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A Leader is up for grabs, Yahoo!

Last week I had a late (early?) Thursday hand-in of my assignment for Technology and Strategy. Coincidentally, I turned it in at 5:14 AM (same as last time). This week I hope to not make it that early! (but earlier instead). In this assignment we had to find the most competitive activities in the value chain, the position of our chosen firms within the value system, and relate developments in both value chain and value system to draw conclusions about strategic stability.

NB. One image is missing, i’ll try to link that from Flickr or somewhere that allows image posts.

A Leader is up for grabs, Yahoo!

Although Strategy and the Internet[1] are deeply related, in the case of Yahoo! the perspective of analyzing industry structure will not be used. Instead, the resource-based perspective will be employed in the analysis of Yahoo!’s strategy. The reason for this is that Yahoo! is completely based on the Internet. As such, Yahoo! is positioned within a turbulent environment that is highly sensitive to change. Furthermore, many of the strengths observed in competing firms (Google) are the result of leveraging key competencies. The Internet provides several opportunities for these competencies to be employed, and leveraged. Hence, the most appropriate strategy perspective for analysis is the resource-based perspective. Peeking into the value chain of Yahoo!, and its associated value system, is a useful starting point for this analysis.

The Value System

Internet search is the value system equivalent of a cradle for companies like Yahoo!, and Google, and is of central importance to the services offered by eBay and Microsoft. In fact, these companies are the main players of a value system that has grown to include platforms for e-commerce, auctions, advertising, content portals, web-based email, instant messaging and interactive maps. The possibilities in this space are endless, the most notorious being to replace software-as-a-product by software-as-a-service, a substantial threat to Microsoft’s overall share of power.

Google has a dominant position in this value system, an offset power balance that has pervaded the industry since it entered the market in 1998. Yahoo!, a pioneer in the industry, has continually lagged behind Google, not only in search, but also in advertising and software tools and services. Google’s services span the breadth of the Internet industry, competing with Microsoft’s Internet portal and software products, in addition to eBay’s e-commerce platform and VoIP service.

This dominance is apparent in the industry developments of the past ten years. As a startup, Google had superior technology in algorithmic search than any other competitor. In face of this threat, Yahoo!’s strategy at the time was position itself as a media company rather than one focused on technology[2], and instead chose to license Google’s services. This would later result in a continued race to catch up.

Intense competition in paid listings was the cause of the second major industry development. This space was dominated by Overture, a company Yahoo! acquired in 2003. Google quickly caught up and dominated what evolved into the “pay-per-click” advertising model that is now its main source of profits.

The most recent industry development was Microsoft’s expressly stated intention to take-over Yahoo! in an unsolicited acquisition proposal sent earlier this month to the company’s Board of Directors. In it, Microsoft’s CEO Steve Ballmer underscores previously failed attempts of acquisition and mentions that a “year has gone by, and the competitive situation has not improved.”[3]

Yahoo!’s Board of Directors responded by saying that “Microsoft’s proposal substantially undervalues Yahoo!”[4] And Google’s VP of Corporate Development questioned in his blog whether Microsoft could “now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC.”[5]

The three developments mentioned previously have been the most significant in the industry. The causes range from Google’s entry, coming of age and subsequent dominance of the Internet. In short, Google has been the cause of these circumstances. The consequences have been profound, and continue to be dire, potentially upsetting the balance of power in the Internet industry. In sum, regardless of whether the acquisition materializes, the stage is being set for yet another competitive war. Yahoo! is at the center of this power struggle, making an analysis of its strategy is of crucial importance to the industry and the public at large.

The Value Chain

Yahoo!’s intangible products (services) make it difficult to disentangle the company’s operations into a set of activities in the value chain. However, taking the core components of Yahoo!’s business a coherent ordering can be achieved, it helps in understanding how the company delivers its services to customers and creates value. Business models aside[6], the following primary activities are identified along with their corresponding contribution.

– Content. Inbound logistics activities in receiving, indexing and maintaining content.
– Search. Operations activities in searching and processing content to match queries.
– Search. Outbound logistics activities in dispatching the results of queries to the users.
– Marketplace. Marketing and sales activities in uniting users to buy and sell products and services.
– Community. Service oriented activities that add value through sharing and collaboration.
– Personalization. Service oriented activities that add value through customization.

These activities are listed on Yahoo!’s website as shown below:

– Content: Access it, personalize it, contribute to it
– Search and Marketplace: Locate and display any and everything
– Community: Empower users to express and connect, enable people and information to interact
– Personalization: What, how, when and where users want Yahoo!

The most notorious developments in the value chain include the acquisition of technology companies such as Zimbra, Flickr and Del.icio.us. Also, projects like Panama promised to improve the quality of Yahoo! search. Further developments in the value chain would be subject to analysis should Microsoft acquire Yahoo!. This is especially applicable for synergies between the two companies. Currently, neither Microsoft or Yahoo! have disclosed any related information.

Conclusions

The most competitive activities in the value chain are those that are related to advertising. They are classified under ‘Search and Marketplace’ by Yahoo!’s core business components and as ‘Marketing and sales’ under the value chain. As mentioned before, the most recent change has to do with Microsoft’s unsolicited proposal for acquisition of Yahoo!. The next step is to evaluate Microsoft’s acquisition proposal.

Yahoo!’s position within the value system is in the ‘change’ quadrant of the figure shown below. There is a possible change in the firm?s position in the value system. The change is in relation to acquisition by Microsoft.

The developments in the value chain and value system are related. The former are in response to the latter, generally at least and especially in the chosen perspective. There was a recent strategic re-alignment at Yahoo! started by CEO Jerry Yang. This, coupled with the recent acquisition proposal by Microsoft makes the strategic stability of Yahoo! very volatile. Should it be acquired its strategy could change, otherwise it is also subject to change depending on how the industry shapes up in the days to come.

The relation between the value chain and the value system is shown graphically in the figure below. The blue cross indicates the relation.

References
[1] Michael E. Porter, Strategy and the Internet, Harvard Business Review, March 2001.
[2] Adapted from Livingston, J. Founders at Work: Stories of Startups? Early Days. Apress, New York NY, 2007.
[3] “Microsoft Proposes Acquisition of Yahoo!,” Microsoft press release, February 1, 2008, http://www.microsoft.com/presspass/press/2008/feb08/02-01CorpNewsPR.mspx, accessed February 10, 2008.
[4] “Yahoo! Board of Directors Says Microsoft’s Proposal Substantially Undervalues Yahoo!,” Yahoo press release, February 11, 2008, http://yhoo.client.shareholder.com/press/releasedetail.cfm?ReleaseID=293129, accessed February 11, 2008.
[5] “Yahoo! and the future of the Internet,” The Official Google blog, February 2, 2008, http://googleblog.blogspot.com/2008/02/yahoo-and-future-of-internet.html, accessed February 10, 2008.
[6] Michael E. Porter, Strategy and the Internet, Harvard Business Review, March 2001.

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