Is It A Good Idea For Yahoo To Refocus Its Business Model?

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In the latest conference call, Yahoo (YHOO) CEO Scott Thompson announced that the company will cut around 50 Yahoo properties. "Yahoo has been doing way too much for too long and was only doing a few things really well," CEO Thompson said. The latest quarter represented the first full quarter of Thompson as CEO of Yahoo. He is implementing a major reorganization of the firm with thousands of layoffs and the restructuring of the firm in three major divisions: consumer, regions and technology.

Thompson said he will be shutting down or "transitioning" at least 50 Yahoo properties, so that it can focus on core products like Mail, Finance, and Sports. The company will seriously consider being a more productive infomediation player by using all the data that Yahoo has collected to deliver a more personalized experience for users, doing more to show advertisers their return on investment, and accelerating the process of developing new features and products.

"Yahoo has built processes that were originally intended to help us scale but they've become way too complex and stifled innovation," Thompson said. He also said that Yahoo won't rule out developing new products in the future, but first it needs to "earn the right to pursue new growth opportunities" by improving core experiences. "I'm convinced we don't need to reinvent who we are," said Thompson - instead, Yahoo just needs to reinvent the user experience.

Thus, for the CEO, Yahoo needs more resources to develop its core activities. Google has refocused also recently, shutting down some properties, in order to reassign more resources to Google +. Steve Jobs had this advice for Larry Page of Google (NASDAQ:GOOG): "Figure out what Google wants to be when it grows up. It's now all over the map," Jobs came to Page with a sharp advising tongue warning Google was making products, "that are adequate but not great. They're turning you into Microsoft (NASDAQ:MSFT)." Thus, Jobs proposed to Page to concentrate in developing some major and breakthrough products or services.

Focusing the organization toward its strengths, which are the nurturing of the core competencies of the firm, may appear a very good strategy. However, it has also some major drawbacks in the medium and long term. Thus, Yahoo may reach in the short term, the target operating margin of 20%. CFO Tim Morse said the company is aiming for margins of 20 percent, excluding traffic acquisition costs. However, in the medium and long term, the lack of a growth plan, with products and services that will replace existing core activities may cause a deeper problem to its profitability.

Clayton Christensen, the Harvard professor and innovation management expert has serious concerns on the ability of Google to renew itself without the development of an independent division that will replace its core activities. He mentioned the very relevant example of IBM (NYSE:IBM). Why IBM is 100 years old? Because IBM reinvented itself by entering new markets that replaced totally in the medium term, its core activities.

Christensen argues that many firms must reinvent themselves or those firms can face bankruptcies. Cisco (NASDAQ:CSCO) disrupted telecommunications with its router and Nortel went bankrupt, while Lucent merged with Alcaltel (ALU). IBM is the sole survivor of the mainframe manufacturers (with a 65% margin), the sole survivor of the mini-frame manufacturers (45% margin) and was among the pioneers in the PC world (25% margin). It reinvented again the firm, while diversifying now in the Services sector: technology and business consulting. IBM succeeded its transformations, while many failed because IBM did not hesitate to start a new business model attached to a new independent business unit, at each transformation period of its history. It succeeded to bring a disruptive innovation, with a new business unit relying on a new business model.

According to Christensen, infocom titans such as Apple (NASDAQ:AAPL) and Google will face also tough issues in the long term. Those firms should not necessarily listen to their customers to evaluate new opportunities. Independent business units with their own business model can create new avenues for long-term value creation. For example, Google doesn't have that so far. It still relies heavily and maybe too much on advertising: Adwords, Adsense and mobile advertising. According to Christensen, the advertising business unit won't be able to create new sustainable business opportunities in the long term. Business units are captive of their own structure and their own old business model.

While refocusing may increase short-term profitability, too much focusing may affect long-term profitability. In the fast moving infocom sector, core activities can become obsolete more quickly. It is better that Yahoo comes up with its own products and services to replace its actual core activities, than being disrupted by competitors.

Disclosure: I am long AAPL.