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The road to success is rarely and easy one, nor a clear one. Today we are here to discuss the case of Kanoodle, a local company who has found success in the online advertising business.

Although Kanoodle has managed to compete with industry giants Yahoo and Google, their future success is by no means assured.

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Founded in 1999 by UB graduate Kent Keating, Kanoodle is based in Amherst, NY and currently employs over one hundred people. Their revenues are expected to surpass thirty million dollars this year, and they expect to hire up to fifty additional employees in 2005.

That’s a far cry from five years ago, when Kanoodle was a fledgling company of five people. Their meteoric growth is the focus of this study: although wildly successful to this point, Kanoodle will soon come to a crossroads. We will discuss the possible effects, both positive and negative, of three probable future scenarios: purchase by another company, continued growth as a private entity, and an offer of their stock to the public.

But first, it is important to understand the industry in which Kanoodle is a player.

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The appeal of Internet advertising lies in its targeting precision as well as its ability to deliver immediate purchases. Traditional media falls short in this regard; audience-quality measurement is based on surveys and demographics, and a significant percentage of the people that view these ads has absolutely no interest or use for the products in question: one study shows that fifty-nine percent of U.S. consumers feel that most advertising has little relevance to them.

Predictably, the online advertising industry has grown a great deal in a short period of time. In the United States, 650 million dollars were spent on Internet advertising in 1997. U.S. ad spending on the Internet reached 2 billion by the end of 1998, and that number had swelled to over 7 billion by the end of 2003. This figure is expected to reach 17.5 billion by 2008, an increase of nearly 2700% since 1997.

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The most common method of online advertising today is paid search, or pay-per- click. These ads are often referred to as sponsored links and are displayed in most popular search engines alongside or interspersed with search results. Another form of advertisement within web pages is known as contextual search. This method places ads relevant to the content of a webpage within that page.

A third method is a new technology known as behavioral targeting. This method anonymously tracks a user’s web usage habits and serves ads to that user based on the web content they have recently viewed.

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U.S. spending on paid search advertising has grown from 927 million in 2002 to an estimated 3.9 billion in 2004, an increase of over 423 percent.

Behavioral targeting advertising spending in the U.S. accounted for 3.8 percent of all online ad spending in 2003, and is projected to grow to 8.3% in 2005.

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Kanoodle went in to business in 1999 offering only one product - its flavor of paid search known as KeywordTarget. Like other pay per click services, customers bid on keywords. When a consumer performs a search on a Kanoodle partner search engine, the customer with the highest bid for the searched-on keywords will have the highest-placed sponsored ad. The customer only pays Kanoodle if a consumer actually clicks on the sponsored ad link.

What sets KeywordTarget apart from the competition are the unique management tools they make available to their customers. Kanoodle’s Automonitor system allows customers to automatically keep their keyword bids one cent higher than the next highest bidder, up to a certain ceiling bid. AutoScheduler permits customers to schedule their sponsored links to be active during specific days or times of day. Kanoodle is a leader in this technology, now commonly referred to as “day parting”. [SLIDE]

Kanoodle’s next offering was their take on contextual search, known as ContextTarget. Kanoodle offered its customers the ability to categorize their contextual links, and then bid on placement in these categories. Until then, other contextual search services relied on keywords to place ads. Kanoodle also introduced something known as ClickFactor. ClickFactor takes in to account the relevance of the proposed advertisement in relation to the category to which it is assigned. This ensures that irrelevant ads are ranked lower, regardless of bid, ensuring greater value to advertisers.

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The most recent of Kanoodle’s products is their version of behavioral targeting, BehaviorTarget. Kanoodle is an industry leader in behavioral targeting technology; BehaviorTarget was the internet’s first behaviorally targeted sponsored links network available to advertisers and publishers. BehaviorTarget also takes advantage of Kanoodle’s proprietary ClickFactor, and it as well as ClickFactor also make use of Automonitor and Autoscheduler.

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Kanoodle’s success is not simply a result of their products. Rather, the success of their products can be attributed to the successful manner in which the company is managed and run.

Kanoodle’s organizational culture is one of teamwork, openness, and family. They provide their employees with an open and relaxed atmosphere, and encourage input in all aspects of the business. Flexible work schedules are available, and promotion from within is common and encouraged. Employees are rewarded both psychologically and materially: Kanoodle gave all of its employees one week’s salary as a bonus for last year’s stellar performance.

The physical layout of the Amherst offices further reinforces Kanoodle’s philosophy of openness and cooperation. The structure has been deliberately designed to facilitate collaboration. Various departments are sectioned off, but there are no intrusive walls creating an “us versus them” feeling. There are a number of conference rooms available in order to afford employees opportunity to create, share, and implement ideas and innovations. To further enhance the easy- going, open environment, CEO Keating frequently brings his dog, Willow, to work with him.

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“If you can understand it, you can control it” and “finish the race no matter how hard it is” are two mottos by which Kanoodle employees are encouraged to work and live. So far, this philosophy is working. However, change is inevitable, and as the paid internet advertising market continues to evolve at breakneck speed, Kanoodle will come to a crossroads.

There are three probable paths that Kanoodle may take. They will continue to grow while remaining privately held, they will be purchased, or they will offer their stock to the public. Although these are obviously not the only paths Kanoodle may take, they each offer unique, noteworthy challenges.

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Purchase will likely pose the most immediate and radical changes for Kanoodle. Kanoodle may instantly become a top contender in their field, much like Overture Services after their buyout by Yahoo!. They may also benefit from the positive image of the parent company, especially if the parent is a household name like Yahoo or Google.

However, depending on the aims of the parent company, Kanoodle’s current successful organizational culture may be lost. Their flat hierarchical structure may be adapted to the parent company’s current structure, possibly transforming it as well. Employees will resist any change, but radically changing the culture and hierarchy of the company may lead to catastrophic employee backlash.

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Continued growth while remaining a private entity comes with its own set of positives and negatives. Kanoodle knows how to do this; they’ve been growing at a rapid pace for five years. Their current flat hierarchy may not survive much longer in its current form, however. With three branch offices and plans to hire up to fifty additional employees in 2005, it will become increasingly difficult for management to listen to the suggestions of every employee. Continued growth will also require additional capital. Recently, Kanoodle has secured funding from a venture capital firm, marking the first time the company has not been privately funded in entirety. Core business philosophies may have to shift to meet the demands of this new influence. Kanoodle has so far managed to continue their growth while leveraging the strength of their core sponsored links technology. Outside influence may drive them to spin off products in unrelated directions based on recommendation by these influences.

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Becoming a publicly held company presents a number of challenges, as well. Kanoodle will likely have a great deal of capital to fuel their growth and new product development as a result of going public. However, Kanoodle would become accountable to its shareholders, and may face a more pronounced outside influence. The focus on employee satisfaction could shift to a focus on shareholder satisfaction, and the successful organizational culture could fail. If Kanoodle’s stock does poorly, the reputation of the company may be adversely affected, as well. Hostile takeover becomes a possibility if Kanoodle sells a large portion of their stock to the public. The effect on the organization if it is taken over by an entity only interested in destroying its competition are obvious: the organization would fail completely.

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There is no perfect solution for any company dealing with these kinds of issues. The organization does need to keep in mind that resistance to any change is inevitable, regardless how small or seemingly positive that change may be. Also, the organization needs to understand that the problems raised during any transition should be dealt with proactively. It’s better to attempt to prevent problems than to deal with them as they occur.

Resistance to change is essentially a method for coping with that change; a manifestation of cultural values and cultural strengths. Removing resistance is akin to removing corporate culture. It may be possible, but the detriments may vastly outweigh the effort.

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If Kanoodle goes forward with a major change, they need to keep the lines of communication open with their employees. Kanoodle treats their employees like family; finding about a major change second-hand would cause that much more damage to the organization. Because the employee base is still of a manageable size, management would be wise to hold a face-to-face meeting with all staff to inform them of any major changes on the horizon. Ensuring that the New York City and Santa Monica offices are involved via live audio/video feed would further foster a feeling of unity among employees.

It would also be to the benefit of the organization overall to encourage employee feedback on such transitions. This gives employees a chance to express the concerns and uncertainties they may be experiencing, thus giving management insight as to what steps need to be taken to ensure the that fidelity and effectiveness of the company is not compromised.

Additionally, this allows Kanoodle to maintain their “employee-friendly” image and demonstrates their resistance to becoming the stereotypical cold and unfriendly corporation.

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According to Bridges and Mitchell, three phases of transition must be taken into consideration when implementing any type of change within an organization. First is the “saying goodbye” phase – people are asked to change the way they go about their jobs, essentially they are being forced to exit their comfort zones.

The second phase may be described as “shifting into neutral” - or a phase of uncertainty. People have been forced to abandon their old ways and find themselves in an “in-between” state of confusion.

The third and final phase of transition is the “moving forward” phase. It is here that the actual transition takes place, in fact, a lot of organizations do not succeed in making it to this phase, failing to let go of the old ways or getting stuck in the neutral zone.

It is pertinent for management to understand that psychological effects will accompany change, confusion will occur, and that, just as they did, employees will need time to adjust to change.

It would also be worthwhile to take into consideration Bridges and Mitchell’s “marathon effect.” This effect occurs when senior management, having been aware of the change from the start, quickly adapts to the transition, forgetting that others may take more time to adjust.

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Hierarchical changes are possible with any path Kanoodle chooses to take. Kanoodle currently thrives on a flat hierarchy, encouraging employee input and feedback. However, when being bought out, growing larger, or going public, the chances of maintaining a flat hierarchy are very slim. It is quite possible that a top-down hierarchy would be implemented in any of the previously mentioned scenarios. This not only compromises the current culture of the organization, but risks the fidelity of communication. It would benefit Kanoodle to attempt to stick with a form of flat hierarchy as it has suited them well to this point.

One possible solution to resisting such a change would be to split Kanoodle into divisions, each maintaining a flat hierarchy. Small divisions would enable management to preserve an open and encouraging environment. However, in order to reduce the chance of isolation, open communication between divisions would be essential.

A good way to prevent this is by performing periodic structural, psychological and cultural communication audits. This will ensure that communication flow is efficient and effective.

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Along with change come inevitable risks. In fact, it’s necessary for organizations to take risks in order to reap the benefits of change. However, this is not to say that organizations, such as Kanoodle, cannot overcome these risks. By predicting and recognizing the potential risks and devising a plan of attack, Kanoodle can conquer them before they become a major concern.

It is here that a structural functionalist approach would be beneficial in that it focuses on maintaining the stability of an organization. According to Marion Levy, it would benefit the organization to define the functional and structural requisites.

[SLIDE] One of the major structural requisites unique to Kanoodle is their corporate culture. Maintaining this comfortable, open environment will preserve their low employee turnover rate and continue to encourage creativity. Happy employees foster successful results.

Bringing business and jobs to Buffalo, Kanoodle’s location may be identified as a functional requisite. If Kanoodle were to relocate, the Buffalo economy may suffer and Kanoodle would run the risk of producing a negative corporate image. However, keeping the Buffalo location, even if only symbolic, would eliminate these risks. Additionally, preserving the Buffalo location would serve as a good public relations tool in that it would promote Kanoodle as a family-oriented organization committed to serving the community.

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Overall, the major benefits of the three situations are all tangible and realistic. As the current structure of Kanoodle does not present any pressing disadvantages it would be very beneficial for Kanoodle to take strides towards preparing themselves for any of the three potential scenarios.

Each entity of the company that is viewed as advantageous needs to be considered, Kanoodle then needs to determine what steps must be taken in order to maintain these entities. From the research collected, entities worth being noted include the following: organizational culture, corporate image, and the dynamic innovation of new products and services.

Growing from the Social-Darwinist theory, the employment of a structural functionalist approach will ensure that the company adjusts itself to reach a homeostatic structure for continued success.

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This evening we have discussed the paid advertising industry, and Kanoodle's place within it. We have also discussed issues that Kanoodle may face, and some possible solutions to their problems. We appreciate the opportunity to present our research to you, and we thank you for your attention. Are there any questions?