Strategy Illustration on External Analysis - Essay Example

?Article The article is taken from the following link: . Introduction On21-Jan-2011, Facebook announced that it had raised $1.5 billion from two sources thereby declaring the company valuation at $50 billion. The press release was addressed to the stakeholders of the company and primarily to the shareholders as the company stressed on its increased valuation in the release (Facebook to unveil financials, raises $1.5 billion, 2011). The company announced that it had raised the amount of $1 billion from Goldman Sachs through overseas offering and direct investment amounting up to $500 million from Digital Sky Technologies and Goldman Sachs. The direct investments in Facebook have valued the company up to $50 billion. The company raised this money for making a further bolster its cash reserves. By this move, the company aimed to strengthen its reserves and surplus thereby increasing financial stability and limiting any liquidity risk by the company in the short term. The company also took care about the limited dilution factor of its shareholders. Macro Environment The investment thereby generated many questions among the shareholders of the company and the investor class as it was against their speculations. The company disclosed no immediate plans to invest the money rose by them and clarified that the money was raised to strengthen the cash position of the company. By this move, the company aimed to strengthen its reserves and surplus thereby increasing financial stability and limiting any liquidity risk by the company in the short term. The company also took care about the limited dilution factor of its shareholders. The company disclosed that under the transaction terms, it had option to accept between $375 million and $1.5 billion to receive from Goldman Sachs by the way of overseas offering. Though the offering was over-subscribed and it was on the discretion of Facebook to accept, the company decided to raise $1 billion from overseas offering. This move also increases the shareholders of Facebook to more than 500 (Facebook to unveil financials, raises $1.5 billion, 2011). Macro-Economic Forces This includes forces at national and regional level that affects the company. Facebook is incorporated in US through Macro-Economic forces in the country have a little impact of the company. Facebook is social networking build on a global platform where factors like inflation rates, interest rate and current exchange rates in bear some impact, but such impact can’t be considered influential. As the interest rates are slashed as a result of recession in the economy, the company could borrow money at a cheaper interest rate. Same is the case with changes in current exchange rates. Global Forces Barriers of trade and information sharing impact the company’s business in a primary way. Removal of such barriers helps the company to expand its operations in other countries. These also help in raising funds globally thereby giving advantage of cheaper funds. Growth in countries like India and China are posing increased opportunities of doing business in these countries. Technological Forces Being a social network company, technological forces impacts the company in a big way. Technology sector in the US includes more than 140,000 companies with combined annual revenue of about $900 billion. AT&T, IBM, Intel, Adobe, Apple, and Microsoft are the major companies (US Technolgy Sector Analysis, 2010). “Industry concentration is high in many segments with the largest 50 participants generating more than 60% of the segment revenue” (US Technolgy Sector Analysis, 2010). Scientific discoveries and new product developments form the basis of profitability in this industry. Both large and small companies can compete successfully – the mammoths have access to capital and marketing and the miniatures have domain-specific expertise. In the period Aug-10 to Jan-11, the Application Software industry has been on a bullish trend before being thrust into a bearish mode in the wake of the European sovereign debt crisis. The YoY revenue growth rate for the industry is hovering around 15.08% (Debt Crises, 2010). This growth rate is significantly higher than the Technology sector growth rate of 12.32% indicating that the industry is growing at a faster pace than the other domains of the sector and contributes to a significant portion of the sector growth rate (US Technolgy Sector Analysis, 2010). This has resulted in high growth rate of Facebook and has posed threat to many of its competitors. Demographic Forces When the company was incorporated, its primary target was young generation which wanted to connect to each other in spite of differences in physical boundaries. With the growing aging populating, the company has also shifted its focus to people of senior age groups. As discussed in the article that the company raised $1.5 billion in January 2011, the company would indulge in expanding the network the various demographics. It would offer commercial micro blogging services, big businesses consider Facebook as a platform to offer information about the new products, run publicity campaigns, offer discount/coupons, make sales announcement etc. Socio-Cultural Forces Being a social networking company, socio-cultural forces impact the company’s operations as Facebook network spans across various countries and continents. Information display, privacy issues and information sharing across people in different countries depends upon the socio-cultural forces operating in that country. It can be argued that if Facebook spans in network to the country like India (For e.g.) it has to keep in mind the culture of people there and whether the current configuration of the company is best suited for operating in that country. Political and Legal and Governmental Forces Legality has a role to play in operations of any company that intends to span globally. Facebook has expanded its business across continents and political and legal policies of the countries can well decide on the fate on how the company can operate within a country. As discussed earlier factors like informational display, privacy issues and information sharing are impacted by political, legal and governmental forces of that country. Information rights are stringent in case of countries like US, India and UK. Results from political and legal developments have a significant effect on the operations of Facebook. Environmental Forces The environmental forces do not have a significant role to play in the operations of the company. Industry Competitive Environment As discussed earlier, technology sector in the US includes more than 140,000 companies with combined annual revenue of about $900 billion. Companies like Google, Twitter, and Microsoft are the major competitors of Facebook. The company has recently raised $1.5 billion and according to analysts, the company along with Google is in talks with Twitter for a takeover valued at around $10 billion. So it could well be the case for raising such an amount. All this discloses the aggressive fame-work and action plan of Facebook in short to medium term. Porters Five forces model Bargaining power of suppliers: This explains how the organization has impacted the bargaining power of its suppliers. This can decide upon how the organization controls its supply chain (Porter Five Forces, n.d.). The primary suppliers for Facebook are the money lenders and information broadcasters. In this case suppliers possess a high bargaining power on the company even though the raising of funds of $1.5 billion was oversubscribed in January. Bargaining power of customers: This explains how the products of the organization have impacted the bargaining power of its customers. This decides upon at what price the customers are willing to buy company’s products. With the biggest company in its segment, it could be argued that Facebook have a high bargaining power over its customers. This includes the acceptance of features provided by the company by customers including applications, security features and rights. Threats of new entrants: This explains how the company is dealing with the risk factor of new competitors entering the industry. This decided the competitive position of the organization (Porter Five Forces, n.d.). The threat of new entrants always prevails in the type of industry Facebook operates. Few years ago, before the Facebook gained popularity, most of the market share was held by Orkut which was also build on a innovative social networking platform. But Orkut gradually lost its market share with the growing popularity of Facebook and considering the current situation Facebook has almost swaped Goggle’s Orkut out of the competitive scenario. Though the companies like Twitter, Microsoft and LinkedIn pose threat the companies growing realm, the threat of new entrants always prevail. Threat of substitute products: This explains how the products of the company are better than that of its substitutes so that this threat could be mitigated. As discussed earlier that the companies like Twitter, Microsoft and LinkedIn pose a threat to the companies increasing market share. Worldwide IT spending has been into a negative turnaround ever since the global financial crisis spread its wings. The financial meltdown led to reduced IT spending throughout the globe in 2009. According to advisory firms Gartner and Forrester, “the European sovereign debt crisis and a weaker euro will cause companies and governments in that geography to curtail IT spending for 2010” (Debt Crises, 2010). Competitive rivalry within the industry: All the above factors when combined decide on the competitive rivalry of the organization within the industry. Competitive rivalry in the social networking and technology industry is growing for Facebook day by day. This would increase manifold if Facebook acquires Twitter on which talks are going on. Industry Life Cycle “A company’s positioning and differentiating strategy must change as the product, market and the competitors change over the industry life cycle” (Kotler & Keller, 2009). The different stages of industry life cycle are: 1. Embroynic: This is the beginning stage for an industry wherein the industry just begins to develop. This stage is market with slow development, buyers infimiliarity with the products and high prices. 2. Growth: At this stage of the life cycle, the product gains rapid market acceptance and there is a substantial profit improvement in regard to the product. Industry demand shoots in the growth phase and the companies begin to attract new customers. The high volumes of products and services are marked by reduction in prices thereby slashing entry barriers. 3. Shakeout: This is a phase for the industry wherein the rate of growth slows and sees a dip. Moreover the demand for products and services in the industry reaches a saturation level. With more players entering the market, rivalries increases manifold and the excess capacity becomes more intense. 4. Maturity: This stage marks the slowdown in the growth rate of sales as the product had already reached an acceptance level my most of its potential buyers. Competition increases at this stage and as a result profits stabilize of start declining. 5. Decline: In this stage of the life cycle, the sales of the product shows a downward drift and its profits start eroding. The industry in which Facebook operates is in the growth phase of industry life cycle. Facebook also operates within the growth phase of the company life cycle. Facebook being a privately held company has always resorted to the means of private equity and overseas offering for raising money. It would be prospective for a big company with valuation of over $50 billion to raise money in the primary market, which would also allow its share to get listed on the NASDAQ or New York Stock Exchange. The companies in the industry are gaining market share with Facebook being an industry leader with valuation of over $50 billion. It is also becoming a great place to find jobs. Hiring people has become more easy and cost effective. Employers looking for social media savvy people have a common platform to find the same. Simply put, Facebook is a communication tool which will evolve with time and find new ways to create networks among people and hence become a long term winner. However, according to the Bureau of Labor Statistics, the technology world will maintain to upsurge with jobs in IT increasing by 16% in the short-run (Folbre, 2011). The job-increase is faster than most other industries in the US, primarily due to the technological advances being experienced within many industries. In Asia-Pacific, IT spending is expected to grow by 5% to reach $15.6 billion in 2010 (Folbre, 2011). IT spending is expected to remain vulnerable to shocks in key regions like Europe and in industrial sectors where decisions will be determined by the return on investment. References Debt Crises. (2010). Retrieved Mar 12, 2011, from martinfrost.ws: www.martinfrost.ws/htmlfiles/july2010/bn1593.html Facebook to unveil financials, raises $1.5 billion. (2011, Jan 21). Retrieved Mar 10, 2011, from www.reuters.com: http://www.reuters.com/article/2011/01/21/us-facebook-idUSTRE70K6VQ20110121 Folbre, N. (2011, Mar 7). His recession, becoming hers. Retrieved Mar 12, 2011, from economix.blogs.nytimes.com: http://economix.blogs.nytimes.com/tag/nancy-folbre/ Porter Five Forces. (n.d.). Retrieved Mar 10, 2011, from www.mindtools.com: http://www.mindtools.com/pages/article/newTMC_08.htm US Technolgy Sector Analysis. (2010, Jun). Retrieved Mar 10, 2011, from www.reuters.com: http://www.reuters.com/article/2010/06/22/idUS176099+22-Jun-2010+BW20100622 Strategic Planning. (n.d.). Retrieved Mar 10, 2011, from www.smallbusinessnotes.com: http://www.smallbusinessnotes.com/planning/strategicplanning.html The five generic competitive strategies. (n.d.). Retrieved Mar 10, 2011, from www.slideshare.net: http://www.slideshare.net/AmSam/the-five-generic-competitive-strategies-which-one-to-employ Kotler, P. and Keller, K. (2009). Marketing Management, 13/E. Prentice Hall. Read More