica - was to result in AdSense (AdSense is a service from Google that brokers and manages advertising on third-party websites). Android, for example - a small, relatively unknown start-up based in Palo Alto, California at the time of the takeover in 2005 - has developed into one of the world's leading operating systems for smartphones and tablets.

Despite Google's many successes in taking over start-ups and larger companies, there have been a number of abuses. With the acquisition of Motorola Mobility (US $12.9 billion in 2011), Google and other smartphone manufacturers that used Google's Android operating system were at odds: As a result of the takeover, Google was no longer just a provider of the Android operating system, but became a direct competitor overnight, e.g. of Samsung, an important customer of the Android operating system (i.e. customers of Google). Due to this channel conflict, Google sold significant parts of Motorola Mobility back to Lenovo in 2014. Although a valid measurement of the success of M&A from a methodological point of view is considered difficult, Google generally stands as an example of an overall successful growth strategy - especially in the complex field of tension between digitization, the Internet and innovation, which is marked by uncertainty.

Behavioral patterns: semi-organic growth

Why was Google so successful in its growth strategy? As shown, M&A activities made up a large part of the company strategy. On closer inspection of these transactions, however, most of the Google acquisitions are not classic acquisitions in the sense of inorganic growth, in which a company is acquired and (partially or completely) integrated into the buying company so that the buying company only uses the existing capabilities and resources or technologies of the acquired company for itself.

 

The article was first published on die bank - Zeitschrift für Bankpolitik und Praxis on January 18th 2016 (German).

Header Pic © hiphoto39 via Fotolia

Case Study: Google