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Facebook Case Study

The Major Trends in the Industry

The major players in the Internet industry and social networking market are Facebook, Twitter, Viber, WhatsApp, Telegram, and Google Plus. The year 2014 was the year characterized by the growth of the market, the production of new products, and the implementation of new strategies. Mark Zuckerberg was the main person of social networking in 2014 due to many purchases implemented by Facebook, which is considered the most successful social network in the world.

One of the subsidiary companies owned by Facebook, which proved successful in 2014, is Instagram. In the past year, the amount of Instagram active users who use this resource every day rose to a record number of 300 million. Citigroup has estimated that this photo- and video-sharing service is worth $35 billion. Nowadays, Instagram strongly leads to the number of users and cost among similar services. However, Instagram has one major similarity with Twitter, which is a weak ability to generate revenue. However, in spite of low earnings, the service avoids an aggressive advertising campaign. One more competitor in the social networking market is Pinterest, which is a service for sharing favorite images and photos. Only in the US, the number of active users comprises 40 million.

However, Facebook also faced several challenges in the previous year. Recently, there was a question about the ability to store private security details on social media utilities. The scandal swirling around the personal photos of celebrities prompted Facebook to notify users about the new settings of the news feed. On the background of hype around the data security, there appeared several services, including Snapchat and Secret, which allow people to share photos, which will be deleted immediately after viewing. On the base of these services, users can send a nameless posting to people from their list of contacts. Just for one month, the developers of Snapchat received an investment in the amount of $2.5 million. Facebook also created a copycat app called Poke, which was smoother and more functional than its rivals, but failed to gain success (Hamburger, 2014). Furthermore, some specialists of social utilities predict future success for the next application with limited information about the personal data called Tinder. It allows to estimate or reject photos of users. Moreover, if one’s positive opinion about the picture coincided with the opinion of another user, the possibility of the dialog will be open for them. According to the developers, it would remove the awkwardness in communication. Forbes rated this service at $2 billion (Subramanyan, 2014).

Currently, the most urgent problem in the social networking industry is the struggle for the security of data. Users are increasingly beginning to pay their attention to the various possibilities of protecting themselves and their data on the Internet. Consequently, numerous messengers became more popular than social networks. Messenger Telegram declared itself as one of the most reliable services for communication, and the number of its active users in the last year exceeded 50 million people. Another app called Viber acquired 100 million individuals over the same period. The service WhatsApp purchased by Facebook in 2014 also reported about the increased security and additional encryption of users’ messages. Furthermore, in 2014, the number of WhatsApp users accounted for 150 million. In addition, Facebook created the service for communication-based on mobile platforms within 2 months. Today, Facebook Messenger is the second most popular service for communication (Holmes, 2014). Experts predict that in the near future social networks will make more effort to minimize the threat of hacking and leakage of personal pages with personal data of the user.

Nevertheless, many services cannot boast of high profits. Thus, during 2014 Twitter and Instagram proved unprofitable but showed good growth among active users. Despite the fact that Instagram has more followers than Twitter, the payback of the service is virtually nonexistent. Furthermore, Telegram and Viber are also unprofitable; therefore, they attempted to make money by selling stickers.

Overall, one can say that nowadays the most popular trends in social networking include:

1) Protection of personal data as from day to day, millions of users understand the necessity of such Internet quality.

2) Reducing the amount of advertising because users do not support active and obsessive advertising, which complicates surfing the net process. Thus, companies for which advertisement placing is the main revenue maker should find more sophisticated ways to locate it and receive revenues.

3) The transfer of services to mobile devices. Due to the development of the technical sphere, using tablets, smartphones, or “clever” watches poses a challenge to Internet companies, as they need to make their services compatible with these devices.

4) The ease of use. Internet service providers have to work in this direction, making their services easier and more user-friendly.

Company’s Core Competencies

A core competency is a factor that helps the company bring unique value to its customers and gives competitive advantages compared to other market players in delivering products or services. The main feature of the organization’s core competence is that it is hard for competitors to copy it. Understanding their core competencies enables companies to invest money in their strength that differs them from other organizations (Bain & Company, 2015). The company’s core competencies serve the basis for the organization’s strategy of development. Therefore, understanding and defining core competencies are vital for a successful business doing. Four-criteria test offers such points for identifying core competencies out of the company’s features:

1) Does this feature give value?

2) Does it help to increase market share?

3) Is it hard for competitors to copy it?

4) Does it give a competitive advantage? (Manktelow, n.d.)

This test helps to identify Facebook core competencies, which help the incorporation to remain one of the most popular internet services in the world.

First, one should point out social networking as the company’s first and main function, which has turned into its competitive feature. Facebook’s management professionally differentiates effective ways and methods of connecting people. This understanding helped the company to build a service where people “make friends” and stay connected with their families, real-life friends, colleagues, as well as class and group mates. Such a network of familiar people is growing, giving an opportunity to share ideas, news, interests, photos, and other important (or sometimes not) moments of life, becoming more socialized. “Suggesting” people to other individuals is also a crucial function that makes Facebook more understanding and customer-friendly. This feature gives value both to users and the incorporation. Moreover, it helped to conquer a market in the beginning, assisted in making a service, which almost does not have competitors in the world. Finally, it gave Facebook a competitive advantage, which differentiates it from similar companies, trying to repeat the company’s success.

Second, one should pay attention to Facebook as an advertising platform. Due to its popularity and prevalence among the huge amount of people, it gives companies and other services an opportunity for efficient advertisements. Furthermore, these advertisements might be of two types, either paid or created by the incorporation or Facebook users, who have good experience with the company’s goods or services. In addition, it is obvious that Facebook is a good platform for business development. Having a company profile on Facebook makes the brand more recognizable and friendly to customers. Moreover, it gives an opportunity to have a 24/7 connection with customers and deliver the company’s news to them. Such features also differentiate Facebook among other social networks.

Another Facebook’s core competency is a partnership system. There are more than 2 million sites integrated with the incorporation, including Twitter, MySpace, and Yandex. One may consider such services Facebook’s competitors; however, instead of organizing battle for customers, Facebook built a network making customers more interested and dependent on it. Such an approach helps to invite new users while explaining them the necessity of using Facebook.

The last competency is application development. Facebook is interested in making its service more convenient to users not through changing interface but through making product logistics improvement. A good example of it is the development of Facebook Messenger, which is a software application and service of instant messaging which provides text and voice communication. Such innovations make Facebook involved in all its customers’ activities.

Level of Competitive Strength

For defining the level of competitive strength, it is necessary to understand the main company’s competitors with which company can be compared. However, Facebook is dominating in the social networking industry and there are no competitors, which provide the same opportunities to their users. Steve Jobs once said about his attitude to Facebook: “We talk about social networks in the plural. But I don’t see anybody other than Facebook out there” (Sun, 2015). In fact, such competitors as Twitter, Google+, LinkedIn, IGLOO, and Bebo do not give so many benefits to users as Facebook does.

The first indicator of competitive strength is a number of active users. Facebook has about 1.4 billion users. To compare, Google+, LinkedIn, and Twitter have about 400 million each. It is also necessary to mention that WhatsApp messenger and Instagram, which count numerous users, are daughter companies of Facebook. Therefore, the actual amount of Facebook’s users is higher than 1.4 billion.

Another important indicator it an average time spent on the social network per day. In the case of Facebook, it is about 19 minutes while Google and Twitter users spend 18and 7 minutes respectively. This fact means that Facebook is more interesting between users and gives more opportunities to spend time (Sun, 2015).

Furthermore, it is necessary to point out such Facebook’s key strengths, which its competitors did not develop or implement:

· Integration with applications and websites, which engages people in using Facebook, resulting in competitive advantage and making competitors provide the same services;

· Excellent users experience. Facebook offers an easy interface, integration with other services and websites, an opportunity to use different devices to access Facebook, and more than 70 interface languages;

· Understanding of users’ behavior and needs, which helps Facebook to develop in line with satisfying users’ interests.

Mark Zuckerberg understands that users will not spend much time to create profiles in different networks. Therefore, it is necessary to build such a network, which will give a set of different functions and opportunities. For example, people travel all over the world and meet new friends. Thus, to keep in touch, they will not use phones or services like Skype of WhatsApp that give partial opportunities (for instance, only calls or text messages). On the contrary, they will utilize Facebook, which gives an opportunity to share news, experiences, photos, and messages. Another important point is confidence and assurance that one’s private information will not become public due to Facebook Private Policy.

To prove the fact that Facebook is #1 social network in the world it is worth reviewing several ratings of different sources:

1) The TopTenReviews (n.d.) consider Facebook the best social network due to design, profile view, search opportunities, and security requirements;

2) Statista (2015) named Facebook #1 social network based on a number of active users, explaining that customers would not have chosen bad or inconvenient service;

3) eBizMBA (2015) also recognizes Facebook as the main player in this sphere.

Therefore, the level of strength, which Facebook possesses, is high; hence making Facebook a player, which dictates terms and conditions for other market players.

Overall Appraisal of Facebook’s Financial Performance

Last Facebook’s financial statements provide an overview of the year ended 31 December 2014. Therefore, to draw a conclusion regarding the company’s financial performance during the last 3 years, it is necessary to review income statement data for 2012-2014 years (Table 1).

Table 1

Income statement

In millions of US dollars

2014

2013

2012

Revenues

12,466

7,872

5,089

Cost of goods sold

2,062

1,628

1,168

Gross profit

10,404

6,244

3,921

Selling, general & admin expenses

2,778

1,908

1,984

R&D expenses

2,644

1,415

1,399

Operating income

4,982

2,921

538

Net interest expense

4

(37)

(37)

Net income

2,940

1,500

53

From Table 1, one can see that the social network showed impressive growth during the last three years. Most of the financial statements are consistent with GAAP. However, some financial reports include information “Non-GAAP” (excluding depreciation of PP&E, compensation based on share and related payroll tax expenses) for investors or lenders.

Revenues have grown from $5.1B in 2012 to $12.5B in 2014. Moreover, the company has managed to reduce the part of sales devoted to the cost of goods sold, as well as SGA and income tax expenses. All these improvements contributed to the raising net income in 2014 as compared to previous years. Concerning revenue-receiving ways, advertising is still the main source of income. Mobile advertising showed a strong performance and increased by 53% in 2014 compared to 2013, representing 69% of advertising money (Huddleston, 2015).

GAAP costs and expenses at the end of 2014 were $2.72 billion, there was the gain of 87% as compared to the end of 2013 ($1.45 billion in 2013 and $1.06 billion in 2012). Non-GAAP costs and expenses accounted for $1.63 billion at the end of 2014 ($1.09 billion in 2013 and $849 million in 2012). GAAP income from operations for the 2014 and 2013 amounted to $1.13 billion compared to $523 million at the end of 2012. Non-GAAP income from operations for the fourth quarter of 2014 was $2.22 billion, indicating a 48% increase in contrast to $1.50 billion in 2013 and $736 million in 2012. In 2014, the GAAP operating margin was 29% (44% in 2013 and 33% in 2012). In 2013 and 2014, the non-GAAP operating margin accounted for 58% (46% in 2012). GAAP income tax expense for the end of 2014 was $413 million ($607 million in 2013), representing a 37% effective tax rate and 31% of the non-GAAP (54% in 2013). GAAP net income for the fourth quarter of 2014 comprised $701 million ($523 million in 2013 and $64 million in 2012). Non-GAAP net income for the fourth quarter of 2014 was $1.52 billion. GAAP diluted EPS accounted for $0.25 in the fourth quarter of 2014 ($0.20 in 2013 and $0.03 in 2012). Non-GAAP diluted EPS for the fourth quarter of 2014 was $0.54 ($0.32 in 2013 and $0.17  in 2012). Capital expenditures for the fourth quarter of 2014 comprised $517 million compared to $483 million in 2013 and $198 million in 2012.

Also, the company’s balance sheet has a strong position. Cash reserves have risen to $4.3B. The majority of Facebook’s asset relates to goodwill, which has increased from $0.5B in 2012 to $18B in 2014 due to the huge premium paid for WhatsApp messaging service.

Overall, 2014 was financially successful for Facebook and Mark Zuckerberg has concluded the 2014-year results in such words: “We got a lot done in 2014. Our community continues to grow and we are making progress towards connecting the world” (Huddleston, 2015).

Blue Ocean Strategies Recommended

Chan Kim and Renee Mauborgne formulated the concept of blue and red oceans in 2005. Their book Blue Ocean Strategy is about how companies generate productive business ideas and achieve rapid growth and high profitability, creating a pre-existing demand for a new market (blue ocean) rather than competing with numerous rivals in the already existing low-profit markets (red ocean). To create a blue ocean, one needs new demand. There are several tools to organize it, including the revision of the profile of one’s customers and the stereotypes of the market. Moreover, one can; explore the related products and change an emotional component of the product.

The strategy of the blue ocean becomes more urgent as many markets are oversaturated. The growing level of technology makes launching new products require deeper study and tools that are more powerful to become profitable. Any industry has companies using the strategy of the blue ocean.

Founded in February 2004 by CEO Mark Zuckerberg, Facebook is the perfect example of a blue ocean strategy. During the first period of its functioning, no one understood the purpose of the social network. Nowadays, users download millions of new posts, photos, videos, and other content to Facebook’s servers every minute. Furthermore, more than 3.5 million events are created each month. In addition, more than 700,000 local businesses have active pages on Facebook. However, new players and products appear on the market that capture a weighty part of the audience of Facebook. Therefore, management of the company should develop a new strategy of the incorporation to form a new blue ocean and increase profitability (Murphy, n.d.).

Several ways of development can make customers more dependent on Facebook:

1) The media platform, which refers to the development in the field of movies and music. In other words, the company should create a platform containing databases of movies and music based on a profile on Facebook. In these databases, the customers will collect their selection of favorite movies and songs. Facebook will show all new items in the film industry earlier than cinemas due to the need to increase the number of unique content. Having collected a large number of unique multimedia content on a single platform, the customer would not use other resources. Consequently, the process of providing licensed content will bring enormous income.

2) The platform of social games fully integrated into the user’s Facebook page. The customers will be able to display their achievements online, share with friends, and compete with them. It is also possible to develop a full-fledged social game console. Exclusive multimedia games from the famous developers of the game industry do not leave anyone indifferent.

3) The secure virtual storage for personal files. The customers will be able to keep all their photos, videos, and other documents in one place. Moreover, they will be able to share files with friends. Security and a large amount of virtual memory will be the main factor in attracting attention.

All the ways of development aim at ensuring proper use of the customer base. The customers will be able to link their personal files to Facebook. Every step of the client will be associated with Facebook.

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