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Analysis of Operational Value Creation at Yahoo!

 

A resource-based analysis of a company’s strategy is congruent with an analysis of value creation in the company’s core: its operations. In other words, operational value creation lies at the heart of the ends and means of the enterprise; creating value for its shareholders through its competencies. Again, this confabulates with the resource-based view on strategic analysis. Furthermore, it stresses the importance of competencies in creating value through a combination of efficiency and differentiation. Analyzing the value creating performance of such processes yields important insights into the company’s strategy.

 

Operational Success Criteria

Yahoo!’s operational success criterion consists of strategic objectives and goals that contribute towards meeting those objectives. The most recent strategic objectives were established a few months after co-founder Jerry Yang stepped up as CEO1 and were announced during Yahoo!’s Q3 earnings conference call in 2007. The strategic objectives are:

 

  • To become the starting point for the most consumers on the Internet;

  • To establish Yahoo! as the “must buy” for the most advertisers;

  • To deliver industry-leading platforms that attract the most developers.

 

Several goals have been established to achieve these strategic objectives. Some of those goals2 are:

 

  • Continue to invest, innovate, and create whatever is necessary to gain more consumers.

  • Create a motivated community of developers all building uniquely compelling applications that reach hundreds of millions of Yahoo! users.

  • Accelerate overall advertising revenue growth by the end of 2008.

  • Leverage strengths and anchor properties to create the most compelling and innovative products and services.

  • Grow visits to key Yahoo! starting points and properties by approximately 15% per year over the next several years.

  • Increase the percentage of total online advertising “demand touch” to 20% of the addressable market over the next several years.

  • Change the game in Search and increase overall share of search queries.

  • Grow market share of total online advertising.

  • Generate the maximum long-term value for assets.


Performance on Operational Success Criteria 

Since Q3 of 2007 Yahoo! has been “putting substantial talent and resources behind two of the major strategic objectives.”3 The progress made up to Q4 of 2007 in these two strategic objectives is discussed below.

 

To become the starting point for most consumers on the Internet, Yahoo! is focusing on five properties: Home Page, Search, Mail, My Yahoo!, and Mobile. Related properties, also referred to as anchor property verticals, including Sports, Finance and News, are also being leveraged as key starting points.

 

An example of value creation that relies on this first strategic objective is Yahoo!’s Home Page. It remains the most visited web page on the Internet, in part as a result of “deliberate efforts to program relevant information from across the web, regardless of whether the landing page is a Yahoo!-owned site or a third party site.”4

 

Value creation is also present in some of the company’s key initiatives, among them Search, Mail and Mobile. In Search, the company is encouraging innovation, most recently by investing in an open source development of grid computing that improves the throughput and scalability of Yahoo!’s services. In Mail, Yahoo!’s recent acquisition of Zimbra is expected to drive innovative developments. And finally in Mobile, Yahoo! introduced the Yahoo! Go a platform for “personalized communications, entertainment and information services to mobile devices, televisions and desktops.”5

 

To establish Yahoo! as the “must” buy for the most advertisers, the company’s second strategic objective, it has sustained increased financial gains on Panama6 – the company’s new marketing ranking system for online advertisements – representing a 20% improvement over previous quarters. More so, Yahoo! has continued to build a partner network for ad display with companies like eBay and AT&T. In addition, the grid computing initiative is also expected to create value in search and marketing.

 

Performance Analysis

The strategic objectives driving Yahoo!’s developments in value creation are part of a coherent strategy that is ultimately aimed towards achieving differentiation. By becoming the starting point for users and by satisfying their needs, Yahoo! is attempting to create lock-in through quality that users will start-off with and come back to, which would essentially mean conquering one of the greatest challenges in the Internet industry, namely the lack of lock-in effects. Yahoo! realizes that “revenue from your locked-in customers is the return on the investment you have made in them.”7 To this end, the company is investing in differentiation.

Even though the home page of Yahoo! is the most visited site on the Internet, the company’s search capabilities, which are the defining competency required for online advertising, are still lagging behind Google’s. The Panama project was launched for this reason and will be a defining factor in Yahoo!’s evolution in value creation.

 

Acquisitions and partnerships are beneficial competencies for value creation in the rapidly changing Internet environment. Yahoo! has effectively leveraged and integrated these resources into its operating routines for value creation.

 

Financial Performance Analysis

The table below shows Yahoo!’s key financial figures for the years between 2002 and 2007. The analysis below will be used in comparison to the Operational Cash-flow Development analysis in the next section.

 

Table 1

Yahoo! Inc (NASDAQ: YHOO)

 

 

 

 

 

 

 

Company

Year

Net Profit

EBIT

EBITD

EBITDA

ROI

ROE

ROA

Gross Margin

Total Operating Expense

Break-even

 

Yahoo!

2002

$107

$88

-$21

-$21

0%

2%

2%

83%

$865

$1,042

 

Yahoo!

2003

$238

$296

$136

$136

2%

5%

4%

77%

$1,329

$1,727

 

Yahoo!

2004

$840

$689

$523

$378

5%

12%

9%

62%

$2,886

$4,655

 

Yahoo!

2005

$1,896

$1,108

$884

$711

8%

22%

18%

60%

$4,150

$6,917

 

Yahoo!

2006

$751

$941

$639

$401

5%

8%

8%

58%

$5,485

$9,456

 

Yahoo!

2007

$660

$695

$286

$36

2%

7%

7%

59%

$6,274

$10,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yahoo!’s net profits rose to a high of $1.9 billion in 2005 after which they declined to a four year low of $660 million. The company’s 8% ROI, the highest to date, coupled with their all time high ROE of 22% in 2005, and the associated decline in subsequent years, are witness to the fact of the fierce competition inherent in this industry sector. Nevertheless, it is also related to Yahoo!’s strategic changes during those years. Both competition and strategic changes have been crucial developments in the company’s evolution.

 

The 18% ROA in 2005, shows that Yahoo! consistently increased efficiency after the Dot-com crash in 2000. The years after that show declining efficiency, again related to competition and strategic changes. Furthermore, the gross margin shows, to some extent, the difference between fixed and variable costs and in turn gives us an insight into the company’s break-even.

 

In relation to the break-even point, gross margin has remained stable at around 60% for the past 4 years while operating expenses continue to rise, clearly indicating an increasing drop in efficiency.

 

Operational Cash-flow Development Analysis 

The table below shows the key financial figures for Yahoo! for a more extensive period, covering the years between 1998 and 2007. Based on these numbers Figures 1 and 2 show the Performance-volume and Differentiation-efficiency relations.

 

Table 2

Yahoo! Inc (NASDAQ: YHOO)

 

 

 

Company

Year

Turnover

Employment costs

Depreciation

Non operational results

Tax

Net profit

 

 

 

 

 

 

 

 

 

 

Yahoo!

1998

$203

$147

$0

$0

$18

$26

 

Yahoo!

1999

$589

$271

$43

$38

$36

$61

 

Yahoo!

2000

$1,110

$489

$69

-$34

$188

$71

 

Yahoo!

2001

$717

$474

$131

$77

$11

-$93

 

Yahoo!

2002

$953

$545

$109

$88

$71

$107

 

Yahoo!

2003

$1,625

$734

$160

$46

$147

$238

 

Yahoo!

2004

$3,575

$1,153

$311

$476

$438

$840

 

Yahoo!

2005

$5,258

$1,556

$397

$1,092

$768

$1,896

 

Yahoo!

2006

$6,426

$2,147

$540

$140

$458

$751

 

Yahoo!

2007

$6,969

$2,662

$659

$131

$337

$660

 

 

 

 

 

 

 

 

 

 

 

 

Yahoo!’s Performance-volume relation shown in Figure 1 below, shows the confusion that came about with the Dot-com crash in 2000. After a period of increasing performance and volume, up to 2005, Yahoo!’s situation dramatically changed with a significant drop in performance with increasing volume. This coincides with the drop in efficiency identified in the financial break-even analysis and is supported by Figure 2. Furthermore, it explains the change in leadership and strategy in late 2006 – point at which the situation started improving.

 

 

Figure 1

 

 

 

The figure below shows at one extreme a drop in efficiency and increased differentiation that came about with the Dot-com crash, of which Yahoo! was a survivor. At the other end it shows a drop in efficiency, after a period of steadily decreasing differentiation, that is the result of increasing competition and strategic changes within the company. These conditions caused a dramatic turn in efficiency after a high in differentiation-efficiency in 2005. This sudden drop in efficiency, which has continued since 2005, confirms the break-even analysis and the analysis from Figure 1.

 

Figure 2

 

Strategic Stability Analysis

Yahoo! has changed its strategy several times over the past few years. Most recently, in October of 2007 it announced yet another shift in strategy. Although such a change was in order, especially with the new vision of co-founder and new CEO Jerry Yang, such changes have a deep and far reaching impact in the company’s value creation capabilities. In this case, the changes have been mostly positive but still require further development.

 

The guidelines provided by three core strategic objectives, and its supporting goals, are effective in setting a clear direction for the company. However, these same objectives must be maintained in coming years in order to be most effective.

 

Conclusions

Yahoo!’s financial performance has significantly decreased since 2005. The company has not been successful according to its own performance criteria, as is evidenced by its increasing break-even point and fairly stable gross margins. Furthermore, the company has not been successful according to standard performance criteria such as ROI, ROE, ROA, EBIT(D)(A), all of which have decreased from highs in 2005.

 

The company’s strategic orientation, after new CEO Jerry Yang was appointed and the company revamped its strategy, is to increase differentiation. This is strongly supported by all three of the company’s strategic objectives and most of the current company goals, both geared specifically towards differentiation. It is clear that the company’s generic strategy is predominantly focused on differentiation.

 

The company’s strategic direction was not successful after 2005. This is evidenced by the changes in top management and strategy, and supported by this financial value creation analysis. Furthermore, the company’s strategic direction has been fairly unstable in the past 5 years indicating the importance of adaptability and agility in this highly unstable environment.

 

 


 

References 

 

1 Yahoo! Co-Founder Jerry Yang Named Chief Executive Officer,” Yahoo! press release, June 18, 2007, http://yhoo.client.shareholder.com/press/ReleaseDetail.cfm?ReleaseID=249882accessed March 1, 2008.

2 Adapted from Yahoo! Q3 2007 and Q4 2007 earnings calls.

 

 Demand touch includes ad revenues and associated expenditures.

 

3 Yahoo! Q4 2007 Earnings Cast,” Yahoo! investor relations, January 29, 2008, http://advision.webevents.yahoo.com/yahoo/earnings/2007/Q4/accessed February 28, 2008.

4 Yahoo! Q4 2007 Earnings Cast,” Yahoo! investor relations, January 29, 2008, http://advision.webevents.yahoo.com/yahoo/earnings/2007/Q4/accessed February 28, 2008.

5 Yahoo! Expands Reach Beyond the Browser with Launch of Yahoo! Go; Yahoo! Go Brings Seamless and Personalized Communications, Entertainment and Information Services to Mobile Devices, Televisions and Desktops,” Yahoo! press release, January 6, 2006,http://yhoo.client.shareholder.com/press/ReleaseDetail.cfm?ReleaseID=183436, accessed March 2, 2008.

6 Yahoo! To Launch New Search Marketing Ranking Model in the U.S. On February 5,” Yahoo! press release, January 23, 2007, http://advision.webevents.yahoo.com/yahoo/earnings/2007/Q4/accessed March 1, 2008.

7 Shapiro C., Varian H. R., (1999) Information Rules: A Strategic Guide to the Network Economy, Cambridge, MA: Harvard Business School Press.

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