Yahoo! was one of the first Internet companies established in the 1990s. Shortly after its establishment, it was transformed into a fully developed web portal that attracted a huge number of customers as it offered various novel products and services. It became the most frequently visited website globally, generating huge revenues from advertising. Despite being one of the few survivors of the 2000 internet bubble crash, Yahoo has faced stiff competition from Google and has struggled for long to restore its strong financial performance (Kuchler). This case study discusses the history, development, and growth of Yahoo! over the years, its internal strengths and weaknesses, and the external environment that surrounds the company’s operations.
Two Ph.D. Engineering candidates, David Filo and Jerry Yang from Stanford University were responsible for founding Yahoo! in February 1994. The two developed a website for cataloging sites and called it “Jerry and David’s guide to the world wide web”. They later renamed the site Yahoo, representing “Yet Another Hierarchically Organized Oracle”- since it could arrange websites into categories and subcategories (Weber and Jeffrey).
In 1995, the Yahoo.com domain was created and incorporated. In April 1995, Yahoo received initial funding of about $ 2 million from Sequoia Capital and assembled a management team. Tim Koogle was hired as the first CEO of Yahoo. The Company went public in April 1996, with its initial public offering selling 2.6 million shares at a price of $13 and raising a capital of $33.8 billion (Hartley).
Yahoo!’s popularity across the world continued to grow before Google revolutionized search engine marketing. Yahoo!’s business model relied heavily on advertisement- based revenues. It also acquired various firms to remain competitive and offer comprehensive products and services (Kuchler). By the end of the 1990s, about 15 million users visited the portal, and in 2000, its stock price had risen to $237 while its market value increased to $220 billion. However, in 2000 the company encountered challenges after the crashing of the internet bubble. Most of the companies it had acquired became bankrupt, resulting in a reduction of its value to less than $10 billion and its stock to $9 a share (Kuchler).
Yahoo!’s failure to innovate and the increasing competition made it lose out to its rivals, mainly Google. While Yahoo focused on product diversification to an extent, it became difficult to identify its core business, Google concentrated on innovating in a search engine that could generate revenues and offer new products. By 2006, Yahoo had lost the leadership to Google since its traffic had gone down while that of Google continued to increase gradually (Weber and Jeffrey). At this time, Yahoo!’s business model was no longer sustainable, and other competitors such as Google and Microsoft dominated the search engine market. In 2008, it turned down an acquisition deal of $44.6 billion from Microsoft that aimed at forming a rival to Google. The frequent leadership changes and lack of an effective exit strategy compounded its challenges. Verizon acquired the Company with a 20-year history in 2016 at $4.8 billion (Kuchler).
Internal Strengths and Weaknesses
- High brand awareness
- Business presence across the globe
- Achievement of a strong market position
- Provision of a wide range of products and services
- It had a strong financial performance initially
- Minimal costs of updating and introducing products and services
- Poor short-term performance in financial growth
- Slow rate of adopting technological and intellectual innovations
- Reducing demand for premium services offered
- Increasing levels of uncertainty regarding the future of revenues based on advertisement
- Challenges in making successful strategic acquisitions
- Failure to differentiate its products and services and enhance competitiveness
- Challenges in getting user information for targeting advertisements
Yahoo operates in the Web Search Portals and Internet Service Providers industry. Its market is competitive and continually upgrades to user-friendly technology. Yahoo has been struggling to improve its financial performance since the early 2000s, but various factors in the industry have hindered its growth. Porter’s Five Forces model works best in identifying influencing factors in an external environmental analysis. The model helps in analyzing barriers to entry, substitute products, buyer and supplier power, and industry’s competitive rivalry.
Porter’s Five Forces Model
Barrier to entry
Barriers to entry in this high-tech industry are limited. It is easy for tech-entrepreneurs to join the industry. The main reasons are the superior levels of technological progress that is displayed among the young people today and low levels of capital needed to start a tech company. However, the domination of the industry by a few big companies such as Google shows that the technology needs to develop a web portal or search engine are much more sophisticated. Only several technological experts in the world have the capability of matching the skills of these firms’ engineers (Weber and Jeffrey).
The threat of substitutes in the industry is very high. Differentiation of services provided by all companies is minimal, making it hard for users to find the differences between them. Thus, they just go for a search engine that offers them convenient services. Since differentiation is difficult, firms in the industry focus on providing their products on as many platforms as possible. For instance, Google has a deal with Hewlett Packard that sees the installation of Google Toolbar in produced computers (Hartley).
The industry has users with a high degree of power while some of its users have no power. Most companies in the industry obtain revenues from advertisement. Hence, the whole industry is at a risk of having its business customers’ move to other providers of services. In case such customers using Yahoo find that Google offers reduced rates for advertising, they will move to Google at low switching costs. Conversely, individual users of search engines have no power over Internet firms since they do not pay for services directly (Hartley).
Supplier power has little impact on the industry as almost all enterprises operating in the sector link to similar websites and content. Additionally, their revenues are advertisement-based, forcing them to accept a standard within the industry for their earnings (Hartley).
Intense competition is found in the industry since a significant portion of revenues is directly proportional to the number of a company’s users. Thus, companies’ objective is to entice users from their opponents by providing latest and superior services. Yahoo!’s main competitors include Google, AOL, and Microsoft (Kuchler). Google is the most competitive player in the industry. It remains competitive by developing fresh ideas products and services through creativity as well as merging or acquiring other businesses.
Yahoo!, an internet company established in the 1990s attained tremendous growth by offering comprehensive products and services. It also acquired other Internet businesses that increased its competitive advantage. Most of its revenues generated through advertisement enabled the Company to grow. Despite this growth, economic conditions at the beginning of 2000 slowed its growth. Lack of strategic innovations and strategic alliances also affected its growth. Frequent leadership changes and various strategic efforts did not help in uplifting its performance. Various industry factors also played a role in the present state of Yahoo!
Hartley, Matt. “Yahoo’s Identity crisis continues unabated”. Financial Post, 2011, Web.
Kuchler, Hannah. “Yahoo: A History of the Internet in 5 acts: From Jerry and David’s website catalogue to Verizon’s 4.8 bn deal”. Financial Times. 2016, Web.
Weber, Jonathan, and Dastin, Jeffrey. “The identity crisis that led to Yahoo’s demise”. Reuters, 2016, Web.