Case Study 1: Paid Search Wars by John Sharp and Des Laffey Once an innovator in the industry, Yahoo s company direction has shifted over the years from that of leader to that of a follower in the search engine wars. Much of the blame could be laid at the feet of Jerry Yang who has been the CEO of Yahoo for much of the duration of Yahoo s history. The company started off well in 1994. Two students, the creators Jerry Yang and David Filo, saw a problem with the way the web was functioning and decided to find a way to organize their favorite websites so that accessing them would be more user friendly. Creating a directory allowed Yang and Filo to organize the growing web; however, as the scope of their project increased it became necessary for the team to utilize spiders in order to better organize their directory. According to Laffey, Yahoo thus diversified into a portal, acquiring other websites, such as the e-mail provider, Four11, to speed development (2008). By diversifying, the company was able to react well to user dissatisfaction about advertising spaces which led people away from the website s search engine. After the creation of GoTo (later to be called Overture) and the dot com crash the landscape of online advertising began to change. Paid search was introduced which allowed advertisers to bid on their position in search results. Google was, in a sense, a direct result of Overture s paid search model. The creators of Google, Sergey Brin and Larry Page, disliked the inability of search engines to provide quality information in the face of the growth of the Web and its increasing commercialism and manipulation of search results by websites (Laffey, 2008). As a response to this, they created PageRank which would rank Web pages by analyzing the quality and quantity of inbound links (Laffery, 2008). Once Google got funding and started accepting advertisements on their site they decided to change the system of paid search and created a cost per click model, through which the ranking formula was based on how many clicks an ad received. With the cost per click model, Google not only satisfied its advertisers but also made the search results more relevant for the user. While Google was paying
attention to user behaviors and focusing on the customer, Yahoo continued to focus on creating a profit through its advertisers (Drucker, 1994). Yahoo failed to notice that Google was becoming a serious competitor in the search engine market. This lack of attention to the changing atmosphere indicated the beginning of the fall of Yahoo s original theory of business. According to Peter Drucker, even if a company s theory of business is accurate and useful early in its history, eventually, every theory of business becomes obsolete and then invalid (Drucker, 1994). The market that Yahoo entered in 1994 was vastly different from the one that existed in in 2008; therefore, Yahoo s managing board should have changed its theory of business to fit with the changing competition in their market. At the beginning of Yahoo s reign as a top search provider it could afford to place priority on making profit from advertisers. This is because there were not many other viable online search options for users. Once Google appeared on the scene and provided its users with tailored paid search rankings, Yahoo should have taken note of its success and changed their advertising method. Instead, the company held onto assumptions that their place in the market was secure, that what they needed most was to make a profit from advertisers, and that they were already fulfilling the core competencies that they needed in order to attract and keep a consumer base (Drucker, 1994). Unfortunately for Yahoo, this theory of business was outdated. Google realized that by paying attention to user activity, it could both make money off of advertisers and appeal to users by showing them the ads that they were most interested in. In order to counter the mounting competition presented by Google s search engine and other products, Yahoo should reassess its theory of business and return to its original goal of satisfying online user needs. Yahoo was originally created to provide online users with a directory of websites to make searching easier. Along the way, Yahoo lost sight of its original purpose and shifted its focus and business theory to satisfying the needs of its buyers. Because the purpose *of a business+ is to create a
customer, (Drucker, 1994) Yahoo should return its focus, mission, and business strategy back to satisfying customer needs. Rather than trying to compete with Google or merge with other companies, Yahoo should look at what products its own customers are satisfied with and assess why these products are successful. By looking at what has remained popular with its users, such as Yahoo s email or news services, Yahoo may be able to anticipate innovative solutions to satisfy other users needs in the future.
Yahoo! Timeline 1994: Yahoo is created as a way to organize websites by Jerry Yang and David Filo. Late 1990s: Yahoo moves from a web directory to a portal model, offering email, search, news, and messaging. 1998: PageRank (to become Google) created by Sergey Brin and Larry Page. 1999: Yahoo begins charging commercial websites in exchange for reviewing their websites more quickly. 2000: Yahoo and the newly created Google sign a contract which enabled Google to grow its revenues and gave Yahoo! a $10 million stake in the company. 2001: Overture begins supplying Yahoo with its paid search results alongside the organic search results provided by Inktomi. 2002: Yahoo acquires Inktomi to bring its organic search technologies in-house. 2004: Yahoo purchases Overture, thereby gaining control of MSN s paid search provider. 2006: Yahoo signs a deal with ebay to provide its search results in the United States. 2007: Yahoo launches Panama, a paid search system with a click-through rate system similar to that of Google. ebay s PayPal was also introduced as an option on Yahoo s paid search. 2008: In an effort to stop a merger between Microsoft and Yahoo, Google and Yahoo begin to cooperate with Google providing some of Yahoo s paid search results. Also, in retaliation efforts against Google s Checkout (a PayPal competitor), ebay announces that it will emphasize more of its advertising on Yahoo and MSN.
Yahoo s Organizational Structure 1 Yahoo! Right Media Advertising Products/Websites Products/Websites Yahoo! Brands Yahoo! Non- Branded Yahoo! Search Yahoo! Search Flickr Paid Search/Panama Yahoo! News Delicious Yahoo! Mail Inktomi Yahoo! Messaging Panama As a portal site, Yahoo s structure and control systems form a complex matrix. While Yahoo earns its revenue from advertising, the company must maintain the products that display those advertisements, namely its various websites. Each of these company branches are managed by separate departments, but must work together towards a common company goal: encouraging the use of their products to generate advertising dollars. As Williams points out, the primary disadvantage of matrix departmentalization is the high level of coordination required to manage the complexity involved with running large, ongoing projects at various levels of completion (Williams, 2008). Because Yahoo is involved in running and coordinating so many different departments and projects, it is not surprising 1 Note: While displayed in a hierarchy, Yahoo s organizational structure is that of a complex matrix. The graphic above only includes the small portion of the entire Yahoo organizational structure mentioned in the article, Teaching Case: Paid Search Wars by Laffey and Sharp (2008).
that Google is surpassing Yahoo s efforts in the search engine wars. In order to compete effectively with Google, whose primary focus is directed at providing optimum search methods for its users, Yahoo must also strive to direct more attention to that area of its business structure. SWOT Analysis of Yahoo! (1994-2008) Threats Opportunities Weaknesses Strengths Beginning Middle End Faced threats from competitors with similar ideas. They also faced competition from companies such as AOL and MSN who approached internet search by courting users. One of the first large non-subscription search engines. New to the market, the market was new, everything was trial and error. One of the original, strongest, portals that offered many services. Ability to maintain relationships with other companies. Google started to be a threat in this time period. They based their ads on what users liked rather than what companies paid them the most to place their ads. Google offered to sell PageRank. Yahoo put $10 million into Google. Purchased Inktomi (organic search). Decreased innovation, were happy at the top. Needed to do more research on why their paid search method was not working. Were the most successful nonsubscription search engine. (Opposed to AOL and MSN.) Google starts taking users from Yahoo. Changing of management from Jerry Yang to new more business focused leaders. Purchased Flicker. Possibly combining with Microsoft (missed opportunity). Google began to be more competitive and yahoo failed to respond to the threat quickly enough to make a change. Ability to maintain relationships with other companies. Different web layout than other search engines. Currently have the ability and money to rest and innovate. Don t have to maintain an empire like Google does. Google provides some search results for Yahoo.
Corporate-Level Strategies: What business or businesses are we in or should be in? Yahoo is in the business of providing a wide array of services on-line. It should also be looking into technology that could improve these services to attract users. Grand Strategy Portfolio Strategy Growth Strategy: Yahoo has not had a strong growth strategy. For years, Yahoo was in the lead in its industry and relied solely on Overture for its paid search service. However, even after Google changed the game and began to gain momentum Yahoo continued to use Overture and even aquired the company. It was not until after the launch of Panama that Yahoo changed its paid search model, four years after Google. Stability Strategy: Overall, Yahoo does have a good Stability Strategy. The main services that Yahoo provides have stayed the same. However, this stability gave Google the competitive advantage as they were able to improve many of services that Yahoo had been maintaining for years. Retrenchment Strategy: Yahoo has used this strategy. When Overture was losing profits for Yahoo they closed it and launched Panama. They also closed Yahoo! Photos after they acquired Flickr. Yahoo has closed down many of its services that have not been popular with users. Diversification and Acquistions: Four11 (e-mail); Agreement with Overture for paid search; Yahoo acquires Overture; Yahoo purchased Inktomi for organic search; Yahoo launched Panama; ebay's Paypal now an option for paid search on Yahoo; Yahoo acquires Right Media; Google and Yahoo make a deal for Google to provide Yahoo with paid search results. BCG Matrix: Stars: Overture-- originally Overture was the monopoly for paid search. Queston Marks: Yahoo acquires $10 million stake in Google. Cash Cows: ebay--with Google and ebay in competition, ebay places more emphasis on Yahoo. Dogs: Overture--after Google entered the scene, Yahoo continues to support Overture and eventually acquires it.
Bargaining Power of Suppliers: High; Advertisers effect the success of businesses like Yahoo and Google (ebay, for instance, has a lot of advertising power and control) Threat of New Entrants: High; Internet market is constantly seeing new companies emerge and success can come quickly (Facebook and Google, for example) Character of Rivalry: High Competition/ Aggressive; Small companies rely on larger ones for survival; New and innovative ideas and busnesses continually emerging Threat of Substitutes: High; Other portals serve as a moderate threat (MSN, AOL); Google serves as a major threat to Yahoo Bargaining Power of Buyers: High; Cost per click model allows users to determine popularity of ads; Users determine a site's success and popularity