Is Yahoos Business Model Working in 2011
Introduction
In the year 2006, Yahoo! was the top most visited social website in the world with an average of 144 million users per day. The company managed to generate a lot of revenues during this time because there was limited competition and people were eager to join web portals for socialization. As the years went by, other Web Portals emerged and Yahoo faced stiff completion from Google and Facebook making it rank number three in 2010. In addition, Yahoo’s market share decreased dramatically by almost 18% leading to an average stock price of 15 dollars in 2011. Yahoo business model was falling down and the management required taking immediate action to save the company from incurring more losses. External environment pressures like global financial crisis, advancement in technologies, and threats from competitors led to the reduction of Yahoo’s market share (Wright Investors Service, 2014). The following analysis aims at determining the effectiveness of Yahoo’s business model designed in 2011. The main issue of yahoo is to implement strategies such as improved marketing and advertising strategies in order to increase the company revenues for future growth.
Yahoo’s developed a unique form of differentiation when it realized that some emerging companies like Google and Facebook were overturning the market. They came up with an artificial intelligent strategy used in their search engine that helped the company increase its market share in 2012. Yahoo developed an effective business model through recruiting new market experts and increasing its advertising functions. Yahoo’s business model could be analyzed using PESTLE model to determine its usefulness in increasing the company’s market share.
Political and legal factors
Legal regulations guiding the use of the internet differ in different countries. All internet providers aim at working within the global laws in order to be consistent with the national policies of specific countries. Social websites offering online services like Yahoo face many challenges involving adaptation of legal policies of every country they operate. In addition, internet jurisdictions have compromised Yahoo’s most tough challenges. Yahoo must maintain the user privacy as proposed in many policies and in order to achieve this, it must make use of intensive technologies. If the company fails to regulate its privacy, the state has the mandate to cut the entire services and sue them for not following the internet policies. Yahoo has found itself in many situations where customers complain of their personal information being shared on the internet. Political and legal factors are capable of suppressing a business leading to poor implementation of laid down business models.
On the other hand, the political stability of many countries affects the success of businesses. Most countries that are prone to terrorist attacks have strict regulations on the use of the internet. The infiltration of internet technologies and the increased use of the internet have introduced new issues that challenge those companies, like Yahoo, who were established long enough before the advancement of technology. Adapting to the current political and legal situations in the world has acted as a barrier for the company to increase its competitive advantage.
Economic factors
United States economy suffered some major decline since 1996 due to world financial crisis. The declines have led to slow economic growth, drop in consumer confidence, and increased employee lay-offs in organizations. With the decline in economy, profit margins for most firms decrease leading to failure of most technology companies. In addition, the economic recession contributes to the decline in the U.S. economy. Yahoo business model is aimed at increasing the company’s profit margin and increasing the competitive advantage, but the current economic recession has led to deterioration of operating results. In addition, reduced access to capital because of lack of enough resources brought about by poor customer turn-over has affected the implementation of new business model planned by Yahoo. On the other hand, the presence of economic trends line inflation has affected consumers’ purchasing power that has a strong influence on the internet industry. These factors have made most consumers prefer cheap technologies offered by foreign markets like Europe and Japan abandoning high priced services from Yahoo and other related companies.
Social-cultural factors
Family values have been affected by the rapid adaptation of technology and internet usage among the young and old generation. Research shows that children engage more in their free time with the internet leading to poor communication among family members. Internet has also changed the mode of communication among people in the society. Even with the advancement in technology, some communities have not had an opportunity to understand the role of social media. Such situations decrease the consumer turns out for such companies as Yahoo leading to low revenues. The company should dedicate large amount of capital to create awareness in such communities on the importance of Yahoo services in communication.
Technology factors
Technology forms the backbone of internet development in the world. The main reason why Yahoo lost her customers to Google and Facebook was because of poor technological advancements. The new business model contains strategies for innovation in order to create more strengths and opportunities for the company. Poor results shown by Yahoo search engine require some action from the firm’s IT experts in order to increase its share on capital. What generic strategy is Yahoo pursuing? Is this a sound strategy in the context of the internet industry?
The porter’s analysis
The main question that needs immediate response about Yahoo is the type of generic strategy pursued by Yahoo using Porter’s framework. In addition, the strategy should be analyzed to determine whether they are in the context of the Yahoo Search Engine business model. Porter’s generic strategies framework contributes a lot to the development of a company strategic management. Michael Porter first developed two generic strategies in 1980 and 1985 respectively. According to Pearson (1999), the most basic challenge faced by an organization is competition in the selected market. An organization develops competitive strategies in order to focus on the strategies that can be implemented to get into the higher position in the industry. High profits are generally achieved through achieving lowest costs of production (Pearson, 1999).Figure 1 shows Porter’s generic strategy framework that Yahoo could use to increase its competitive advantage.
Figure 1: Generic strategy framework
The main aspect of the framework is the competitive advantage achieved when an organization differentiates its products and services to reach the targeted markets.
Cost of leadership
Yahoo has been on the first lane since 2006 to become the lowest producer in the internet industry through following a cost leadership strategy. In 2010, the company reduced the cost of its services lower than those of competitors. This was a very effective move because most customers went back into using Yahoo, but the strategy failed because the company had no effective technology compared to Google. The move also saw an increase in profit level for the company when it charged an average price for internet services. The main risk that faced the company was that reduced costs were at the expense of other vital factors whereby employees complained of lack of incentives such as promotion, and salary increments.
Differentiation
Yahoo tried differentiation strategy to allow it achieve its business model strategies. Some of the differentiation strategies adopted by Yahoo include improvement of services to her customers, and better performance in terms of internet speed and innovations. According to Porter (1980), any firm employing a differentiation strategy has to incur an extra cost related to high advertising in order to promote new services and build a good image to consumers. Yahoo has managed to implement service implementation in 2011by advancing in internet and digital technologies, but the company has not managed to estimate the exact cost of implementing these strategies. Poor price estimation has made the company unable to effectively price its services leading to poor coordination of business models.
Focus
Focus refers to the means by which a firm focuses on the area of marketing in order to win a competitive advantage. Companies that employ this strategy focus more on markets where competition is minimal (Porter, 1980). Yahoo makes use of this strategy by focusing of a specific niche in the market and offering unique services for that market niche. In order to achieve a competitive advantage, Yahoo has changed its focus on target segments such as the young generation in schools, colleges and universities who must use Yahoo web portal in their daily activities. The combination of cost leadership and differentiation promoted the use of focus strategy because it depends on the two strategies. Using the focus strategy, Yahoo gets an opportunity to charge premium prices to internet users and provide superior services. The only challenge with Yahoo is the fact that economies of scale play a major role leading to disappearance of niche over time due to changes in the business environment and customer needs as more innovations come along. Industry evolution (Fragmented or Consolidated )
The above generic strategies have a strong relationship with industry forces that may result into fragmentation or consolidation of the firm. Yahoo is a fragmented industry because it has seen a reduction in number of users over the last few years. The 2011 business model is playing a major role in consolidation the company management in order to improve their business position in the international markets. Yahoo uses these strategies to defend it against competitive forces introduced by rivals. This can be analyzed using Porter’s 5 force analysis:
Porter’s competitive strategies
Competition from rivals
Yahoo market share decreased because of the stiff competition it experienced from rival companies Google and Facebook. Advances in internet and digital technology left the company management wondering what had gone wrong because a large number of online users shifted their focus to other companies. Presence of a competitive environment makes a firm vulnerable to many challenges. The only advantage for Yahoo is its ability to implement the cost leadership strategy. This has enabled the firm perfectly compete with rivals on the issue of price. However, companies like Google have ended up reducing their prices and at the same time offering more competitive services compared to Yahoo.
Barriers to entry
Yahoo found it hard to create barriers for new entrants into the internet market because it had not implemented any of the three generic strategies mentioned above. With the new business models proposed by Yahoo in 2011, it has a better chance of winning back the competitive advantage because it is already an established company with a selling brand name. High customer loyalty on a company brand plays an essential role in discouraging any potential entrant into the industry. On the other hand, customers always like receiving services from a niche player because they show core competences that are unique in the market. Effective strategies like cost leadership and differentiation will enable Yahoo fight many new entrants into the industry.
Threats to substitute
Firms offering substitute products and services introduce a stiff competition in an industry. Differentiation-focused strategies help in reducing the threat of substitutes. Yahoo implemented differentiation-focused strategy in order to prevent some small upcoming social media companies like Facebook, Twitter, and Instant-messaging from introducing threat to the industry. The slow implementation of strategies has led into these companies overcoming bigger firms like Yahoo. Presently, Facebook serves 100 million more users compared to Yahoo. In order to reduce such threats, Yahoo should improve customer loyalty by offering unique services that no substitute company can afford to offer. For example, the incorporation of voice and video calls in their system would serve a better strategy.
Power of buyers
The tastes and preferences of buyers changes in accordance with the above generic strategies. With the availability of cost leadership strategy, Yahoo has the capacity to attract more consumers. The use of differentiation-focus strategy makes buyers to have less power because they have limited alternatives left. Yahoo has management to reduce the power of buyers, but its models are not effective enough because of poor technology advancement (Wright Investors Service, 2014).
Supplier Power
The main suppliers for Yahoo are internet providers. The availability of many firms offering internet services has increased the power of suppliers who offer services at higher costs. Even with the cost leadership strategy in use, the company generates low revenues because of high costs associated with suppliers.
What are the strengths of Yahoo? Does it have a distinctive competence? If so, where does it lie? Is this competence imitable? The strengths of Yahoo can be easily analyzed using the SWOT analysis process.
SWOT Analysis
Strengths
- The company has many users and can generate revenues through ads found in yahoo mail
- It’s a powerful marketing company because of large number of mail subscribers it possess
- It has a strong web portal, effective search engine, yahoo finance, yahoo answer services, mail services, and yahoo directory that increases its chances of attracting more customers
- It has other portfolio like Yahoo messenger, Yahoo 360, Yahoo mobile, shopping services that are modern and more attractive
Weaknesses
- Low market share (6%) in search engine because of many competitors compared to Google with 83% in the end of financial year 2012
- The company has lost its market share to mailing services because of Google’s strong presence through the famous Gmail mailing services
- Poor financial health has made more investors look for alternative companies
- The company is the leading internet service provider, but keeps grabbing revenues from advertisement
Opportunities
- It has the most structured and authenticated directory among its competitors
- Increasing number of yahoo mobile users in developing nations
- High potential in combining its services with social media platforms
Threats
- Increasing competition in the local markets, especially China
- Poor response because of cultural beliefs and lack of technological knowhow
- Declining presence in search engine because of Google strong presence
- Upcoming innovations in the internet space by new entrepreneurs
Categorizing international industry (Multi-domestic, global)
Yahoo is a global firm because it offers services to different nations across the globe. The company has the power to serve every person in the world at the same time because of their globally accepted internet services. Strategic factor Analysis Matrix
Yahoos’ business model is faced with many pros and cons
Benefits
- With the above strengths, Yahoo can easily attract more customers because its services are internationally recognized
- The firm offers mobile services that can boost its strategies of becoming a global leaders in internet service provision because of high number of customers using the service
- Yahoo offers mailing services combined with social media that allow users to easily read their emails using social media channels, or get notifications through their emails
Cons
- The low adaptation to technology can delay the implementation program giving room for competitors
- Many people have built a bad reputation for the company because of its slow services
- Poor promotion strategies might hinder the process implementation because of lack of diversification.
Recommendations
In order to implement its business model and achieve a tremendous growth, Yahoo should follow the following recommendations. Firstly, the firm should implement differentiation strategy that will allow it offer more unique services at an affordable price. Differentiation will help in gaining more customer loyalty, and advertising their services worldwide. Through differentiation, the company will record more revenues that can be used for future growth. Secondly, the company can major more on advertising their services globally. Some of Yahoo services like yahoo mobile, instant messaging, and yahoo shopping are highly demanded by consumers. Advertising these services will lead to more people adopting yahoo programs bearing in mind that the company practices cost leadership strategy. This attracts more people who want to pay less for quality services leading to increased revenues.
Conclusion
The Yahoo’s business model proposed in 2011 can only succeed if the management improves on some issues discussed above. The company has implemented generic strategies that require exaggeration by introducing more innovations, hiring qualified IT professions, and working on advertisement. That main weakness for Yahoo is the poor financial health that has scared investors. The company has a mobile service that generates huge revenues. They can advertise this service and carry out promotions to allow more people subscribe in order to acquire capital for major strategies like improving on new technologies.
References
Pearson, G. (1999). Strategy in Action, Prentice Hall Financial Times.
Porter, E. M. (1980). Competitive Strategy: Techniques for Analyzing Industries and
Competitors. New York: The Free Press.
Wright Investors Service. (2014). Yahoo! Inc.. - Research and Markets. Retrieved June 4, 2014,
http://www.researchandmarkets.com/reports/624273/yahoo!_inc#relb2
