Strategic Analysis of Yahoo Inc - Case Study Example

Strategic Analysis of Yahoo Inc. Introduction This report is about an in-depth strategic analysis of Yahoo, one of the oldest Internet companies. Three things about Yahoo are examined in this report. The first one is a detailed analysis of the macro-environment in which Yahoo operates and how the current and future trends of the macro-environment factors affect the company. Analysis of the macro-environment of the company is done using the macro-environment model. The second thing is a detailed analysis of the industry environment in which Yahoo operates and how the factors of the industry affect the strategy and operations of the company. Analysis of the industry environment is done using Porter’s Five Forces model. The third thing is a presentation of the strategic options that are open for the company and development of a new mission and objective statement for the company going forward. This is done using the 5Qs model. Analysis of the macro-environment Under the macro-environment model, companies within industries are usually affected by the political, economic, social, legal, technological and environmental factors (Hubbard, Rice & Galvin, 2014, p. 68). The effect of these factors on industries in general may be positive or negative (Fernando, 2011, p. 41). Also, the effect of the macro-environment factors on industries usually determines the future trends of the industry, growth prospects and the threats and opportunities that companies in different industries are likely to face. Yahoo operates in a general industry of web search engines and other Internet services (David, 2011, p. 93). This industry is defined by companies which offer web search portal services and make their revenue mainly through advertising (Bhatia, Deep & Sachdeva, 2012, p. 7). Also, there are very many companies that operate in this industry. However, the major ones, in terms of revenue and profitability, include Google, Microsoft and Ask.com. The following is an analysis of the effect of the main macro-environment factors on Yahoo. The first main factor is technology. As an Internet services firm, Yahoo is affected by changes in the technologies that are used by other Internet services firms such as Google and Microsoft. In general, companies in the industry attempt to develop and adopt new technologies to help them optimise their operations, take advantage of new opportunities to generate revenue and optimise their current revenue-generation streams in the form of advertisements (“Verizon buys Yahoo”, 2016). Changes in technology are likely to have a positive effect on the entire industry. Companies will increasingly use innovate Internet-based technology to achieve two major objectives: increase their level of efficiency and develop new methods of increasing their revenue from advertisement activities (Association of Progressive Communications, 2011, p. 11). For example, Google is constantly developing new metrics and models that it uses to increase the level of efficiency of its search engine functionality and increase the amount of revenue it gets from advertisers and creators of content. The second most important factor of the macro-economic environment that is likely to have a major impact on the entire industry is changes in the economy. By nature, all Internet-services companies are global. The products and services that they offer overcome all the geographical confinements and are available in different parts of the world. Further, the companies are affected by changes in the global economic environment. For example, back in 2008, Google, Yahoo and the other major companies in the industry were affected by the Global Financial Crisis (Koo, 2014, p. 141). The effect was felt in the form of reductions in revenues as many advertisers across the world cut on their budgets as a way of surviving the global economic slowdown that followed the crisis. Currently, no major disruption in the global economy has occurred. Therefore, it can be argued that the effect of the economy on the current and future strategic decisions of companies operating on the industry as a whole is neutral. The third factor is social and demographic changes. The effect of social and demographic changes on companies operating in the industry is seen in several ways. For example, changes in the number of people who access the internet means that the companies have to respond by developing the right products content that caters for the growth. Similarly, changes in the manner in which people consume different types of Internet services means that companies have to develop the products and services that appeal to their Daily Active Users (DAU). For example, Chu et al. (2010, p. 3) note that since Yahoo has been trying to ensure that its Front Page, known as Yahoo Today, appeals to Internet users by giving them relevant and current news stories. It should be noted that Yahoo, unlike Google, creates content, in addition to providing its clients with search and communication services. But more importantly, the growth in the number of active Internet users means that companies in the industry have the chance to not only improve their existing products, but also develop entirely new ones. Therefore, social and demographic changes will have a positive effect on the industry as a whole. The fourth main factor of the macro-environment affecting companies in the industry is political and legal issues. Changes in policies and the occurrence of many legal cases involving Internet-based companies have a negative impact on the industry. For example, it is noted that several countries in Europe, including the United Kingdom, are developing regulations that force technology and Internet services companies such as Google, Yahoo and Microsoft to be compelled to share the data of their clients with law-enforcement agencies, when required to do so. Also, changes in regulations on how the companies can handle the privacy issues of their clients are likely to have a negative effect on the industry in general (Association of Progressive Communications, 2011, p. 15). Furthermore, Google, which is the leading company in the industry in terms of revenue from advertising, is facing antitrust lawsuits in relation to the manner in which it runs its advertising business (Couturier, 2016). Therefore, changes in regulatory policies and the existence of several lawsuits against companies in the industry will have a negative effect on the industry. In summary, technological and social changes will have a positive effect on the activities and strategies of companies in the industry. However, changes in the regulatory and legal environment are likely to have a negative effect on the industry in general. Economic changes, represented by trends of the global economy, are likely to have a neutral effect on the industry. Therefore, companies should seek to take advantage of social and technological changes to increase their revenue while being aware of the possible negative effect of the regulatory and legal environment in different countries can have on their operations and strategies. Analysis of the industry environment Analysis of the industry which is made up of web search portals companies to which Yahoo belongs can be done using the Five Forces model. Under the Five Forces model, which is also referred to as the Porter’s model, the current and future profitability of an industry is determined by the interaction of the following five factors: threat of entry, bargaining power of suppliers, power of buyers, substitutes and the intensity of internal rivalry (Hubbard, et al., 2014, p. 77). All these factors have either a positive or negative effect on the current and future profitability of any given industry (Hubbard, et al., 2014, p. 78). Therefore, their cumulative effect determines the current and future level of profitability of the industry under consideration. First, Internal rivalry is very intense in this industry. For example, early in the 1990s, Yahoo was controlling the search engine market when it was a start-up that was using very sophisticated technology and offering users an appealing experience (David, 2012, p. 93). However, Google is currently controlling the search engine market and is constantly working to consolidate its position by developing highly innovative products (Bhatia et al., 2012, p. 4). Furthermore, Yahoo Inc. (2015, p. 7) in its annual financial report for 2015, points out that it is facing intense competition from rivals in all its three business segments of search engine, web mail and digital content. Therefore, intense competition among all the companies that operate in the industry is high and this bears a negative effect on the current and future profitability of the industry in general. The second factor that affects the current and future profitability of the industry is the extent to which it is difficult for new entrants to successfully get into the industry. In theory, barriers to entry occur in the form of the need for new companies to access a high amount of start-up capital in order to get into an industry, regulatory frameworks that may restrict the entry of new comers into the industry and the existence of very strong brands which make it difficult for new companies to succeed (Hubbard, et al., 2014, p. 81). In this industry, it is true that there are well established brand names in the form of Google, Microsoft and even Twitter. However, the brand strength of these companies does not deter new companies from entering the industry. More so, the industry is not very capital-intensive hence new companies can be easily formed and they can enter into the business. Therefore, the threat of new entrants in the industry is high because barriers to entry are low. Third, the influence that buyers in the industry have is high. The high bargaining power of buyers arises from the nature of the business model that nearly all the companies operating in the industry use. Basically, companies in the industry rely on business clients to advertise on their sites as the primary means of creating revenue (Bhatia et al., 2012, p. 6). Therefore, business clients are the primary buyers of the products of the company. In order for the companies to make sure that they increase their advertising revenue, they attempt to create platforms and portals that individuals use in order to have a large number of users and, in the process, attract more advertisers. However, business clients can easily switch from one company to another. Given that all the companies in the industry are competing for business clients as the primary source of advertising revenue, the industry is characterised by buyers who have a very high level of bargaining power. The fourth factor is the bargaining power of the suppliers. In general, suppliers in this industry have low bargaining power. This is the case because of several reasons. First, many companies in this industry invest a considerable amount of their resources in developing their technical capacity to develop and manage their products. Companies in this industry focus on recruiting very talented individuals with technical expertise and charge them with the responsibility of developing specific technological requirements that the companies need. For example, Yahoo has been investing in developing a very strong talent pool of engineers to manage its product development cycles (Yahoo Inc., 2015, p. 10). This approach makes it less dependent on suppliers. Second, given that this is not a product-based industry, companies do not have a heavy reliance on suppliers and that they can change their suppliers very easily. The last factor that defines the current and future profitability of the industry is the power of substitute products. It is very difficult for firms in the industry to differentiate their services. For example, the three major firms, Microsoft, Google and Yahoo, all offer clients mail services and search portals. Also, Microsoft and Yahoo still offer content to their clients whereas Google uses third parties to create content for its affiliate sites. Additionally, the failure by Yahoo to carefully define its product is one of the reasons that led to its decline and eventually getting purchased by Verizon, which operates AOL (“Verizon buys Yahoo”, 2016). In as much as Yahoo could not compete with the likes of Facebook and others which rely on business clients for their advertising revenue, it can be seen that the level of substitutes in the industry is very high. In summary, the high bargaining power of buyers, intense competition and high power of substitute products bear a strong effect on the current and future profitability of the industry. These factors, together with low barriers to entry and low supplier power, have made it possible for existing and new companies in the industry to develop new product offerings. Hence, the future profitability of the industry remains high, given the high level of innovativeness in the industry. Recommendations The strategic options open for Yahoo, its mission statement and objectives can best be determined by addressing the five questions under the 5Qs model. The 5Qs model addresses the key issues which can be used to define the current and future strategic direction of any organisation (Hubbard, et al., 2014, p. 35). This model is applied to the case of Yahoo as follows. First, in relation to the level of growth and profitability, Yahoo seeks to take advantage of the high rate of growth of the industry. For the 2015 financial year, the company was making losses, having made a loss of $4,434,987 for the last quarter of 2015 (Yahoo Inc., 2015, p. 158). The loss-making streak of the company was one of the main reasons that led to the company being bought out by Verizon. On the other hand, it is estimated that other competitors in the industry will continue making profit (“Verizon buys Yahoo”, 2016). Therefore, the immediate need for Yahoo is to end the loss making streak and return to profitability. Second, Yahoo has been focusing on three main product categories: content, communication and search engine (Lashinsky, 2016). It has been argued before that providing content in addition to the search engine and communication services complicates the business model of Yahoo. The company seeks to streamline its service offering and products (Yahoo Inc. 2015, p. 4). However, it is recommended that the company only focuses on providing mail and search services so that it can concentrate on monetizing its services through its advertising platforms. Third, by the nature of its business, Yahoo serves a global clientele. Therefore, it has to maintain its global operations. Fourth, the company has to use a focus strategy in order to effectively compete in the industry. A focus strategy is based on the need to identify specific market needs and channel organisational resources towards meeting the need at the expense of the other needs (Porter, 2008, n.pag). It is recommended that Yahoo focuses on generating income through advertising by providing users with search and communication services at the expense of entertainment services. Fifth, Yahoo seeks to effectively compete with industry leaders in terms of revenue (“Verizon buys Yahoo”, 2016). It is expected that this objective can be achieved using the focus strategy. Conclusion From the foregoing, it can be seen that the mission statement of Yahoo should change from one that is based on a company that seeks to entertain, inform and connecting its clients to one that only seeks to connect and inform. This implies that the company should drop the digital content business and focus on search and communications. This approach is consistent with not only the macro-economic factors affecting the future growth of the business but also the industry-specific trends and their impact on current and future profitability of the industry. Lastly, the main objective of the company right now should be to end the loss-making streak and return to profitability. References Association for Progressive Communications. (2011). Policy and regulatory issues in the mobile Internet. Retrieved from http://www.apc.org/en/system/files/RussellSouthwood_MobileInternet-.pdf Bhatia, A., Deep, G., & Sachdeva, A. (2012). Strategic analysis of search engine giant: A case study of Google Inc. International Journal of Computing & Business Research. Retrieved from http://www.researchmanuscripts.com/isociety2012/55.pdf Chu, W., Park, S., T., Beaupre, T., Motgi, N., Phadke, .., Chakraborty, S., & Zachariah, J. (2010). 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