Problem 6: Google's customized advertising model wins Yahoo’s ad model

Google managed to create technology that better connects users with web-sites. Moreover, Google’s advertising model was more attractive for companies rather than Yahoo’s model. Yahoo charges for “impression” – users’ click on a web-site, while Google charges for clicks that result in sales. Even though these charges were quite small, big amount of companies’ paying resulted in huge revenues. 

Porter’s five forces theory:

1. Level of rivalry - in the beginning of Yahoo performance was low, nowadays it is high. Tough competition from Google;

2. Potential for entrants - Yahoo operates in a low barrier environment, where companies can easily be launched due to the ease of online launches;

3. Power of large suppliers – Yahoo is dependent of suppliers, but that’s not a major problem for its operations;

4. Power of large customers - Due to Google’s competition, the majority of Yahoo consumers began to use Google’s services; advertising business was more ‘comfortable’ in Google than advertising options provided by Yahoo.

5. Threat of substitute products - is very high. Rapid development of Internet industry and low barriers for new entrants.

Theoretical analysis

Under the resource dependency theory it is important to consider internal and external resources of a company, which are vital for optimal strategic and tactical management of any organization. Theory is oriented on the proper identification of organizational structure, management team, employees, external links and many other aspects which could influence a company’s survival in a certain market.

One of the most important resources for sustainable growth and development of Yahoo inc. was financial inflow of capital. The vital source of survival had to be wisely used to be competitive and save market power. However, financial operations of Yahoo were not always effective and efficient. Yahoo spent money for acquisition of companies to broaden the variety of services and products provision for customers; however technologies possessed by these firms became widely used by Yahoo’s competitors. Result of these operations was not forward-looking strategy spending millions of USD, which could bring higher return from investments for R$D, marketing researches or other goals. Moreover, Yahoo’s advertising was a major source for company’s development and growth. Rapid growth of rivals, new ideas and innovations brought Yahoo to loose market share (ex. YouTube, Google, Amazon and etc.). As for management, it didn’t pay enough attention to the analysis of current and potential competitors, what resulted in the downturn of Yahoo’s success.

       Under Institutional theory it is considered to analyze company from the perspective of its social behavior. Institutional theory corresponds some aspects to Resource Dependency theory through the environmental activities of a firm.

Yahoo could be more consistent with its environment. The potential threat was purchased without proper consideration of potential benefits and costs. Huge money was wasted for suppression of rivals. Moreover, acquisition was primarily focused on those fields where Yahoo could make revenue from advertisement, rather than selling other services. Probably better strategy with external environment and institutions could be Yahoo’s cooperation with small companies instead of acquiring them to save money, human and financial resources.

Under Population ecology theory, company in order to survive has to experience and use its luck, chance, or randomness situation. Due to the management problems Yahoo lost its chance to merge with eBay what poorly affected market power of Yahoo. Consequence was lost contract with eBay for customized advertising system. Missed opportunity resulted in Google’s cooperation with eBay. Yahoo lost opportunity to acquire Google as well. Such investment could give an opportunity to have good search engine provider a major reason of customers outflow from Yahoo to Google. Same reason is applicable for YouTube case as well. However, the positive side of Yahoo’s performance is it’s following of ‘fashion’ of Web network; however, Yahoo is strongly necessary to be on track looking for new ways of customer’s attraction, watching for the long-term trends to be competitive.

· Recommendations

1. Use the Google’s advertisement model

2. Improve the search engine

3. Refrain from purchasing new applications and services

4. Hire a CEO with a degree in IT and strong managerial skills

5. Merge Yahoo! and Google companies

1. Google's advertising model has been extremely successful. Google uses a Query-based Paid Placement, i.e. sells favorable link positioning or advertising keyed to particular search terms in a user query, such as Overture's trademark "pay-for-performance" model. Moreover, Google receive revenue from using a Content-Targeted Advertising that extends the precision of search advertising to the rest of the web. Google identifies the meaning of a web page and then automatically delivers relevant ads when a user visits that page. It is more effective than broad-based advertising. Therefore, it is necessary to use the already well-established advertising model.

2. Quality of a portal’s search engine defines a quantity of users and advertising revenues. Since Yahoo! has terminated the contract with Google and has purchased Inktomi, Yahoo!’s search engine loses to Google’s search engine. Hence, improvement of the search engine is vital for Yahoo!.

3. CEO and managers of Yahoo! has purchased a lot of applications and services. They have spent billions of dollars, but not all of their purchases were paid back. While, Yahoo!’s strategy is a diversification of activities to build a “megabrand”, one of ten principles of Google states: "It is better to do one thing, but do it very, very good". At this stage, it is important for Yahoo! to invest in improvement of the search engine. So, in the future managers of Yahoo! should refrain from purchasing new applications and services.

4. Information Technologies is a specific area where it is not enough just to have an MBA degree. For instance, Eric Schmidt was appointed a CEO of Google, because he holds a bachelor’s degree in electrical engineering, a master’s degree and Ph.D. in computer science. Therefore, a person with a technical education should be a CEO of Yahoo!. Moreover, a CEO should have strong managerial skills. Also Yahoo! should concentrate on a human resource management, because human resources are the main factor of production in IT. Management of IT companies has to motivate their employees in order to get unique ideas and innovations. For instance, Google has become the most desirable place of work and therefore it has the opportunity to recruit the best professionals in their fields.

5. The best alternative for Yahoo! is to merge 50 to 50 with Google. Each of them has a competitive advantage. Yahoo! is the best in news, financial services, etc. The major advantage of Google is the search engine. Such a merger would make a great benefit to both companies. It is better to work together rather than compete. Such a merger is possible, because Yahoo’s founder David Filo is a mutual friend of both Google’s founders - Larry Page and Sergey Brin. Moreover, this was Filo who approved the perspective technology of Page and Brin and advised them to organize their own company to develop a search engine. Finally, as Yahoo and Google have experience of working together, they will be easy to agree on a merger.