February 21, 2012
Dr. Jay Lee
California State University, Sacramento
Yahoo started out as a hobby between two Stanford students, Jerry Yang and David Filo, and turned from a simple website with categorized information to a powerful navigational tool for millions of users. It generated millions in revenue and helped shape the way the modern-day internet is used, both in terms of streaming information and streaming revenue.
The U.S. military first used the internet in the 1960s as a way of safeguarding against centralized information. Decades later, it was used as a tool to help researchers share informaiton. In the 1990s, HTML language was created to help read documents easier. Within a few years, browsers, portals, and internet service providers (ISPs), along with the low price and easy access to computers had connected the world and the internet was born. As Yang and Filo created a way to monetize the traffic created by the popular Yahoo portal, the attractiveness of the Yahoo model helped propel the global reach of the internet, and brought about intense competition, new tools, new models of monetization, and the need for new strategy.
When using Porters five forces model to analyze the portal industry’s attractiveness, it is clear that attractiveness is low. The bargaining power of suppliers is high, bargaining power of the buyers is low, threat of new entrants is high, start-up costs cause high barriers to entry, alternative media allow the threat of substitutes to be high, and the potential for revenue has saturated the industry with competitors. This competitive environment rapidly changed since Yahoo was first created. There was virtually no competition and it was able to quickly secure large market segments. Using a strategy of simplicity, independence and strategic partnerships, Yahoo created a user-friendly point-of-entry for consumers to find information on the internet while making millions of dollars. Yahoo led the portal industry from 1994 to 1998, during which its market capitalization grew to $30 billion.
In 1999, the industry began to change further as mergers and acquisitions consolidated power. Media companies, ISPs, browser companies and content providers were merging and acquiring each other in a flurry of moves in order to retain competitive advantage. The strategy of independence that brought Yahoo success needed to be reevaluated. In an environment with such volatile and intense competition, what strategy should Yahoo implement?
As leader of the internet portal industry, Yahoo’s position, both in terms of its external environment and internal resources and capabilities, should be exploited in order to bring about above-average returns. Both the Industrial Organization (I/O) and Resource-Based models of above-average returns can be utilized. It shows Yahoo to be in a favorable position and the tools needed to effectively create new partnerships that will secure market share and long term profitability. Further, A SWOT analysis shows that Yahoo has strong brand image and opportunities for strategic partnerships, even though as first-mover in the industry, it lacked a long-term strategy and is threatened by intense competition.
The story of Yahoo shows that a company’s strategy must always be evaluated for effectiveness in terms of its current external environment and its internal resources and capabilities. While effective strategy early on may bring about a favorable position in the industry, competitive forces will cause a company to seek out new strategies, new partnerships and new models in order to remain competitive and profitable. Background
Jerry Yang and David Filo created the portal Yahoo in April of 1994. It was originally used as a hobby to track web addresses sent to them by friends. They were students at Stanford, but they gave up their...