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FOLLOWING THE PATHS TO INNOVATION: “Fostering Creativity within the Search Engine

Industry”

By Irella Christina Blackwood, 15768090

UC Berkeley, Fall Semester 2005

Information Systems 141

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TABLE OF CONTENTS

1. Summary of Topic2. Methodology3. Goals4. Structure of Search Engine Industry5. Applicable Theories from Literature6. Case Analysis: Yahoo!7. My Interpretations8. Conclusions9. Limitations 10. Condensed Bibliography

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SUMMARY OF TOPIC:

Definition of Creativity:

• “The ability to develop new ideas.” (Byrd and Brown 2005). Some of these ideas help solve problems and others lead to new innovations that facilitate the firm’s main goal.

Purpose of Study

• To examine the conditions of internal development of creativity and the progression of external acquisition of creativity at search engine firms such as Yahoo, Microsoft, Google and Ask.

• To bring attention to the importance of creativity in competitive high-level technical firms.

Why Creativity Needed for Search?

• To better serve the information seeking tasks of it users, tasks that range from navigational to research to shopping and entertainment (Rose 2005).

• To ensure sufficient and increasing traffic (user visits) to search sites.

• To better organize information on the internet, by avoiding manipulated ranked pages (spam).

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METHODOLOGY• Interview a manager and a recruiter to investigate

the search firm’s strategy to foster creativity at their organization.

• Review existing literature of the search engine market in journals, articles, websites, and books.

• Analyze financial statements of search engine firms.

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OVERVIEW OF THE INDUSTRY

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DYNAMICS OF COMPETITION

• Search competition began in 1994 with Lycos and Yahoo (Gandal)

• Search engines hold the key to helping consumers access the wealth of information on the web.”

• “Learning by doing” (economy of new industries)

• No consumer switching costs. Income plays no role in consumer choice.

• No major network externalities. New issues emerging.

• “First mover” advantage declines over time (Gandal).

• Advertisements is the main way search engine firms earn profit. They do not get paid off of their search methods alone.

• Risks to employees in United States of offshoring

• Vigorous competition. Some competitors have more brand recognition in horizontal and vertical markets.

• Generating profit could be hard if businesses postpone advertising spending because of economic hardships right now. (Hurricane Katrina, terrorist attacks)

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BARRIERS TO ENTRY

• Initially relatively low, however, barriers have significantly risen (Batelle 2005).

• A firm can only maintain leadership position by providing a superior product. (Gandal 2000)

• Product differentiation based on utility of consumers.

• “Pure brand rents in these markets will likely be short lived.”

(Gandal 2000) • Effective trademark, patent, copyright and trade secret

protection may not be available in every country (FS 2004)

• Still the threat of mergers between big competitors and small competitors. (FS 2004)

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THEORIES ABOUT WORKER MOTIVATION

TO BE CREATIVE • Intrinsic Motivation:

– Arises when individuals feel both self-determined and competent in their work (Deci and Ryan, 1985)

• Motivator-hygiene theory– Two component maintenance factors which are necessary to maintain a

desired level of employee satisfaction and motivational factors. Process can be done through recognition, responsibility, and growth potential. These motivational factors strongly impact an individual's willingness to contribute through creation. (Herzberg 1966)

• “Creativity has three parts: expertise, the ability to think flexibly and imaginatively, and motivation.” (Byrd and Brown 2003)

• Individual creativity stems from independent work (Brown 2005)• Incentives and Complementarity (rewards for quality and improvement)

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A Simple Model of Motivation(Carlson 2000)

NEED-Creates desire to fulfill needs (food, friendship, recognition, achievement).

BEHAVIOR-Results in actions to fulfill needs.

REWARDS-Satisfy needs; intrinsic or extrinsic rewards.

FEEDBACK-Reward informs person whether behavior was appropriate and should be used again.

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OTHER APPLICABLE THEORIES

Worker Performance:

• Performance is based on skills developed in classroom and on the job (Brown)

• “The way people are paid affects the quality of their work.” (Milkovich)

Generally Why Creativity is Needed:

• Innovation = Creativity X Risk Taking (Byrd and Brown 2003)

• Need for workers to have ability to deal with changes and adjustments (Koike)

Engineer Development

• “Companies devote significant resources to the development of engineers, and it is expected this will increase.” (Lynn 2002)

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FACTORS THAT LEAD TO INNOVATION(SAMMONS 2005)

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Forecast of Company Knowledge Structures

• “In the twenty-first century, it seems likely that knowledge will continue to grow steadily. Organizations will need to remain abreast of technical, social and legal developments. To do this, some knowledge will be developed within the organization, whilst the rest will be sourced externally.” (Sammons 2005)

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Options Where Firms Can Obtain Knowledge(Sammons 2005)

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SOURCES OF CREATIVITY(SAMMONS 2005)

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STRATEGIES TO OBTAIN KNOWLEDGE(SAMMONS 2005)

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STRUCTURE OF KNOWLEDGE AND LABOR MARKET

In order to foster creativity, firms can make various arrangements and mixtures of their workforce and knowledge foundation based on the options available to them in society. The way firms structure their organization determines how vertically integrated they will be.

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POTENTIAL SHIFT IN SEARCH FIRMS’ KNOWLEDGE STRUCTURE

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SOME INNOVATIVE FEATURES OF SEARCH ENGINES

• MAPS

• DESKTOP SEARCH

• PRINT SEARCH

• IMAGE SEARCH

• VIDEO SEARCH

• PERSONALIZED SEARCH

• SCHOLASTIC SEARCHES

• SUGGESTED SEARCHES

• PHOTOGRAPHY SEARCH/SHARING

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CASE ANALYSIS: YAHOO!

• Interviewed with a recruiter and a User Experience and

Design manager Monday October 24, 2005 at headquarters.

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HISTORY OF YAHOO!

• Started in 1994 by Stanford Computer Science Students David Filo and Jerry Yang as a company just doing search.

• Realized that remaining a pure search engine company would cause the firm to be stagnate. Evolved into a diverse entertainment portal.

– CEO, Semel says the company’s revenue more than doubled because, “we benefited from the diversity within our core businesses of advertising and premium services.

• Now Yahoo! has three general departments: – 1)      Yahoo Media

– 2)      Yahoo Network services

– 3)      Yahoo Search and Market place.

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FUTURE OF THE COMPANY

• Yahoo! has future outlooks for innovative ideas and growing revenues:

– “I am sure that change and innovation will be even more rapid and profound over the next 10 years…. The next 10 years is going to be about the integration of everyone’s information and entertainment devices and Yahoo! plans to be at the core of this infrastructure.” –Terry Semel Yahoo! Chairman and CEO (1)

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CONDITIONS OF ENGINEER’S @ YAHOO!

• Working in teams is dominant at Yahoo! (teams vary in size)• Workforce is set apart through company culture and compensation• More industry experienced engineers as opposed to only University educated• Turnover over low compared to industry• Recruiters try to find creative people at the initial stage of hiring. (very

aggressive recruiting) • Able to continue making Yahoo! Search a leading service by improving the

methods of search or by improving the click stream of paid listings. • Are able to plan out each future year using FOCALS• Most engineers have the ability to switch between different departments

throughout the company (mobility)• Promotion can include working on higher level technical projects or becoming

more involved in managerial aspects• Young and energetic environment.

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CREATIVITY DEVELOPMENT @ YAHOO!

• Matte Scheinker, a User Experience and Design Manager says Yahoo’s goal to foster creativity is “to develop creativity in house and recruit from the external labor market.”

• “Creativity is encouraged by giving engineers some type of flexibility on projects they are working on (and sometimes the language implication used). Mainly I would say their creativity is encouraged by allowing them to participate in a project from the beginning. Some may not be the owners of what could be deemed the creative output, but they have the opportunity of being a key contributor. I’d also say that in a broader sense, engineers are always encouraged to be creative with technical solutions.”

• He also talked about the fact that Yahoo! impacts millions of users could serve a way of motivating people to be creative. (intrinsic motivation)

• “Our business is dependent on our ability to retain, hire and motivate talented, highly skilled personnel.” (CEO FS 8)

• A variety of factors encourage engineers at Yahoo! to be creative. Compensation and rewards are high on the list too.

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REWARDS IN THE COMPANY:• Although I do not have information the key compensation aspects of the company

such as salary and performance evaluations, Yahoo! does publicly make available their general compensation and benefits package. Their U.S. office includes:

• Stock Options/ Employee Stock Purchase Plan• 401K (with company match) • Vacation • Health Care• Medical Insurance • Dental Insurance • Vision Insurance• Pre-Tax Savings Programs • Income Protection • Other Benefits - Backup Childcare, Educational Reimbursement, Matching Gift Program,

Health Club Benefit, Game Room, Y! Mart, discount movie passes, on-site ATM machine, On-Site Dental, and free sodas and lattes.

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EMPLOYEE REWARDS (CONT.)

• Other rewards of working at Yahoo! include a “highly creative (and highly casual) work environment, to the fact that they celebrate just about every success with a party (always featuring food)”, “funky” yellow and purple color scheme that extends from the walls of our office to our cubicles and conference rooms. Foosball and video games around the complex make “a fun work break.”

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EXAMPLE OF A RECENT INNOVATION AT YAHOO! SPARKED BY CREATIVITY

• “Although we only launched our own algorithmic search product in February 2004, today many analysts and critics already believe Yahoo! Search Technology is now among the best in the world. We quickly followed the global launch with an aggressive rollout of unique and ground-breaking search solutions, such as My Yahoo! Search, award winning desktop search, the largest image search with more than 1 billion images, the first video search to be offered by a major search engine, and integration into vertical areas, such as news, shopping. Local, mobile and travel.” (Terry Semels, CEO)

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EXTERNAL ACQUISITIONS

• Not only does Yahoo develop creativity amongst its workers, but Yahoo! has made many acquisitions since its beginnings. Here are some recent one’s: – “We continue to acquire companies. We completed a number of

acquisitions during 2004, including acquisitions of 3721 Network Software Company Limited (3721), in January, Kelkoo in April, and Musicmatch in October. 3721 is a Hong Kong based software development company focused on keyword search technology. Kelkoo is an online comparison shopping service for the European market. Musicmatch is a provider of personalized music software and services. Since inception, we have also acquired a number of other companies including those that provided technologies, content, databases, software, and/or tools to develop and expand upon our offerings on the Yahoo! Network.”

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PROBLEMS WITH ACQUISITION

• “If we are unable to license or acquire compelling content at reasonable costs or if we do not develop compelling content, the number of users of our services may not grow as anticipated, thus hurting our operating results.” (CEO FS 15)

• “Without innovative ideas, a company stagnates and may even cease as a going concern…. (Byrd and Brown 2005)

• “Knowledge contributes to the measurable ‘intellectual capital’ of organizations.” (Sammons 2005)

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Prior Acquisitions’ Risks:(FS 2004)

1) The difficulty of assimilating the operations and personnel of our acquired companies into our operations.

2) Potential disruption of our ongoing business and distraction of management3) Difficulty of integrating acquired technology and rights into our services and

unanticipated expenses related to such integration. 4) Failure to successfully further develop acquired technology resulting in the impairment of

amounts currently capitalized as intangible assets. 5) The potential for patent and trademark infringement claims against the acquired company. 6) The impairment of relationships with employees of the acquired companies or our

employees as a result of integration of new management personnel. (extinction)7) The difficulty of integrating the acquired company’s accounting, management

information, human resources and other administrative systems. 8) In the case of foreign acquisitions, uncertainty regarding foreign laws and regulations and

difficulty integrating operations and systems as a result of cultural, systems and operational differences.

9) The impact of known potential liabilities or unknown liabilities associated with the acquired companies.

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INTERPRETATIONSFactors that lead to Creative Workers• Although there are many factors that develop a creative engineer in the search

engine industry, there appears to be no clear definitive path to develop creativity in the search engine industry. It appears that an individual already posses some level motivation to be creative since they are joining major search engine firms, like Yahoo, which have superior reputations. It is mostly likely that they want to be a contributor to this type of institution. (Intrinsic motivation) Past experiences at other companies could determine an engineer’s level of creativity also. Owning stock in the company could be a key factor to having workers be innovative (profit sharing theory).

The Need for Creativity• The nature of the search engine industry demands creativity from firms to

remain in a leading position. As a result, search firms maximize creativity in their companies by recruiting and acquiring it externally, and attempting to foster it internally.

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INTERPRETATIONS (CONT.)

Free Rider Problem• It is possible that a “Free Rider Problem” is associated with team

activities. It appears a worker in a team situation has the potential to benefit from other team members’ hard work without demonstrating the same effort. I especially thought of this issue when the manager told me everyone receives a pay increase when a team overall performs well. At the same time, he also said they have a way of dealing with low performing people. The free rider problem could be offset by the fact that teams are composed of people from different areas of the company so everyone has a specific role to play, making it obvious if their contribution is lacking. Claire Brown’s paper supports the view that engineers (in the semiconductor) industry could develop creativity more through individual work.

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MORE INTERPRETATIONS

Assessment of Internal Creativity• Internal creative development appears to be insufficient to

sustain search companies like Yahoo! because they prefer to recruit industry experienced engineers as opposed to develop them. Although these types of companies promote from within, they tend to hire people with more industry experience. What does this say about barriers to entry? Do all firms have the same access to intellectual capital? The tendency for acquisition of external knowledge or creativity to be the most dominant strategy of search engine companies today could be a result of the fact that it is very hard to recruit qualified people. According to the recruiter, “This year was an unbelievably aggressive year for hiring.”

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CONCLUSIONS

What determines creativity in Search Firms? • The main determinants of creativity in the search engine industry are

intrinsic motivation, company environment and reputation, work content, individual’s interest in company’s business strategy, compensation and incentives, and their ability to be recognized (either by management or users). (Motivator-hygiene theory by Herzberg 1966)

Current Position of Search Firms• Search engine firms cannot survive in the industry by creating superior

search mechanisms alone. They must find other diverse creative ways, besides just search, to attract users in order to remain in business (advertisement click stream rates). However, they must find a balance between providing various forms of search, and attracting users to their advertisements and other income generating features of their companies. Fostering creativity is highly important to keep pace with competition and in order to generate revenue.

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CONCLUSIONS (FINAL)Future Outlook of Search Firms• Many authors suggest that companies cannot depend on buying external

knowledge indefinitely. – “The creativity of an organization does not have to totally exist within

the organization. An organization’s productivity can be built on other’s creativity as a base or though injection for creativity at any point in the productivity process. But an organization has to have some lead of internal creativity or it will stagnate and die.” (Schumann 112).

• Essentially, firms in the search industry must have an equilibrium between developing creativity internally, recruiting creative workers externally, and buying creativity from the outside market. Of course, it is probably more dynamic than this, especially since the HR departments of these firms “default” to hiring talent as opposed to developing it. Hence, the recommendation is to spend time determining ways to develop talented, creative workers in order to reach this type of equilibrium.

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LIMITATIONS OF STUDY

• Time constraint during interviews

• Internal information often too confidential

• Inability to interview actual engineers

• Subjective viewpoints from recruiter and manager

• Need to further explore external creativity recruitment process (such as Yahoo!’s acquisition policy).

• Campus recruiting methods not investigated

• Future research should analyze team environment more

• Asymmetric information (managers, recruiters only know so much). Human resources seem to hold more information about work structure.

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Bibliography (Condensed)

Battelle, John. The Search. Penguin Group. New York, New York. USA: 2005Brown, Claire. “Managing Creativity and Control of Knowledge Workers.” 2005

University of California, Berkeley. Economics Department Brown, Paul Lockwood and Jacqueline Byrd. “The Innovation Equation.” 2003.Gandal, Neil. “The Dynamics of Competition in the Internet Search Engine Market.”

University of California, Berkeley. Escholarship repository. 2001. Handel, Michael J. and David Levine. “The Effects of New Work Practices on Workers.”

University of California, Berkeley and University of Wisconsin, Madison. 2005. Interview at Yahoo! Headquarters with Sammy Rashidchi & Matte Scheinker 10/24/05Koike, Kazuo. “Learning and Incentive Systems in Japanese Industry.” The Japanese Firm: The Sources of Competitive Strength. 1994: Oxford University Press.Lynn, Leonard H. and Hal Salzman. “What makes a good Engineer? U.S., German and Japanese perspectives.”

Case Western Reserve University, Cleveland, OH., USA. Center for Industrial Competitiveness, University of Massachusetts, Lowell, MA., USA. 2002

Milkovich, George T. and Jerry M. Newman. Compensation. McGraw-Hill Irwin: NY 2002. Sammons, Peter. “Buying Knowledge: Effective Acquisition of External Knowledge.” 2005 Gower Publishing

Company England Yahoo!’s Financial Statements, 2004