1.

1 Introduction

The purpose of this study is to investigate how Yahoo emerged as a market-leading company
in mid 90s and how it suddenly lost this position by the end of 2001. In order to fulfill this
objective, this study firstly, audits various macro-environmental, micro-environmental,
external and internal level factors with the help of some well-established analytical
techniques (i.e. STEP analysis, SWOT analysis, Boston Consulting Group matrix,
Stakeholders analysis and Ansoff matrix) to find out the contribution of various factors in the
rise and fall of the company. Based on the outcome from these analyses, this study further
suggests some alternative strategies for Yahoo. To set the scene, the following section briefly
highlights the background of the company including its business strategy and provides a base
for further analysis.

1.2 Yahoo’s background and business strategy (1994-2001)

Yahoo was the first online navigational guide to the Internet and attracted media attention,
which in turn led to more advertising. The main objective of the company was to become a
starting point for the most consumers on the Internet and establish Yahoo as the must buy for
the most advertisers. The company initially managed to achieve this target by attracting 180
million unique visitors in 2000. The company also become a leading advertising platform for
advertiser and its revenue grew from $600 Million to $1.1 Billion 2000 majority of revenue
(85%) coming from banner ads and placement fees. By the end of year 2000, the company
shares started to fall due to declining of dotcom and soon mainstream advertisers become
reluctant to pay high advertisement fees. In parallel, stock brokers started to worry about the
top management efficiency causing advert revenue to dry up quickly. The company had a
chance to buy eBay, the biggest auction site on the Internet and AOL, but due to CEO’s
(Koogle) ambivalence towards this transaction, the company failed to acquire both these
profitable companies. In short, due to too much reliance on online advertisement, dotcom
companies and poor management structure, the company lagged behind in technological
advancement and during this time Google emerged as a leading search portal and overtook
Yahoo by a long way.

In the following section, we will systematically apply some various techniques starting from
PEST analysis to find out the contribution of various factors in the rise and fall of the
company from a broader perspective.
1.3 PEST Analysis

The first technique to be applied is PEST model, which stands for Political, Economic, Social
and Technological analysis. This is most commonly used framework of macro-environmental
factors used in the environmental scanning component of strategic management. The PEST
framework has been further expanded with Legal, Environmental, Education and
Demographic factors and rearranged the mnemonic to SLEPT, PESTEL or and STEEPLED
respectively. The PEST framework is used in this study because of its simplicity and focus on
the most influenced factors with a company.

If we scan Yahoo through the PEST framework, it can be established that the company did
not have any problem in respect of the first factor (Political and Law) that a company must
deal with. These aspects were in the favour of Yahoo as the US political environment is
considered to be extremely stable. In addition, being a developed country along with a
developed system of law and administration, government’s policies about international trade
and business has always been very encouraging and supporting. Therefore, firm like Yahoo
had an advantage of political environment which undoubtedly provided a positive start to
Yahoo.

The second issue to be considered is the economy. The US economy was growing well when
Yahoo started its operation providing a favorable business environment to the company.
Although it is perceived that the decline of US economy in 20001 played a vital role on the
overall performance of company. However, in reality company’s lack of good management
structure and high ad fee was actually one of the main reasons for company’s deterioration in
the Internet business arena. This is further discussed in the later part of this report.

In terms of social and cultural issues, Yahoo received very good response from this key area
too. The company quickly drew 180 unique users from different age/ social and educational
background and created a social network where people could interact via email and Yahoo
messenger. Yahoo quickly became a major player on the nascent Internet and the name
Yahoo virtually became so synonymous with the Internet.

The last feature of the PEST model is technology which is vital for any business in this
modern world. It is considered to be the backbone in the context of Internet technology. In
Yahoo’s case, the company did not pay much attention to this key aspect and relied more on
revenue generation through banners advertisement rather than technological advancement.
With the passage of time, the company lagged behind against its competitors who invested
more on R&D for innovation of technology. This emerged as one of the major causes for the
company’s decline in the Internet market.

1.3 Porter’s 5-force Analysis

Moving to micro-environmental scanning, Porter's (1980) “Five Forces of Competitive
Position Model” is used for assessing and analysing the competitive strength of Yahoo. Table
1 below highlights the possible threats and their level showing Yahoo’s competitive strength
and position in the Internet domain.

Table 1 Porter’s Five Forces Analysis - Yahoo

Threat of new entrants
Event
New search engines entering the market and
claiming the large number share of market.
Bargaining power of buyers
Event
This industry has widely dispersed users or
consumers with low switching costs between
suppliers.
Threat of substitute products
Event
People could use substitutes ranging from
classified advertisements, postal services,
magazines and newspapers.
Bargaining power of suppliers
Event
Suppliers (IT personnel, hardware and
software) and the search engines need each
other, but highly concentrated suppliers tend to
have relatively good bargaining position as they
can offer their expertise to other provides.
Degree of rivalry among competitors
Event
Competitors taking offensive actions in
acquiring market share.
Threat level - High
Comments
With low barriers to entry, demand threat is high.
Threat level - High
Comments
It is very easy to switch email address, to use a different
search engine and for internet companies to change their
online advertisers. The power of buyers is thus a strong force
to be considered.
Threat level- Low
Comments
Due to lack of convenient in terms of usage or accessibility,
this force carries a weak threat in this industry.
Threat level - Moderate
Comments
The suppliers (IT personnel, software developers) sell to
other companies (most are not reliant on just one search
engine). Since, the internet has become a highly integrated
industry, thus supplier bargaining power is not as low as it
may appear as they have some diversification (other search
engines to see too).
Threat level - High
Comments
There was a huge rivalry between the search engines
providing opportunities for competition to expand.

The above simple Porter’s five forces analysis indicate that due to low barriers to entry, new
entrants such as Google created a major threat for Yahoo. Consequently, this lead to
competitive rivalry becoming a high threat as the new search engines (Google, AOL, and
MSN) entered the market more innovatively. This also created a room for substitutes to
become a bigger threat as alternative search engines offered similar or even better services to
customers. In light of this simple analysis, signs show that the threat level of market forces at
the beginning of Yahoo’s business was favourable for Yahoo’s profitability due to low threat
level from various market forces. However, with the emergence of new players offering more
innovative and better service, the threat level rose to high and company started losing its
market share.

1.4 SWOT Analysis

In respect of internal and external position of the company, SWOT (or SLOT) model is used
in this study. Through this model, Yahoo’s resources (its strengths and weaknesses) are
evaluated alongside the external environment (the source of opportunities and threats) before
determining strategic position of the company.

Figure 1 SWOT analysis of Yahoo

If we look at the internal strength of Yahoo, the company had over 180 million users in 2000.
This made it a very powerful marketing company, with a very well-known brand. In mid to
late 90’s Yahoo was probably the most popular website in the World. From internal weakness
point of view, the company suffered from a poor management structure and gradually started
to lose its innovative edge and brand image across the cyber world.

In term of external strengths (opportunities), steady growth of internet users’ offered

tremendous growth potential for Yahoo. Although, dotcom business was the main source of
revenue for Yahoo, generating more funds through new products was also a great opportunity
to attract other type of business as well. In addition, to acquire e-bay and AOL was yet
another opportunity for Yahoo to possibly become a biggest auction and search portal in the
world for a long time. In parallel, external threats such as intense competition and
technological advancement put Yahoo at the back seat.

1.5 Boston Consulting Group Matrix

This section applies a different approach based on the product life cycle theory “BCG” matrix
to determine what priorities Yahoo should have given in its product portfolio. Matrix plots
market share (low and high) against matrix growth (low and high) and each products to be
divided into four quadrants. A simplified version of the BCG is shown in in Figure 2 below
and further discussed in the following section.

Figure 2 The Boston Consulting Group (BCG) Matrix

If we analyses the cash cows, stars, question marks and dogs in Yahoo’s product portfolio, it
could be concluded that online advertising remained only the cash cow product for the
company generating heavy cash flow and high profit margins in a large share of a shrinking
market in late 90’s. Despite the fact, that cash cows do not have a long-term future company
did not invest the money milked from this sector to support star product (search engine) or
look for other source of income. Due to lack of attention and long term plan, this cash cow
soon moved into question marks leaving company with an unbalanced portfolio without
having any cash cows in the business. Potentially, there was an opportunity for a replacement
cash cow by acquiring an auction website (e-bay) if the company had invested the milked
money from advertising business (previous/dead cash cow). Yahoo search engine stayed in
star area but could have moved into cash cows if the company had taken innovative steps or
acquired AOL.

1.6 Stakeholder Analysis

This section of the study analyses Yahoo from stakeholders’ perspective to investigate the
most significant influencers of Yahoo’s strategy. A stakeholder of an organisation is ‘any
group or individual who can affect or is affected by the achievements of the organisation’s
objectives’ (Freeman, 1984 p 46). Stakeholder analysis can be defined as a managerial step
taken to identify each stakeholder’s level of interest in a product/project and how their
involvement can influence the project. One of the useful tools is the Power/Interest Matrix,
which helps categorising project stakeholders with increasing power and interest in the
project. This tool helps to focus on the key stakeholders who can make or break your project.
The Power/Interest Grid contains four quadrants indicating the level of stakeholder’s
influence (see Figure 3 below).

Figure 3 Power/Interest Matrix

 Source: Gardner, Rachlin and Sweeny, 1986

The implications of each box in general and particularly in the context of Yahoo are
summarised below.

Stakeholders appearing in Box A hold low power and are less interested in the project. A
minimal effort is needed to keep them satisfied. The stakeholders in box B with low influence
on, or importance to the project objectives, may require limited monitoring or evaluation, but
are of low priority (e.g. junior staff). Stakeholders appearing in Box C possess high power,
but low level of interest such as government. This implies that they will require special
initiatives if their interests are to be protected. Stakeholders appearing in Box D with high
level of interest and high power, people that must be fully engaged and make the greatest
efforts to keep them satisfied. In this case the CEOs, founders and the dotcom companies
were the most significant influencers in Yahoo’s strategy throughout 1994-2001.

1.7 Asnoff’s Matrix

Having audited the PEST, SWOT, the competitive positioning (Porter’s generic analysis,
Boston Matrix) and stakeholder analysis, the following section attempts to lay down a future
strategic direction for Yahoo based on Asnoff’s (1957) product/market Matrix.

Ansoff’s product/market matrix is a tool that helps businesses decide their product and
market growth strategy. The output from the Ansoff product/market matrix is a series of
suggested growth strategies with varying level of risks that set the direction for the business
strategy (see figure 4 below). The purpose of this matrix is to help managers consider how to
grow their business through existing or new products or in existing or new markets.
 Figure 4 Asnoff’s Matrix

Source: Asnoff, 1957

The four strategies are:

Market penetration – This low risk strategy involves increasing market share within existing
market segments. This can be achieved by selling more products/services to established
customers or by finding new customers within existing markets. Yahoo could use this
strategy by offering free ads or offer lower prices than competitors’ to attract the current
market. This is a highly recommended strategy because of the potential for rapidly growing
market is large.

Product development/expansion – This involves developing new products for existing

markets. Product development involves thinking about how new products can meet customer
needs more closely and outperform the products of competitors. Yahoo can take advantage of
this strategy and should strive for innovation to keep the control of its current customers and
also to gain further market share. The first steps towards product development would be to
improve its search engine capabilities. Moreover, company should also introduce fast
growing integrated cloud office features to its current and news users. Introducing a new
social media platform could also boost company’s brand and wealth. Although, this is a high
risk strategy, but due to nature of business and fading brand image of the company, Yahoo
needs to take these steps as soon as possible.

Market expansion – This strategy entails finding new markets for existing products. Market
research and further segmentation of markets helps to identify new groups of customers. This
strategy should be the first priority of Yahoo, because there is a huge potential for company
to introduce and expand its services to less competitive markets, e.g. Asia/African countries
where potential for market share is quiet large. In general, this is a relatively risky strategy;
however, given the nature of the business, it does not provide such level of risk to Yahoo as
the company does not need to have any physical infrastructure or physical distribution of its
products in overseas market.

Diversification – This very high risk strategy means new products and new customers and
mainly involves acquisitions. This approach is not recommended to Yahoo this this point.
This report suggests that company should attempt to regain its position first by improving its
credit worthiness and brand image through above-mentioned strategic approaches before
heading towards this risky approach.

1.8 Conclusion

This study concludes that most of the macro-environmental factors were in the favour of
Yahoo throughout 1994-2001, however company could not reap the full benefits from the
encouraging conditions. The company heavily relied on online advertising and dotcom
companies for its main stream income and paid less attention towards technological aspects
which ultimately undermined its competitiveness in the Internet business. In addition, Yahoo
completely failed to keep its portfolio in balanced and did not invest the money milked from
cash cow (online advertising) to support its star product (search engine). More importantly,
the company suffered from a good management team who consecutively failed to acquire
profit making companies; AOL and e-bay.

In sum, if Yahoo had not relied on dotcom companies, paid more attention towards research
and development and had a good management team, company would still probably be the
well reputed brand associated with the Internet.

Going forward, this report strongly suggests that Yahoo should adapt the market penetration,
market expansion and particularly product development strategy to take full advantage of this
fast growing sector. Above all, the company seriously needs to improve its chronicle
management structure particularly the top management (CEO!).