Facebooks Acquisition of Instagram - Case Study Example

?Strategic Management Table of Contents Introduction 3 Strategic Opportunities and Threats Facing Facebook 4 Methods of Strategic Development and Growth of Facebook 5 Analysing Instagram’s Strategic Decision using the TOWS Matrix 7 Conclusion 10 References 12 Introduction This study is based on the case study, which discusses Facebook’s acquisition of Instagram. Social Media vehicles are contributing enormously to national income of the countries around the world. Mergers and acquisitions going on in the social media industry is indeed a hot topic of discussion. Social communities like Facebook have billion of users, but they cannot offer a better platform for photo sharing, so acquiring Instagram was the decision taken to eliminate this drawback. Instagram on the other hand also got the opportunity to add its name with a market leader. Facebook acquired Instagram also because they want to hedge the rising popularity of Pinterest, which was a competitor of Instagram (Instagram, 2013). Mark Zuckerburg, the CEO of Facebook considered their decision to acquire Instagram at an inflated price to be correct because they had the target to firstly acquire it before Google did so, and secondly they also stated that this acquisition would have been costlier in future, so the price that they paid was appropriate. This study would be evaluating different facet of such an acquisition, with special focus towards other rising players in photograph sharing segment. The objective of this report would be to analyse the strategic threats and opportunity that Facebook is facing, the framework that they have developed for growth and also assessing the decision of acquiring Instagram. In order to evaluate the decision, strategic management tool like TOWS matrix would be used and Facebook’s development, strategic objectives, and steps to attain goals would be studied, so as to understand whether the acquisition of Instagram was in Line with the objectives and goals of the company or not. Strategic Opportunities and Threats Facing Facebook The social media industry is cluttered with social networking sites, which are quite popular among people in different countries. Facebook was successful in making its way through this clutter. The CEO of Facebook Mark Zuckerburg was the founder of this company, who took certain strategic decisions, which drove the company towards success. However, the opportunities and threats that Facebook is facing or might face can be identified through evaluation of the strategies. Facebook has the opportunity to expand its operations to other international destinations and take the advantage of the popularity in order to introduce new features which will also generate good revenue for the company, such as web advertising, etc (Ansoff, 1987). With the help of technological know-how, and innovative culture, Facebook would be able to diversify and also look forward towards other dedicated segments such as photography sharing segment because now it has already acquired Instagram, web advertising segment, professional platform for job hunters, etc (Eldon, 2010.). However, the company also faces various threats that should be considered before taking strategic decisions. Firstly, the spending of Facebook are more than it is bringing in. Apart from this, Mark Zuckerburg as a CEO also does not have a good reputation, which might hinder successful partnerships (Porter, 1985). Another threat is related to issues of privacy and safety of public information and photos online. The security infrastructure of Facebook is not up to the mark and in this scenario the acquisition of Instagram might be of unproductive for the company because if the privacy and security norms are not strong people will not upload photos. The company has also allowed the third party developers to assist them in their business functions, and also do not prove any button to alert cyber police if someone what to report unethical activity or spam content (Edwards, 2013). Instagram which Facebook acquired was valued to be around $20 million in the year 2011, but Facebook acquired the company at 1 billion, which signifies that purchase was overvalued. This proves that the outflow of funds was much higher than the inflows. According to The Verge, the billion dollar acquisition of Instagram by Facebook actually costs $715 million now mainly because of the falling price of Facebook’s shares. The shareholders of Facebook are really worried regarding this decision of the company. Moreover, Facebook has to face strong competitors in the market such as Pinterest and Google. Instagram application for Facebook users will increase the frequency of photo uploads, which will raise security and privacy issues (Blagdon, 2012). On the other hand it can be said that Facebook would be successful in getting hold of Instagram’s huge user base and it would be able to cater to the mobile user segment because people are using internet on their phones mainly. Facebook would be drawing Instagram’s expertise for mobiles and would shift its focus towards the users of mobile devices. Instagram would be sharing more than 5 million users with Facebook. This would be surely an opportunity for Facebook to grow in terms of size and user base. Methods of Strategic Development and Growth of Facebook The term strategic development simply signifies a systematic approach towards development. Strategy assists in identifying the right direction towards development. There are several methods of strategic development, but few significant techniques are internal development, joint development, acquisition and mergers. Internal development is considered when the strategies are built on the capabilities of the organisation. Many organisations utilise the internal development method for strategic growth (Haberberg, and Rieple, 2008). The second strategic development method is formation of strategic alliance. It happens when two or more organisation come together to form a joint venture to conduct business together on specified terms and conditions. The third and most significant method in today’s business environment is mergers and acquisitions. When two companies join permanently to form a new company, it is called merger. Similarly, when one company purchases another company, and the sold companies do not have its own separate legal entity, it is called acquisition. In this case too, Facebook opted for acquiring Instagram for its strategic development. However, this can be considered as an external strategic growth and development method (Daft, and Marcic, 2012). External growth increases the actual growth and assets of the company. In today’s business environment internal development is not enough to survive. Increasing rate of new entrants in the social networking industry and share cannibalization in the market demands for external strategic growth. External strategies usually focus on increasing mutual relationships with the help of third parties. This is what Facebook is exactly doing; allowing third parties to support the operational functions of the site and also in the maintenance functions. Facebook has gone for horizontal integration of external strategic development and growth, which is significant from its decision to acquire related businesses and expand in size (Daft, Kendrick, and Vershinina, 2010). This is the reason why it is said that external development strategies offer better opportunities to the companies and assist in increasing their worth for lucrative return on investment. However, external growth such as acquisition or merger can be risky if the company cannot properly access and ascertain the value of the company. Facebook bought Instagram for 1 billion, however, the value of the purchase was found to be much less that what was paid for. Though Facebook officials claim that they would have to acquire Instagram at a much higher price afterwards, but reality is that Facebook paid a high price than required. This was just an example from the case to prove how external strategic development can be risky (Geron, 2012). After a comprehensive discussion on the available strategic development and growth methods, the focus would shift towards the appropriate methods for growth of Facebook, with respect to its move towards acquisition of Instagram. Facebook is one of the major players in the social networking segment, with the largest number of user base. As far as the internal operational functions and growth of the company is concerned, revenue flow of Facebook and strategic decisions were criticised. Moreover, the CEO of Facebook does not possess high goodwill in context of his relationship with other players in the market. Considering the present scenario it can be said that Facebook should go for external growth as well as consider internal strategic growth (Eldon, 2010). With the acquisition of Instagram Facebook is going to motivate users of both Facebook and Instagram to upload more pictures through mobile phones after filtering them through various photo editing tools offered by Instagram. However, the crux of this strategy in this case is offering privacy and security for the pictures that users upload on their wall. In Facebook any person who is added to a profile can easily download others pictures, which proves that users information and photos are not safe. Improvement in technology settings and privacy policies has to be made internally (Johnson, Scholes, and Whittington, 2008). In order to hedge Pinterest’s popularly and grab its users, Facebook has to offer more, and differently. Facebook’s decision to buy Instagram was to utilise some of its feature and push into Pinterest’s space, but if Instagram is an application worth enough to be bought at an overvalued price then complete utilisation of its capabilities would provide Facebook higher impetus to deal with industry leaders such as Google, MySpace, etc (Daft, and Marcic, 2012). Analysing Instagram’s Strategic Decision using the TOWS Matrix In this section TOWS matrix would be analysed in order study Facebook’s strategic decision to acquire Instagram. TOWS matrix assist in discussing the strengths, weaknesses, opportunities, and threats of Facebook in a precise manner which will assist in explaining the strategic development and growth policies of the company in details. The TOWS matrix of Facebook in relation to its acquisition of Instagram would be discussed below: Strengths Weaknesses 1. It is one of the leading networking sites. 2. Facebook offers the advantage of offering social networking services in 70 languages. 3. It has a strong base of loyal customers. 4. Presently it has a stable financial position (Daft, Kendrick, and Vershinina, 2010). 1. It has invested in various irrelevant applications. 2. Cash inflow in less than outflow 3. Privacy policies 4. Safety and security issues STRENGTH - Opportunity WEAKNESS - Opportunity Opportunities 1. Facebook has prospect for international expansion. 2. Investments can be made for acquiring relevant application 3. There are scopes for strategic alliances with strong business partners in order to offer better networking services to the users. 4. Takeover of other networking sites would also increase the user base of Facebook, and its company value (Daft, Kendrick, and Vershinina, 2010). 1. Acquisition of Instagram can be helpful in offering the customers an application to edit photos and upload on Facebook. 1. Instagram will individual generate revenue as a company, that will add to Facebook’s revenue 3. Instagram will also bring along more than 5 million user bases for Facebook. 4. Facebook would be able to push Pinterest and acquire its users. 1. Instagram acquired at inflated price would also indicate that the value of the company is higher, which will assist in long-run. 2. Facebook has invested in various applications, which are fun if not relevant. Many users find them to be entertaining and use them (Daft, Kendrick, and Vershinina, 2010). STRENGTH - Threat WEAKNESS - Threat Threats 1. Increasing level of competitors in the industry such as Pinterest, Flicker, Picasa, etc are all specialised social sites for uploading not only personal photographs, but on specific subjects too (Nieman, and Pretorius, 2004). 2. Stricter norms would be developed by the cyber police of different countries for social networking industry, which might become a hindrance for the smooth flow of business (Daft, and Marcic, 2012) 1. Investment in Instagram more than its actual value. 2. Increasing rate of competition in the social networking industry. 3. Exploitation of networking sites such as Facebook by youth. 4. Instagram would be assisting Facebook to encourage users to upload photos with its existing privacy policies leading to increase in cyber crime (Daft, Kendrick, and Vershinina, 2010). 1. Attitude of the CEO would lead to hostile relationship with competitors in the industry 2. Weak privacy and safety settings may lead to increase in cyber crimes if the frequency of photo uploads increases for Instagram. 3. Drawing example from Instagram’s purchase, and purchasing other application at an overvalued price might be harmful for the company. Conclusion This study is aimed at analysing the strategic developments of Facebook in relation to its acquisition of Instagram at a whopping price of $1 billion. Though it was stated by several analyst that the acquisition was overvalued, but according to Facebook, they bought Instagram because they wanted to acquire it before Google did it. They also wanted to focus towards the mobile users who do not directly upload photos because Facebook does not offer any photo editing or filter options. Instagram is extremely popular among photography enthusiast, and has more than 5 million users. Facebook not only wants to utilise some of its features, but also want to grab Pinterest user base. Facebook has opted for external strategic development method in order to acquire related businesses in order to not only increase its asset base but also its size. Based on TOWS matrix discussed above it is clear that Facebook is indeed one of the top networking sites, and enjoys the largest market share and user base around the world, but it also suffers from several weaknesses such as its investment in irreverent applications, privacy issues, security norms, etc. Considering these strengths and weaknesses, Facebook’s decision of acquiring Instagram would decide whether the strategic decisions taken by the company was right or not. Before moving on to grab mobile user base and encourage users to upload their photos from mobiles and other medium with the help of Instagram, Facebook should have to consider internal strategic developments such as strengthening their technological base on security front. With increasing flexibility in internet industry, the risk of cyber crimes is also increasing. Keeping in mind this phenomenon Instagram should be utilised carefully. References Ansoff, H. I., 1987. Corporate strategy. 2nd ed. London: Penguin. Blagdon, J., 2012. Facebook's 'billion dollar' Instagram acquisition to actually cost $715 million. The Verge, [online] Available at: [Accessed 27 May 2013]. Daft, R. L., and Marcic, D., 2012. Understanding management. 8th ed. Connecticut: Cengage Learning EMEA. Daft, R. L., Kendrick, M., and Vershinina, N., 2010. Management. Connecticut: Cengage Learning EMEA. Edwards, J., 2013. How Facebook's acquisition of Instagram has hurt brands that use Twitter. Business Insider, [online] Available at: [Accessed 27 May 2013]. Eldon, E., 2010. Facebook’s multi-prong mobile strategy pays off with significant traffic growth. Inside Facebook, [online] Available at: [Accessed 27 May 2013]. Geron, T., 2012. Facebook officially closes Instagram deal. Forbes, [online] Available at: [Accessed 27 May 2013]. Haberberg, A. and Rieple, A., 2008. Strategic management: Theory and application. Oxford: Oxford University Press. Instagram, 2013. About us. [online] Available at: [Accessed 27 May 2013]. Johnson, G., Scholes, K., and Whittington, R., 2008. Exploring corporate strategy. 7th ed. New Delhi: Pearson Education India. Nieman, G., and Pretorius, P., 2004. Managing growth: A guide for entrepreneurs. Cape Town: Juta and Company Ltd. Porter, M. E., 1985. Competitive advantage. New York: Free Press. Read More