February 2, 2011

To: Aleksey Kolpakov, Acting Associate Professor

From: Akeneev Ermek, Dzhumabaev Arthur, Kim Anna, Mambetalieva Ellina, Usubakunov Eldan

Subject: Yahoo’s analysis

As you requested, we investigated the Yahoo’s environment, pointed out its main problems, used theories in analysis of problems, and elaborated some recommendations to improve Yahoo’s activity.  
 

• Description

 

      Yahoo was established in 1994 by two graduate students with no previous business experience - Jerry Yang and David Filo as a collection of useful links on the Internet and eventually grew up to become world’s most-visited online destination worth hundreds of billions of dollars by the late nineties.

      Led by Tim CEO Tim Koogle and COO Jeffrey Mallet Yahoo went on to replicate its early success in US to 18 major international markets available in 12 different languages. Majority of Yahoo’s strategy from 1996 to 2005 relied on the acquisition of smaller developing companies which have created their own niches and are servicing them with the best products. Rather than developing its own software or applications, Yahoo acquired companies and brought them into the fold of the Yahoo brand name. Among most notable were acquisitions were ViaWeb (Yahoo! Shopping), Rocketmail (Yahoo! Mail), Classic Games (Yahoo! Games), E-Groups (Yahoo! Groups). Altogether Yahoo had purchased and integrated 47 companies from 1996 to 2006. The most notable exemption - Yahoo! Search was outsourced to outside companies such as Inktomi or Google until Inktomi was eventually purchased in late 2002 for 235 million.

      Since the lion share of Yahoo’s revenue was generated through placement of advertisements on its portal’s pages, the market-share in number unique of visitors played a vital role in attracting cash flows from advertisers. Using its human-powered directory listings and highly visible brand name, Yahoo had dominant market-share in late nineties competing well against number of small and big similarly diversified competitors - namely AOL and MSN portals. However, after dot-com bust it became clear that Yahoo while still attracting huge number of visitors overall to all of its properties, was either far behind or seriously threatened in every major market it competed. More niche specialized rivals such as EBay, Amazon, YouTube, MySpace, Google had amassed nearly insurmountable advantage over their respective Yahoo counterpart offerings: Yahoo! Auctions, Yahoo! Shopping, Yahoo! Video, Yahoo! 360’ and Yahoo! Search.

      After failed 50/50 merger talks with EBay and having lost nearly 90% of its peak market value board of directors decides that change of direction is needed and fires Tim Koogle and Jeffrey Mallet, chooses Terry Semel (experienced Hollywood media executive) as a new CEO of the company. Under Semel’s leadership Yahoo had continued purchasing spree (26 acquisitions), but still failed in establishing itself in any one niche of the market as it continues to be too wide and diversified to be identifiable with a single trait. One notable exception from the years past - Yahoo had decided to invest heavily into its own search and advertisement placement technology - “Project Panama” is well underway going into 2006 and should bring Yahoo on the same playing field with its major arch-rival - Google, Inc.

• Diagnosis

Yahoo’s environment analysis

 

Task environment 

Customers

In our case customers are Internet users. Considering customers’ satisfaction, we estimate it highly:

• In 1996 18 Yahoo’s portals could be accessed by users in twelve languages;
• Yahoo contributed to the development of e-commerce;
• They continuously developed and expanded the range of content and services such as email, instant messaging, news, stock alerts, and job placement services that attracted more users;
• It often acquired well-known Internet companies to increase the value of its portal to users;

But at the same time customers have low brand loyalty, therefore the company has to offer content which meets the user’s needs to a very high degree. 

Competitors

In the 2000s Yahoo’s competitors like Monster.com, MySpace, and YouTube emerged and in a few years became dominant portals in providing a particular kind of online application. The strongest competitor is Google. Nowadays Google is still winning Yahoo users over to use its web search and other services.   

Suppliers

• Netscape. Yahoo had limited hosting capacity and borrowed server space from Netscape;
• Google. Yahoo cooperated with Google and paid it for the volume of search questions;
• Inktomi. Yahoo dropped Google’s search engine service and rolled out its own by Inktomi.

 

Distributors

• ISP (Internet Service Provider) - ISP provide population with Internet access;
• Software producers;
• EBay. In 2006 Yahoo and EBay formed a marketing advertising alliance.

 
 

General environment 

Demographic forces

Yahoo increased its value by advertising message considering specific demographic groups like sport fans, teens, or investors. It also customized to the tastes and needs of local users. 

Technological forces

• First analog of directory allowed to search for the information faster;
• 18 portals operating outside the US;
• 200,000 individual websites in over 20,000 different categories;
• Internet shopping portal Yiaweb - Yahoo Stores in 1998.

Economic Forces

• Due to economic recession stock prices fall;
• Decrease in price of Internet services leads to high amount of users. 

 

Problems:

Problem 1: Dramatic fall in stock price

In 2002 Yahoo's stock had plummeted to just $9 a share from 237$ in 2000. It happened due to dot.com bust, which sent many e-companies into bankruptcy. The second major cause is that Yahoo’s business model was mostly based on advertising. For instance, Ebay’s stock price didn’t fall during this economic downturn, because its business model wasn’t totally dependent on advertising. 

Problem 2: Acquisitions are not efficient and effective

Another mistake of top management was that many acquisitions of Yahoo (GeoCities, eGroups, Yahoo’s video service) weren’t efficient. The problem is that all these companies were dependant on Internet advertising. Internet is constantly widening, and everyday thousands of new web-sites are being created. Technological advances allowed to provide similar Internet services as Yahoo did, so web-sites, such as Monster.com, MySpace.com, YouTube.com became more popular than Yahoo’s similar services. 

Problem 3: Constant losing of market share

Google shows modest gains, while Yahoo continues to lose the ground. Google invests a lot into search engine technology, which gives new applications that makes user’s life much easier. Google’s search engine outperforms other search engines and that is why Yahoo is losing the search engine war. 

Problem 4: Problems with a Content-Driven Strategy

Yahoo’s content-driven strategy is becoming less productive with time, because social networking portals (Facebook, MySpace) and Google are taking away Yahoo’s users. Yahoo’s strategy is described as “spreading peanut butter” across opportunities. They don’t focus on nothing in particular and have wide range of different services. Investments are spread among numerous services and that is why are not efficient. Nevertheless, Yahoo’s services covering sport, entertainment and finance are very popular. Even Google can’t compete with Yahoo in these fields. 

Problem 5: The Search Engine Dilemma

Top management of Yahoo made a major mistake with search engine issue. Yahoo was always searching for the best search engine. They started with AltaVista, then gave a contract to Inktomi, and finally, they used services of Google. Yahoo’s management lacked forecasting skills. Yahoo had a wonderful chance to buy Google, when its stock prices soared amazingly. But it didn’t use this chance. At least, Yahoo could create its own search engine to eliminate all possible threats.  

Problem 6: Google's customized advertising model wins Yahoo’s ad model

Google managed to create technology that better connects users with web-sites. Moreover, Google’s advertising model was more attractive for companies rather than Yahoo’s model. Yahoo charges for “impression” – users’ click on a web-site, while Google charges for clicks that result in sales. Even though these charges were quite small, big amount of companies’ paying resulted in huge revenues. 

Porter’s five forces theory:

     1. Level of rivalry - in the beginning of Yahoo performance was low, nowadays it is high. Tough competition from Google;

     2. Potential for entrants - Yahoo operates in a low barrier environment, where companies can easily be launched due to the ease of online launches;

     3. Power of large suppliers – Yahoo is dependent of suppliers, but that’s not a major problem for its operations;

     4. Power of large customers - Due to Google’s competition, the majority of Yahoo consumers began to use Google’s services; advertising business was more ‘comfortable’ in Google than advertising options provided by Yahoo.

     5. Threat of substitute products - is very high. Rapid development of Internet industry and low barriers for new entrants. 

Theoretical analysis

     Under the resource dependency theory it is important to consider internal and external resources of a company, which are vital for optimal strategic and tactical management of any organization. Theory is oriented on the proper identification of organizational structure, management team, employees, external links and many other aspects which could influence a company’s survival in a certain market.

     One of the most important resources for sustainable growth and development of Yahoo inc. was financial inflow of capital. The vital source of survival had to be wisely used to be competitive and save market power. However, financial operations of Yahoo were not always effective and efficient. Yahoo spent money for acquisition of companies to broaden the variety of services and products provision for customers; however technologies possessed by these firms became widely used by Yahoo’s competitors. Result of these operations was not forward-looking strategy spending millions of USD, which could bring higher return from investments for R$D, marketing researches or other goals. Moreover, Yahoo’s advertising was a major source for company’s development and growth. Rapid growth of rivals, new ideas and innovations brought Yahoo to loose market share (ex. YouTube, Google, Amazon and etc.). As for management, it didn’t pay enough attention to the analysis of current and potential competitors, what resulted in the downturn of Yahoo’s success.

      Under Institutional theory it is considered to analyze company from the perspective of its social behavior. Institutional theory corresponds some aspects to Resource Dependency theory through the environmental activities of a firm.

     Yahoo could be more consistent with its environment. The potential threat was purchased without proper consideration of potential benefits and costs. Huge money was wasted for suppression of rivals. Moreover, acquisition was primarily focused on those fields where Yahoo could make revenue from advertisement, rather than selling other services. Probably better strategy with external environment and institutions could be Yahoo’s cooperation with small companies instead of acquiring them to save money, human and financial resources.

     Under Population ecology theory, company in order to survive has to experience and use its luck, chance, or randomness situation. Due to the management problems Yahoo lost its chance to merge with eBay what poorly affected market power of Yahoo. Consequence was lost contract with eBay for customized advertising system. Missed opportunity resulted in Google’s cooperation with eBay. Yahoo lost opportunity to acquire Google as well. Such investment could give an opportunity to have good search engine provider a major reason of customers outflow from Yahoo to Google. Same reason is applicable for YouTube case as well. However, the positive side of Yahoo’s performance is it’s following of ‘fashion’ of Web network; however, Yahoo is strongly necessary to be on track looking for new ways of customer’s attraction, watching for the long-term trends to be competitive.

• Recommendations 

1. Use the Google’s advertisement model

2. Improve the search engine
3. Refrain from purchasing new applications and services
4. Hire a CEO with a degree in IT and strong managerial skills
5. Merge Yahoo! and Google companies

 

      1. Google's advertising model has been extremely successful. Google uses a Query-based Paid Placement, i.e. sells favorable link positioning or advertising keyed to particular search terms in a user query, such as Overture's trademark "pay-for-performance" model. Moreover, Google receive revenue from using a Content-Targeted Advertising that extends the precision of search advertising to the rest of the web. Google identifies the meaning of a web page and then automatically delivers relevant ads when a user visits that page. It is more effective than broad-based advertising. Therefore, it is necessary to use the already well-established advertising model.     

2. Quality of a portal’s search engine defines a quantity of users and advertising revenues. Since Yahoo! has terminated the contract with Google and has purchased Inktomi, Yahoo!’s search engine loses to Google’s search engine. Hence, improvement of the search engine is vital for Yahoo!.      

3. CEO and managers of Yahoo! has purchased a lot of applications and services. They have spent billions of dollars, but not all of their purchases were paid back. While, Yahoo!’s strategy is a diversification of activities to build a “megabrand”, one of ten principles of Google states: "It is better to do one thing, but do it very, very good". At this stage, it is important for Yahoo! to invest in improvement of the search engine.  So, in the future managers of Yahoo! should refrain from purchasing new applications and services.     

4. Information Technologies is a specific area where it is not enough just to have an MBA degree. For instance, Eric Schmidt was appointed a CEO of Google, because he holds a bachelor’s degree in electrical engineering, a master’s degree and Ph.D. in computer science. Therefore, a person with a technical education should be a CEO of Yahoo!. Moreover, a CEO should have strong managerial skills. Also Yahoo! should concentrate on a human resource management, because human resources are the main factor of production in IT. Management of IT companies has to motivate their employees in order to get unique ideas and innovations. For instance, Google has become the most desirable place of work and therefore it has the opportunity to recruit the best professionals in their fields.     

5. The best alternative for Yahoo! is to merge 50 to 50 with Google. Each of them has a competitive advantage. Yahoo! is the best in news, financial services, etc. The major advantage of Google is the search engine. Such a merger would make a great benefit to both companies. It is better to work together rather than compete. Such a merger is possible, because Yahoo’s founder David Filo is a mutual friend of both Google’s founders - Larry Page and Sergey Brin. Moreover, this was Filo who approved the perspective technology of Page and Brin and advised them to organize their own company to develop a search engine. Finally, as Yahoo and Google have experience of working together, they will be easy to agree on a merger.