Will Wall Street Hit the Like Button - Case Study Example

Case Study Analysis of Facebook Contents Overview of the Company 3 External and Internal Environment 3 PESTLE 3 Porter’s Five forces 4 Internal Analysis 5 SWOT 6 Strategic Options of Growth 7 Recommended Actions 8 Reference List 10 Overview of the Company Facebook was launched officially in 2004 after the initial attempt of Mark Zuckerberg of launching Face mash in 2003 was a resounding success. By 2005, Facebook became extremely popular and was used in more than 800 universities and received a stunning venture capital of 12.7 million dollars from Accel Partners (Rothaermel and Taylor, 2014). Facebook provides services for three primary segments namely, normal users; application developers; and advertisers and marketers. By 2012 Facebook had acquired a user base of 1.06 billion in terms of daily; users and 618 million daily users (Rothaermel and Taylor, 2014). The website has made itself available in more than 70 vernacular languages and massive expansion was achieved as most of the users were outside the U.S.A. and Canada. In 2012, the company made its first public offering and has ambitious plans for the future. External and Internal Environment PESTLE Political: Government actions can have significant negative impact on the profitability of facebook’s future expansion. For instance, the Chinese government has banned the website from China and the governments of multiple nations like Germany has raised a concern that collecting user information by the company is a breach of security. Economic: Facebook has been able to maintain strong growth even during the period of recession and its revenue has increased significantly from $731 million in 2010 to $1,584 million in 2012 (Rothaermel and Taylor, 2014). Additionally the rising level of internet penetration in developing countries is contributing to its active users regularly. Social: Social tastes and preferences of consumers regarding the usage of social media are changing drastically which is largely visible from the rising popularity of other social websites like Twitter, LinkedIn and Instagram. In the U.K. particularly it has been noted that facebook had lost around 2 million users mainly belonging in the teenage group. Technological: As of now, Facebook does not have the technological expertise of Google which is in a better position to generate revenues from the online advertisement market. Google+, another social networking site is technologically more advanced than Facebook (Rothaermel and Taylor, 2014). Legal: Legal hassles of Facebook have emerged in California and the website has been accused of using information provided by users for unauthorized purposes. Environmental: Facebook has committed itself to minimize its carbon emissions. Its estimated emissions were 285,000 metric tons compared to Googles 1.5m tons in 2010 (The Guardian, 2014). Porter’s Five forces Threat from buyers: Customers for facebook are the advertisers who pay the company to post their ads on the website. Current estimates of facebook show that $7.64 billion is expected to be earned from the advertising revenues even by charging higher price to them (Rothaermel and Taylor, 2014). This implies that the current customer base is wide. However, there are other social networking sites which can be used by customers as well. Overall bargaining power is moderate. Threat from suppliers: Threat users of facebook are its suppliers and it has been able to construct its sturdy business based on the pillars of newsfeed, timeline and graph search. Customers are intrigued by these applications and the company has crossed the billionth mark. So threat from the suppliers can also be considered as medium. Threat from competitors: Mobile applications like hike, viber and i-message can be considered as competitors of facebook as these services tend people to connect on a virtual basis. Video calling facilities of facebook face competition from skype and hangout. Overall, the threat from competitors is low as facebook provides integrated service. Existing Rivalry Social networking and social sites like Twitter, Google+ and Microsoft can be considered as competitors. Google offers a series of online products like Google Chrome, Picasa, YouTube and has 44.9% of the market share. Facebook also has to compete with Microsoft for advertising revenue. Growing popularity and rising share price of LinkedIn are also reasons for concern. Threat of New Entrants: Threat of new entrants is high. His is because very low costs are required to set up business. Though it is difficult to replicate the success of giants like Google and Facebook, but there are almost no barriers to entry for new firms. Internal Analysis The resources and capabilities framework is an effective tool to study the internal analysis of Facebook. Value Chain analysis The value chain of facebook is unique as it is two-sided and customers are both end-users and suppliers. Facebook has been able to acquire a huge database from its customers which can be considered as the most valuable resource. Even though other applications like Twitter and Google+ have become popular among users, these websites does not have half the popularity of facebook. For instance, Twitter’s revenue was $139.5 million in 2011. In the same year the revenue of Facebook was $3.15 billion. This is primarily the reason for which value added to the advertisers rise. Upstream consumers of facebook are the end-users which range from advertisers to developers to customers. They are the primary value adding units. Similarly, the downstream customers are data-buyers. This group does not add much to the value. Competency Framework Core Competency The large number of users is the main core competency of facebook as none of its rival can match up to this number. Though Google+ has been launched in an attempt to compete with Facebook, the former has not been able to secure more than 1.5% of the market share whereas the later has a total of 62.39% of the market share (Rothaermel and Taylor, 2014). The relationship it has built with its client base is the main factor contributing to the success of the company. Distinctive Competency Facebook has been able to respond to changes in the market and has recently bought whatsapp to reduce competition it was facing from mobile messaging. The ability of the company to understand the market trends and invest accordingly is the biggest distinctive competency. Facebook’s strategic partnership with Microsoft and the purchase of Skype by Microsoft is also expected to help with video calling. The company is also capitalizing on applications and has invested money amounting to $9,626 million to upgrade its services. Appraisal of resources and competencies VRIO Valuable Rare Inimitable Supported by Organization Competitive Advantage Service provided to customers Yes Yes Yes Yes Sustained competitive advantage Have acquired the status of a search engine Yes No No Yes Competitive Parity Acts as a platform of interactive communication Yes Yes No Yes Temporary competitive advantage Adding value to the shareholders Yes No No Yes Competitive Parity SWOT Strength: The huge customer base of the company. Constant innovation introduced in terms of collaborating with applications. Good understanding about the market and brand name. Weakness Issues regarding protection of information provided by customers. Applications of facebook do not have features that are offered by competitors. No money generation has been obtained from the use of mobiles. Threats Rise in the number of mobile internet users can affect Facebook profits adversely. Political and legal threats arising in some countries like China. The competitive environment is becoming stronger. Opportunities Greater internet usage in developing countries provides opportunity for the company. Rising popularity of social gaming and the potential revenues. Launch of mobile devises in future. Strategic Options of Growth The Ansoff matrix can be regarded as an analytical tool that can help the company to decide on the course of its action. It is presented below: Figure 1: Ansoff Matrix (Source: Author’s creation) The first one refers to the generation of high revenues from the existing promotion of products in the existing markets. This can be achieved by raising price of existing products and earning greater revenues. The second option is creating new products for the existing markets mainly by following the market trends. The third option is expanding into new geographies to acquire greater customers and the final option is to develop new products for new markets. There are three main strategic options that are available for Facebook at this point of time. The first one relates to modification of the existing business model to generate higher options. It has been observed that Facebook have a steady stream of advertising revenue which is highly promising for the company. However, the inherent problem lies with the extent of earnings that are generated from advertising revenue. For instance, Google earns $88 per user from its advertising campaigns and the same earnings for facebook is $15. This means generating higher revenue would require the company to charge higher tariffs from the advertisers. The second option that is available to the company is to charge its users on per unit of usage or add a subscription fee for obtaining greater services. This means that the company can keep the price of joining the community zero but later on charge users on the basis of services they want to achieve. This can substantially add to the profit margins of the company and make the revenue generation stream even stronger, given the fact that the company has already more than a billion customers. The final option for the company is to expand to other countries where it has not penetrated yet. The increasing drive of globalization has increased the number of internet and computer users in the developing countries. Spreading operations to new countries is a plausible way for the company to earn higher revenues. However, there is an inherent problem with this expansion. It has been observed that the revenue that can be earned from users in the developing countries is much lower compared to that of the U.S. Recommended Actions Based on the three possible options that can be explored by Facebook it can be suggested that the best possible option would be to consider a combination of raising the tariffs from the advertisers and charging customers based on the service that can be obtained by them. This would be equivalent to the upper left-hand square (market penetration) in the Ansoff matrix. This is recommended for two main reasons. Firstly, charging the advertisers can be easily justified as the growing importance of social media advertising is greatly shaping the consumer purchase behaviour. This implies that marketers are greatly relying on social networking sites like facebook for reaching out to the consumers. Secondly, the good connections that Ms. Sandberg, the Chief has with the advertisers since the time she has been working in Google. It is unlikely that advertisers will quit using facebook if the prices are hiked. This is mainly because facebook has an unparallel customer base that is not provided by other service providers like Twitter and Instagram as has been observed from their market shares. This means that advertisers are likely to pay more for the services which they are obtaining from facebook. Finally, the free price structure for the company should be modified slightly. However, this should be done very carefully and slowly if the company does not want to lose users. One possible option is keeping most of the services like uploading of photos or messaging services. However, a very small amount can be charged from the customers for the applications that they are using via Facebook. The subscription fees should be kept very small, say $6 a year which can be easily paid by every consumer. This is likely to generate a dramatic increase in the revenue stream of the company and diversify revenue from only the advertising fee. These two options are suggested because the domestic market is not yet saturated and there are ample chances of growth. Revenue earnings from the new countries will be lesser compared to that of the U.S. The recommendations are sustainable because both consumers and advertisers value the service provided by Facebook and are most likely to pay a higher price for the services they receive. Following these recommendations will definitely help facebook to strengthen its growth in the future. Reference List Rothaermel, F.T. and Taylor, S., 2014. Facebook (in 2013): Will Wall Street Hit the Like Button? [pdf] McGraw Hill. ] Available at: [Accessed 27 November 2014]. The Guardian, 2014. Facebook reveals its carbon footprint. [online] Available at: [Accessed 27 November 2014]. Read More