BAIDU

I. DISCUSSION QUESTIONS, CASE INTRODUCTION AND KEY POINTS

Introduction

Baidu is the dominant search engine and online advertising service provider in China. To date,
they have succeeded where Microsoft, Yahoo! and everyone have failed: They are beating
Google at their own game. Will Baidu be able to maintain their market share lead over Google
and the other search engine and online advertising players? What will/should Baidu do to
maintain their competitive advantage?

The case introduces the search engine business model and outlines various measures of search
engine and online advertising market share in China, as well as globally and in the U.S. There is
discussion of the political hurdles that companies face in doing business in China. There is also
exhaustive information regarding the growth and financial position of both Baidu and Google.

Summary of key learning points and strategic issues

1. Measuring the financial health and expected growth of a firm.

2. Identifying where the firm differentiates itself within the value-chain.
3. Understanding the political/legal/governmental issues that may affect the growth/progress
of a firm.
4. Awareness of whats happening and what may happen in the broader economy and how
that may affect the success of the firm.
5. What factors to evaluate in considering expansion and entrance into new markets.
6. Macro issues and trends to consider when evaluating high-tech firms.

Discussion Questions

1. Perform a STEEP analysis to understand the general environment facing Baidu. How
will the firm be affected by external factors?
2. Use Porters Five Forces Model to analyze the search engine / online advertising industry
in the China. Given this analysis, is the industry attractive or unattractive?
3. Who are Baidus main competitors? How do they measure up against these competitors?
4. What are Baidus main capabilities? Do they have a core competence?
5. Create a SWOT analysis to understand Baidus strengths and weaknesses. Does Baidu
have a sustainable competitive advantage? Is so, what is the source? What about Baidus
evolution and current business strategy may pose problems going forward?
6. What is Baidus business-level strategy? Is the strategy appropriate to offset the forces in
the industry? Do you recommend any changes and/or foresee any challenges?

BAIDU |1
 BAIDU

II. EXTERNAL ENVIRONMENT ANALYSIS

Summarize the external environment, including conditions in the general, industry, and
competitor environments.

a. The General Environment

Definition: The general environment is focused on the future and can be analyzed by
considering the STEEP framework: Social/demographic, Technological, Economic,
Environmental/geographic and Political/legal/governmental factors at play.

1. Social/Demographic
2. Technological
3. Economic
4. Environmental/Geographic
5. Political/Legal/Governmental

Discussion Question 1: Perform a STEEP analysis to understand the general environment

facing Baidu. How will the firm be affected by external factors?

Social/Demographic Segment
a. Currently Chinese culture and language barriers give Baidu a competitive
advantage over other companies such as Google who must gain this kind of
expertise over time. As Baidu seeks to expand overseas, especially in the US, it
will similarly have to adapt its strategies to meet consumer demands.
b. User education and support remains important in China because many SME
customers are not accustomed to online business and the payment and logistic
infrastructure still needs improvement.
c. China is a fast growing market. For the first time the Chinese search market
exceeded the US in number of search requests in November 2007 and then in
February 2008 Chinas number of internet users surpassed that of the US.

Technological
a. Baidus experience with two byte search algorithms and user behavior serves as
an advantage in China but it will have to adapt to one byte as it expands overseas,
particularly in the US.
b. Constant innovation makes any new competitor dangerous, even in an established
market.

Economic

BAIDU |2
 BAIDU

a. The free floatation of the RMB makes currency fluctuation a greater issue for
Baidu as it moves into the future.
b. Due to its status as a foreign-invested enterprise registered in a high-tech zone,
Baidu enjoys preferential tax benefits and a much lower effective tax rate.
c. A potential economic downturn could have a significant impact on advertising
revenues.

Environmental/Geographic

a. Chinas number of internet users surpassed the US in February 2008.

Political/Legal/Governmental
a. Chinas strict censorship policies can serve as an impediment to Baidus foreign
competitors, as it did to Google in 2002.
b. Chinas foreign ownership restriction on providing internet content and
advertising services in China impacts Baidu and requires it to operate through a
local subsidiary. Google and other foreign companies must also abide by these
rules

b. The Industry Environment

Definition: An industry is a group of firms producing products that are close substitutes. In the
course of competition, these firms influence one another. Typically, industries include a rich
mixture of competitive strategies that companies use to pursue above-average returns. In part,
these strategies are chosen because of the influence of an industrys characteristics. Compared
with the general environment, the industry environment often has a more direct effect on the
firms strategic competitiveness and above-average returns.

The industry environment is the set of factors that directly influences a firm and its competitive
actions and competitive responses. Porters 5 Forces Model is a powerful tool for understanding
the dynamics amongst the five key factors that determine an industrys level of rivalry and profit
potential. [Outlined below, High=H; Medium=M; Low=L]

Discussion Question 2: Use Porters Five Forces Model to analyze the search engine / online
advertising industry in the China. Given this analysis, is the industry attractive or
unattractive?

Baidu and Google essentially follow the same business model which is selling ads tied to user
searches. They earn their revenues from online marketing activities on their websites, mainly
auction-based pay-for-performance (P4P) search advertisements.

BAIDU |3
 BAIDU

1. Threat of New Entrants (or barriers to entry): Medium

a. Constant technological innovation means competitors could come from almost
any direction.
b. It is tough, however, for new players to compete in an established space without
disruptive technology that differs significantly from what is currently available.
2. Supplier Power: Low There is no shortage of third parties with whom Baidu can start a
revenue-sharing model. Currently Baidu derives 25% of its revenue from its partner
websites while Google receives 10 to 15 % more.
3. Threat of Product Substitutes: High
a. Baidu, Google, Yahoo, and Microsoft have similar product offerings and so
customers can easily switch between them.
b. Niche offerings can potentially steal away specific customers.
4. Buyer Power: Low/Medium
a. No company has clear monopoly power, although Baidu does have a dominant
market share in China.
b. Customers who purchase ads, however, have relatively few options because the
search ad market is so concentrated.
5. Intensity of Rivalry: High
a. The Chinese search ad market is growing quickly and becoming more
concentrated.
b. The combined market share of the top three search engines increased from 78% in
Q1 2006 to 95% in 2007 (with Baidu 60.4%, Google 21.2% and Yahoo!
China/Alibaba 13.8%.

c. The Competitor Environment

Definition: The competitor environment is the final subject of analysis required to gain a full
understanding of the company's external environment. A competitor analysis focuses on each
company against which a firm directly competes and involves gathering and interpreting
information about JetBlue's competitors. The intense rivalry of the airline industry creates a
strong need to understand competitors, which can be accomplished by evaluating each
competitor in the following areas:

Competitive rivalry is the ongoing set of competitive actions and responses that occur among
firms as they maneuver for an advantageous market position. Especially in highly competitive
industries, companies constantly jockey for advantage as they launch strategic actions and
respond or react to rivals moves. It is important to understand competitive rivalry because it
influences a firms ability to gain and sustain competitive advantages.

3 Is Framework

The competitor environment is the final subject of analysis required to gain a full understanding
of the company's external environment. A competitor analysis focuses on each company against
which a firm directly competes and involves gathering and interpreting information about its
competitors. Leveraging the 3 Is framework provides a thorough overview by grouping

BAIDU |4
 BAIDU

competitors into three buckets: immediate competition, impending competition, invisible

competition.

Discussion Question 3: Who are Baidus main competitors? How do they measure up against
these competitors?

1. Immediate Competition
Both Baidu and Google provide a wide range of products and services that give users a
better search experience with a view to increasing traffic and user stickiness. Their
offerings can be placed into three categories: search, community and other
enhancements.

a. Google
i. Google was incorporated in 1998 and is now the leading global
internet search engine and online ad company
ii. Google differentiates itself because of the quality of its search results.
Its search algorithm takes into account relevance and other qualitative
elements that other search engines ignore.
iii. Google strives to Make money without doing evil. It does not allow
ads to be displayed on its results pages. Ads produced by certain
searches are always clearly identified as a sponsored link.
iv. Since 2001, Google has sought to expand through numerous
acquisitions and adding on a wide array of products and services
outside of its sponsored search domain.
v. Google reentered China in 2005 after censorship conflicts with
Chinese government forced it to leave in 2002.
vi. In 2007, international revenues accounted for approximately 48% of
Googles total revenue and in 2008 more than half of it user traffic
came from outside the US.
vii. In 2007, Google had 21.2% market share in Chinas search ad market.
b. Yahoo: In 2007 Yahoo held a 13.8% market share in Chinas search ad
market.
2. Impending Competition
a. Yahoo/Microsoft: A partnership or merger between these two companies
introduce a much larger player to the market and make the market even more
concentrated.
b. Traditional Media: Indirect competitors could move into the online paid
search market.
3. Invisible Competition
a. Startups: Technological innovation presents a constant threat to established
market players.
b. Foreign Competition: New/unknown competition could emerge from abroad.

BAIDU |5
 BAIDU

III. INTERNAL COMPANY ANALYSIS

Summarize internal company factors including: capabilities and weaknesses, value chain
activities, strategy, and financial situation.

a. Outline the company's internal capabilities and weaknesses.

Definition: Capabilities exist when resources have been integrated to achieve a specific set of
tasks and are frequently developed within a specific functional area. In addition to identifying
the company's opportunities and threats from the external environment, another important
objective of the situation analysis is to evaluate strengths and weaknesses as input for developing
the company's strategies.

Discussion Question 4: What are Baidus main capabilities? Do they have a core
competence?

Discussion Question 5: Create a SWOT analysis to understand Baidus strengths and

weaknesses. Does Baidu have a sustainable competitive advantage? Is so, what is the source?
What about Baidus evolution and current business strategy may pose problems going
forward?

Using the table below, conduct a SWOT analysis identifying the firms strengths, weaknesses,
opportunities and threats in the table below.
Strengths Weaknesses
First-mover advantage; Dominant market Differentiation between sponsored &
share unsponsored search results
Knowledge of Chinese culture and Weak on piracy, strong on censorship
language Lack of presence outside of China
Better penetration with distributors Reliance on advertising as primary
Direct sales force revenue source in economic downturn
Opportunities Threats
Further expansion into Japan/Other Asian Google/Yahoo!/MSN getting better at
Markets doing business in China
Revenue sharing with publishers/IP holders Loss of top sales people/distributor to
for piracy protection competitors
New revenue generating services/products; Revenue loss due to economic downturn
portfolio diversity

BAIDU |6
 BAIDU

b. Conduct a Value Chain analysis to identify value-creating activities.

Definition: By exploiting its core competencies, a competitive firm creates value for its
customers. Value is measured by a products performance characteristics and by its attributes for
which customers are willing to pay. Companies with a competitive advantage offer value to
customers that is superior to the value competitors can provide. Value is created by innovatively
bundling and leveraging resources and capabilities.

A value chain analysis provides information relative to primary (inbound/outbound logistics,

operations, marketing & sales, and service) and secondary (firm infrastructure, human resources
mgmt, technological developments and procurement) activities.

1. Internet Users
a. Most SME customers in China are not used to doing business online, therefore
Baidu must spend significant energy and resources on user education.
2. Traffic Acquisition
a. Baidu has been able to acquire traffic for remarkably little between 2004 and
2007. However, if current trends continue, they will soon lose their advantage in
total user acquisition (TOC).
3. R&D
a. Familiarity with the Chinese market and Chinese culture, along with a search
platform based on 2-byte technology, gives Baidu a significant competitive
advantage.
4. Marketing

BAIDU |7
 BAIDU

a. First-mover advantage in China has been the primary driver behind their market
share dominance. However, they are a fraction of the size of Google, with a
fraction of the resources, and their market share lead will shrink as Google invests
heavily and marketing their services and learns how to do business in China.
5. Sales & Distribution
a. Baidu has direct sales force of 3000 located in 7 major cities. Further, they have a
head start over Google and all other competitors with their deep penetration into
the network of Chinese distributors.
6. A Paid Search Network
a. All of these pieces add up to significant value and a dominant market share for
Baidu in China.

c. Financial Analysis

Definition: Financial analysis is used to assess the viability, stability and profitability of a
company or operating division. The analysis is done using quantitative historical performance
found in the financial reporting documents (Balance Sheet, Income Statement, Statement of Cash
Flows). The goal of the analysis is to understand a companys financial health through its
profitability, solvency, liquidity, and stability.

Baidu has grown exponentially since 2003, with $239M in revenue in 2007.

BAIDU |8
 BAIDU

The question remains: Is Baidus P/E ratio justified, especially if you consider it relative to the
P/E ratios of its top competitors.

To date, Baidu has been able to acquire traffic for significantly less than Google. However,
current trends indicate that they are gradually losing their advantage to Google in terms of TAC.

BAIDU |9
BAIDU

B A I D U | 10
 BAIDU

IV.STRATEGY FORMULATION

a. Strategic Analysis

Definition: Conduct an analysis of Nucors business strategy by using the 4 Ps Framework.

The 4 Ps Framework is used to understand a companys strategy based on its Position (Mission,
Values, and Vision), Priorities, Payments (what it will spend its money on to reach those
priorities), and Performance (how it will measure success).

By completing the framework, we can analyze a companys current, future, or recommended

priorities as well as set forth a path in order to achieve goals and measure accomplishments.

Discussion Question 6: What is Baidus business-level strategy? Is the strategy appropriate to

offset the forces in the industry? Do you recommend any changes and/or foresee any
challenges?

Use the 4 Ps Framework to analyze the firms past/current/future strategy.

Baidu
1. Position
a. Baidu began as provider of internet search solutions to other Chinese portals.
Baidu gained 1st mover advantage as the only search engine with information in
local Chinese language. It was initially popular because of its multimedia
presence, including MP3 music & movies. Baidu is often criticized as weak on
piracy, strong on censorship.

B A I D U | 11
 BAIDU

i. Mission to provide the best way for people to find information by

applying an avant-garde technology to the worlds most ancient and
complex language
ii. Values Focus on Chinese market; Chinese heritage
iii. Vision Be go-to resource for Chinese speaking world; Expansion
internationally when China growth slows.
2. Priorities
Baidu has 4 key strategic priorities:
a. Complimentary strategic acquisitions
i. Aug 2004 - acquires domain name that is its largest traffic contributor
ii. Acquires distribution business of Qilang- P4P services
b. Chinese market dominance/growth
c. Baidu.jp for Chinese SMEs
d. Look at C2C and mobile search
3. Payments
a. Not relevant to this case.
4. Performance
a. Baidu is the #1 website in China, the #1 search engine in China and the largest
website/search engine outside of the U.S.
b. Baidu has a 60.4% market share in China, which is double Googles market share
c. Baidu is the only Chinese company listed in the NASDAQ 100
d. Though it has achieved great success and market dominance in China, Baidu is
still small when compared with Googles global size. In 2007, Baidu earned $86
million in net income on $239 million in revenue, compared to Googles $4.2
billion in net income on $16.6 billion in revenue.
e. Baidus IPO price went from $27 to $122.54 on the first day of trading.

B A I D U | 12
 BAIDU

Discuss possible recommendations that Nucor could follow going forward to improve the
performance of the company. Determine the decision criteria and also analyze the pros
and cons of each recommendation.

a. Key Questions and Recommendations

Question Option / Hypothesis Decision Pros Cons

Criteria

Is it just Yes Chinas online Expansion into 2nd Lack of expertise

a matter user/ad growth largest market in 1 byte
of time rate slows, Steal Market algorithm
before dips below US Share, esp. from Entrenched
there is a growth rate Google search market; no
Baidu.us first mover
portal? advantage
Cost to build US
infrastructure
What If MS acquires N/A Fewer MS becomes
will Yahoo!, industry will competitors stronger
happen if be more Opportunity to competitor
Microsof concentrated, pick up MS/old Increased
t rivalry/competition Yahoo! intensity of
acquires will be more intense Customers that rivalry
or fails to dont switch
acquire
Yahoo!?
Was No, the share price is Comparable China is the Baidus
Baidus to high P/E ratios, fastest growing dependence on
share market market single Market
price dynamics Baidu has Googles future
justified? dominant MS growth in China
Would it Revenue growth Impending
last? forecast economic
How downturn
should Chinas growth is
investors unsustainable
evaluate
the
stock? Is
it time to
buy or

B A I D U | 13
 BAIDU

sell?

B A I D U | 14