Case Study - Facebook On IE

Case Study for IEB31003 Strategic Management
Case Study: Facebook

Author: Matt Cook, Kathryn Hicks, Ricardo Rodriguez, Austin Rogers, from Texas A&M University
Introduction
After going public in 2012, Facebook immediately experienced a fair amount of criticism and quite a bit of
investor uncertainty. However, Mark Zuckerberg, Facebooks founder and CEO, was pleased to report that,
as of one year later, on January 30, 2013, the firm had surpassed Wall Streets expectations. Moreover, in
only eight years, Facebooks growth resulted in it becoming the largest social networking platform in the
world.
Nevertheless, Zuckerberg and his top management team knew that they needed to consider how to
adjust the firms strategies to complete as a public company, partly in response to the belief among some
users and analysts that Facebook was losing its ability to satisfy customers and shareholders simultaneously.
In this regard, what should the firm do strategically to ensure its long-term and profitable growth? While
Facebooks advertiser base is constantly looking to the firm for additional innovative means to target users,
its investors are questioning its ability to monetise its user base. Relatedly, in a highly dynamic and
competitive industry, how will Facebook out-innovate its rivals and retain customer mind-share? Along
with his top management team, Zuckerberg concluded that the firm should focus on both worldwide and
domestic market growth. With many recent product innovations and strategic changes, 2013 and the few
years beyond were expected to defining ones for the young, public social networking firm.
Facebooks Timeline
At the age of eleven, Facebook founders Mark Zuckerbergs orientation and actions hinted that he could
become a successful entrepreneur. Born in 1984 as the only son to a psychiatrist and a dentist, he quickly
gained a sense of reasoning and adaptability that allowed for complex, yet creative thinking. Growing up in
New York, middle school offered excess spare time that Zuckerberg used to write software. After learning
basic programming from his father, a private tutor who constantly referred to Zuckerberg as a prodigy
was hired. During high school at Phillips Exeter Academy, he created a music player as a product for sale by
his newly founded company, Intelligent Media Group. Zuckerberg declined Microsoft and AOLs offers to
purchase this firm. Winning several awards in math, astronomy, and physics, Zuckerberg set his sights on
Harvard University, claiming on his college application that he was fluent in French, Hebrew, Latin, and
ancient Greek. It was at Harvard that Zuckerbergs truly invigorating path began.
Getting Started
Given this early interests, the fact that Zuckerberg majored in computer science and psychology in college is
perhaps not too surprising. He began his journey by writing a program called CourseMatch that allowed
students to coordinate and strategically select their classes. Soon after this, he created Facemash. Facemash
gave students the opportunity to rate others based on looks and then post these results online. Popularity
for this site increased to the extent that campus networks were overwhelmed and malfunctioned, forcing
Prepared by: Shahrinaz Ismail, Dr.
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Facemash to shut down. Zuckerberg next embarked on creating a social network that he dubbed
Thefacebook. The young entrepreneur dropped out of Harvard during his sophomore year to develop his
soon-to-be multibillion-dollar company.
Working with his roommate Dustin Moskovitz, fellow investor, Peter Thiel, and former Napster
employee, Sean Parker, Thefacebook was renamed Facebook. By 2007, Facebook Platform, which
allowed programmers to create social applications within Facebook, was complete. The characteristics bluecoloured website design stemmed from Zuckerbergs colour-blindness, which limited him from clearly seeing
the colours red and green, but allowed visual clarify with the colour blue. Later that year, Beacon was
created as a social advertising foundation. This led to a massive increase in growth for Facebook as both
students and companies could now derive value from the company. In August 2008, Facebook hired Sheryl
Sandberg to be it Chief Operating Officer and, in an effort to reach new markets, in October 2008, in addition
to its local headquarters in Palo Alto, California, Facebook set up its international headquarters in Dublin,
Ireland. By July 2010, the company had over 500 million users and by the end of 2012, the user base totalled
1 billion.
Earning Respect
In 2009, Vanity Fair magazine ranked Zuckerberg as the 23rd most influential person of the Information Age;
in 2010, the magazine chose him as the most influential person. Fast Company selected Facebook as the
most innovative company of all in 2010 while Glassdoor indicated that employees indentified the firm as the
best place to work in both 2011 and 2013. Zuckerberg currently has an employee approval rating of 97
percent. Mentors such as Apples Steve Jobs and Netscapes CFO Peter Currie were serving as mentors for
Zuckerberg regarding issues such as developing and using financing strategies and creating management
teams.
Expanding
Acquisitions have played a significant role in Facebooks success. Beginning in 2008 with ConnectU,
Facebook has forged relationships with many influential companies over the years. The firm uses
acquisitions to add products and technologies; but most importantly, to gain access to valuable human
capital. Zuckerberg once elaborated on Facebooks acquisition strategy saying, We have not once bought a
company for the company. We buy companies to get excellent people.
From 2008 to April 2013, Facebook acquired over 30 companies. The majority of these companies were
never intended to survive as independent businesses. Facebook uses the acquired employees to improve
Facebook capabilities and develop new businesses. It acquired companies such as Rel8tion, Beluga, Snaptu,
Chai Labs, and ConnectU, as shown in Exhibit 1. Each acquired business brought knowledge to Facebook in a
strategic area of weakness.
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Exhibit 1: Acquisitions
Acquisition Date
Company
Business
23 Aug 2005
Facebook.com
AboutFace
19 Jul 2007
Parakey
Offline applications/Web OS
23 Jun 2008
ConnectU
Social networking
10 Aug 2009
FriendFeed
Social networking aggregator
19 Feb 2010
Octazen
Contact importer
2 Mar 2010
Divvyshot
Photo management
13 May 2010
Friendster patents
Intellectual property
26 May 2010
ShareGrove
Private conversations/Forums
8 Jul 2010
Nextstop
Travel recommendations
15 Aug 2010
Chai Labs
Internet applications
20 Aug 2010
Hot Potato
Check-ins/Status updates
29 Oct 2010
Drop.io
File hosting/sharing
15 Nov 2010
FB.com domain
American Farm Bureau Federation
25 Jan 2011
Relation
Mobile advertising
2 Mar 2011
Beluga
Group messaging
20 Mar 2011
Snaptu
Mobile app developer
24 Mar 2011
RecRec
ComputerVision
27 Apr 2011
DayTum
Information graphics
9 Jun 2011
Sofa
Software design
9 Jun 2011
MailRank
Email prioritisation
2 Aug 2011
Push Pop Press
Digital publishing
10 Oct 2011
Friend.ly
Social casual Q&A service app
8 Nov 2011
Strobe
HTML 5 mobile apps, SproutCore
2 Dec 2011
Gowalla
Location based service
9 Apr 2012
Instagram
Photo sharing
13 Apr 2012
Tagtile
Customer loyalty app
5 May 2012
Glancee
Social discovery platform
15 May 2012
Lightbox.com
Photo sharing
21 May 2012
Karma
Social gifting
18 Jun 2012
Face.com
Face recognition platform
14 Jul 2012
Spool
Mobile bookmarking and sharing content
20 Jul 2012
Acrylic Software
RSS app Pulp and secure database app
24 Aug 2012
Threadsy
Social aggregator
28 Feb 2013
Atlas
Atlas advertiser suite
14 Mar 2013
Hot Studio
Design agency
Source: http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Facebook
For example, in August 2009, Facebook acquired a news feed company called FriendFeed. Before the
acquisition, Facebooks news feed required users to refresh the data manually and user posts that received
comments did not move up to the beginning of the news feed. With the acquisition, Facebook leveraged
FriendFeeds superior technology into the Facebook platform. However, the key to this and to the majority
of Facebooks acquisitions was the knowledge and experience gained from the human capital that arrived
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with the acquisition. In the case of FriendFeed, Facebook gained four key employees that had previously
played a major role in launching Google maps and Gmail as Google employees before starting FriendFeed.
The talent and experience of these talented individuals was the foundation for enhancing Facebooks ability
to provide this type of functionality for its users.
In 2010, Facebook formed a strategic partnership with Zynga, one of the largest and most successful
providers of web-based social games. This partnership allowed Facebook to enter into the promising online
gaming space while simultaneously attracting a younger user base. In return for helping Facebook, Facebook
stated that it would help Zynga reach specific monthly growth targets and would give Zynga a portion of the
revenues from ads placed on its game pages. In return, Facebook required that Zynga not launch its games
on any other social platform.
In March 2011, Facebook acquired Snaptu. Snaptu provides application software for services such as
Facebook, Twitter, and LinkedIn that allows these services to be featured on phones. Snaptus employees
also became a part of Facebook.
In 2012, Facebook faced competition in a major business unit: photo sharing. Instagram, a popular photo
sharing application on iPhones, was gaining popularity and planning to launch an Android version. With
analysts speculating it could rival Facebook in photo sharing, Facebook evaluated the competitor and
decided to complete a USD 1 billion dollar acquisition of Instagram. This acquisition, completed in
September 2012, allowed Facebook and Instagram to share activities and core competencies and created
additional value for users. It also helped strengthen Facebooks competitive advantage in photo sharing by
gaining market power and economies of scope. The sharing of intangible and tangible resources between
the two business units also created value for end users and helped strengthen Facebooks presence on
mobile devices. Facebooks VP of Engineering, Mike Schroepfer, explained the reasoning behind this
acquisition:
So many of us at Facebook love using Instagram to share moments with our friends and for so many
people, sharing photos with friends is an important part of the Facebook experience. Thats why were so
excited to bring Instagram to Facebook and see what we can create together.
Facebook has since made Instagram available to all smart phones. Unlike its other acquisitions, the
Instagram acquisition was the first major acquisition that involved the purchase of a product with already
engaged users. This acquisition was also different in that Facebook allowed Instagram to operate as a
standalone service and not incorporate into the Facebook mobile experience. Instagram benefited from the
strong engineering team and infrastructure at Facebook and brought reciprocal experience by utilising the
seamless benefit of the Instagram mobile experience. As of February 2013, Instagram had over 100 million
Monthly Active Users (MAUs).
Following the Instagram acquisition, Facebook acquired several additional companies including Spool,
Acrylic Software, and Threadsy. In the case of Spool, which offered a mobile bookmarking service, Facebook
decided to discontinue the product offering. However, Facebook will be utilising Spools five programmers to
enhance the Facebook mobile experience.
Facebook utilises partnerships to help strengthen and enhance product offerings to customers. These
strategic partnerships broaden and expand the Facebook experience and provide the firms users with an
engaging and complete product. In September 2011, Facebook chose to form partnerships with media
companies Netflix and Spotify, thus allowing users to update their news feeds with information about what
they were currently doing. Users could now seamlessly notify their connections about what they were
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listening to or watching. In 2013, Facebook enhanced its partnership with Trend Micro, a global cloud
security leader, and Rovi, an information database of movies, TV shows, and celebrities that can be tied to
Facebook user profiles. Facebooks partnership with Rovi will allow advertisers to advertise to specific
customers groups that they want to target. These strategic partnerships add value to the Facebook
experience, which increases Daily Active Users (DAUs) and MAUs, leading to increased revenue.
Going Public
Facebook filed for its initial public offering on February 1, 2012. As detailed in the filing, Zuckerberg would
retain a 22 percent ownership share and would own 57 percent of the voting shares. The shares were valued
at USD 38/share, valuing the company at USD 104 billion, the largest valuation to date for a newly public
company. One day before the IPO, Facebook announced it would sell 25 percent more shares than originally
planned, raising the IPO to USD 16 billion. Trading began on May 18, 2012 at a price of USD 42.05; but by the
end of the week, the stock had dropped 16.5 percent to USD 31.91. In less than four months, the price had
declined to USD 17.55 and as of April 16, 2013, the share price was USD 26.92, representing one of the most
disappointing IPOs in recent history. More recently, Facebooks market cap exceeded USD 64 billion and
showed a monthly growth rate around 2 percent.
Inside Facebook
Give people the power to share and make the world more open and connected. Facebook Mission
Statement.
Mission
After evolving for over four years from its original mission to connect people through social networks at
colleges, Facebook has transferred its focus from simply connecting college students to that of empowering
all users. Facebook impacts the world by expanding the global user community, providing the most
compelling user experience to increase user engagement, improving advertisement opportunities for
businesses, creating engaging and easy-to-access mobile products, and developing a scalable infrastructure.
In a 2009 interview with Forbes, Mark Zuckerberg stated his vision in regard to the impact Facebook could
have on the world:
Building a good economic engine is what allows all these other platform companies and advertisers and
other partners to exist, and be a part of this ecosystem. Ultimately, what being a company means to me,
is not being just that building something that actually makes a really big change in the world.
Although Facebooks scope has expanded, its purpose remains the same: giving people a way to share
information in an easy and exciting way. Users are invited to share their photos, hobbies, educational
backgrounds, friends, and just about every other piece of information about themselves. With the
encryption of a powerful search engine, a continuously increasing number of companies, groups, and
individuals establish connections within seconds.
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Culture
Facebook itself operates under a developer-centred culture where the focus is less on the flashy features of
a new product and more on the logistics behind products. Yee Lee provides a very important message in his
article, How Facebook Ships Code.
Engineers [at Facebook] generally want to work on infrastructure, scalability, and hard problems
thats where all the prestige is. If can be hard to get engineers excited about working on front-end project
and user interfaces. This is the opposite of what you find in some consumer businesses where everyone wants
to work on stuff that customers touch so you can point to a particular user experience and say, I built that.
At Facebook, the back-end stuff like news feed algorithms, ad-targeting algorithms, memcache
optimisations, etc. are the juicy projects that engineers want.
These developers are referred to as the offensive line as they are the backbone of the Facebook team.
One of the key aspects that sets Facebook apart is its celebration of its offensive line. It ensures that the
difficult jobs, those whose effects are less noticeable for the end user, are the ones that people at Facebook
are most excited about doing. These jobs are the most highly respected occupations at Facebook and
because of this, Facebook has managed to create a culture that would be challenging to duplicate or imitate.
Core Themes
An employee of Facebook for over three years, who previously worked for Google, cited four core themes at
Facebook that countless others have echoed and confirmed. The first is Autonomy and Responsibility, which
enables all employees to govern their own work, resulting in a sense of ownership and pride. The second
theme is Focus on Impact, which entitles developers and engineers to create whatever they want in their
mission to have a positive effect on end users. As Facebook accumulated a significant user base, it focused
on scaling horizontally, moving fast, and finding the right people. Facebook placed its engineers on small,
independent teams and allowed them to make choices that had major impacts on the direction of their
respective product lines. For example, historically, only three engineers have run Facebooks photo sharing
service the largest on the Internet. This type of control given to employees makes coming to work exciting
and has created a culture at Facebook where changes designed to meet customers needs can be quickly
made. The next theme is Facebook is Run by Hackers. What this tongue-in-cheek theme implies is that
employees enjoy the ability to innovate and create new products based on extensive research into every
small detail. The final theme is Growth and Coaching. A dominant culture that has evolved is described as
no fear of failure. This honours the concept that triumphs come out of failures, and the atmosphere plays
a huge part in Facebooks success. Additionally, coaching allows for a constant embedding of continuous
progression. Whit these motivations suggested by the four core themes, the source of much of Facebooks
enthusiasm is obvious.
Outside Facebook
Social Networking
One of the most innovative creations in the twenty-first century is social networks. Connecting the world
through schools, families, businesses, photos, and just about every other piece of information, social
networks thrive on people sharing their life stories. In the last ten years, the most important networks have
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been Facebook, MySpace, Twitter and LinkedIn, with several additional sites surfacing within the last few
years. Facebook in particular is considered a disruptive innovation that has interfered with search engines
such as Google and Yahoo!
Social networking sites serve three main purposes in addition to connecting people: advertising,
employee and idea screening, and application development and gaming.
In September 2012, Facebook generated over USD 1 billion per quarter from advertising revenue.
Facebooks advertisers range from Ford Motor Company and McDonalds to Dell and Nike. Procter & Gamble
estimates that it generates USD 500 million in sales from Facebook advertisements. Over 3,800 Wal-Mart
stores have their own Facebook page.
These sites also provide a platform for employers to monitor current employees as well as find and
screen possible new employees. With this screening, new information may lead to new social capital for a
firm. Access to new ideas via social networking is critical to the innovation process. This process allows for a
type of integration among suppliers and buyers that is difficult to find elsewhere.
The last major source of innovative activity involves application, software, and gaming developers.
Creations for Facebook apps and electronic platforms and operating systems have become especially
popular. Zynga, a game development firm, developed the highest grossing online game on Facebook,
FarmVille, and represented 12 percent of Facebooks total revenues. Whether acting as a hosting service,
development platform, employment locater, or any innovation hub, social networks is a fascinating
innovation with seemingly unlimited potential to identify and serve customers needs.
The Industry
Facebook is influenced by several factors, most notably its customers. Customers can be divided into two
categories: users and advertisers.
Users have tremendous power over Facebook as they constantly demand innovation and Facebook
carefully listens to their needs, ever mindful that switching costs to another social network are relatively
non-existent. With every move Facebook makes, users send a signal sometimes positive and sometimes
negative. Small incremental innovations, such as tweaking the position of a box, may be seen as a positive or
inconsequential change to users. Larger radical innovations, such as the creation of a personal timeline
and reformatting an entire profile page, often cause the users to divide into two categories: those who
appreciate the alteration and those who do not.
While user influence is high, the opposite is seen with advertisers. At first glance, one might conclude
that advertiser power is high because Facebook depends on its advertisers for profit. This, however, is quite
the contrary. Because Facebook supplies a lucrative customer base and despite speculation around the
measurable impact of advertising on Facebook, the power held by advertisers is actually low. Placing
advertisements on Facebook is incredibly targeted and effective. The COO of Facebook, Sheryl Sandberg,
revealed that of the 60 studies conducted by Facebook in 2012 on how its advertisements impacted offline
and online sales, 70 percent showed a ROI of better than three times, and 49 percent showed a ROI of better
than five times. This large ROI for companies comes from Facebooks ability to target a narrow field of
customers. For example, Facebook claims it can reach an 18- to 28-year-old woman with 90 percent
accuracy. This compares to the industry average of approximately 35 percent.
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In April 2013, Facebook was testing an advertising feature that lets advertisers and agencies use
Facebook Exchange (FBX) to take into account the browsing behaviours of Facebook users outside of
Facebook. This feature will provide advertisers the opportunity to display advertisements to users that have
already browsed their sites or access information about the products or services it offers. These advertisers
will be able to describe a typical customer to Facebook and then utilise FBX to find those customers. This will
significantly increase the ability of advertisers to interact directly with their most valuable customers. In
2012, Facebook brought in almost USD 5 billion in advertising revenue, accounting for 84 percent of total
Facebook revenue. This reliance on advertising revenue requires Facebook to ensure that advertisements
are social, relevant, and well integrated with other Facebook content.
There were over 6.8 billion mobile subscriptions worldwide at the end of 2012 and that number is
expected to continue to grow. Mobile platforms have quickly become one of the fastest growing segments
of advertising. According to Gartner Research, spending in this space would likely reach USD 11.4 billion in
2013. Recently, Facebook chose to allocate a large amount of its R&D to mobile products. Advertisers pay a
premium to advertise to mobile users, which makes up for the lower volume of advertisements. Facebooks
new approach to offering services to mobile devices involves it recent launch of Facebook Home. Facebook
wants to interact with users continually throughout the day as they access their mobile devices. Facebook
believes it can earn a significant amount of revenue by strategically placing advertisements that target
specific mobile users. Home takes the Facebook application that many mobile phone users have installed
and completely integrates it with the user interface of the phone. It was initially released on April 12, 2013
and will be preloaded on a new HTC smartphone.
While some firms such as P&G claim results, others such as Coca-Cola are sceptical. With its 62 million
followers on Facebook, Coca-Cola has publicly questions Facebooks quantifiable effects on sales.
Competitors
Facebook competes against direct competitors as well as others with the ability to attract its customers
mind-share. Twitter is an example of a direct Facebook competitor while Google examples one of
Facebooks indirect competitors. The industry is growing rapidly, imitation costs are low, and it is difficult for
firms to protect their competitive advantages for an extended period. In addition to Facebook, there are four
main players in the social media industry: Google Plus, MySpace, LinkedIn, and Twitter. Comparisons of
Facebook relative to a few of its competitors appear in Exhibit 2.
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Exhibit 2: Competitor* Comparisons (as of December 31, 2012)
Google
LinkedIn
Facebook
Revenue
50.18B
972.31M
5.09B
Quarterly Revenue Growth
36.2%
81.0%
40.1%
Gross Profit
29.54B
846.79M
3.72B
EBITDA
16.28B
125.51M
1.19B
New Income Available to

Common Shareholders
10.79B
21.61M
32.0M
Market Cap
257.98B
19.63B
63.42B
Profit Margin
21.4%
2.2%
1.0%
Operating Margin
26.7%
5.9%
10.6%
Return on Assets
10.1%
3.2%
3.1%
Return on Equity
16.6%
2.8%
0.6%
Total Cash
48.09B
749.55M
9.63B
Total Debt
7.21B
2.36B
11
16.62B
267.07M
1.61B
Current Ratio
Operating Cash Flow
Google Plus
Google Plus, aggressively pushed by chief executive Larry Page, is a new social network leveraging the
existing Google infrastructure to complete with Facebook. With nearly 100 million users utilising various
accounts and products such as email, profiles, and gaming, Google represents Facebooks largest competitor
and seemingly has the capability to attract a substantial share of the social networking market. Google
maintains a significant level of awareness among corporate users due to its popular Gmail service. It has
begun to capitalise on this advantage by creating Google Plus for business. This service not only allows
companies to establish their own social networking presence on Google Plus, but also integrates with
Googles many features such as Google Search and Google Ads. To expedite its growth and use, Google
recently required all of its users to sign up for Google Plus. Competitors within the dynamic social
networking space are rushing to create ways to differentiate themselves and increase their average revenue
per user (ARPU). While Facebook accounted for 46 percent of logins for social media in recent times, the
percentage of logins through Google is increasing.
Twitter
This online micro blogging service was established in 2006 by Jack Dorsey. With over 200 million users and
1.6 billion tweets per day, Twitter has become one of the most iconic and visited websites on the Internet.
The estimate of the firms advertising revenues for 2013 was USD 583 million with the projection for 2014
being that this figure would double, surpassing USD 1billion. The largest reason for growth is mobile ad
revenues. Robert Hof from Forbes comments, Unlike some leading online advertising companies such as
Google and Facebook, which have been struggling to contend with lower mobile ad prices that have
depressed thri growth, Twitter has found mobile has been its key moneymaker. Its quick and simple posts
make mobile ads an ideal location and advertisers are flocking to exploit this channel.
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MySpace
MySpace, engineered by Chris DeWolfe, implemented a strategy very similar to Facebook in its origination.
This firm initially targeted the same audience as Facebook, had enormous capabilities, and was purchased by
News Corporation, a large media corporation with professional management to lead its unique resources.
Started in 2003, the site pioneered social networking and once boasted more users than any other social
media site. However, its rise to popularity in the teenage and young adult category from 2005-2008
plummeted in 2009. Once a music-centred social platform, with the advent of Facebook, MySpace chose to
reposition itself as a social entertainment destination and ultimately, alienated many of its followers.
While Facebook and other competitors focused on introducing a platform where developers could co-design,
MySpace chose to build everything in-house. Although it designed many features, MySpace neglected to
deepen its differentiating factors and in the end, other networks capitalised on this opportunity.
LinkedIn
LinkedIn has differentiated itself by targeting working and employment seeking professionals. Used as a site
to connect with future employers and employees, LinkedIn reports more than 200 million users in over 200
countries. Founded by Reid Hoffman and managed by CEO Jeff Weiner, a previous Yahoo! executive, the firm
has successfully managed to segment customers and compete alongside Facebook. LinkedIns success stems
from its creation of connections that allow people to maintain and discover relationships between many
people and companies. The company went public in 2011, priced at USD 45/share. The value of a share of
the firms stock increased to just under USD 180 by mid-2013. It acquired several companies such as
Rapportive and SlideShare, alongside several patents from additional companies. With a focus on trust
building and creation, LinkedIn appears to have positioned itself to compete successfully with Facebook.
Out-Innovating the Competition

In comparison to its more profitable competitors who charge for their services such as LinkedIn, Facebook
essentially gives away its social networking features at no cost. Creating a strategic subscription model is
becoming the norm within the Internet services industry. While maintaining basic access and services with
no fee, LinkedIn grants extra features to those who value its networking and job-search functionalities
enough to pay a monthly fee. Other online services have begun offering the basics of their services for free
and charging fees for premium features. The ability of subscription-based firms such as Netflix, Amazon
Prime, and Dropbox Pro to attract lucrative users has started to attract investors. A recent study aimed at
understanding the extent to which consumers value free online services calculated the amount customers
would be willing to pay for different services. The results indicated that respondents between the ages of 2322 maintain a significant level of willingness to pay for what have customarily been free services (see Exhibit
3). With Google Search, Gmail, Wikipedia, and then Facebook topping the charts, this study revealed that
subscription-based models have a promising future.
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Exhibit 3: Willingness to Pay for Services
Strategic Leaders
Facebooks leaders have played a major role in making the company what it is today the largest social
network in the world. Each leader has added essential values in creating a unique company. Facebooks
team is not a result of luck; it is the result of Mark Zuckerbergs efforts to hire the best and most
knowledgeable people in the industry.
For Facebook, a major priority is to bring people on board who fit the culture and values of the company
and who have the right attitude and skills to make strategic decisions. Individuals with visionary qualities
help Facebook form and implement strategies for achieving strategic competitiveness and above average
returns. Since 2008, Zuckerberg has hired a team capable of taking Facebooks growth to the next level. A list
of key personnel at Facebook appears in Exhibit 4.
Exhibit 4: Key Personnel
FOUNDERS
Mark
Zuckerberg
Dustin
Mostovitz
Eduardo
Saverin
Chris Hughes
Andrew
McCollum
BOARD
Mark
Zuckerberg
Jim Breyer
Peter Thiel
Sheryl
Sandberg
Mark
Andreessen
Erskine Bowles
Susan Desmond
Don Graham
Reed Hastings
Sheryl
Sandberg
COO
David
Ebersman
CFO
EXECUTIVE
OFFICERS
Mark Zuckerberg
Chairman & CEO
Mike
Schroepfer
CTO
Mark Zuckerberg, Chairman of the Board and CEO

Mark Zuckerberg is the Chairman of the Board and CEO of Facebook Inc. He has been CEO since 2004 and
Chairman of the Board since the company went public in 2012. As noted earlier, Zuckerbergs ability to
innovate began at a young age and culminated with the inception of Facebook. Parts of the media
sometimes paint an unattractive picture of Zuckerberg with respect to some of his actions over the years;
however, his actions do not appear to support the medias occasional assertions related to behaviour.
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Indeed, Zuckerberg has been involved in various acts of charity and joined a new political organisation that
promotes venture and immigration reforms.
David Ebersman, Chief Financial Officer

David Ebersman has been with Facebook since 2009. He started his career at Oppenheimer & Co., Inc. in
1991 where he worked as a research analyst. He later joined Genentech, a biomedical firm, from 1994 to
2009 where he had a brilliant career that ultimately contributed to his position as CFO of Facebook. Across
Wall Street, investors consider him a truthful professional who a=works for the best interests of investors.
Proof of this fact is the way he administered the takeover of Genentech by Roche, working tirelessly to
generate to generate the most value for Genentechs shareholders during the transaction. The value that
Ebersman brings to Facebook is his expertise regarding public companies and his strong operational
background. His presence has resulted in a greater level of confidence for Facebooks team and its
shareholders.
Sheryl Sandberg, Chief Operating Officer

Sheryl Sandberg has been a very influential leader at Facebook since 2008. After graduating summa cum
laude from Harvard University with an A.B. in Economics, Sandberg joined the World Bank to work on health
projects in India. After earning her MBA (also from Harvard), she held positions at McKinsey & Company, the
U.S. Department of Treasury, and, most recently, Google. At Google, Sandberg is the VP of Global Online
sales and Operations and was involved in the launch of Googles Philanthropic arm, Google.org. As part of
Facebooks top management team, her knowledge of international markets and finance is valuable as
Facebook forms and implements its international strategy.
Theodore Ullyot, VP and General Counsel

Theodore Ullyot also started with Facebook in 2008. His academic background includes an A.B. in History
from Harvard University and a J.D. from the University of Chicago. Before Facebook, he was a partner at
Kirkland & Ellis LLP where he focused on telecommunications and appellate law. Ullyot joined America
Online and remained through its merger with Time Warner, ultimately becoming the Senior VP and general
counsel for AOL Time Warner Europe. In January 2003, Ullyot began a two-year stint in the White House as
associate counsel and deputy assistant to President George W. Bush and chief of staff to U.S. Attorney
General Alberto R. Gonzales. Ullyots experience in government as well as public and private companies
coupled with his telecommunications expertise and high-level connections make him a perfect fit for
Facebook. Ullyots current responsibilities include examining and addressing the rising concerns about data
privacy among Facebook users.
Financial Results
In 2012, Facebook generated over USD 5 billion, mostly from advertising (Exhibit 5). Facebook relies heavily
on advertising to generate positive cash flows. From 2010 to 2011, and 2011 to 2012, revenue increased 74
percent and 59 percent, respectively. This slowing of revenue growth is a concern for Facebook that must be
Page 12 out of 17

accounted for and improved in order to continue to be a market leader in connecting advertisers to
consumers. Net income from 2010 to 2011 increased 65 percent. However, from 2011 to 2012, net income
decreased by a staggering 95 percent to only USD 53 million. This substantial reduction in income was due to
a 133 percent increase in total costs and expenses. Cash flows from operations and financing have been
increasing each year to support cash outflows used to purchase PPE and marketable securities (Exhibit 6).
Facebook continues to emphasise R&D and, in 2012, the percentage spent on R&D increased by 261 percent,
nearly USD 1.4 billion. Facebook hopes significant expenditures in 2012 will result in additional revenue
opportunities in the future. Another financial move occurred in preparation for its IPO when Facebook tried
to eliminate short- and long-term debt (Exhibit 7).
Exhibit 5: Income Statement (summarised)
In Millions, except Per Share
data, unless otherwise specified
12 Months Ended
Dec 31, 2012
Dec 31, 2011
Dec 31, 2010
% Change
from 2010
USD 5,089
USD 3,711
USD 1,974
88%
37%
Cost of revenue
1,364
860
493
74%
59%
Research and development
1,399
388
144
169%
261%
Marketing and sales
896
393
167
135%
128%
General and administrative
892
314
138
128%
184%
Total costs and expenses
4,551
1,955
942
108%
133%
Income from operations
538
1,756
1,032
70%
-69%
-51
-42
-22
91%
21%
-19
-2
Income before provision for

income taxes
494
1,695
1,008
68%
-71%
Provision for income taxes
441
695
402
73%
-37%
Net income
53
1,000
606
65%
-95%
Less: Net income attributable to

participating securities
21
332
234
42%
-94%
Net income attributable to

common stockholders
32
668
372
80%
-95%
Basic
USD 0.02
USD 0.52
USD 0.34
Diluted
USD 0.01
USD 0.46
USD 0.28
Basic
2,006
1,294
1,107
Diluted
2,166
1,508
1,414
Revenue
% Change
from 2011
Costs and expenses:
Interest and other income

(expense), net:
Interest expense
Other income (expense), net
Earnings per share attributable

to Class A & B common
stockholders:
Weighted avg. shares used to

compute earnings per share
attributable to Class A & B
common stockholders:
Page 13 out of 17

Exhibit 6: Consolidated Statements of Cash Flow (summarised)
(USD)
In Millions, unless otherwise specified
Cash flows from operating activities
12 Months Ended
Dec 31, 2012
Dec 31, 2011
Dec 31, 2010
USD 53
USD 1,000
USD 606
Depreciation and amortisation
649
323
139
Loss on write-off of equipment
15
Share-based compensation
1,572
217
20
Deferred income taxes
-186
-30
23
Tax benefit from share-based award activity
1,033
433
115
Excess tax benefit from share-based award

activity
-1,033
-433
-115
Accounts receivable
-170
-174
-209
Income tax refundable
-451
Prepaid expenses and other current assets
-14
-24
-38
Other assets
-5
-6
Accounts payable
12
Platform partners payable
-2
96
75
Accrued expenses and other current liabilities
160
37
20
Deferred revenue and deposits
-60
49
37
Other liabilities
43
50
16
1,612
1,549
698
Purchases of property and equipment
-1,235
-606
-293
Purchases of marketable securities
-10,307
-3,025
Sales of marketable securities
2,100
113
Maturities of marketable securities
3,333
316
Investments in non-marketable equity securities
-2
-3
Acquisitions of businesses, net of cash acquired,

and purchases of intangible and other assets
-911
-24
-22
-2
-9
-7,024
-3,023
-324
Net proceeds from issuance of common stock
6,760
998
500
Taxes paid related to net share settlement of

equity awards
-2,862
17
28
1,496
250
-250
Proceeds from sale and lease-back transactions
205
-250
Principal payments on capital lease obligations
-366
170
-90
Excess tax benefit from share-based award

activity
1,033
433
115
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in assets and liabilities:
Net cash provided by operating activities

Cash flows from investing activities
Change in restricted cash and deposits

Net cash used in investing activities
Cash flows from financing activities
Proceeds from exercise of stock options

Proceeds from long-term debt, net of issuance
cost
Repayments of long-term debt
Page 14 out of 17

Net cash provided by financing activities
6,283
1,198
781
-3
872
-273
1,152
Cash and cash equivalents at beginning of period
1,512
1,785
633
Cash and cash equivalents at end of period
2,384
1,512
1,785
Effect of exchange rate changes on cash and cash

equivalents
Net increase (decrease) in cash and cash
equivalents
Exhibit 7: Consolidated Balance Sheets

(USD)
In Millions, unless otherwise specified
12 Months Ended
Dec 31, 2012
Dec 31, 2011
USD 2,384
USD 1,512
7,242
2,396
Accounts receivable, net of allowances for

doubtful accounts of USD22 and USD17 as of
December 31, 2012 and 2011, respectively
719
547
Income tax refundable
451
Prepaid expenses and other current assets
471
149
Total current assets
11,267
4,604
Property and equipment, net
2,391
1,475
Goodwill and intangible assets, net
1,388
162
Current assets:
Cash and cash equivalents
Marketable securities
Other assets
57
90
Total assets
15,103
6,331
Accounts payable
65
63
Platform partners payable
169
171
Accrued expenses and other current liabilities
423
296
Deferred revenue and deposits
30
90
Current portion of capital lease obligations
365
279
1,052
899
491
398
Long-term debt
1,500
Other liabilities
305
135
Total liabilities
3,348
1,432
Convertible preferred stock
615
Common stock value
10,094
2,684
-6
Retained earnings
1,659
1,606
Total stockholders equity
11,755
4,899
USD 15,103
USD 6,331
Current liabilities:
Total current liabilities

Capital lease obligations, less current portion
Commitments and contingencies

Stockholders equity:
Additional paid-in capital

Accumulated other comprehensive income (loss)
Total liabilities and stockholders equity
Page 15 out of 17
Strategic Challenges
On January 30, 2013, Facebook announced that it had surpassed several milestones. Not only did the firm
exceed 1.06 billion MAUs, it also tallied over 680 million monthly active mobile users (Exhibit 8). However,
the firm faces several unique challenges.
Exhibit 8: Mobile Monthly Active Users (in millions)
Monetising Facebooks User Base

Facebook boasts an enormous user base, but finding a way to monetise its users is a significant challenge.
User growth will likely not continue at the impressive rates it has seen in the past, which is why the firm
needs to focus on long-term revenue growth. Social media monitors, such as SocialBakers, have reported
concerns that Facebooks domestic growth has peaked. As a result, Facebooks ability to tie more revenuegenerating ideas into the long-term strategy will be essential.
Facebook currently generates most of its revenue through two different methods: advertisements and
royalties from third-party software developers. As previously discussed, advertising is the firms primary
source of revenue. Because of this, the advertisements on the site need to be effective enough to ensure
advertiser satisfaction. Facebook posted a 37 percent increase in revenue from 2011 to 2012, but analysts
are still worried. A closer look at the increase reveals that the primary driver behind the increase was a three
percent advertisement price increase coupled with a 32 percent increase in the number of advertisements.
Put simply, Facebooks increase in revenue is merely a reflection of its increasing user based and does not
appear to be a result of the firms efforts to innovate. In a post-IPO world, investors want to see evidence
that Facebook is working hard to create new avenues for revenue creation and bottom-line growth.
Page 16 out of 17
Future of Facebook
Although Facebook had a successful fiscal year in 2012, many analysts believe the companys level of
meaningful growth is beginning to plateau. Further, Facebooks users, advertisers, and investors are anxious
for the firm to develop more sustainable competitive advantages. With the introduction of Facebook Home,
FBX, and Instagram, the firm has started to prove that it is capable of becoming much more than a basic
social networking platform. Mark Zuckerberg and his team of strategic leaders have decided to invest a
significant amount of R&D dollars to create additional value for customers. What financial results will
Facebook generate in the years to come? Can Facebook find ways to generate value for demanding
customers across time? How does the firm need to position itself relative to competitors to enhance its
potential to earn above-average returns? Dealing with questions such as these and perhaps a host of others
will affect Facebooks future.
Adapted from:
Hitt, Ireland & Hoskisson (2015) Strategic Management: Competitiveness & Globalisation, 11th ed., Cengage
Learning: Stamford, pp. 133-145
Page 17 out of 17

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