Competitive Rivalry Within The Industry: A wide range of players from full featured platforms (Google

+) to niche social networking sites and new mobile apps could hamper Facebooks user base growth

Social networking space is prone to innovation, swift change and the introduction of new technologies.
Hence, Facebooks massive user base cannot be taken for granted; the company continuously needs to
innovate and to adapt to changing customer trends Any failure to do so could potentially cause its user
base to migrate to other social media networks.
Competition stems not only from social platforms that vie for users, but also from companies that allow
marketers with targeted advertising and new development platforms for application developers.
Facebook commands a loyal user base across several user demographics and geographies. However,
competition from Google+ and Twitter can cause a reduction in the average time spent by active users
on the FB platform, as these platforms offer unique sets of features.
Further, a number of social networks are cropping up that target a niche user base. For example,
Snapchat appeals to a younger audience and is more popular among females. We expect this trend to
persist and hence Facebook could see competition intensifying within different user demographics.
Apart from this, since desktop usage is being replaced with mobile usage, we believe rapid changes on
the mobile landscape pose a potential threat to Facebook. The mobile platform is inherently different,
with apps being more targeted towards a specific functionality rather than a broad range of features.
Currently FB provides a vast range of services such as photo-sharing, messaging, etc. We believe newer
innovative apps could emerge providing one of these discrete services. In the event that any such app
gains widespread popularity, it could lead to lower engagement on FB-owned platforms. This could also
result in Facebook buying out upcoming competitors at steep valuations.
There are several regional social networks, such as Renren in China, Mixi in Japan, vKontakte in Russia,
etc., and these compete with FB for users in their respective geographies. Increased regulation in certain
markets such as China is more beneficial to regional players.

Bargaining Power Of Customers: While users of social networking platforms hold high bargaining
leverage, the same is limited for marketers

Users on platforms including Facebook, Whatsapp, Instagram, Messenger, and marketers advertising on
these platforms, represent customers for Facebook.
Given the large-scale competition, the bargaining power of users is high. This means ensuring good user
experience is the key to attract and retain customers on social networking platforms.
The switching costs for users are low, making it easy for them to migrate to other platforms.
This also places a higher limit on the ad load (the percentage of posts that are ads) on the FB platform;
the ad load was previously measured to be around 5 to 10% and we believe this represents an optimal
level without compromising on user experience. [1]
Since customers can choose from a wide array of messaging and other apps, this always restricts the
fees Facebook could charge for Whatsapp in the future.
The wide-spread popularity of Facebook, along with its ad-targeting capabilities, makes it an attractive
platform for marketers, raising FBs bargaining leverage with advertisers.
Facebook caters to a very large number of marketers across both large and small scale businesses and
hence their individual bargaining power is limited.
However, in the event, Facebook starts increasing ad pricing significantly, we think marketers could start
gravitating more towards other social networking platforms. And hence this factor limits Facebooks
ability to dramatically raise ad pricing on the platform.
 Threat Of New Entrants: Rapidly evolving mobile landscape could result in newer (more innovative)
players enter the market

The Internet business is characterized by low barriers to entry. It is relatively easy to build new sites and
applications. However, significant amount of resources are required for marketing and for gaining brand
recognition, and this raises the barriers to entry to an extent.
The introduction of innovative and niche social networking sites could potentially be a threat to
Facebook. Concerns related to falling teen engagement on FB had led to a drop in its stock price in 2013.
The rapidly evolving mobile landscape is an area to watch out for as Facebooks usage is increasingly
shifting to mobile platform mobile daily active users (DAUs) comprised for more than 80% of
overall Facebooks DAU in September 2014.
Hence, we believe investors should closely track the rising popularity of new mobile apps (in areas
including social sharing, messaging, micro-blogging) as this market is still emerging with the advent of
smart phones.

Threat Of Substitute Products: New social networks and mobile applications could emerge as viable
alternatives to Facebook

There are a large number of social networks that facilitate sharing of information, and hence customers
could choose these other platforms over Facebook.
A number of social networks cater to specific interests such as cooking and gaming, and hence any
increase in their popularity could impact engagement levels on FB-owned properties.
Apart from this, new and innovative mobile applications keep entering the market and they could
potentially impact user growth on Facebook in the long-run.

Bargaining Power Of Suppliers: Certain software and hardware providers may hold moderate
bargaining power

Providers of servers, storage, power, software, data center and office equipment, technology etc.
represent suppliers for Facebook.
We expect their bargaining power to be moderate as Facebook is a large scale customer holding
significant buying power.
However, there are only a few reputed suppliers for a large range of hardware and software supplies,
and hence this raises their bargaining power to an extent.

INDUSTRY COMPETITORS.

Rivalries naturally develop between companies competing in the same market. Competitors use means
such as advertising, introducing new products, more attractive customer service and warranties, and
price competition to enhance their standing and market share in a specific industry. To Porter, the
intensity of this rivalry is the result of factors like equally balanced companies, slow growth within an
industry, high fixed costs, lack of product differentiation, overcapacity and price-cutting, diverse
competitors, high-stakes investment, and the high risk of industry exit. There are also market entry
barriers.

PRESSURE FROM SUBSTITUTE PRODUCTS.

Substitute products are the natural result of industry competition, but they place a limit on profitability
within the industry. A substitute product involves the search for a product that can do the same function
as the product the industry already produces. Porter uses the example of security brokers, who
increasingly face substitutes in the form of real estate, money-market funds, and insurance. Substitute
products take on added importance as their availability increases.

BARGAINING POWER OF SUPPLIERS.

Suppliers have a great deal of influence over an industry as they affect price increases and product
quality. A supplier group exerts even more power over an industry if it is dominated by a few
companies, there are no substitute products, the industry is not an important consumer for the
suppliers, their product is essential to the industry, the supplier differs costs, and forward integration
potential of the supplier group exists. Labor supply can also influence the position of the suppliers.
These factors are generally out of the control of the industry or company but strategy can alter the
power of suppliers.

BARGAINING POWER OF BUYERS.

The buyer's power is significant in that buyers can force prices down, demand higher quality products or
services, and, in essence, play competitors against one another, all resulting in potential loss of industry
profits. Buyers exercise more power when they are large-volume buyers, the product is a significant
aspect of the buyer's costs or purchases, the products are standard within an industry, there are few
changing or switching costs, the buyers earn low profits, potential for backward integration of the buyer
group exists, the product is not essential to the buyer's product, and the buyer has full disclosure about
supply, demand, prices, and costs. The bargaining position of buyers changes with time and a company's
(and industry's) competitive strategy.

POTENTIAL ENTRANTS.

Threats of new entrants into an industry depends largely on barriers to entry. Porter identifies six major
barriers to entry:

Economies of scale, or decline in unit costs of the product, which force the entrant to enter on a
large scale and risk a strong reaction from firms already in the industry, or accepting a
disadvantage of costs if entering on a small scale.
Product differentiation, or brand identification and customer loyalty.
Capital requirements for entry; the investment of large capital, after all, presents a significant
risk.
Switching costs, or the cost the buyer has to absorb to switch from one supplier to another.
 Access to distribution channels. New entrants have to establish their distribution in a market
with established distribution channels to secure a space for their product.
Cost disadvantages independent of scale, whereby established companies already have product
technology, access to raw materials, favorable sites, advantages in the form of government
subsidies, and experience.

New entrants can also expect a barrier in the form of government policy through federal and state
regulations and licensing. New firms can expect retaliation from existing companies and also face
changing barriers related to technology, strategic planning within the industry, and manpower and
expertise problems. The entry deterring price or the existence of a prevailing price structure presents an
additional challenge to a firm entering an established industry.

In summary, Porter's five-forces models concentrates on five structural industry features that comprise
the competitive environment, and hence profitability, of an industry. Applying the model means, to be
profitable, the firm has to find and establish itself in an industry so that the company can react to the
forces of competition in a favorable manner. For Porter, Competitive Strategy is not a book for
academics but a blueprint for practitioners-a tool for managers to analyze competition in an industry in
order to anticipate and prepare for changes in the industry, new competitors and market shifts, and to
enhance their firm's overall industry standing.

Throughout the relevant sections of Competitive Strategy, Porter uses numerous industry examples to
illustrate his theory. Since those examples are now over twenty years old, changes in technology and
other industrial shifts and trends have made them somewhat obsolete. Although immediate praise for
the book and the five-forces model was exhaustive, critiques of Porter have appeared in business
literature. Porter's model does not, for example, consider nonmarket changes, such as events in the
political arena that impact an industry. Furthermore, Porter's model has come under fire for what critics
see as his under-evaluation of government regulation and antitrust violations. Overall, criticisms of the
model find their nexus in the lack of consideration by Porter of rapidly changing industry dynamics. In
virtually all instances, critics also present alternatives to Porter's model.

Yet, in a Fortune interview in early 1999, Porter responded to the challenges, saying he welcomed the
"fertile intellectual debate" that stemmed from his work. He admitted he had ignored writing about
strategy in recent years but emphasized his desire to reenter the fray discussing his work and addressing
questions about the model, its application, and the confusion about what really constitutes strategy.
Porter's The Competitive Advantage of Nations (1990) and the more recent On Competition (1998)
demonstrate his desire to further stimulate discussion in the business and academic worlds.
Read more: http://www.referenceforbusiness.com/management/Or-Pr/Porter-s-5-Forces-
Model.html#ixzz3mQXI9Apg