Strategic Management of Facebook Inc - Assignment Example

STRATEGIC MANAGEMENT OF FACEBOOK, INC. ID number: Number: Table of Contents Table of Contents 2 Introduction and company background 3 Facebook, Inc.’s current situation, where it is going and how it is going to achieve it 3 Facebook, Inc.’s Vision, Mission, Objectives and Strategy 7 Evaluation of Facebook, Inc.’s external environment 8 Evaluation of Facebook, Inc.’s resources and competitiveness 9 References 16 Introduction and company background Answered questions: Q1 Facebook, Inc. is an online portal that facilitates users to create and maintain social networks over the internet. It was started in 2004 by Mark Zuckerberg and is headquartered in California, USA. In 2013, it employed over 6000 employees and hosted 1.2 billion registered users worldwide (Facebook, 2014a). Financially, Facebook, Inc. registered revenues of $7.9 billion with an operating income of $2.8 billion (NASDAQ, 2014a). In 2012, Facebook, Inc. went public, collecting about $105 billion and making it the second largest IPO ever (Bloomberg Businessweek, 2012). Facebook, Inc.’s current situation, where it is going and how it is going to achieve it Answered questions: Q2 to Q13 Facebook, Inc. is currently the largest social networking portal in the world, with over 1.2 billion registered users. Over 750 million users access the company’s website daily and more than 940 million users use it on the mobile platform. More than 350 million pictures are posted on its website every day. It maintains 11 offices in the US and 24 other offices worldwide (Facebook, 2014a; Facebook, 2012). It is offered in over 50 languages, including English, Arabic, French, Chinese and Spanish (Facebook, 2014b). Among recent developments, Facebook purchased WhatsApp, A social messaging service for a sum of 19 billion dollars (The Guardian, 2014). This has been Facebook’s higher acquisition till now. The company’s management has describes this strategic move as valuable and absolute advantageous for its future goals and objectives. This acquisition is coming just one year after Google offered 1 billion dollars for acquiring WhatsApp. The current deal is regarded as beneficial because of various reasons. Firsts, Facebook has still not been able to stand properly in the mobile market. Acquiring WhatsApp will enable Facebook to gain access to more than 1 billion active mobile customers. The level of user engagement is extremely high and growing and is driven by powerful, simple and instant message capabilities. Also WhatsApp has a huge penetration level in Latin America and Europe, specifically in nations such as Portugal, Germany and Spain. With the acquisition of WhatsApp, Facebook will now be able to tap these consumers and increase its consumer base to manifolds. Though Facebook has gained a strong foothold in developed nations, the future for the social media marketer lies in developing nations where WhatsApp is becoming increasingly popular and preferred mode of instant communication. According to research and industry analysts, this move will also be extremely beneficial in terms of revenue generation. Facebook’s entry into the SMS and instant chat market will not only help the social media site to connect and build relationship with them, but will also help in generating revenue by creating a platform for advertising and marketing. The data and information on consumers of WhatsApp will also aid in creating the right advertising and marketing mix as well as increases its overall brand value. In the future, Facebook, Inc. wishes to tap the business potential of emerging opportunities in its business segment. For instance, consistent with the increasing penetration of internet around the world, it has the target of adding 5 million more registered users within the next decade. It also wishes to enhance its presence, accessibility and popularity of its mobile interface in the future to counter declining usage of stationary computers. Lastly, it wishes to be a bigger source of business and commerce, besides simple social networking (Facebook, 2012). To achieve the targets, Facebook, Inc. is constantly simplifying its user interface, making it more user-friendly. It also routinely adds additional utility features, such as, the timeline, where users can maintain and view a record of all their activities on the website. It has also created a mobile application mimicking the website, thereby offering similar features on multiple mobile platforms, such as, Android and iOS (Facebook, 2012). Lastly, to enhance the appeal of its website to people, it offers features such as, sharing likings and opinions with friends. Such a feature results in raising awareness and knowledge about latest issues and trends. Presently, Facebook, Inc. is in a formidable position, being the largest social networking website in the world. It is a market leader in its segment, dominating with over 60% of market share, overshadowing 20% share of Youtube and fewer than 2% share of Twitter (Marketing Mix, n.d.). It is also in a sound financial condition, having registered revenues of $7.9 billion with an operating income of $2.8 billion in 2013 (NASDAQ, 2014a). However, it has lower success rate of advertisements than its competitor, Google, which it must improve upon (Marketing Mix, n.d.). As stated earlier, the goals of Facebook, Inc. are to offer a more user-friendly interface to its users, acquire 5 billion additional registered users in the next decade, tap the mobile social networking market more effectively and enable greater commerce between buyers and sellers of goods and services through its website. As per Hitwise US / Experian Marketing Services, in 2009, Facebook, Inc. held about 46% of the US market share by total number of visits (Marketing Charts, 2010). This jumped to 62% in 2010 (Marketing Charts, 2011), growing to 63% in 2011 (Marketing Charts, 2012), decreased to 62% in 2012 (Marketing Charts, 2013) and then to 58% in 2013 (Marketing Charts, 2014). The recent decline has been due to the growth of Youtube, from 15% in 2009 to 24% in 2013. On the other hand, profitability for Facebook, Inc. has also increased in the last 5 years, although the percentage of increment has not been consistent. This is summarized below (Market Watch, 2014a; NASDAQ, 2014a): 2013 2012 2011 2010 2009 Amounts in $ million Gross Profit 5997 3725 2851 1481 554 % increase 60.99% 30.66% 92.51% 167.33%   There are several performance indicators that signal that Facebook, Inc. is being managed successfully. For instance, revenue generated has increased consistently over the past 5 years, from $777 million in 2009 to $1.97 billion in 2010 to $3.71 billion in 2011 to $5.09 billion in 2012 and $7.87 billion in 2013. On the other hand, expenditure in research and development of new technologies has increased from $87 million in 2009 to $144 million in 2010 to $388 million in 2011 to $1.4 billion in 2012 to lastly, $1.78 billion in 2013. In other words, between 2009 and 2013, revenues have jumped by an overwhelming 913%, whereas expenditure in research and development of new technologies has jumped by an overwhelming 1526% (Market Watch, 2014a; NASDAQ, 2014a). The competitive advantages of Facebook, Inc. over rivals are primarily ease of use; multiple features such as, chatting, messaging, sharing pictures and videos, all rolled into a single package; and an immense market share of around 60%. The closest competitor Youtube offers only video sharing, whereas another social networking website, Twitter, holds less than 2% market share. The strategic vision statement of Facebook, Inc. is “to give people the power to share and make the world more open and connected”. It states that users access its website to keep in touch with their family members and acquaintances, to gain knowledge about the latest developments and trends and to give opinions and share audio, video and text information of their likings with fellow users (Facebook, 2014a, Facebook, 2012). Facebook, Inc.’s Vision, Mission, Objectives and Strategy Answered questions: Q14, Q15 and Q16 Facebook, Inc.’s financial objectives are to increase revenues collected from paid advertisements through its websites by creating a more efficient environment for commerce to take place. It currently has a much lower success rate of advertisements compared to its rival, Google; a gap which it wants to bridge (Facebook, 2012). The strategic objectives of Facebook, Inc. are to increase the number of registered users worldwide, particularly in countries like, Brazil, India and Mexico; enhance the efficiency and attractiveness of its services to users, promote greater usage of its services on the mobile platform; assist programmers to create better products and applications; better facilitate commerce between buyers and sellers through its website; and routinely upgrade its IT infrastructure to offer uninterrupted services. The four key elements of Facebook, Inc.s strategies are empowering users with various tools and utilities to ensure their privacy; enabling users to choose the contents and data they wish to receive, share or block; maintaining transparency in its operations and conduct; and maintaining accountability and compliance with statutory and regulatory authorities. Cost Leadership and Differentiation strategy Among the basic strategic and competitive approaches for continued growth, it is ideal for Facebook, Inc. to adopt differentiation strategy for its registered users and cost focus for its paid advertisers. Since it targets all kinds of people around the world to turn into users, it would be ideal to achieve differentiation through innovative new features and products, which would give it sufficient competitive advantage. On the other hand, to counter rivals, it should offer low-cost advertisement options for paid advertisers. The cost leadership strategy is achieved through price differentiation while negotiating with online bidders as well as diversification of revenue sources. Facebook, Inc.’s business model is primarily of a social networking website. It allows users to register for free and enjoy features such as, making and communicating with friends, managing friends list, building contacts, recommending personal likings and causes and events, sharing pictures and videos by either uploading on the website or sourcing through external websites as well as using applications and games. For sustainability, Facebook, Inc. earns through selling online advertisement rights on its website to interested parties. Evaluation of Facebook, Inc.’s external environment Answered questions: Q17, Q18, Q19 and Q23 There are several competitive forces that are creating the strongest competitive pressures for Facebook, Inc. For instance, the internet space is experiencing an increased power shift towards consumers, with users rapidly switching between mediums, such as, stationary computers, portable devices and now, mobile platform. Accordingly, Facebook, Inc. is compelled to routinely bring out new changes, such as, introduction of a mobile version of its website. Power of developers is also an important factor, with multiple competing social networking sites, such as, Twitter and Orkut, and mobile platforms, such as, Android and iOS. Competitors pose significant pressure, with Google aggressively acquiring smaller companies and increasing its portfolio of services to attract more users. As a consequence, there is an increased risk of substitution of services, with new services gaining viral popularity worldwide and dethroning established ones. Lastly, there is a risk of new entrants, with big geographic companies, like, Odnoklassniki of Russia and Mixi of Japan, surging in popularity (Facebook, 2012). The “weapons of competition” that rival companies can use to gain sales and market share from Facebook, Inc. are chiefly in the domain of paid advertisements. Since Facebook, Inc. has a low success rate in this avenue, rivals can effectively create a desktop and mobile commerce environment, which can generate high profits. The factors affecting the intensity of rivalry in Facebook, Inc.’s industry are primarily the changing trends and preferences of consumers, tremendous business potential in paid advertisements and increasing penetration of internet in emerging countries. Evaluation of Facebook, Inc.’s resources and competitiveness Answered questions: Q24 to Q29 For the purpose of measuring Facebook, Inc.’s financial performance, six key indicators have been chosen, namely Operating Margin, Return on Total Assets, Current Ratio, Working Capital, Long-term Debt to Capital Ratio and Price-Earnings Ratio. To calculate the said, data were taken from Facebook, Inc.’s 2012 Annual report as well as records from NASDAQ and Market Watch (Facebook, 2012; Market Watch, 2014a; Market Watch, 2014b; NASDAQ, 2014a; NASDAQ, 2014b). Operating Margin It is given by: Operating Margin = Operating Income / Net Sales * 100% (Taylor and Brown, 2003).   2013 2012 2011 2010 2009   Amounts in $ million Operating Income 2804 538 1756 1032 262 Net Sales 7872 5089 3711 1974 777 Operating Margin 35.62% 10.57% 47.32% 52.28% 33.72% Return on Total Assets It is given by: Return on Total Assets = EBIT / Total Net Assets * 100% (Vause, 2009).   2013 2012 2011 2010 2009   Amounts in $ million Total Assets 17895 15103 6331 2990 1109 Total Liabilities 2425 3348 1432 828 241 Total Net Assets 15470 11755 4899 2162 868   2013 2012 2011 2010 2009   Amounts in $ million EBIT 2810 545 1737 1030 264 Total Net Assets 15470 11755 4899 2162 868 Return on Total Assets 18.16% 4.64% 35.46% 47.64% 30.41% Current Ratio It is given by: Current Ratio = Total Current Assets / Total Current Liabilities (Taylor and Brown, 2003).   2013 2012 2011 2010 2009   Amounts in $ million Current Assets 13070 11267 4604 2246 0 Current Liabilities 1100 1052 899 389 0 Current Ratio 11.88 10.71 5.12 5.77 0 Working Capital It is given by: Working Capital = Total Current Assets - Total Current Liabilities (Taylor and Brown, 2003).   2013 2012 2011 2010 2009   Amounts in $ million Current Assets 13070 11267 4604 2246 0 Current Liabilities 1100 1052 899 389 0 Working Capital 11970 10215 3705 1857 0 Long-term Debt to Capital Ratio It is given by: Long-term Debt to Capital Ratio = Long-term Debt / (Long-term Debt + Stockholders Equity) (Damodaran, 2012).   2013 2012 2011 2010 2009   Amounts in $ million Long-term Debt 237 1991 398 367 0 Stockholders Equity 15470 11755 4899 2162 868 Long-term Debt to Capital Ratio 0.02 0.142 0.08 0.15 0 Price-Earnings Ratio It is given by: Price-Earnings Ratio = Price per share / Earnings per Share (Groppelli and Nikbakht, 2006).   2013 2012 2011 2010 2009   Amounts in $ Price per share (31 December) 54.65 26.62 0 0 0 Earnings Per Share 0.6 0.01 0 0 0 Price-Earnings Ratio 91.08 2662 0 0 0 Since Facebook, Inc. went public in 2012, Price-Earnings Ratio could not be calculated for years prior to 2012 (Bloomberg Businessweek, 2012; NASDAQ, 2014c). The three best measures of financial performance for Facebook, Inc. are Operating Margin, Working Capital and Price-Earnings Ratio. Facebook, Inc. has, over the years, consistently maintained a high operating margin of more than 30% except in 2012, when it dropped to 10.57%. This is due to the exponential rise in sales, administrative, research and development expenditures, since going public (NASDAQ, 2014a). Facebook, Inc. has also maintained positive working capital at all times, signifying that its operations are financially sustainable. A high 2013 price-earnings ratio of 91.08 with earnings per share of $0.6 signifies that the company has a great potential to grow further in the future. The three worst measures of financial performance for Facebook, Inc. are Current Ratio, Return on Total Assets and Long-term Debt to Capital Ratio. A high current ratio means that it has huge reserves of surplus cash, which is not being directed to achieve operational efficiency. Lower return on total assets in 2012 and 2013, compared to previous years, prove this concern. Lastly, a low long-term debt to capital ratio signifies that it sources most of its capital from equity investors, which is a very risky financial position as they may withdraw their investments during financial hardships of the company. The continuing increase in profit margin, together with a nearly-constant 60% market share in the industry and a large base of current assets, are ample evidences, which indicates that Facebook, Inc.s strategies are working fairly well. SWOT analysis of Facebook, Inc. Strengths The overall brand equity of Facebook is its biggest strength. The social media site boasts one of the largest numbers of active media users. Facebook applications are extremely simple and user friendly, allowing individuals from various age demographics to create their profile and become Facebook user. Facebook, Inc. provides social networking features with third-party services, games and applications. It also offers customized solutions such as, advertisements and promoting social and personal causes. It allows restricted profile view by others and several other security options, such as, blocking specific people. Lastly, it is a market leader in its segment, dominating with over 60% of market share, three times the share of its closest competitor, Youtube (Marketing Mix, n.d.). Over years, Facebook has invariably understood the demands and needs of its users has been updating its applications and other offerings accordingly. The company has also integrated itself with other firms and websites such as Microsoft and Amazon enhancing its technical and retail competencies. Weaknesses Facebook, Inc. has been a late entrant in social networking through mobile platform. Moreover, it does not display paid advertisements in its mobile version, which leaves the segment yet to be capitalized. It even has a lower success rate of advertisements than its competitor, Google (Marketing Mix, n.d.). The major revenue sources for Facebook are online advertisements which are still at a nascent stage. Lack of a properly customized website also creates negative image among investors and potential customers. Apart from that, the company is suffering from numerous privacy issues creating negative publicity and tarnishing the brand image. Opportunities Facebook, Inc. is yet to tap the business potential in China, where it is severely restricted due to its non-compliance with state policies (Woollaston, 2013). The Chinese market, if opened, can provide unprecedented growth for the company. Besides China, the growing market of online advertising also offers an opportunity for Facebook, Inc. (Marketing Mix, n.d.). Since more and more number of users are moving towards mobile applications and usage, Facebook’s acquisition of WhatsApp will be extremely beneficial. Also it is help in diversification of Facebook’s revenue sources and opening of a new marketplace for Facebook. Threats The declining growth rate of users registering in Facebook, Inc. poses a serious threat to the company. This is chiefly due to increasing migration to mobile social networking platforms worldwide (Marketing Mix, n.d.). Low barriers to entry are the major threat to Facebook. New entrants such as Instagram are increasingly becoming popular and eating away large chunks of market share of Facebook. The core competencies of Facebook, Inc. are a huge network of users that spans across all continents of the globe; an easy user interface that provides a rich experience and quick accessibility of data; and an unparalleled bundle of services like, online applications, games, pictures sharing and video sharing, that distinguishes it from its competitors. The competitive strategy, which best characterizes Facebook; Inc.s strategic approach to competing successfully is that of differentiation. As stated earlier, it also offers a bundle of services that are not collectively offered by any of its competitors. For instance, Youtube offers only a video viewing and sharing experience, whereas Google offers communication and networking options and Flickr offers picture sharing options. Facebook, Inc. offers all these options in one place and even betters the user experience by offering other services, such as, online application, gaming and gifting options. References Bloomberg Businessweek. 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China lifts ban on Facebook - but only for people living in a 17 square mile area of Shanghai. Retrieved from http://www.dailymail.co.uk/sciencetech/article-2431861/China-lifts-ban-Facebook--people-living-working-small-area-Shanghai.html. Read More