Case 3: A Strategy for Facebook
Overview:
Facebook (FB) has been rattled by bad news and poor decisions. Its market capitalization has alternately shrunk and risen while and its image has slumped. Despite its astounding profitability, the company shows massive weaknesses in management capability. While it grows and makes money, it lacks clear goals and direction. All across the country, MBA students want to delve into Facebooks problems and propose solutions.
Your Task:
The goal is to devise a clear strategy for Facebook. Strategic concepts are needed, not marketing plans. SWOT analysis stinks! It uses superficial opinions and never provides a clear roadmap. We need to know what to do in each of the next three years and we need to know why. As a serious MBA candidate, you need to create a credible plan. Since this is the third case in the course, you should be able to apply concepts from class discussion and from previous cases. Facebook should know:
Where is the revenue going to come from?
What issues do we have to resolve?
How much will that cost?
Who are our competitors?
The elements of a clear plan.
Plan of Attack:
Read the case five times to understand your role.
Go to the Wall Street Journal and other credible business sources to learn about Facebook.
Find out its strategic direction if any. Learn the problems it faces. Look for proposed solutions.
Do not use blogs or opinions. Get the facts.
Develop sound ideas for a detailed plan.
Apply concepts from the course: Driving Force, real capabilities of the firm
Make a year-by-year plan with goals and milestones. For example, in year 1, the company will achieve xxxxxxx. (Be specific.)
Do not tell Facebook to develop a plan. That is your job! And use common sense. Do not tell them they are stupid. Provide a good plan without criticizing their mistakes.
Requirements for the Assignment:
n Write a carefully thought out paper of at least five pages defending the option you choose.
n Spend adequate time explaining why the other alternatives have merit but are not as strong as your choice
n Think about and address likely arguments you will receive. For example, to borrow money, the company will need assets. It is also difficult to borrow money while sales are declining. Also, an expensive Marketing Plan would have to be tied to an aggressive sales effort. If employees leave the company or do not get bonuses and pay increases, this may be difficult.
n Do not write a paper saying that you cannot choose a direction. Management looks at you as someone who has learned about corporate strategy and grappled with business problems.
n Use all of the street smarts at your disposal. If you insult one of the top managers, you may get fired. You will also put your boss in a bad spot. The other senior managers will blame him or her for selecting you for the task.
As background, the following article was written several years ago. It may not be up-to-date, but it gives an idea of how experts saw Facebook a few years ago. Remember that SWOT analysis is useless unless it is linked directly to a strategic plan.
SWOT Analysis of Facebook Inc.
Lets do a basic SWOT analysis of the worlds largest social network.
Leo Sun
()
May 8, 2015 at 10:18AM
Facebook () stock has climbed 30% over the past year, handily outperforming the NASDAQ’s 22% gain. But after that big rally, does the stock still have room to run? To answer that question, let’s do a simple SWOT (strengths, weakness, opportunities, and threats) analysis of Facebook’s business.
Strengths
Facebook, the world’s largest social network, has 1.44 billion monthly active users (MAUs) worldwide. Unlike rivals Twitter () or LinkedIn (), Facebook is consistently profitable on a GAAP basis.
Last quarter, mobile advertising revenue accounted for 73% of Facebook’s advertising revenues, up from 59% in the prior year quarter. Total ad revenues rose 46% annually as its average revenue per user (ARPU) climbed 25% to $2.50. Unlike Google, Facebook limits the number of ads it displays every quarter. This strategy — which emphasizes quality over quantity — caused Facebook’s average price per ad to soar 285% annually last quarter as ad views fell 62%.
Research firm eMarketer estimates that Facebook generated $3.54 billion in mobile display ad revenues in the U.S. last year, more than triple Google’s $1.13 billion. Unlike Google’s scattered network of display ads, most Facebook ads are displayed within its News Feed.
Last year, Facebook beefed up its for video ads, and launched its own embedded video system to challenge Google’s YouTube. Facebook uses single-sign ons (SSOs) in third-party apps and sites to tether users to its News Feed, which gathers data for marketers. Thanks to its strength in social, users are often more inclined to use Facebook’s SSOs instead of Google’s.
Weaknesses
Despite those strengths, critics have questioned Facebook’s “conversion rate,” which measures whether or not purchases or marketer-specified actions occur after an ad is clicked.
Research firm Marin Software reported that 63% of clicks on Facebook ads came from mobile devices during the fourth quarter of 2014, but only 34% of conversions occurred on smartphones and tablets. Meanwhile, the click through rate (CTR) of Facebook ads is consistently lower than the CTR for Google AdWords. Those two weaknesses, combined with soaring ad prices, have caused smaller businesses to question the of Facebook ads.
Another key question is whether or not Facebook can keep growing. Last quarter, MAUs rose 13% annually, but that figure has ticked lower every quarter. If MAU growth hits single digits, Facebook will need to rely more heavily on ARPU growth instead. Facebook’s heavy investments into expanding its ecosystem have also eaten into its bottom line. Last quarter, costs and expenses soared 83% year-over-year to $2.6 billion, causing its net income to slip 20% to $512 million.
Opportunities
However, investors should remember that Facebook’s ecosystem already extends far beyond its News Feed. Facebook also owns WhatsApp, which has 800 million MAUs, and Instagram, which had 300 million MAUs at the end of 2014. WhatsApp relies on nominal $1 annual fees, but unlike Facebook or Instagram, it isn’t banned in China. This gives it a possible backdoor into the massive Chinese market.
Citigroup analysts estimate that Instagram, which Facebook bought for $1 billion in 2012, could generate $2 billion in “high-margin” revenue annually after it is fully monetized with ads. That would equal nearly 12% of Facebook’s projected 2015 revenues.
Facebook is also evolving its stand-alone Messenger app, which can already be used for , into a mobile platform of its own. This could eventually generate additional revenue from sponsored accounts, sticker sales, and e-commerce integration with third-party sites.
Facebook also recently expanded into LinkedIn’s backyard with “Facebook at Work,” which lets businesses create their own social networks. Facebook’s Oculus VR could also launch its long-awaited Rift VR headset later this year, and the company is in new markets to tether more developing market users to its ecosystem.
Threats
Those are all lucrative long-term opportunities, but Facebook also faces four near-term threats. First, a strong dollar could weigh down Facebook’s top and bottom line over the next few quarters. Second, Facebook faces ongoing questions about privacy in the EU, which could lead to a damaging probe of its business strategies.
Third, data breaches could eventually turn hacked Facebook accounts into “skeleton keys” for SSO connected apps and websites. Lastly, the rise of ad-blocking extensions like Facebook AdBlock could reduce the profitability of Facebook ads. According to research firm PageFair, a similar extension, AdBlock Plus, cost Google $887 million in potential ad revenues in 2012.
The verdict
In my opinion, Facebook’s strengths and opportunities outweigh its weaknesses and threats. It’s the world’s largest social network, it’s profitable, and its ecosystem is growing in multiple directions. Facebook stock isn’t fundamentally cheap at 30 times forward earnings, but it’s still cheaper than shares of LinkedIn and Twitter, which have respective forward P/E ratios of 59 and 55.
owns shares of Apple and Facebook. The Motley Fool recommends Apple, Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Apple, Facebook, LinkedIn, and Twitter. Try any of our Foolish newsletter services . We Fools may not all hold the same opinions, but we all believe that makes us better investors. The Motley Fool has a .
