How Yahoo Can Search for its Growth Engine

Yahoo’s board is on borrowed time to fix its woes — a situation that was no doubt aggravated by the board’s decision not to name a new CEO at its annual meeting on Thursday. Wharton professors Kartik Hosanagar, Eric T. Bradlow and Waheed Hussain have advice for the board on how to ensure stable leadership and reposition the struggling company for growth.

Hosanagar, Wharton professor of operations and information management, states that time is running out for the company’s board. “They need to elect someone … who can bring back some of the entrepreneurial spark in Yahoo,” he says. “Traditional, seasoned management veterans are not the right candidates for Yahoo given all that it’s going through.”

Many expected Yahoo’s board to name interim CEO Ross Levinsohn to the top job, but now speculation is growing that the board is considering other candidates, too. Levinsohn, 48, took over as interim CEO in May from Scott Thompson, who quit after being accused of making false claims on his CV. Since then, Levinsohn has scored several victories, including making peace with Facebook last week by settling patent disputes. Also, Yahoo and Facebook agreed to form advertising and content-sharing partnerships. Finally, Levinsohn in May guided Yahoo’s decision to sell half its 40% stake in Chinese e-commerce firm Alibaba for $7.1 billion, ending tensions over how much value Yahoo can extract from that investment.

What should guide the Yahoo board as it picks the firm’s next CEO? “The last two Yahoo CEOs were outsiders, and it seems that Levinsohn is also essentially an outsider, having been at Yahoo for only two years,” says Hussain, Wharton professor of legal studies and business ethics, whose research areas include corporate governance issues. “You never know an outsider the way that you know one of your own executives, and you naturally have to take much more on trust.”

Hussain’s advice for corporate boards in general, including Yahoo, is to build better structures and processes for grooming leaders from within the corporation. “There is no hard and fast law that says internal leaders have less viable and transformational ideas than outsiders,” he says. “And in general, the devil you know is better than the devil you don’t know.”

Wharton marketing professor Bradlow says the new CEO must develop “a core niche strategy” to restore Yahoo’s fortunes. “[That person] should rebuild from the ground up by owning a segment of customers and branching [out] big from there.”

Bradlow has a specific to-do list: “Be willing to experiment,” he says, such as offering value-added services like web page layouts. His other suggestions: “Track much more than visits/sales to understand performance. Make sure you understand repeat visitation behavior, page depth and [other] things at the individual customer level.” Any company, including Yahoo, that tracks only aggregate behavior will miss out on important diagnostics showing whether a strategy is or is not working, he adds.

Hussain cautions against placing too much emphasis on just the CEO’s actions. “In the long run, the choice of a CEO is only one moderate factor among many that figure into making a company successful,” he says. “These decisions get an enormous amount of attention in the media, so boards tend to feel enormous pressure to do something dramatic. But it’s important to be realistic. You can only do so much to move an ocean liner in a short amount of time. Where it ends up depends a great deal on the seas and the winds.”

Shaky at the Top

Yahoo has had more than its share of instability at the top. Thompson, who quit after less than six months as CEO, had replaced Tim Morse, who had been at the helm for four months. Morse was named interim CEO last September after Yahoo’s chairman fired then-CEO Carol Bartz for what was widely seen as a failure in her efforts to boost the company’s fortunes.

Bartz, who had been CEO since 2009, had a little more than a year left on her contract when she was fired. Bartz had replaced Yahoo’s co-founder Jerry Yang, who had taken on the CEO role in July 2007. Yang had replaced then-CEO Terry Semel, a six-year veteran at the company, amid worries that Yahoo’s ad revenues were shrinking as business opportunities on the Internet were expanding.

Concerns over revenues persist to this day. Yahoo’s revenue has fallen steadily from $6.46 billion in 2009 to about $5 billion by 2011, although net income has grown in that period from about $600 million to a little more than $1 billion. “The major issue is that [its] growth is lagging the industry, especially [that of] Google, Facebook, etc.,” Hosanagar had noted in a Knowledge@Wharton Today report after Bartz’s exit.

Meanwhile, Yahoo’s shareholders seem to be losing patience. “You are behind the ball and you have been behind the ball, regardless of which CEO has shown up,” a shareholder told Levinsohn and other Yahoo executives at a Q&A session on Thursday, according to The Associated Press. “You don’t execute…. As a consumer, I have given up on this company.” Many still rue Yahoo’s decision not to sell itself to Microsoft four years ago for $47.5 billion. Back then, Yahoo’s share price was $33; On Thursday, it closed at $15.69.

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