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BAIDU'S BUSINESS MODEL AND ITS EVOLUTION
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INTRODUCTION
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In the second quarter of 2016 ended July, Baidu, Inc. (Baidu), the leading Chinese language Internet search engine, reported a 34% fall in its quarterly net income — its biggest quarterly decline since going public in August 2005. The company’s net income fell to RMB 2.41 billion (US$362 million) in the quarter from RMB 3.66 billion a year earlier. The poor performance of the company was attributed to curbs on online advertising in China following the death of a 21-year-old Chinese student in April 2016 who had tried an experimental cancer therapy advertised on Baidu’s website. “The challenges Baidu faced in the second quarter served as a healthy reminder to stay focused on the key drivers of growth, sustainability and leadership: delivering the best user experience and staying at the forefront of technology. The implementation of new regulations and the stricter standards that we proactively imposed to make our platform more robust will likely suppress revenue for the next two to three quarters. This period of uncertainty will pass,” said Robin Li Yanhong (Li), Chairman and CEO of Baidu.

BACKGROUND NOTE

Baidu was co-founded by Li and his friend Xu in 2000. In 1991, Li, a native of the Shanxi province of China, went to the US for higher studies. After completing his studies, he worked with IDD Information Services between 1994 and 1997, and as a staff engineer at Infoseek between 1997 and 1999. Right from the beginning, Li had a passion for Internet-based search and while working at Infoseek he developed a search mechanism called ‘Link Analysis’. After this, he was given an assignment to supervise search engine development. But in 1999, Walt Disney Co. acquired a stake in Infoseek after which the company’s focus shifted from search to content. In order to further his interests in search engines, Li decided to start his own search engine along with Xu, a Chinese national working in the US, who had a PhD in biochemistry and good contacts in Silicon Valley.

EXCERPTS

BUSINESS MODEL

Baidu generated revenues mainly from online marketing services which included pay-for-placement (P4P) services, performance-based online marketing, and time-based online advertising services. The company’s P4P Program was one of the core tenets of its business model.The auction-based P4P platform was an online marketplace that enabled customers to bid for priority placement of their links in the search results and reach users who searched for information related to their products or services. Baidu was the first auction-based P4P service provider in China.The P4P model helped Baidu monitor each click, understand the tastes and preferences of Chinese internet users better, and improve user experiences in order to drive traffic to its sites.

SECRET OF SUCCESS

Since its inception, Baidu had positioned itself as a Chinese language search engine which allowed users to find information, products, and services using Chinese. According to industry observers, it was a challenging task for Baidu because of the complexity of the Chinese language. To make search easier for users, it introduced the ‘pinyin’ search in 2001 that allowed users to type in Chinese keywords using English alphabets when the user was not sure of a written form of a keyword. This gave relevant results and made Baidu’s search reliable.

FORAY INTO O2O SERVICES

O2O was one of the fastest growing segments in the Chinese e-commerce market and was projected to grow at an annual rate of 25% from US$390 billion in 2014 to US$718 billion in 2017 (See Exhibit IV). A growing population, an increasing number of internet users, and the rapid shift toward smartphones from personal computers were driving the O2O trend in China. With the PC search business maturing and the Chinese economy slowing down, Li was looking to diversify as he wanted to reduce Baidu’s dependence on the desktop search business. His goal was to transform Baidu from connecting people with information to connecting people with services. He decided to invest in O2O services as he wanted Baidu to capture a substantial market share in the surging but highly competitive e-commerce space in China. According to Li, the Chinese O2O represented a US$1.6 trillion market opportunity.

GLOBAL EXPANSION

Though Baidu was the biggest search engine in China, its presence outside the country was limited. In 2007, it entered Japan but eventually succumbed to market pressures and shut down its Japanese search engine in March 2015. In Japan, Baidu could not compete against Yahoo and Google and eventually reported losses that amounted to RMB 260 million in 2010. Despite the setback, Li said that he wanted Baidu to become a global brand with a presence in over half the world’s countries. Baidu’s president, Zhang Yaqin (Yaqin), said the company was targeting emerging markets like Brazil, Indonesia, and India with their huge populations and rapidly growing mobile usage so that the company could attract a new wave of users who were coming online for the first time on their smartphones. He said that in such markets Baidu planned to roll out specific products for each country rather than coming out with a generic, across-the-board service offering. “Baidu has more than 700 million users abroad, with over 250 million active users in a month. Over the past three decades, we have virtualized the physical world, but in the next three decades, we will go the reverse process, applying the Internet technology and business model to the physical world,” said Yaqin.

GROWING PAINS

Though Baidu dominated the online search engine market in China, its reputation was at stake as the company became involved in some serious medical and healthcare-related scandals in China. In April 2016, a 21-year-old college student, Wei Zexi (Wei), died of cancer after reportedly receiving experimental treatment from a hospital in Beijing that advertised on the Baidu search engine.

A NEW BUSINESS MODEL

In May 2016, Li announced that Baidu would shift its business from a search-oriented model to one based on Artificial Intelligence due to a slowing revenue growth in its core search business. He said that the shift would allow the company to develop products in areas such as voice search, automatic translation, and driverless vehicles. Baidu was exploring a sub-field of artificial intelligence known as deep learning which aimed to improve search results by training computers to work more like the human brain. In September 2016, Baidu launched an artificial system called the Baidu Brain, featuring state-of-the-art technology for recognizing and processing speech, images, and words and building user profiles based on big data analysis. In 2014, Baidu had opened its research facility on Deep Learning in Silicon Valley and appointed Artificial Intelligence (AI) researcher Andrew Ng as Chief Scientist of Baidu. Ng was to lead Baidu Research, with labs in Beijing and Silicon Valley.

CAN BAIDU BOUNCE BACK?

China with about 710 million internet users as of June 2016 was the world’s fastest-growing online market. As of September 2016, Baidu continued to dominate the Chinese search engine market with a market share of 54.3% followed by Qihoo 360 (29.24%) and Sogou 14.71%. In the third quarter ended September 2016, Baidu’s revenues were RMB18.253 billion (US$2.737 billion), a 0.7% decrease from the corresponding period in 2015. Net income was RMB 3.102 billion (US$465.2 million), a 9.2% increase compared to the corresponding period of the previous year. Revenue from online marketing services decreased by 6.7% year on year and 2.6% quarter on quarter due to a slump in the number of active online marketing customers.

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Case Questions:
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1. Evaluate the business model and strategy of Baidu and suggest which of the leadership skills facilitate the team performance and that contributed to its success. (100 words)
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2. Illustrate the internal and external factors of team performance and examine the global expansion strategy of Baidu. (150 words)
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3. Identify the need to continuously reinvent the business model of a company amidst rising competition and the changes in the business environment. (100 words)
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4. Explore ways in which Baidu can overcome the challenges by effective team performance. (100 words)

Answer 1

1. Evaluate the business model and strategy of Baidu and suggest which of the leadership skills facilitate the team performance and that contributed to its success. (100 words)

Baidu uses the business model of searches targeted with Ads based on the Bids. So, any person or advertiser who wants to advertise their product has to bid, and these bids are for different types, like words, criteria and display etc. And as per the bids the ads are prioritized, and any person who searches these in Chinese get the ads as relevant results and hence is benefitted by the targeted service. At the same time, now they are focussing on Artificial intelligence, which will make the searches more suited and by deep learning give the searches more human touch and how the searches work in a more human way and also moving from PCs to smart phone as a focus of search.
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1. Illustrate the internal and external factors of team performance and examine the global expansion strategy of Baidu. (150 words)
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The internal factors that impact performance are they were unable to compete with innovation in other markets like Japan due to the presence of Yahoo and other global players.

The external factors are the regulations of Chinese government related to ad publishing and limiting its use. So, there were several types of ads which now could not be published, so there were less users and causing damage.

The reputation damage due to the incident causing death of a Chinese student due to medication sought through Baidu search engines by an ad published by an Hospital, which provides experimental cancer treatment.

1. Identify the need to continuously reinvent the business model of a company amidst rising competition and the changes in the business environment. (100 words)
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As today there are new innovations and new companies comping up with better solutions due to technology advancement, the needs of users get modified very quickly. When the customer demands and convenience are changing there is a requirement of shifting the solution as per the demand, and that too at a very rapid pace, if the incumbent players are not ready to move quickly there are always several other players ready to provide a solution and eat away the old market share.

And at the same time the technology changes are too fast to provide an optimized solution, like the shift from PC to smart phones, the user experience changes completely, and the model and offering needs to change.

4. Explore ways in which Baidu can overcome the challenges by effective team performance. (100 words)

Baidu was late to react to the shift from PCs to smart phones and during this time they lost a bit of their market share, so they need to identify the future trends and address through crunching the time and reacting to it quicker than the competition.

Today they also need to use AI and help prevent the ads which are not allowed as per the regulations. So, the team should be more innovation focused and target the new ways of capturing the market. Use social media solutions as part of their search engine solutions and get more targeted and evolved ads which are better targeted.