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Leading Organizational Change

BA560-99B1

Term Paper

Student: Sergei Bugrov

Date: 4/25/2016

Subject: How Yahoo Has Failed to Change

Introduction

In January 1994, Jerry Yang and David Filo, electrical engineering graduate students at Stanford
University, created a website named Jerry and David's guide to the World Wide Web. The site was a
directory of other websites, organized in a hierarchy, as opposed to a searchable index of pages. In
March 1994, Jerry and David's Guide to the World Wide Web was renamed Yahoo! The yahoo.com
domain was created on January 18, 1995. The word yahoo is a backronym for Yet Another
Hierarchically Organized Oracle or Yet Another Hierarchical Officious Oracle. However, Filo and Yang
insist they mainly selected the name because they liked the slang definition of a yahoo.

Yahoo grew rapidly throughout the 1990s. Like many search engines and Web directories, Yahoo
added a web portal. By 1998, Yahoo was the most popular starting point for web users. It also made
many high-profile acquisitions. Its stock price skyrocketed during the dot-com bubble, Yahoo stocks
closing at an all-time high of $118.75 a share on January 3, 2000. After the dot-com bubble burst, it
reached a post-bubble low of $8.11 on September 26, 2001.

In 2000, Yahoo began using Google for search. Over the next four years, it developed its own
search technologies, which it began using in 2004. In response to Google's Gmail, Yahoo began to offer
unlimited email storage in 2007. The company struggled through 2008, with several large layoffs.

In February 2008, Microsoft Corporation made an unsolicited bid to acquire Yahoo for $53 billion.
Yahoo formally rejected the bid, claiming that it substantially undervalues the company and was not in
the interest of its shareholders. Three years later, Yahoo had a market capitalization of $22.24 billion.

In early 2012 rumors began to spread about upcoming layoffs. Several key executives, such as
Chief Product Officer Blake Irving left. On April 4, 2012, Yahoo announced a cut of 2,000 jobs or about 14
percent of its 14,100 workers. The cut was expected to save around $375 million annually.

On May 19, 2013, the Yahoo board approved a $1.1 billion purchase of blogging site Tumblr, and
the company's CEO and founder David Karp will remain a large shareholder. The announcement

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reportedly signifies a changing trend in the technology industry, as large corporations like Yahoo,
Facebook, and Google acquire start-up Internet companies that generate low amounts of revenue as a
way in which to connect with sizeable, fast-growing online communities. The Wall Street Journal stated
that the purchase of Tumblr would satisfy the company's need for a thriving social-networking and
communications hub. [13]

On August 2, 2013, Yahoo Inc. announced the acquisition of social Web browser concern
RockMelt. With the acquisition, the RockMelt team, including the concern's CEO Eric Vishria and CTO
Tim Howes, will be the part of Yahoo team. As a result, all the RockMelt applications and existing Web
services were terminated on August 31.

Data collated by comScore during July 2013, revealed that more people in the U.S. visited Yahoo
Web sites during the month in comparison to Google Web sites; the occasion was the first time that
Yahoo outperformed Google since 2011. The data did not incorporate visit statistics for the Yahoo-owned
Tumblr site or mobile phone usage.

In March 2014, Yahoo officially announced its partnership with Yelp, Inc., which will help Yahoo
boost its local search results to better compete with services like Google. Later, in November 2014, Yahoo
announced it would be acquiring video ad company BrightRoll for $640 million.

By the fourth quarter of 2013, the company's share price (NASDAQ: YHOO) had more than
doubled since Marissa Mayer took over as president of July 2012; however, the share price peaked at
about $35 in November 2013 at $35. It did go up to $36.04 in the midafternoon of December 2, 2015,
perhaps on news that the board of directors was meeting to decide on the future of Mayer, whether to sell
the struggling internet business and whether to continue with the spinoff of its stake in China's Alibaba ecommerce site. Not all has gone well during Mayer's tenure including the $1.1 billion acquisition of Tumblr
that has yet to prove to be beneficial while the forays into original video content led to a $42 million writedown. The closing price of Yahoo! Inc. on December 7, 2015 was $34.68.

Tim Koogle

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T. Koogle was the first Yahoos CEO. Along with the co-founders, he is likely to be responsible for
what Yahoo has become. By 2001, Yahoo grew into a full-service information and shopping portal and at
one point became the world's most popular Internet destination. For a while, Yahoo also was one of the
Internet's biggest financial success stories. But the company's dependence on advertising which
accounted for nearly 90 percent of revenue in 2000 has proven problematic in the dot-com meltdown
and the overall slowing of the economy.

All businesses in the United States are facing challenging economic conditions that have
weakened further in recent weeks, and as consumer confidence and spending has deteriorated, a broad
range of customers have delayed their spending across all media formats until their economic outlook
improves,'' Koogle said [14]. Yahoo also has been suffering turnover in a number of its top divisions in
recent weeks, the company's heads of operation for Asia and Europe have resigned.

In 2001, Yahoo announced a stock repurchase program of up to $500 million of its outstanding
shares over the consequent two years. Shares of Yahoo at that time were trading more than 90 percent
off their price in December 1999. The company also announced that its first-quarter operating earnings
will come in approximately break-even,'' well short of Wall Street's expectations. Full-year results also
missed targets. [1]

Terry Semel

Laid low by the tech crash, Yahoo brought in Terry Semel in May 2001, when the company was at
its nadir. It rebounded spectacularly under his leadership, but 2006 a year expected by many to be
Yahoos best turned out dismally. Brand-advertising growth fell by half while Yahoos share of searchrelated advertising dropped from 32 to 24 percent. No wonder Yahoos share price fell 36 percent the year
before.

And the problems did not stop there. Semels extraordinary dealmaking skills seem to have
abandoned him. Sure, Yahoo snapped up some smaller companies in 2006 and formed partnerships with
eBay and a consortium of newspapers. But when it came to the big acquisitions, deals that might have

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positioned the company for the new world of social networking and online video, Semel came up empty. A
months-long dalliance with the social-networking darling Facebook ended in nothing more than a polite
kiss on the cheek. Yahoo was interested in buying YouTube, but Google snatched away the Web video
star for $1.65 billion.

Worst of all, Yahoos long-delayed push to aggressively compete in the search-driven advertising
business is only now getting off the ground, arguably two years behind schedule. Semel bought a search
engine company, Overture, in 2002 and a search-driven ad firm in 2003. All that was left to do was to put
the pieces together.

Semel did not appear to have recognized the depth of the problems until the fall of 2005, when he
had decided in March 2005 to finally, fully integrate Overture into Yahoo, but it didnt become a truly top
priority until Weiner took over. All you had to do was look at Googles numbers compared to ours, says a
former Yahoo search exec. When Yahoo decided it was going to buy Overture in 2002, Overture
dominated search-related advertising; its revenue was two times Googles. By the time the deal was
actually announced in 2003, the two companies were neck and neck. Two years later, Googles revenue
was 2.5 times Overtures. [2]

Jerry Yang

Yahoo's plummeting stock price has continued to send alarm bells to the board. On Monday,
Yahoo shares closed at $10.63 a share, down 1.76% on the Nasdaq Stock Market. However, in afterhours trading, the shares jumped 4.42%. Microsoft had offered $31 a share on Jan. 31, which Yahoo's
board rejected.

Meanwhile, Mr. Yang's strategy of keeping Yahoo independent has faced a number of new
roadblocks. Google abandoned a pending search deal with the company amid regulatory concerns. And
talks over a possible merger with Time Warner Inc.'s AOL which are ongoing failed to progress. [3]

Carol Bartz

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In September 2011, Yahoo announced that the board of directors had removed Bartz and
appointed CFO Tim Morse to replace her on an interim basis until a permanent successor can be found.
Despite a market-leading position in web traffic, Yahoo has been flat-lining for a long time, forcing Bartz to
offer one explanation after another as to why its financial performance was stagnating. Yahoo shares
closed at $12.91, about their level in January 2009, when Bartz, a former CEO of Autodesk and executive
at 3M and Sun Microsystems, took over. [4]

Scott Thompson

Scott Thompson, whom Yahoo hired as CEO in January 2011, agreed to resign over the weekend
after the company's board obtained evidence that contradicted his claim of innocence about his misstated
academic record.

In particular, an executive-search firm provided Yahoo with information that appeared to show Mr.
Thompson years ago had knowingly claimed to have a computer-science degree that he, in fact, didn't
have. Yahoo named Ross Levinsohn, the executive in charge of its media websites, as interim CEO. [5]

Marissa Mayer

As Yahoos chief executive, M. Mayer has acquired more than 20 companies, but is now facing a
spinoff and consequent sale of the companys core business. Marissa Mayer was named a CEO of Yahoo
on July 16, 2012. M. Mayer, a former top executive at Google, became the seventh chief executive of
Yahoo in less than five years.

In 2013 Yahoo and its chief executive abolish the company's work-at-home policy in an effort to
reinvigorate the once-dominant Internet pioneer. The move is seen as a reaction by a company in crisis
mode, and is immediately met with criticism. This isnt a broad industry view on working from home,
according to a statement from the company. This is about what is right for Yahoo right now.

Later in 2013 Yahoo buys Summly, a news-reading app started by a 17-year-old high school
student in Britain. The purchase price was about $30 million. In May 2013, M. Mayers own very short

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maternity leave shortly after she joined the company only added to doubts that Yahoo was a welcoming
place for working parents. However, later the company doubles the time new parents are allowed to take
off, an olive branch after receiving negative attention for revamping its work-at-home policy.

M. Mayer has said that attracting talented workers is crucial for the companys turnaround. Since
arriving at Yahoo, M. Mayer has increased the number of perks employees receive, including handing out
smartphones and free lunches in the company cafeteria.

Yahoo snaps up Tumblr for $1.1 billion. The deal for the blogging service is regarded as the
largest acquisition of a social networking company in years, surpassing Facebook's $1 billion purchase of
Instagram in 2012.

Yahoo becomes top trafficked online property again. For the first time since May 2011, Yahoo
sites get the most monthly visitors among Internet properties, barely inching out sites owned by Google,
which includes YouTube. [6]

With an estimated 275 million users, Yahoo used to be the most popular email service in the
United States. But it has been surpassed in recent years by Googles Gmail service and Microsofts
Hotmail offering. [7]

In 2014, Alibaba goes Public, a windfall for Yahoo. The Alibaba Group, the Chinese Internet
juggernaut, raises nearly $21.8 billion in its initial stock sale. Yahoo, a longtime shareholder with a
sometimes rocky relationship with its Chinese partner, raises nearly $8.3 billion through the offering. [8]

In 2015, M. Mayer announced plans to spin off Yahoo's 15 percent stake in Alibaba into a
separate company, with the aim of avoiding taxes on the transaction. The decision cheers shareholders
since they stand to reap all the remaining profit from Yahoos prescient investment, which cost virtually
nothing a decade ago but is now worth about $39.5 billion. [9]

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Later in 2015, the acquisition of Polyvore, which was founded in 2007 by three former Yahoo
engineers, gives Yahoo a foothold in mobile e-commerce. And the shopping site's ads, which blend in with
the other content on its app, fit Yahoos strategy of moving more into so-called native advertising. [10]

Nevertheless, a prominent activist investor, the hedge fund Starboard Value, urges Yahoo to forgo
a plan to spin off its stake in Alibaba and instead sell its core business. Starboard argues that the reason
for spinning off the Alibaba stake avoiding taxes while raising money for shareholders appears to have
evaporated after the Internal Revenue Service declined to provide any guidance about the tax liability
related to the spinoff. [11]

Later, Yahoo drops a plan to spin off its $31 billion stake in Alibaba. Instead, the company will spin
off all of its other assets, including its stake in Yahoo Japan, into a new company. After spinning off the
companys 15 percent stake in Alibaba, M. Mayer had planned to focus on improving the companys core
business, the sale of advertising that is shown to the roughly one billion users of Yahoos apps and
websites. [11]

In February 2015, confronted with investor demands for radical action, Yahoo outlines a
turnaround plan that includes laying off 15 percent of its 11,000 employees, shedding assets, cutting
expenses and focusing on just a few areas where growth seems promising. A few weeks later the
company takes a step toward a sale, announcing that its board had formed a strategic-review committee
to consider the best path for its core business. [12]

Analysis

Yahoos value proposition and the whole mission was unable to stay relevant as internet evolved.
Since yahoo was founded in 1994, two major value propositions have emerged a search engine and a
social network. Google, the most popular search engine, was founded when Yahoos stock price was
growing extremely fast. Yahoo was an iconic internet technology company; Goggle was a startup nobody
though seriously about. There were no obvious reasons to dramatically change their business.

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Facebook, the biggest social network, was founded when Yahoo was obsessed with the search.
In the early 2000s, right after dot com burst, Yahoo lost 90% of its market value. They, therefore, were
unable to make big acquisitions. They, however, were trying to acquire Google. The problem was that
they did not know the true value of Google, which was already higher than Yahoos market capitalization.
They did exactly the same mistake when tried to acquire Facebook in 2006 Mark Zuckerberg was pretty
confident that it is obvious that they were not selling the company at that moment. He was sure that his
company value is higher than offered $1 billion. Now only his own shares of Facebook worth $24 billion.

These failed acquisition attempts clearly show that Yahoo was aware of the threat these two
companies represented to their own business. Yahoo leadership was, however, reluctant to change
anything in their value proposition. They were committed to their initial identity Internet navigational
service to information and entertainment on the Web, on the one hand, which is how it is supposed to be
from strategic standpoint. On the other hand, they were not developing it but chasing all possible
opportunities, which is a strategic mistake.

According to one researcher who tracked Yahoos press releases, the company has changed its
self-description 24 times since it was founded. This is another sign that the company was aware of the
roots of the problem. However, it does not seem that they have tried to change anything but a description
of their company.

Another strategic mistake was that their business was revenue not intrinsic value driven. Yahoo
went public in 1996, only one year after it was incorporated. The company was not even profitable by that
time. Yahoos co-founders were pretty fast to withdraw themselves from executive positions, which means
that they were pursuing the operational effectiveness from the very beginning. While there is nothing
fundamentally wrong in seasoned executives and operational discipline, it must not be a cornerstone of
the strategy.

From technological standpoint, their mistake was in building a business based on a technology
that is easy to replicate. Moreover, this mistake and Yahoos success in the late 1990s altogether

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attracted competition. Nowadays, they have to directly compete with aol.com, ask.com, msn.com, etc. In
fact, every major online newspaper now looks like Yahoos start page.

Finally, their value proposition was market not technology driven. The dot com bubble, however,
made this mistake not so obvious. In technology, it is important to create solutions that the market will
need tomorrow, not today. People always need faster horses and Yahoo was always focused on current
market trends instead on looking for the technological insight that could create both value for the
customers and cash flow for the company.

It seems, however, that everyone is blaming the current Yahoos CEO Marissa Mayer.
Nevertheless, it is more likely that it is simply Yahoos capabilities and value propositions that were
doomed many years ago. Yahoos leadership, however, has kept refusing that fact. For instance, in 2008
Microsoft unsuccessfully tried to acquire Yahoo, offering three times of Yahoos then-current market value
$53 billions. In other words, Yahoo has never been a great company. Its market value in December
1999 was nothing but a bubble. Marissa Mayer could not be responsible for that. She just created an
illusion of improvements, but nothing important really has changed.

The failure to change the business model is the key reason of Yahoos problems. The big change,
however, has been never embraced by the companys leadership. Yahoos example shows the
importance of avoiding the various psychological biases in decision making and change. All these factors
led to the refusal of any strategic change, even though there were many signs that something is going
really wrong. The majority of change management frameworks assumes that it is, however, not so
important and start at the point where the companys leadership is aware of the importance of changes.

Another problem is that some early strategic decisions that seemed to be reasonable turn out to
be big mistakes and nothing at that point can be changed. Yahoo was created to be the company it is now
mediocre internet business, not as great as its leadership thought it was. Its market value in the late
1990s was extremely overestimated. 90% of its current market value is the stake in Alibaba.

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References

1. Yahoo! CEO Tim Koogle to Step Down. Mar. 08, 2001. Lubbock Avalanche-Journal. URL:
http://lubbockonline.com/stories/030801/sci_030801095.shtml#.Vx5P9cD2a71

2. How Yahoo Blew It. Feb. 01, 2007. Fred Vogelstein. WIRED. URL:
http://www.wired.com/2007/02/yahoo-3/

3. Yang to Step Down as Yahoo CEO. Nov. 18, 2008. Jessica E. Vascellaro. WSJ. URL:
http://www.wsj.com/articles/SB122697024336935679

4. Carol Bartz Is Out As CEO Of Yahoo. Sep. 6, 2011. Jeff Bercovici. Forbes. URL:
http://www.forbes.com/sites/jeffbercovici/2011/09/06/report-carol-bartz-steps-down-as-ceo-ofyahoo/#21d18f4f3a30

5. Thompson Resigns as CEO of Yahoo. Amir Efrati and Joann S. Lublin. May 13, 2012. WSJ.
URL: http://www.wsj.com/articles/SB10001424052702304192704577402224129006022

6. Yahoo #1 Web Property Again In US, First Time Since May 2011. Aug. 21, 2013. Greg
Sterling. Marketingland. URL: http://marketingland.com/yahoo-1-again-not-there-since-early08-56585

7. Furor over Yahoo Mail Changes. Nicole Perlroth. Oct. 16, 2013. NYT. URL:
http://bits.blogs.nytimes.com/2013/10/16/furor-over-yahoo-mail-changes/?_r=0

8. Alibaba Raises $21.8 Billion in Initial Public Offering. Michael J. De La Merced. Sep. 18,
2014. NYT. URL: http://dealbook.nytimes.com/2014/09/18/alibaba-raises-21-8-billion-in-initialpublic-offering/

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9. Yahoo to Spin Off Its Stake in Alibaba. Vindu Goel and Michael J. De La Merced. Jan. 27,
2015. NYT. URL: http://www.nytimes.com/2015/01/28/technology/yahoo-earnings-alibabaspinoff.html

10. Yahoo Buys Polyvore, a Site Focused on Shopping. Vindu Goel and Mike Isaac. Jul. 31,
2015. NYT. URL: http://www.nytimes.com/2015/08/01/technology/yahoo-buys-polyvore-a-sitefocused-on-shopping.html

11. Yahoo Pressured to Keep Alibaba Stake and Sell Core Business. Michael J. De La Merced.
Nov. 19, 2015. NYT. URL: http://www.nytimes.com/2015/11/20/business/dealbook/yahoopressured-to-keep-alibaba-stake-and-sell-core-business.html

12. Marissa Mayer Sets Yahoo on Streamlined Course. David Streitfeld Feb. 2, 2016. NYT. URL:
http://www.nytimes.com/2016/02/03/technology/yahoo-layoffs-strategic-alternativesearnings.html

13. Yahoo Deal Shows Power Shift Tumblr Commands $1.1 Billion Price as Web Giants Circle
Fast-Growing Startups. Joann S. Lublin, Amir Efrati and Spencer E. Ante. May 20, 2013.
WSJ. URL:
http://www.wsj.com/articles/SB10001424127887324787004578493130789235150

14. Yahoo! Updates First Quarter 2001 Financial Guidance. SEC. URL:
http://www.sec.gov/Archives/edgar/data/1011006/000091205701007396/a2040901zex99_1.htm