CASE STUDY 1

FACEBOOK: THE EVOLVING STRATEGY

Lucy Miller, Macquarie University

Strategic management is the process of directing an organisation in its competition with other organisations. The market for online social networks such as Facebook is no different, with its large variation in performance and approach to products and the markets. Understanding these differences and how they impact on success is fundamental to the study of strategy. A strategy acts as the key driver of how and where the organisation invests its resources. Vision and the intention of creating value for all stakeholders tends to have a positive impact on an organisation’s economic performance.

   Facebook began as an online directory for college students in February 2004; a low cost operation in a Harvard University dorm room.1 Known originally as ‘TheFacebook’, the Harvard website quickly gained popularity. It spread to other universities before being opened up to the general population in 2006 and reaching 12 million active users.2

   Online social networking sites allow people to re-establish and maintain connections with a large group of people in both a time- and cost-effective manner. Considerable enthusiasm for this form of communication has led to the increasing popularity of online social networking. Unlike traditional media like print and television — where the media owners generate the content in order to sell advertising space — in online social networking sites, the users themselves generate the content. So, the discrete consumer now becomes content producer, consumer and circulator.3

   The challenge that faced Facebook was how to generate a profit from all those eyeballs and all that data. Social strategists agree that companies who focus their efforts on business goals such as short-term profits are not as successful as those who focus on their customers’ unmet social needs.4 By keeping running costs low, and with a few banner ads running on the site, Facebook became profitable when it raised its first round of cash from investors.5 Facebook claims to be built around the belief that success comes from putting customers first6, with a mission to ‘make the world more open and connected’7; the emphasis on ‘connection’ demonstrating the company’s strategic intention to focus on growing market share.

   Facebook founder Mark Zuckerberg has been described as ‘an odd combination of heart and mind’ and someone who ‘navigates product strategy by his gut, but he navigates business strategy via a highly analytical measurement of users, growth, engagement, and other stats’8; managing and leading his team with flexibility and a willingness to change. Strategic intent is concerned with not only how the organisation will compete now, but also with what the organisation will become in the future. Strategic intent sets the aspirations that can motivate and inspire the organisation.

   In 2006, Zuckerberg was approached by a number of companies wishing to acquire Facebook, including Yahoo! who offered to buy Facebook for US$1 billion. The offer was turned down and, later that same year, Facebook was valued at over US$6 billion. It seemed that Zuckerberg and his team were happy to continue growing their network of active users and, with it, the data these users uploaded, and their share of the market.

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   The use and management of data and the information it provides comprises the essential work for Facebook employees (as per most modern organisations), since information is their most important asset. The effective use of information enables management to make important decisions without having to rely on ‘gut feelings’, to measure results and improve performance.9 Finally, in 2009 with over 200 million users, Facebook announced itself to be in the business of advertising, providing a platform for companies to connect with people in an unobtrusive way.10 However, the public was sceptical that Facebook would be able to provide the support required to sustain its growth rate without charging users a fee.11 There were no plans to go public in 2009; though Facebook chief operating officer Sheryl Sandberg was quoted as saying ‘never say never’.12

   By 2011, Facebook had over 750 million active users and was valued at over US$100 billion.13 In 2012, active users of the online social networking site numbered over 900 million — all of them actively entering data about themselves and their networks.14 That year, Zuckerberg and his team decided that it was time to turn Facebook from a private company into a publicly listed company. Facebook was launched on the stock exchange in May 2012 with its first public offering.15

   As a public company with shareholders to satisfy, Facebook needs to show a return on its investments and a reliable generation of income. Facebook seems to have shifted its strategy from being user focused, to one that capitalises on the data it captures and the networks it has created. Facebook plans to work with brands to develop personalised marketing strategies through the use of Facebook Pages, where consumers are encouraged to participate in activities and engage in conversations. Facebook claims that brand Pages can be used to generate awareness, create new sales and drive sales growth.16

   Facebook generated over US$4 billion dollars in advertising revenue in 2011; more than double its 2010 figure.17 With 70 per cent of social network advertising spend flowing to Facebook in 201218, it appeared the Facebook strategy was reaping rewards. However, when Facebook’s stock lost half its market value within four months of the company’s initial public offering, many analysts questioned Facebook’s capacity to generate returns for investors in the longer term.19

   An important objective of strategic management is to create differentiation between the organisation and its competitors or the other entities operating in its space. A competitive advantage is any source of difference between one organisation and its competitors that will assist the organisation to achieve its objectives. An organisation may be said to have a competitive advantage if it can continuously outperform its rivals in attracting customers. Facebook has evolved from a humble product in 2006 to a complex array of applications and functions that focus on sharing the general and everyday activities of life. This differentiation has been further underscored with Facebook’s acquisition of the photo-sharing application Instagram in 2012.20

   Corporate social responsibility (CSR) is considered to be the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as that of the local community and society at large. Facebook itself was developed as a platform to allow users to share their lives with only their friends. However, it could be argued that this stand is at odds with Facebook’s current business model. Their current strategy clearly seeks to profit from the information provided by users — either advertently or inadvertently. The default privacy settings are such that users must actively opt out of sharing their personal information and status updates with ‘everyone’ should they want to limit sharing to ‘friends only’. The collection of personal information provides online social networking sites such as Facebook with the potential to generate huge profits. The personal information becomes market research data which can be sold to businesses. This data can then be used

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to effectively target specific market segments for advertising and promotional activities, to monitor social trends and track usage behaviour. Facebook has a moral obligation to act ethically, to keep in mind the interests of society. As online social networking sites become increasingly commercial in nature, they are generating growing amounts of backlash from consumers. In 2009, Facebook established a global safety advisory board and during that year Facebook management simplified the site’s privacy settings in response to noisy protest from site users (who sought pledges of support for a ‘quit Facebook day’) and government prompts to meet the social responsibilities that corporations hold.21

   Value creation by an organisation has different meanings for different stakeholders. For example, customers will view factors such as price, quality, customer service and innovation as forms of value, whereas shareholders will view share price and dividends, which reflect the organisation’s profitability, as value. Facebook launched its prospectus in early 2012, at a time when mobile internet usage was ‘exploding’ and over 350 million active users were accessing the site through mobile devices.22 At this point the company faced prospective shareholder concern regarding the lack of revenue generated from Facebook’s mobile offering.23 Given that the growth of smartphone usage was not a heavily weighted factor when Facebook was conceived, the company now had to turn its focus towards monetisation strategies for mobile platforms. As an advertising platform, the smartphone does not offer the same functionality as an internet browser that affords a larger screen for ad space. Although Facebook launched on the stock exchange with an initial public offering (IPO) price approximately 77 times earnings24, its share price began to slide shortly after listing. Part of the reason for the share price fall could be attributed to investor doubt about whether the company could capitalise on a situation where mobile device user growth was outstripping revenue from this platform.25 However, Facebook claims to have many opportunities to grow as mobile internet usage continues to increase and the web becomes ever more interactive and personal. As such, it will continue to invest more resources towards leveraging this segment.

   The forces driving globalisation are the quest to exploit market opportunities in other countries and the desire to exploit operational opportunities by locating activities wherever they can be conducted most efficiently. Global strategic management views the world as a single, segmented, market and applies the organisation’s resources to the opportunities (and risks) it offers. Facebook has evolved into a global company, capitalising on the globalisation of customer preferences and scale economies. As a reflection of this evolution, over 80 per cent of Facebook’s 900+ million users are located outside of the United States and Canada and its site is available in more than 70 languages.26

QUESTIONS

1. Whittington has distinguished four theories of strategy based on two dimensions: (1) the extent to which the perspective assumes a profit-maximising motive versus more pluralist motives, and (2) the extent to which the theories assume that strategic management is a deliberate, rational planning process versus an emergent process (See chapter 1).

Which of the four theories of strategy (Classical, Evolutionary, Systemic or Processual) suggested by Whittington do you think Facebook has adopted? Justify your answer giving examples from this case study.

2. There are two approaches to ensure a business is competitive: (1) set a lower price for the product than the competitors, or (2) incorporate ‘added-value’ to differentiate the product in the eye of the customer. Without the ability to compete on price (social network sites are free of charge), Facebook has had to add value to attract customers (site users). List five features of Facebook that add value for users.
3. When Facebook was listed publicly, the company suddenly had to satisfy the needs of thousands of shareholders along with its millions of users (customers). What parts of the business do you think the shareholders focus on and how does this change the strategic focus of the company?
4. Discuss corporate governance and corporate social responsibility with regard to Facebook’s privacy policy.
5. As a global business, Facebook benefits from a global strategy. What are the two main reasons why a global strategy can provide a greater degree of security than a simple national strategy? List five other benefits that companies can gain from a global strategy and discuss these in relation to Facebook.

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