Part 1 Industry Analysis

Facebook Inc. Five Forces Analysis &

Recommendations (Porter’s Model)
UPDATED FEB 8, 2017 JUSTIN YOUNG

Facebook’s social networking website’s homepage in December 2012. A Porter’s Five Forces analysis of Facebook Inc. shows
external factors that highlight customers and substitution as the strongest forces on the social media company. (Photo: Public
Domain)

A Five Forces analysis (Michael Porter’s model) of Facebook Inc. reveals issues that the
company must address to maintain its position as the top player in the social media market.
Michael Porter developed the Five Forces Analysis model to describe the external factors that
influence companies’ industry environment. In Facebook’s case, these external factors affect
the situation of the social media market, as well as the online display advertising industry
environment. As the biggest competitor in the industry, the company enjoys the benefits of
high revenues and popularity among users and advertisers. However, to keep this position,
Facebook Inc. must counteract the negative effects of external factors shown in this Five Forces
analysis of the company and the online display advertising industry environment.
 Facebook Inc.’s Five Forces analysis (Porter’s model) puts emphasis on customers and
substitutes as the strongest forces based on external factors in the social media business.
Nonetheless, all external factors in the online display advertising industry environment are
significant in affecting Facebook’s business performance.

Overview: Facebook’s Five Forces Analysis

Facebook’s market position as the leading online social media business provides a variety of
benefits. However, this Five Forces analysis shows that the company must satisfy customers to
reduce the potential negative effects of competition and substitution against its social
networking website and related offerings. The following are the strengths or intensities of the
Five Forces that influence Facebook Inc.’s business:
1. Competitive rivalry or competition (moderate force)
2. Bargaining power of buyers or customers (strong force)
3. Bargaining power of suppliers (weak force)
4. Threat of substitutes or substitution (strong force)
5. Threat of new entrants or new entry (weak force)
Recommendations. Based on this Five Forces Analysis (Porter’s model), Facebook Inc. retains
its industry leadership partly due to new entrants’ and suppliers’ weaknesses. Such weaknesses
impose minimal barriers to the social media company. However, customers significantly
influence Facebook in terms of their ability to easily transfer to other companies that offer
online advertising services. In relation, it is essential to address the potential of substitutes to
eat away from the firm’s leading market share. Thus, the external factors in this Five Forces
Analysis highlight the need for Facebook to maintain strategies that continually satisfy
customers and users of its social networking website and mobile apps. This recommendation
can help retain clients. In addition, it is recommended that Facebook Inc. must implement
strategies that keep its display advertising services more attractive than those of substitutes.
This move should minimize the negative influence of substitution on Facebook’s industry
environment.

Competitive Rivalry or Competition with Facebook Inc.

(Moderate Force)
Even with its leading social media market position, Facebook Inc. experiences the significant
impact of competition. This element of the Five Forces Analysis determines how competitors
affect the company’s industry environment. The following external factors lead to the
moderate force of competitive rivalry against Facebook:
 Small number of firms (weak force)
 Moderate variety of firms (moderate force)
 Low switching costs (strong force)
 There are only a small number of companies that offer online advertising services similar to
that of Facebook Inc. For example, YouTube LLC (a subsidiary of Google) has a social media
website that also offers targeted online advertising service. The small number of these
competing firms exerts a weak force against Facebook. However, the variety of these firms
helps attract advertisers, thereby imposing a moderate force in Facebook’s industry
environment. In addition, the low switching costs (low difficulty of transfer from one provider
to another) make it easier for advertisers to shift away from Facebook to competitors. These
external factors create the moderate force of competition. Based on this element of the Five
Forces Analysis, competitive rivalry is a major consideration in Facebook Inc.’s strategic
formulation.

Bargaining Power of Facebook’s Customers/Buyers (Strong

Force)
Customers impose pressure on Facebook Inc. in terms of what they want from the company.
The impact of consumers or buyers on the online display advertising industry environment is
examined in this element of the Five Forces Analysis. The following external factors are
significant in creating the strong force of the bargaining power of customers on Facebook’s
social networking website and related services:
 High substitute availability (strong force)
 Low switching costs (strong force)
 High demand from buyers (weak force)
Facebook provides social media services to its members/users. However, advertisers are the
company’s primary source of revenues. These advertisers have the option to use substitutes,
which are highly available. For example, instead of advertising on Facebook, customers could
advertise on television, radio and print media, all of which are widely available and effective in
reaching target audiences. This condition exerts a strong force against Facebook Inc. In
addition, the external factor of low switching costs makes it easy for customers to shift away
from Facebook’s social networking website and related services, thereby also exerting a strong
force against the company. The high demand for online advertising buffers the potential shift of
advertisers and slightly weakens the bargaining power of customers. This element of the Five
Forces Analysis shows that Facebook Inc. must prioritize its customers to ensure competitive
advantage.

Bargaining Power of Facebook’s Suppliers (Weak Force)

Suppliers are among the factors that influence Facebook Inc.’s social networking website and
display advertising services. This element of the Five Forces Analysis shows how suppliers affect
firms and the industry environment. The following external factors lead to the weak bargaining
power of suppliers on Facebook Inc.:
 Moderate size of individual suppliers (moderate force)
 Large population of suppliers (weak force)
 High overall supply (weak force)
Facebook’s supply needs include servers and related computing and network
technology/equipment, as well as office supplies. Some suppliers are large firms that exert a
moderate force on Facebook Inc. However, these supplies are widely available, as there are
many manufacturers of such equipment and materials. Thus, the corresponding external factor
exerts a weak force on Facebook Inc. In relation, the high overall supply minimizes the influence
of individual suppliers on the company. Based on these external factors in the Five Forces
Analysis, suppliers are a minimal issue in Facebook Inc.’s online advertising industry
environment.

Threat of Substitutes or Substitution (Strong Force)

Substitutes could potentially reduce Facebook’s business performance and create challenges in
the social media firm’s industry environment. The impact of substitution is considered in this
element of the Five Forces Analysis. The most notable external factors that create the strong
threat of substitutes against Facebook Inc. are as follows:
 Low switching costs (strong force)
 High substitute availability (strong force)
 Moderate cost of substitutes (moderate force)
It is easy for advertisers to pay for substitutes, such as television and print advertising, instead
of paying for Facebook’s social media advertising. This condition exerts a strong force on the
company. In relation, the high availability of such substitutes strongly affect Facebook’s
industry environment. Nonetheless, many of these substitutes, especially television advertising,
are more expensive than Facebook’s advertising services. Such condition exerts only a
moderate force on the company. This element of the Five Forces Analysis shows that the threat
of substitution is one of the major issues facing strategy development at Facebook Inc.

Threat of New Entrants or New Entry against Facebook Inc.

(Weak Force)
Facebook Inc. faces the negative effects of new entrants on the industry environment. This
element of the Five Forces Analysis covers the impact of new firms on the business. In the case
of Facebook Inc. and its social networking website and related products and services, the
following external factors lead to the weak threat of new entry:
 Low switching costs (strong force)
 High cost of brand development (weak force)
 High cost of loyalty (weak force)
New entrants exert a strong force against Facebook, based on the low switching costs (low
difficulty) of advertisers in moving from one service provider to another. However, it is difficult
 to develop a popular and reliable social media brand similar to Facebook’s. It is also difficult to
build the loyalty of advertisers and users/members. This situation weakens the threat of new
entry against Facebook Inc. Based on this element of the Five Forces Analysis, new entrants are
a minimal issue in Facebook’s strategic formulation processes.
References
 Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry
analysis templates. Competitiveness Review, 24(1), 32-45.
 Facebook Inc. Form 10-K, 2015.
 Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic
Change, 15(5), 213-229.
 Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.
 U.S. Digital Advertising Landscape and Key Players (Part 2). Forbes.
TAGS:
CASE STUDY & CASE ANALYSIS, EXTERNAL ANALYSIS, FACEBOOK INC., PORTER'S FIVE FORCES ANALYSIS,
SOCIAL MEDIA, SOCIAL NETWORKING

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PART 2
POLICY DIRECTIONS

2.1 COMPANY BACKGROUND

Facebook is a social networking service launched on February 4, 2004. It was founded by Mark
Zuckerberg with his college roommate and fellow Harvard University student Eduardo Saverin.[1] The
website's membership was initially limited by the founders to Harvard students, but was expanded to
other colleges in the Boston area, the Ivy League,[2] and gradually most universities in the United States
and Canada,[3][4] corporations,[5] and by September 2006, to everyone with a valid email address along
with an age requirement of being 13 and older.[6][7]
2.2 COMPETITIVE ADVANTAGE AND ACTIVITIES (VALUE CHAIN
ANALYSIS)

Facebook Value Chain Analysis

Posted on January 12, 2017 by John Dudovskiy

Value chain analysis is a strategic analytical tool that can be applied to analyse
business activities to be able to identify those activities that contribute most the overall
competitive advantage of the business. Facebook value chain analysis provided below
discusses sources of competitive advantage of the social media company by referring
to its primary and support business activities. Figure 1 below illustrates the essence of
value chain analysis.

Figure 1 Facebook Value Chain Analysis

Primary Activities
Inbound logistics
Facebook Inc. inbound logistics refers to ways the company acquires resources and
uses according to its needs. The range of resources used by the social media giant
includes hardware, various types of technologies and office supplies. Generally, value
chain analysis framework analyses the processes of receiving and storing raw
materials until their transformation into the final goods.
However, due to Facebook Inc.’s business model illustrated in Figure 6 below, tangible
resources such as hardware and technology used by the company are only secondary
in their nature and the primary resources used to attract the customers are intangible.
Specifically, Facebook offers its customers unique intangible ‘products’ of
informational nature, i.e. content. From this point of view, inbound logistics of
content is highly cost-effective since the content is uploaded by users of in the forms
of texts, pictures and videos without any additional costs for the business.
Operations
Facebook is available in more than 90 different languages, and the company has
offices or data centres in more than 30 countries around the world. Moreover, there
are five support offices and more than 35 sales offices located globally.
[1] Approximately 84.5% of Facebook daily active users are outside the US and
Canada.[2] As it is illustrated in Figure 2 below, Facebook operations mainly involve
the transformation of raw content into user-friendly format via profile page, timeline,
real time updates, news feed, alerts, friend whereabouts, apps etc. With more than
1.13 billion daily active users and 1.03 billion mobile daily active users[3], Facebook is
the most popular social networking site in the world. An extensive amount of
sophisticated hardware, software and data centres, as well as, more than 12500
employees, including technical employees, play a critical role in providing an
interrupted service to such a large customer base.
 Figure 2 Facebook Inc. business operations mapping[1]
Main sources of value for Facebook Inc. business operations include improvement of
content packaging practices in a consistent manner. Specifically, the social media site
is engaged in critical evaluation of its existing product portfolio with the view of
enhancing user experience and introducing new products regularly.
Outbound logistics
Generally, outbound logistics relates to warehousing and the distribution of finished
goods to customers. For Facebook Inc., outbound logistics relates to the provision of
the packaged content to its users via its respective sites and applications. The e-
commerce nature of the business is the main source of value addition for Facebook
Inc. since there are no additional costs for the business related to the outbound
logistics aspect of the business.
Moreover, in 2016 the company introduced a set of initiatives to reduce the loading
time of links, by pre-fetching advertisers’ sites and this measure is estimated to
shorten mobile site load times by 29%, or 8.5 seconds. This and other similar
initiatives provide additional competitive advantages for Facebook’s outbound
logistics aspect of the business.
Marketing and sales
The number of Facebook employees engaged in marketing and sales increased by 32
per cent in 2015. Generally, for 2015, 2014, and 2013, advertising accounted for 95%,
92% and 89%, respectively, of the company’s revenues. The utilization of 7P’s of
marketing by Facebook benefits from the place and price elements of the marketing
mix. The social media company has been consistently expanding its target customer
segment since its establishment in 2004 and it employs multi-segment type of
positioning, targeting multiple customer segments at the same time with different
social media platforms.
Service
The company does not have physical customer service offices due to the online nature
of the business. Range of Facebook customer service platforms include phone number
for customers based in the USA, online help community for all customers and options
tool bar within the site that is intended to assist its users with technical issues…
Facebook Inc. Report contains a detailed discussion of Facebook Value Chain
Analysis. The report also illustrates the application of the major analytical strategic
frameworks in business studies such as SWOT, PESTEL, Porter’s Five Forces and
McKinsey 7S Model on Facebook Inc. Moreover, the report contains analysis of
Facebook marketing strategy, leadership and organizational structure and
discusses the issues of corporate social responsibility.

[1] Annual Report (2015) Facebook Inc.

[2] Our Mission (2016) Facebook Inc. Available at:
http://newsroom.fb.com/company-info/
[3] Stats (2016) Facebook Inc. Available at: http://newsroom.fb.com/company-info/
[4] Source: www.generatorresearch.com
2.3 STRATEGIC DIRECTIONS

Facebook Inc.’s Vision Statement & Mission

Statement

Our Mission
Founded in 2004, Facebook’s mission is to give people the power to
build community and bring the world closer together. People use
Facebook to stay connected with friends and family, to discover what’s
going on in the world, and to share and express what matters to them.

UPDATED FEB 7, 2017 NATHANIEL SMITHSON

Army General Dempsey hosts

a Facebook town hall meeting with service members in 2014. Facebook Inc.’s vision statement and mission statement are
combined in the company’s official mission statement. (Photo: Public Domain)
 Facebook Inc. is the largest social networking website in the world. This market position aligns
with the company’s mission statement and vision statement. The corporate vision statement
describes the business condition that the company wants to achieve. Facebook’s vision
statement guides employees in focusing their efforts. The corporate mission statement
identifies the primary aims and actions needed to reach the vision. Facebook’s mission
statement determines the strategies and tactics to grow and develop the firm. Through
consistent focus on the mission and vision statements, Facebook Inc. ensures its leadership in
the global market for online social networking service.
Facebook Inc.’s mission statement gives specifics of what the company intends to do as the
world’s leading online social media business. However, Facebook’s vision statement requires
specification to provide a guide for the firm’s human resources to support global business
expansion and diversification.

Facebook’s Vision Statement

Facebook’s vision statement, based on the company’s social media service offering, is “People
use Facebook to stay connected with friends and family, to discover what’s going on in the
world, and to share and express what matters to them.” This vision statement shows that the
business is not just an online social networking site. Instead, the company is established to
facilitate valuable communication among individual users. Facebook’s vision statement has the
following main components:
6. Global market
7. Facilitation of communication among friends and family
8. Tool for discovery
9. Tool for self-expression
The “global market” component of Facebook’s vision statement is based on the company’s
specification of “people” as users, indicating everyone around the world. The vision statement
also shows that the company sees itself as a facilitator of communication among friends and
family. Moreover, Facebook Inc. aims to be a global discovery tool through information access.
In addition, the company aims to make its online social networking website a global tool for
self-expression. These components of Facebook’s vision statement push the company to grow
internationally to maintain its leadership position in the global social media market.

Facebook’s Mission Statement

Facebook’s mission statement is “to give people the power to share and make the world more
open and connected.” The company focuses on making its social networking web site an
important part of individual users’ lives. The following are the significant components of
Facebook’s mission statement:
10. Empowering people
11. Enabling sharing
12. Connecting the world

The “empowering people” component of Facebook’s mission statement signifies the company’s
goal of making its online social networking service practical for users to become more capable
online. The mission statement shows that this capability is in the form of enabling users to
share pieces of information. Such information may be in the form of texts, images, videos, and
other file types. The mission statement further indicates that Facebook Inc. has the goal of
connecting the world. A connection is created each time users become “friends” on the social
media website.

Facebook Inc.’s Vision & Mission Statements: Analysis &

Recommendations
Facebook Inc. released an official mission statement that is actually a combination of the
company’s vision statement and mission statement. The wording of the official mission
statement indicates that it also contains Facebook’s vision statement. Thus, it is recommended
that Facebook Inc. must separate these statements to make it easier for investors and
employees to understand the company’s strategic direction and goals. Another
recommendation is for the company to include diversification in its vision and mission
statements. Diversification is relevant, considering that Facebook’s intensive growth strategies
include diversifying the business by offering other services, such as through Instagram and
Oculus VR.
References
 Amabile, T. (2012). To Give Your Employees Meaning, Start With Mission. Harvard Business
School.
 Facebook Inc. Form 10-K, 2015.
 Facebook Inc. Investor Relations – Resources – FAQs.
 Holland, K. (2007). In Mission Statements, Bizspeak and Bromides. The New York Times.
 Kirkpatrick, S. A., Wofford, J. C., & Baum, J. R. (2002). Measuring motive imagery contained in
the vision statement. The Leadership Quarterly, 13(2), 139-150.
TAGS:
CASE STUDY & CASE ANALYSIS, FACEBOOK INC., SOCIAL MEDIA, SOCIAL NETWORKING, VISION AND MISSION
STATEMENTS

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FROM PANMORE INSTITUTE AND ITS AUTHOR/S. COPYRIGHT BY PANMORE INSTITUTE - ALL RIGHTS
RESERVED. SMALL PARTS OF THIS ARTICLE MAY BE QUOTED OR PARAPHRASED FOR RESEARCH PURPOSES, AS
LONG AS THE ARTICLE IS PROPERLY CITED AND REFERENCED TOGETHER WITH ITS URL/LINK.
2.3.1 DIRECTIONS AND PRIORITIES

2.3.2 PEOPLE ALIGNMENT

2.3.3 DECISION MAKING
2.3.4 DRIVING ALIGNMENT
2.3.5 COMMUNICATING THE MESSAGE

PART 3 POLICY IMPLEMENTATION

3.1 STATEMENT OF POLICY

3.2 SCOPE
3.3 OBJECTIVES
3.4 POLICY GUIDELINES
3.5 IMPLEMENTING GUIDELINES
3.6 EFFECTIVITY