Business
Facebook - A Case Study - Part 3
Facebook - Part 3: Business Strategy
This the final (and my favourite) part of this Facebook case study series. This section is a group effort with two of my classmates, Charlie and Shin, who have also did similar background research on Facebook. We combined our findings and synergised a strategic business outlook for Facebook. This post will document a high level view of our thoughts. Feel free to comment below to discuss more.
Overview Sections
1. Background
2. SWOT analysis, Key Business Characteristics
3. 2-Year Prognosis
4. Strategy Recommendations
5. Conclusion
1. Background
Ever since Facebook was founded in
2004, it gained prominence with its simple user-centric design that quickly
replaced its then-competitor Myspace[1]. Today, the company is the largest social
media platform in the world with 1.7billion users[3]. From its social network
core product to its experimental Aquila planes, Facebook’s mission is to give
people the power to connect and to share[3]. In order to accomplish this global
task, Facebook’s business strategy and execution provides the blueprint that
pushes the tech-locomotive forward. The following sections analyze Facebook
from both internal and external perspectives to lend insight into how Facebook
has become a highly profitable company.
2. SWOT Analysis
An analysis of Facebook’s internal
strengths and weaknesses reveals some key factors of its current conditions.
Strength
Global
User Population
Facebook currently has over 1.8
billion active users each month[9]. This user base is a strength that
Facebook can leverage on to flourish. With the user network effect, Facebook’s
users spread the product on their own virally. This results in low marketing
expenses and high revenue as most of Facebook’s revenue is from its advertising
platforms[5] which is strongly correlated with its user base. As its
user population increases, Facebook’s revenue increases.
Financial Stability
Since the IPO in 2012[4], Facebook has generated a growing revenue stream each year from $1.5 billion in 2013 to $6.4 billion in 2016 due to its success in desktop and mobile advertising. Also, Facebook hosts its own infrastructure and does not have a large expenditure on operations. It’s operating margin is 40%, double of the technology industry’s 20%[5], Financial stability is a strength for Facebook because it gives Facebook the cash flow to make risky investments as a tradeoff for future profit. For example, Facebook’s huge $19 billion acquisition of WhatsApp[6] opened the market to give Facebook access to over one billion users.
Since the IPO in 2012[4], Facebook has generated a growing revenue stream each year from $1.5 billion in 2013 to $6.4 billion in 2016 due to its success in desktop and mobile advertising. Also, Facebook hosts its own infrastructure and does not have a large expenditure on operations. It’s operating margin is 40%, double of the technology industry’s 20%[5], Financial stability is a strength for Facebook because it gives Facebook the cash flow to make risky investments as a tradeoff for future profit. For example, Facebook’s huge $19 billion acquisition of WhatsApp[6] opened the market to give Facebook access to over one billion users.
Weakness
Single
Advertising Revenue Source
97% of Facebook’s revenue is
contributed by its advertising platform[5]. This has proven effective,
but it is a weakness because it limits Facebook’s revenue streams to
advertising. While advertising has been on an upswing, if it falters, Facebook
is exposed to tremendous losses.
Ineffective Global Presence
With Facebook’s involvement in expanding internet presence to third world and underprivileged countries, it aims to capture more users in these areas. However, it’s plan to generate additional revenue from this group is unclear as users of Facebook in these regions do not have buyer potential and advertisers generally do not target these audiences. For example, the ‘Rest of the World’ consists of 33% of Facebook’s monthly active users, ‘US & Canada’ consists of 13%. However, when it comes to the percentage of revenue, the first group takes up 10% while the latter takes up 51%[5]. This is a weakness as Facebook has spent billions in such programs but there are not yet any tangible returns.
With Facebook’s involvement in expanding internet presence to third world and underprivileged countries, it aims to capture more users in these areas. However, it’s plan to generate additional revenue from this group is unclear as users of Facebook in these regions do not have buyer potential and advertisers generally do not target these audiences. For example, the ‘Rest of the World’ consists of 33% of Facebook’s monthly active users, ‘US & Canada’ consists of 13%. However, when it comes to the percentage of revenue, the first group takes up 10% while the latter takes up 51%[5]. This is a weakness as Facebook has spent billions in such programs but there are not yet any tangible returns.
Opportunities
A Leader in Innovation
Facebook’s continuous innovation in user experiences, connectivity, and advertising makes it successful because its competitors may not have the same amount of resources to do so. The firm spends around 25% of its expenditure on R&D[5], and has over 800 patents[7]. A recent example of an innovative product from Facebook is to connect with others in Virtual Reality through Oculus[8]. Facebook’s core competency in innovation is a sustainable competitive advantage due to the ever-changing needs in ways people connect.
Considering Facebook's core mission is to enable people to connect and to share, anything that fits to this mission works for Facebook. This includes getting the developing countries to connect to the internet when the Aquila planes beam network connection. It also includes AI facial recognition technologies to recognise people. Sharing of different mediums range from photos, to live videos that can be streamed from mobile phones, drones, or "live" glasses. In future, the distance between people can be drawn nearer as well if they can be connected through VR.
Considering Facebook's core mission is to enable people to connect and to share, anything that fits to this mission works for Facebook. This includes getting the developing countries to connect to the internet when the Aquila planes beam network connection. It also includes AI facial recognition technologies to recognise people. Sharing of different mediums range from photos, to live videos that can be streamed from mobile phones, drones, or "live" glasses. In future, the distance between people can be drawn nearer as well if they can be connected through VR.
The China Market
One of Facebook’s biggest opportunities is to capture additional users from countries such as China because the user base will increase Facebook’s revenue stream[12]. However, China is proven hard to break into. Mark Zuckerberg has been picking up Mandarin, and even gave his daughter a chinese name, it may or may not help him in this quest.
Other Revenue Streams
Another opportunity for Facebook is to tap on other products as additional revenue streams. This includes having a peer to peer market place with Facebook Messenger, something that the a China chat tool, WeChat works really well. Also, with acquisitions such as Oculus VR that is a leader in the VR market[13], monetizing this product early may place Facebook as a leader in this market. Finally, Facebook can introduce B2B SaaS business tool to connect businesses. This functionality can provide support similar to Facebook groups. With the market in infancy, Facebook can penetrate the market with ease.
Other Revenue Streams
Another opportunity for Facebook is to tap on other products as additional revenue streams. This includes having a peer to peer market place with Facebook Messenger, something that the a China chat tool, WeChat works really well. Also, with acquisitions such as Oculus VR that is a leader in the VR market[13], monetizing this product early may place Facebook as a leader in this market. Finally, Facebook can introduce B2B SaaS business tool to connect businesses. This functionality can provide support similar to Facebook groups. With the market in infancy, Facebook can penetrate the market with ease.
Threats
and Risks
Competition
Facebook’s large R&D movement into different market segments such as messaging and VR has invited many formidable competitors; causing Facebook to fight on multiple fronts. While Facebook has enjoyed successful user retention, there are consistent competitors such as Twitter, Google+ and Snapchat who are attempting to capture a piece of Facebook’s market segment[14].
With reference to an Innovator's Dilemma, considering Facebook has grown to a considerable size, competitors with seemingly inferior product features like Snapchat has the ability to gain traction to a subgroup of its user-base. Just like how people use Google Doc due to its cloud-sharing capabilities despite it having lesser features that Microsoft Words.
The following section elaborates an analysis on the competition in different market segments:
Social Network Market
Facebook’s large R&D movement into different market segments such as messaging and VR has invited many formidable competitors; causing Facebook to fight on multiple fronts. While Facebook has enjoyed successful user retention, there are consistent competitors such as Twitter, Google+ and Snapchat who are attempting to capture a piece of Facebook’s market segment[14].
With reference to an Innovator's Dilemma, considering Facebook has grown to a considerable size, competitors with seemingly inferior product features like Snapchat has the ability to gain traction to a subgroup of its user-base. Just like how people use Google Doc due to its cloud-sharing capabilities despite it having lesser features that Microsoft Words.
The following section elaborates an analysis on the competition in different market segments:
Social Network Market
Facebook has two competitors in the
social media market: Twitter, and Snapchat. Facebook is stronger than Twitter
in the engagement perspective where for every one million Twitter followers,
there are 300 interactions while for every one million Facebook followers,
there are 700 interactions[10]. Also, Facebook is able to sustain its
competitive advantage of being the core social network because its persistent
posts allow users to connect and maintain strong online relationships over
time. In contrast, Snapchat have an ephemeral user platform where user posts
are erased after a specific amount of time. Facebook currently has gross
margins of 85%. This is higher than Twitter’s 69%, and the tech
industry’s standard of 75%.
Advertising
Market
In advertising, Google dominates the
“paid search” space while Facebook controls the “paid social” space. Both types
of advertising schemes allow the companies to remain profitable in the duopoly[11].
Despite Facebook’s advertising conversions, Google is leading in paid per click
rate, making Google the leader in advertising platform recognition. However,
Facebook’s competitive advantage is in that it can dominate the social
advertising due to its loyal customers.
Other Analysis
Porter’s
Five Forces
Facebook’s enjoys weak threats to
entry because competitors who want to enter the social media market would not
only require the similar 1.8 billion users but also overcome Facebook’s user
stickiness. Facebook enjoys a weak power of suppliers because it supplies its
own servers. Facebook enjoys buyer power as Facebook’s user base have no costs
to use the social network. Facebook also enjoys weak threat of substitutes as
there are no substitutes for users to transition their social network
connections to another platform. Finally, Facebook suffers from rivalry among
firms as there are other tech companies which aim to supplant its
products.
PESTEL
Analysis
It is interesting to note that
Facebook has grown to a size that impacts the PESTEL environment as much as it
impacts Facebook. Politically, Facebook has been impacted by the recent US
elections as a significant source of campaigning. It also encourages voters to
vote by distributing relevant information on its
platform. Economically, Facebook has largely followed the trend of
the technology sector in that when technology firms as a whole enjoy a boom, it
enjoys a boom as well, and vice versa. Socially, the term ‘social network’
embodies Facebook’s core mission and competencies, defining the company and its
vision. Technically, Facebook consistently produce cutting edge R&D and
technology. Facebook is able to attract top-talent engineers to its workforce
as a result of its technology culture. Leading to a feedback loop of quality
talent and innovation. Environmentally, with the arising usage of mobile phones
globally, Facebook’s mobile advertising has become its main source of revenue.
Finally, Facebook has been hampered by legal actions such as the Chinese
government preventing the use of Facebook to its near 1.4 billion citizens that
has spending power.
3. 2-Year Prognosis
Current
Business Strategy
The following analysis leverages on
Rothaermel’s VRIO framework to analyze Facebook’s current sustainable
competitive advantage, and it gives basis for Facebook to continue with its
strategy to expand its social network globally.
Facebook’s vision and mission is to
connect the world through a global platform. The most valuable component of
Facebook’s strategy is their loyal user base and their core competency of being
able to provide intimate social networks for people that are just “one-click”
away. In order to achieve its mission, Facebook’s strategic intent is to become
the largest social network provider. Its goal is to expand its influence across
the globe, reaching places that are not yet tapped.
This leads to the rare component
of its strategy, brand and influence, as none of its social media competitors
have been able to acquire as many diverse demographics as it has. Facebook
is unique in that its product scope is aimed to encompass users of all
demographics. This focus drives business activities such as acquisitions to
capture additional markets such as Asia and South America.
Next, though Facebook’s operations
and acquisitions looks like a negative factor due to the magnitude of its cost,
this gives Facebook an advantage as it eliminates competitions, gain more
patents and talents, and is a barrier of entry for other similar competitors in
the market.
Finally, Facebook’s organization and
leadership is a critical competitive advantage. This is because Facebook’s
leadership is dedicated to pursuing innovation and technology by investing in
their employees and managers. For example, Mark Zuckerberg, CEO of Facebook, is
very active on Facebook. He posts updates every other day, and currently has
around 78 million followers[15]. He leads by example by fronting
strategic moves like acquiring Oculus VR and founding Internet.org that allows
the company to capture new opportunities and attract top-level talent.
Business
Strategy Logic
The following analysis explains how
Facebook’s current strategy works to make Facebook a Fortune 200 company.
Facebook’s business strategy is logical because it effectively leverages its
core competencies in technology and brand to reinforce its business focus.
Because Facebook’s scope is to distribute its platform on a global scale, its
utilization of the user network-effect is in line with its strategy. Even
though user marketing is effective to spread brand awareness, Facebook decided
not to go with this technique as its users spread the brand image autonomously
without any input cash flow by Facebook.
Facebook also draws upon its revenue
generation and value creation to support its business strategy. It accomplishes
this with the feedback loop that it has created with its user base and
advertising platform. As it acquires more users for its social network,
advertisers are more inclined to purchase more ad space to attract the
additional demographic and generate more revenue for Facebook. This in turn
provides Facebook with the resources required to place out more internet
expansion campaigns and mobile features to attract more users. Here; the value
created for advertisers is the additional advertising space, the value created
for regular users is new features and additional networks to connect with. This
win-win situation for Facebook is critical in Facebook’s success.
In addition to being innovative on
its products, Facebook is also innovative in its advertising methods. This
includes Facebook Pages as an easy alternative to the tedious effort of setting
up websites, sponsored advertising, and dynamic advertisements that can be
easily embedded into various platforms.
This paper classifies Facebook’s
competitive advantage of a strong user base and driven innovation as a
sustainable advantage. It is always looking to push innovation and does not
stagnate its resources, driving the business strategy forward and placing high
barriers of entry to its competitors in the market. Facebook leverages its
partnerships and resources effectively in supporting of its business strategy.
For example, during the boom of mobile advertising, Facebook leveraged its
investor relations and went public in order to raise capital for mobile
R&D. It was also able to acquire newsfeed and gamify the game center
platform via its partners in order to attract millennials.
4. Strategy Recommendations
Strength
- Opportunities
Also invest in other products such
as Oculus VR. With the advent of augmented and virtual reality hitting the tech
market, Oculus VR has begun to capture a market segment. A product strategy
would be to integrate a VR experience with its social network platform. This
added new feature will attract millennials who are prone to technology and give
users an intimate social sentiment.
Weakness
- Opportunities
Expand to the Asian global
continental market. The strategy to capture the Chinese market is to tackle it
from a political perspective and adapt rather than counter the censorship laws.
A modification to the current Facebook product include a modified version
specifically for countries that value censorship.
5. Conclusion
Since Facebook’s mission is to give
people the power to share and to make the world more open and connected, it’s
business strategy is focused on expanding its platform to billions of users. It
leverages its large user base to expand its advertising revenue stream to a
global scale and address the threat of competitors. Because Facebook has
remained successful in the past decade, its current strategy does not require
modification in order to sustain its success. However, there are risks that it
must consider and be cautious of as it progresses further; resulting in the
recommendations and suggestions made in this report. One such recommendation is
to diversify its revenue stream to other products. While Facebook’s future is
laid out to be bright, it is important to remain cautiously optimistic.
References
[1] How Facebook Beat
MySpace - Forbes. http://www.forbes.com/sites/adamhartung/2011/01/14/why-facebook-beat-myspace/.
[2] 2016. Facebook Remains
the Largest Social Network in Most Major Markets ... http://www.emarketer.com/Article/Facebook-Remains-Largest-Social-Network-Most-Major-Markets/1013798.
[3] 2010. Facebook |
Facebook. https://www.facebook.com/facebook.
[4] 2013. Initial public
offering of Facebook - Wikipedia. https://en.wikipedia.org/wiki/Initial_public_offering_of_Facebook.
[5] 2016. Facebook Investor
Relations. https://investor.fb.com/.
[6] 2014. Facebook Closes
$19 Billion WhatsApp Deal - Forbes. http://www.forbes.com/sites/parmyolson/2014/10/06/facebook-closes-19-billion-whatsapp-deal/.
[7] 2014. How many patents
does Facebook own? | ZDNet. http://www.zdnet.com/article/how-many-patents-does-facebook-own/.
[8] 2016. Facebook Social VR
Demo - Oculus Connect 2016 - YouTube. https://www.youtube.com/watch?v=YuIgyKLPt3s.
[9] 2015. Facebook users
worldwide 2016 | Statista. https://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/.
[10] 2014. Instagram Is The
King Of Social Engagement | Forrester Blogs. http://blogs.forrester.com/nate_elliott/14-04-29-instagram_is_the_king_of_social_engagement.
[11] 2016. Advertising:
Facebook and Google build a duopoly - Financial Times. https://www.ft.com/content/6c6b74a4-3920-11e6-9a05-82a9b15a8ee7.
[12] "World Population
Clock: 7.5 Billion People (2016) - Worldometers." 2011. 13 Nov. 2016 http://www.worldometers.info/world-population/
[13] "Facebook shows
how it's gonna make virtual reality social - CNET." 2016. 13 Nov. 2016 https://www.cnet.com/news/facebook-mark-zuckerberg-shows-off-live-vr-virtual-reality-chat-with-oculus-rift/
[14] Facebook Losing Teen
Audience. Now It's Just Old People Socializing, 3 February 2015, By Quinten
Plummer, http://www.techtimes.com/articles/30603/20150203/faceook-losing-teen-audience-now-its-just-old-people-socializing.htm
[15] 2016. Facebook |
Facebook. https://www.facebook.com/zuck/friends?source_ref=pb_friends_tl
[16] Blog Image: http://www.theblogismine.com/wp-content/uploads/2016/04/facebooks-f8-conference-mark-zuckerberg-revealed-10-year-roadmap-spotlight-01.jpg
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