Coring, Tipping, and Envelopment Business Model Innovation
There are two main strategies for companies seeking platform leadership. Activities related to the creation of a new platform are called “coring”. Meanwhile, “tipping” is the construction of new and unique features that can be bundled with a "core" that attracts more users to the platform and thus competes with rivals.
At the beginning of the business, both Google and Yahoo focused on the creation of the search engine. This activity can be categorised as coring. However, they tipped differently on developing a business model to capture the value from their search engine users. Yahoo’s strategies on seizing and sustaining were dominated by partnering while Google was relatively balanced on using internal deployment, acquisitions and partnering.
Yahoo launched pay-per-performance search results to be bundled with its search service in 2001. They partnered with Overture to gain revenue by introducing paid listings that were typically sold on a “per-click” basis where an advertiser paid only when a user actually clicked on the advertiser’s listing. The “cost-per-click” (CPC) strategy was a huge success for both Yahoo and Overture. Search engine leads were seen as more successful from the marketers' perspective than banner advertising on other websites because search engine users were always looking for goods and services they intended to buy early. For an advertiser, a high position on the search results page would lead to greater visibility, more clicks, and more sales. As a result, advertisers were often actively competing for top positions, which meant high payments to platform providers. The CPC auction structure encouraged advertisers to focus their bids on product-related keywords so that their ads would be relevant to users' needs.
Google adopted a variant of Overture’s cost-per-click model in 2002. Google measured CPC bids by the ratio of an ad’s actual click-through rate (CTR) to Google’s CTR predictions. This measurement helped ensure that the most prominent positions were earned by related advertisements. An ad with a low CTR would suffer a lower effective bid and would be shown less prominently. Conversely, an ad that is shown in the top result has a high CTR and higher bid. This method successfully maximised Google’s revenue and threatened Yahoo’s market share in search service and paid listings in 2004. Google’s market share rose to 58.4% by 2007 and 65.6% by 2009, while Yahoo’s share dropped to 17.5%.
In addition to “coring” and “tipping”, envelopment as a strategy by which one platform provider combines its platform's functionality with the functionality of a newly created platform to form a multiplatform bundle. The merger of two networks and platforms strengthen network effects and improves the value for users because of the increased number of users and functionality. The typical business model innovation option is whether to enter or expand with an improved value proposition to new markets.
Google performed focused envelopment in their search market by expanding the search service from search to keywords into search to pictures. This means that Google bundled two different platforms in the same platform market, which is the search service. Additionally, Google also seized the opportunity using dispersed envelopment strategy. It refers to the bundling of a platform in one market with a different platform in another different market. Google docs, for instance, is a product of dispersed envelopment strategy, resulting in the dispersed activity and user base across two markets.
Google introduced 100 products in 22 markets from 2006 through 2011. The 2007–2011 period was marked by 70 focused and 15 dispersed moves of platforms, content, and applications in the development. The combination of core markets of Google and its dispersed envelope movements expanded the core market of Google resulting in accelerated revenue growth, leveraging its large user base and value. This is the starting point of Google's ambition to penetrate the “supra-platform” market.
Yahoo introduced a total of 56 new products across 11 markets during the period 2006 to 2011. The 2007–2011 period was marked by 41 focused and four dispersed envelopments. Prior to 2006, Yahoo pursued a scattered envelopment strategy and changed its strategy in response to unsustainable growth in revenues. Most of Yahoo's product introductions fell into the entertainment market in 2006, including "Yahoo TV," "Yahoo Sports for TV," and the "In The Dressing Room" web series. These products were seized on the same market as focused envelopment, arguing that they complement each other—Yahoo TV and Yahoo Sports for TV—or replace—Yahoo Sports for TV and In the Dressing Room. Therefore they largely share overlapping user bases and functionalities. This strategy, however, failed to secure sustainable revenue for Yahoo. The core market base for Yahoo stagnates from 2009 onwards. In 2010 and 2011 no new dispersed envelopment was created to grow its ecosystem. The company's revenue dropped to $5.0 trillion in 2011. The redesigning of Yahoo's envelopment strategy accounts for revenue decline, and failure to grow core markets further inhibited Yahoo's ability to scatter its portfolio and grow and protect revenues.
Surferers versus Engineers
One of the key dilemmas about effective resource reconfiguration is how to combine dynamism and capacity growth with several reconfiguration strategies. There are many different reconfiguration processes involved in organisations such as dynamic R&D or marketing. The advantage of locating dynamic capabilities in organisational routines is that they can be mapped, analysed and benchmarked against competitors, and evaluated based on tractable outputs.
Yahoo’s dynamic strategy integrates its broad sensing throughout partnering with a shift to internal deployment to build capability in core markets. Yahoo changed its corporate structure to better reflect the branding and marketing focus. They hired 386 full-time staff at the end of 1997, of which 199 were in sales and marketing, and 80 were surfers who were classifying pages. Yahoo deployed its surfing capability to discover desirable content and potential partners. It also reorganised the internal structure by applying media and film industry-like "producer teams" into its management. The surfing department also was responsible for monitoring competitors and complementors and reporting the producers about relevant sites. Nevertheless, Yahoo’s human editors could not keep up with Google’s algorithm because its unfocused dispersed market made the teams confused and became less productive.
In contrast, Google’s strategy integrates targeted sensing in a narrower set of markets through creating opportunities and adding flexibility through external resources in opportunity pursuit. Google's focus-envelopment approach is supported by its distinctive governance system and corporate principles. Management implements a 70:20:10 allocation rule for engineering works. Seventy percent of engineering time was spent on the core business, which is web search and paid listings. Twenty percent was spent on extended core projects, such as Gmail. Ten percent was spent on new businesses. Google engineers work in teams of three to five people to encourage swift execution, in order to have as little middle management as possible. This approach was intended by Google leaders to create a flexible organisation, with small teams pursuing hundreds of projects. Thus, Google’s strong management function and flexible organisation enable it to perform a successful orchestration of internal and external resources.
So, Who Performes Better?
Google has dominated the search engine market, maintaining an 87.35% market share as of January 2020 while Yahoo has only 2.83%. Yahoo and Google penetrated the same search market with different resources that could have offered them different choices for the exploration of potential opportunities. Google learned from the market by investing in internal capability development which leads to market changes and reshaped consumers’ needs and expectations. Yahoo’s strategies demonstrated very high levels of dynamism in both numbers of opportunities sensed and use of partner resources to rapidly sense and seize. However, Yahoo’s strategy in partnering and acquisitioning seems very broad and lacks focus on the brand mission, thus, leads to an identity crisis. The failures that Yahoo faced were also caused by many factors:
Failure to shift from desktop web to a mobile even though Yahoo was in a prime position to take advantage.
Weak company’s culture that leads to inconsistent leadership and identity crisis.
Major cyber attack from more than 1 billion user accounts in August 2013, making it the largest data breach in history.
Inability to perform orchestration of its M&A assets with its internal abilities.
The failure of Yahoo suggests that a company needs to be clear on the mission, brand image and competitive advantage to be focused on. Yahoo’s data breach also proved the incapabilities of Yahoo incorporating an external resource which in this case is the technology from its partner hosting company into Yahoo’s internal deployment. The management is not flexible enough to reconfigure the internal knowledge to integrate with external assets.
Google as an ambidextrous company, in contrast, able to explore new practices, products and business models while exploiting existing ones at the same time - a capability which is valuable for customers and hard to imitate by competitors. The success of Google justifies that not all pioneers have benefits of an early-mover. Therefore, to some extent, later movers can free ride on early-movers’ efforts and build better products than the pioneers.
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