Appendix 1

Assignment Cover Page

Faculty of Business and Information Science (FoBIS)

BB309 – Strategic Management
January 2020 – April 2020

Group Name: Steady Bom Bibi

Leader’s Name: Zheng Kai Wei
Leader’s Email: [email protected]
Leader’s Contact No: 016-347 0573

No. Name ID Contact Number Remarks

1. Zheng Kai Wei 1001645932 016-347 0573

2. Chong Kar Yang 1001746500 014-974 8538

3. Ting Yee Meng 1001746584 018-975 2721

4. Kok Ling Wai 1001747496 018-918 4801

5. Kong Chun Kit 1001849340 012-477 6887

6. Keith Lim Kit Sern 1001539760 018-299 9529

7. Huey Sin Ruey Nen 1001748294 013-222 2838

8. Caleb Emmanuel Santoso 1001748040 018-266 3852

 Table of Content

No. Title Pages

Introduction:
1
1.
1.1 Brief Introduction of the Case and Concept

Content:

2.1 Using 5 Competitive Forces Model, describe how Baidu can earn above- 1-6
average return in local market despite its highly competitive market.

2. 2.2 Describe different levels of diversification strategy for Baidu to achieved

6 - 10
competitive advantage in China local market.

3. Conclusion 10

4. References

5. Appendix (Assignment Mark Sheet)

1. Introduction

1.1 Brief Introduction of the Case and Concept

In China, Baidu is the supreme search engine and online advertising service provider. At
present, in its local market, Baidu has succeeded where Microsoft, Yahoo! and even Google have
failed. Over the years, Baidu has restructured the strategies of operating business involving
technology. Nonetheless, in year 2016, it has encountered several obstacles including the political
hurdles or inauguration of new government regulations in terms of healthcare-related advertising,
the intense competition from new entrants which puts pressure on its profits and growth.

The application of the five competitive forces model in real-world context allows
organizations to make effective strategic decisions. It is a business analysis model that explains
why various industries are able to sustain different levels of profitability (Chappelow, 2020). The
professor has identified five competitive forces that play a vital role in shaping every market and
industry in the world which are threat of new entrants, bargaining power of suppliers and buyers,
threat of substitute products, and rivalry among competing firms. Diversification strategies are
employed to expand firms' operations by adding markets, products, services, or stages of
production to the existing business. There are different levels of diversification strategy including
low levels, moderate to high levels and very high levels.

2. Content

2.1 Using 5 Competitive Forces Model, describe how Baidu can earn above-average return
in local market despite its highly competitive market. (15 marks)

i. Threat of New Entrants

The threat of new entrants demonstrates the way in which new market players poses threats
to Baidu. This threat depends substantially on the barriers to enter the particular industry. In this
case, it is vital to examine how easy or difficult it is for a business to enter into the internet content
and information industry in China in order for Baidu to ascertain on how it can earn excess returns.
In this sense, Baidu will only be able to earn above-average returns if the threat of new entrants is
low. To achieve this, the barriers to enter the industry must be high, thereby making the industry
appear unattractive to potential new entrants and subsequently minimize the threat of new entrants.

1
 In the internet content and information industry, economies of scale is practically difficult
to be attained. Thus, the companies which produce large capacities will benefit from the
proportionate reduction in the fixed cost per unit also known as the economies of scale. Baidu can
make use of the economies of scale that it has within the industry, such as by producing more
goods and services, in order to force away new entrants with its cost advantage. This is because
new entrants are highly unlikely to match the large production scale of Baidu in achieving the
same cost advantage (Porter, n.d.).

From the perspective of product differentiation, threat of new entrants will lose its strength
if there is an existence of significant product differentiation and customers value the extraordinary
product experience. Baidu should emphasize on innovation to make its products exclusively
distinctive from that of new entrants. In this way, psychological switching cost for customers will
rise and Baidu will be able to establish a loyal customer base. To strengthen its market positioning
and minimizing the threat of new entrants for above-average returns, Baidu can further endeavor
to build strong brand identification and awareness through marketing such as advertising and
customer relationship management. As a result, Baidu can attract new customers and even retain
its existing customers instead of losing them to the new entrants.

In addition, Baidu can boost its capacities and fund research and development activities.
Instead of solely keeping up with the technological trend, Baidu should further innovate and
develop useful proprietary technology which can result in competitive advantage. Accordingly,
Baidu will have cost advantage that cannot be duplicated by the new entrants. There are less
chances for new entrants to enter a dynamic industry where existing players like Baidu persistently
define the standards and raising the bar high. It significantly decreases the window of extraordinary
profits for the new entrants and increases the barriers to enter the industry, thus enabling Baidu to
earn above-average returns without the threat of new entrants.

With the threat of new entrants, Baidu can secure its above-average returns and fight off new
entrants utilizing predatory pricing. Predatory pricing is known as a form of strategic deterrence
which discourage new entrants into the industry by adjusting its price below actual profits
(Luenendonk, 2014). This strategy shows potential new entrants that expected retaliation is
intense in the industry. Although this approach is deemed extreme due to the lost profit incurred,
it has long-term benefits of not only hindering the current new entrant threat but also any

2
impending threats through the establishment of an aggressive reputation of Baidu, given that Baidu
has economies of scale which makes it affordable for Baidu to engage in predatory pricing.

ii. Bargaining Power of Suppliers

The bargaining power of suppliers reflects the pressure exerted by suppliers on business
organizations like Baidu through the adoption of various tactics including reducing the product
availability, decreasing the quality and increasing the prices. Strong bargaining power of suppliers
will increase the competition in the industry and minimize the profit and growth potential of Baidu.
In other words, the lesser the suppliers present in the industry, the stronger is their position and
control against Baidu. Hence, a weak force of bargaining power of suppliers favors Baidu and
fortunately, the number of suppliers in the internet content and information industry greatly
exceeds the number of business organizations as buyers, in this case, Baidu.

In order to earn above-average return, Baidu can switch its suppliers to those that sell at lower
prices if the costs of products are not suitable for Baidu, since the switching cost is low. To tackle
the low bargaining power of suppliers, Baidu also can build its supply chains with several
suppliers according to the different geographic locations which helps ensure the efficiency of its
supply chain. Due to the fact that the industry’s profit directly affects to that of the suppliers’,
Baidu operates as an essential customer for its suppliers. Thus, Baidu can benefit from this by
developing a close relationship with its suppliers. Next, Baidu can look for alternatives to
produce the product if the demand for its products are sufficiently high, the firm has required
competencies, expertise, and economies of scale. Nevertheless, this strategy requires detailed cost-
benefit analysis to determine its feasibility.

iii. Bargaining Power of Buyers

This force examines the ability of buyer to effect on the business organizations’ products
pricing and quality. When bargaining power of buyer is strong, buyers have the power to demand
higher product quality at a lower price along with superb customer service from business
organizations. Generally, the lesser the number of buyers, the higher the bargaining power of the
buyer as there are more sellers than buyers which makes it is easier for them to switch. Therefore,
a strong bargaining power lowers profitability and makes the industry more competitive. As there

3
are limited firms operating in the internet content and information industry, buyers only have
limited firms to choose from. This results in low bargaining power of buyers within the industry,
making Baidu to have greater control over the price instead of its buyers.

To earn above average return, Baidu should emphasize on product differentiation and
innovating new products to boost buyer’s attentions. As buyers value the product’s quality and
uniqueness, Baidu can attract many buyers if they focus on these. Besides, Baidu can earn above-
average return by building large and diversified customer base in order to lower customer
concentration. This can be done through marketing efforts and promotional strategies.
Diversification can also be adopted where new market segments can be targeted to further
increase the customers base which provides an opportunity for Baidu to enhance its sales and
increase its profits. Furthermore, Baidu can build loyalty by offering excellent customer
experience and services, thereby raising the switching costs and further reducing the bargaining
power of buyers. The economies of scale that Baidu possess enables it to develop a cost advantage
and sell at low prices to the low-income buyers of the industry. In this way, Baidu will be able
to attract a large number of buyers, increase its customers base, thereby decreasing the buyers’
bargaining power which leads to above-average returns.

iv. Threat of Substitute Products

The force of threat of substitute products focus on the availability of substitute products or
services that stirs up competition in the environment. In the industry in which Baidu operates, there
are very few substitute products available. The limited substitutes found are of high quality but
also way more expensive. Comparatively, Baidu sells at a lower price than substitutes, with
adequate quality which makes customers unlikely to switch to substitute products. Subsequently,
the threat of substitute products is low in the internet content and information industry.

As a method for Baidu to earn above-average return through weakening the force of threat of
substitute products, Baidu should provide compelling reasons for customers to buy its products
instead of the substitute goods by offering a greater experience and high value for money. To
do so, Baidu can focus on enhancing the quality of its products and set strong differentiation
basis to discourage customers from using the substitute product. As a result, customers cannot

4
derive the same satisfaction, in terms of quality and performance, from substitute product as they
derive from the value proposition that Baidu offers.

Instead of being product-oriented, Baidu has to incline towards service orientation to offer
the ultimate utility for customers. Customers will be reluctant to switch if they experience excellent
services (Courage, 2019). Most of the successful businesses adopt service orientation as it is a
simple method to be distinctive from other companies in the industry. Customer loyalty will also
arise through the application of principles of service orientation.

Besides, Baidu has to better apprehend the customers’ core needs through market research in
order to provide what the customer wants. Through this, Baidu will be able to provide unique
benefits to its customers. In other words, Baidu has to offer a value proposition that is uniquely
different from the existing offerings of the industry that cater the needs of its customers. Thus,
when Baidu focus on the value that it can create for its customers, it can strategically earn above-
average returns despite its highly competitive market.

v. Rivalry among Competing Firms

The force of rivalry among competing firms refers to the extent which companies within an
industry exert pressure onto one other which limit the potential profits accordingly. When the
rivalry is intense, competitors have to fight for profit and market shares from each other. This
results in reduction of the profitability for all firms within the industry. Baidu has very few but
large competitors in the industry, so all moves made by the firms in the industry will not go
unnoticed. Evidently, Baidu operates within a weak force of rivalry among competing firms.

As a strategy to increase above-average returns through reducing the force of rivalry among
competing firms, Baidu should invest more in research and development programme to
innovate and create new services or products as it helps them to add onto their bottom line. This
way, Baidu can stay ahead of its competitors. Research and development projects often lead to
patents, copyrights, and trademark which can differentiate Baidu products from its competitors so
that the pressure of competitors on its customers will be minimized.

Baidu can also raise switching cost by establishing long-term relationships with its customers
to dissuade them from switching to a competitor's product, brand, or services. Baidu has to create

5
superior values for its customers so that it can capture the hearts of the customers and gain loyalty
from them, making their switching cost as high as possible so that Baidu would not have to worry
about the customers seeking their competitors’ products and services.

Besides, Baidu can conduct market research to understand the supply-demand situation
within the industry and prevent overproduction. Baidu should aim to understand why customers
are using their services including consumer behavior such as how cultural, societal and personal
factors influence that behavior. The market research should also enable Baidu to understand the
implicit needs and expectations of its customers. Baidu has to conduct ongoing market research to
gain above-average returns because customers preferences are constantly evolving.

Lastly, rather than focusing on existing customers that are already using other search engines,
Baidu can focus on new customers that are new into the technology scene. In this new
technological age, more and more people are adapting to using smart phones and computer which
includes the older generation. Perhaps Baidu can make an agreement with specific smart phone
and computer firms to pre-install their service as their main search engine.

2.2 Describe different levels of diversification strategy for Baidu to achieve competitive
advantage in China local market. (15 marks)

Diversification refers to the development of business either through operating in multiple

industries simultaneously or entering various geographic markets or starting a new business in a
similar industry. According to a number of experts, diversified firms vary according to the three
different levels of diversification such as low, moderate to high, very high level of diversification.

i. Low Levels of Diversification

Low levels of diversification is found in an organization that execute its activities mainly
on a single or dominant business. The company is in a single business if its revenue is greater than
95 percent of the total sales. If the generated revenue is between 70 percent and 95 percent, the
company’s business is dominant (iEduNote, n.d.).

The way that Baidu use low level of diversification to gain competitive advantage in China
local market is supported by its cost leadership generic growth strategy as cost minimization
ability, and existing framework makes it workable for the organization to investigate new product

6
opportunities in new markets. The single business for Baidu as the dominant of Chinese internet
search engine company, is equivalent to Google in the United States. Furthermore, Baidu offer
similar products and services, but the focus is China where it controls most of the search market.
Baidu censors search result and other content in accordance with Chinese regulations. Baidu also
offers a range of products including maps, news, video, reference book, anti-virus, and web TV
(Kenton, 2019). Baidu has the second biggest internet researcher in the world and owns over 75
percent of the market share in China's search engine market.

Besides that, Baidu generates revenue from advertising with a system called Baidu
Tuiguang and it is quite alike Google AdWords. It is a pay-per-click advertisement platform that
allows advertisers to have their advertisements advertised on the Baidu search results pages and
on other Baidu Union websites. Yet the search results of Baidu are also focused on advertisers’
payments. Baidu TV, its advertisement channel, in collaboration with Ads it! Online advertising
agency and technology company Media Corporation to provide advertisers with access to its Baidu
Union members' websites, enabling advertisers to select websites on which they post their video
advertisements using their targeted and matching advertisement system (Kenton, 2019).

On the other hand, Baidu also has Global Business Unit as its dominant business, called
DU Group or DU Apps Studio that provides apps and services to over 2 billion active users
worldwide. The Baidu App Store and Shouji Baidu have downloadable content and applications,
and the organization's advertising platform is called DU Ad Platform (Kenton, 2019)

Moreover, Baidu is investing greatly in Artificial Intelligence (AI). The company is now
beginning to focus on AI because its core search engine segment faced strict controls from the
Chinese authorities over online medical ads. It is also working on developing products involving
voice search, automatic translation, and driverless vehicles. For instance, Apollo Project is the
world's leading autonomous driving and AI program that Baidu operates with global partners
(Kenton, 2019)

ii. Moderate to High Levels of Diversification

Next, there are two types of diversification under the moderate to high levels of
diversifications, which are related constraints (related diversification) and related linked (mixed
related and unrelated diversification).

7
 In the case of related constraints, less than 70 percent of revenue comes from the dominant
business and all businesses share product, technology, and distribution channels. For related linked
diversification, less than 70 percent of revenues come from the dominant business and there are
only limited links between businesses.

As for Baidu’s case, the moderate to high level of diversification strategy that Baidu have
used to achieve competitive advantage in the China local market is that other than their dominant
search engine which generates their core revenue, they have broadened to offer a wide scope of
web-related administrations to their buyers, for example, Baidu Maps, a work area and versatile
mapping arrangement limited to the Greater China locale. Baidu Tieba offers an accessible
question-based network for clients to exchange thoughts and share knowledge. Baidu News
connects a choice of local, national and universal news, and presents reports in an accessible
configuration close to distributing them on the Internet. Baidu MP3 Search provides songs and
other multimedia files that Internet content providers offer. These are just a couple of the instances
of administrations that Baidu brings to the table for their customers.

Next, there is Pay for Placement (p4p). Baidu centers around income age, essentially from
web-based showcasing administrations. The Pay for Placement (P4P) foundation of Baidu permits
its clients to meet clients who are searching for data concerning their items or administrations.
Baidu offers some warning types of assistance, for example, keyword suggestions, account
management and performance reporting. Baidu suggests related terms in the inquiry postings to
be utilized as keywords. Such suggestions will help clickthrough posting rates for the client.

Baidu began moving their business into O2O (Online to Offline) services. According to
(Hayes, 2019) Online-to-Offline help is a business system that draws in potential clients to make
exchanges in physical stores from online stages. Online-to-offline trade (O2O) perceives online
space shoppers, for example, messages and web promoting, and afterward utilizes an assortment
of devices and procedures to convince clients to leave online space. For Baidu's situation, this
incorporates on the web and installment administrations, individual distributed computing,
mapping and food delivery.

Baidu's food delivery application, Meituan Waimai is an online-to-offline (O2O) food

delivery stage giving internet shopping, food delivery and some other related administrations to
clients in China. Its administration is settled in all first-and second-level urban communities like

8
Beijing, Shanghai, Hangzhou, Guangzhou and 300 different urban areas in China. Notwithstanding
nourishment, buyers can likewise purchase prescriptions, vegetables, and other regular things that
can be purchased in a store.

iii. Very High Levels of Diversification

A corporate is said to incorporate very high levels of diversification when they venture
into unrelated business, where the revenue from dominant business comprises of less than 70% of
the total revenue and there were no common links among the businesses.

Being the dominant search engine platform in China, Baidu traditionally does not venture
into very high level of business diversification. It is reported that in 2016, 93% of the total revenue
of Baidu Inc originate from returns from online advertisement and marketing campaign (Si, 2016).
However, according to the latest financial report for the Financial Year of 2019, the composition
of the total revenue of Baidu presents a whole different figure. The revenue from Baidu Core
(Baidu App, Baidu Search, Baidu Knows etc.) comprises of only 65% of the total revenue, where
the remaining 35% comes from iQiYi (Baidu, Inc, 2019). The iQiYi was fully took over by Baidu
back in 2012, and since then it has been generating substantial revenue for Baidu Inc, making it
one of the most valuable assets for Baidu Inc. The iQiYi is a very high level of business
diversification adopted by Baidu. Boosting over 100.5 million active users up until 2019, iQiYi is
the current highest online video site in China, beating its arch competitors Tencent Video and
Youku Tudou by a substantial margin. This provide Baidu a considerable competitive advantage
over its competitors. The factor that attributes iQiYi to this competitive advantage could be due to
the quality of the services offered, as it is believed that the key factor that attracts audience towards
an online video site would be the quality of the video, followed by the variety of genre of videos.

Besides, it is also notable that Baidu Ventures had made some very high level of business
diversification for Baidu. Baidu Ventures is established by Baidu back in 2017, which has a sole
focus in innovating and supporting enterprises which incorporates Artificial Intelligence into their
business activities (Baidu Ventures, n.d.). Baidu Ventures holds a vast portfolio of companies that
are dedicated to developments and continuous research on Artificial Intelligence for commercial
purposes. One of the portfolio companies held by Baidu Ventures is Catalog.

9
 Catalog strives to innovate data storage platforms from the existing cloud storage into
DNA-based data storage platform. The service offered by Catalog was inspired by the superb
capabilities of human body to store genetic information, and they came up with a DNA data writer,
which prints data onto synthetic strands of DNA (Cipriani, 2019). Baidu would be able to earn a
substantial amount of return from this investment. Additionally, lower costs of storage services
may prevail and eventually Baidu would have a competitive advantage over its competitors.

Another portfolio company under Baidu Ventures would be Subtle Medical. It is a

healthcare technology firm which focuses on making medical imagery more efficient and
improving patient’s experience through Artificial Intelligence driven healthcare solutions (Subtle
Medical, Inc., n.d.). This is a classic example of very high level of business diversification by
Baidu, as Subtle Medical is very different from other businesses invested by Baidu. Baidu
Ventures had made a very intelligent decision in investing in Subtle Medical as it projects
unlimited potential among other AI healthcare companies by offering value promoting healthcare
solution with a substantially unique approach. In the long run, this could provide Baidu a
competitive advantage.

3. Conclusion

In summary, the setbacks faced by Baidu did not encumber it from its continuous development
and innovation that it specializes in, which can ultimately create superior value for the consumers
in order to achieve long-term sustainable growth.

Through the use of the Five Forces analysis, Baidu can determine the industry attractiveness,
make rational entry or exit decisions and evaluate the influence of these forces on their own
business and competitors. Moreover, the dynamic analysis of this model can reveal significant
information that can be used for objectives such as to earn above-average returns as discussed
previously. Diversification has enabled Baidu to enter lines of business that are different from
current operations. In addition, with the approach of different levels of diversification strategy,
Baidu may achieve competitive advantage in its local market in China.

10
 References

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Baidu Ventures. (n.d.). What We Do. Retrieved March 11, 2020, from Baidu Ventures:
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Chappelow, J. (2020, February 22). Porter's 5 Forces. Retrieved March 13, 2020, from
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Cipriani, J. (2019). Cutting-Edge Data Storage. Retrieved March 11, 2020, from Time:
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Courage, J. (2019, January 21). Service Orientation - 10 Skills To Future Proof Yourself.
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Kenton, W. (2019, May 7). What Is Baidu? Retrieved March 11, 2020, from Investopedia:
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Luenendonk, M. (2014, August 19). Threat Of New Entrants | Porter’s Five Forces Model.
Retrieved March 12, 2020, from Cleverism: https://www.cleverism.com

Porter, M. (n.d.). Barriers to entry: Factors preventing startups from entering a market.
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Si, M. (2016, August 23). Analysts say Baidu must diversify further. Retrieved March 11, 2020,
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Subtle Medical, Inc. (n.d.). About Us. Retrieved March 11, 2020, from Subtle Medical:
https://subtlemedical.com/about-us/