Name

Case #1 – “Facebook."
Class
Professor
December 16, 2016

EXECUTIVE BRIEF

Part A: Summary

Mark Zuckerberg, Eduardo Saverin, Andrew McCollum, Dustin Moskovitz, and Chris
Hughes launched Facebook in 2004. Soon after the launched, the firm surpassed Wall Street's
expectations. Over the last eight years, Facebook has become the most popular social networking
site in the world, based on the number of active user accounts. The firm continues to focus on
worldwide and domestic market growth.

Facebook’s success is due in large part to the strong commitment of its owners and managers
to leadership, honesty, and integrity. Leadership emboldens its hacker culture through an
environment that rewards creative problem solving and rapid decision making (Facebook, 2016).
Since the company’s initial public offering, pressure from investors has forced management to
re-evaluate its business strategy to compete against direct competitors in the Internet Industry.
With the long-term profitable growth in question, management must address the company's
ability to satisfy customers and shareholders simultaneously. Additionally, investors question the
firm's ability to monetize its user base. Although the Facebook has experienced exceptional
growth, many analysts believe the company's level of significant growth is beginning to plateau.

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 projects, and developing a scalable
infrastructure (Hitt, Ireland & Hoskisson, 2015). Four months after the firm’s IPO, the stock
price declined by 35 percent indicating concern for the future of the company and its market
share.

Part B: Core Problems

The following are the core problems associated with Facebook.

1. Valuation: weak financial strength- declining share price and slow revenue growth rate.
2. Monetization: identifying a method to benefit from the company's enormous user base
financially.
3. Innovation: value-creation efforts of as a result of the firm’s effort to innovate; seek new
avenues of revenue creation to promote bottom-line growth.
4. R&D Expenses: continually increasing research and development expenses to reach
nearly $1.4 billion, an increase of 261 percent.

Part C: Recommendations
The following are recommendations related to each of the core problems listed above.

1. Valuation:
o Acquisitions of superior technology and new access to valuable human capital
o Strategic partnerships to enter new markets
2. Monetization: focus on creating new industry standards with the incorporation of the
highest statistics of DAUs and MAUs to promote increased advertising effectiveness.
3. Innovation: partnerships to strengthen and enhance product offerings, broaden and
expand the company’s experience.
4. R&D Expenses: strategically manage R&D expenses across company entities to mitigate
outstanding debt.

Part D: Analysis

Mark Zuckerburg and fellow Harvard college students launched Facebook with the original
mission to connect people through social networks at colleges. The developer-centered culture
allows the company to scale difficult problems to innovate through software continually.
Facebook’s mission has allowed the company to develop a dominate culture of talented
engineers and programmers to challenge the competition through creativity and capitalization.
Increased competition in the industry has made it difficult for firms to protect their competitive
advantages for an extended period. Competition within the dynamic social networking space has
forced companies to create new ways to differentiate themselves and increase their average
revenue per user.

Problem Definition

Facebook relies heavily on advertising to generate positive cash flows. In 2011 revenue
increased 74 percent, and in 2012 revenue increased 59 percent from the base year 2010. The
figures as mentioned earlier indicate slowing of revenue growth and represent a problem for the
company’s future growth. Facebook must account for the decline of income and improve its
business strategy to retain its position as a market leader in connecting advertisers to consumers.
Additionally, the company must find a way to monetize its user base to focus on long-term
revenue growth. Facebook must strive to improve advertisement effectiveness to ensure
advertiser satisfaction. Management must adjust the business strategy to create new avenues for
revenue creation and bottom-line growth.

Innovation is a process used to create a commercial product from an invention (Hitt, Ireland
& Hoskisson, 2015). Through disruptive innovation, Facebook has successfully pioneered the
social media revolution. The company’s creative and easy to access platform has successfully
standardized the user experience giving the firm the upper hand in competition. While innovation
has carried the company since its initial public offing, many believe the industry growth has
begun to plateau.

Core Problems
 1. Valuation: the shrinking stock price after the company's IPO represents a weakness
in the Facebook's ability to demonstrate value. Investor hesitation and opposition to
the current strategy has negatively influenced the rapid share price decline
consequently resulting in the 2 percent growth rate.
2. Monetization: user growth will likely not continue at the effective rates as seen in the
past, the company must focus on long-term growth through the implementation of
revenue-generating business strategies.
3. Innovation: direct competitors including Google, Twitter, LinkedIn and MySpace
have created a challenging environment for the company. Throughout the industry, it
is becoming increasingly difficult for firms to protect their competitive advantage for
an extended amount of time.
4. R&D Expense: to retain market supremacy, the competitive environment has forced
Facebook to allocate a significant amount of cash to research and development.
Continued innovation of advanced intellectual and proprietary software development
has caused R&D expenses to increase by 261 percent.

SWOT Analysis

A SWOT Analysis of Facebook will indicate areas of improvement and advantages regarding
the strategic business plan set forth by leadership. Facebook accomplishes its mission of giving
people a way to share information in an easy and exciting way. The company's success is made
possible through the specially tailored developer-centric culture and shared leadership. Shared
leadership is a dynamic, unfolding, interactive influence process among individuals, where the
objective is to lead one another toward the achievement of collective goals (Pearce, Manz &
Sims, 2009). The company’s embedded core themes provide employees with a sense of
ownership and pride creating a dominate culture impossible for many other firms to imitate.

Strengths
 Strategic acquisition to add products and technologies and more importantly gain access
to valuable human capital.
 Additional knowledge and experience learned from the human capital that arrived with
the acquisition.
 Facebook's large total market of businesses, exceptional corporate governance guidelines,
and constant customer traffic, presents an excellent outlook for growth and profitability.
 Strategic partnerships strengthen Facebook’s competitive advantage in share activities
and core competencies.
 Strategic leadership exercised by the executive officer to hire the best and most
knowledgeable people in the industry.
Weaknesses
 Disappointing IPO and the subsequent fall in the share price; resulting in weak financial
valuation.
 Constant requirement of demanded innovation from users to retain positive traffic
figures.
 Facebook competes against direct competitors as well as the ability to attract its customer
mindshare.
  Slowing growth as identified in the company’s financial reports.
Opportunities
 Adjust the firm’s strategies to compete as a public company, achieve the ability to satisfy
customer and shareholders simultaneously.
 Ability to connect people through different avenues of business including advertising,
employee and idea screening, and application development and gaming.
 Industry expected to grow; mobile platforms are becoming the fastest segments of
advertising.

Threats
 Absolute dependency on advertising as the primary source of revenue generation.
 Significant expenditures on R&D to support expected growth.
 Investor criticism regarding long-term revenue growth and future business strategy to
contribute to the bottom line.

Financial Analysis

Facebook has experienced extreme volatility since the company’s IPO in 2012. The
company’s unclear long-term strategy for growth has caused investors to question the firm’s
financial viability. The sharp decline in the company's share price and the marginal growth rate
indicate financial weakness which may result in insolvency. See Appendices for Facebook’s
financial statements and analysis for years 2010 through 2012 (Hitt, Ireland & Hoskisson, 2015).

Facebook’s Income Statement is shown in Appendix A. In Appendix B; you will find that
when graphed, it indicates that the revenue increased 61% from 2010. This is likely the result of
the company’s success in social networking through the provisions of creativity, innovation, and
excellent programming.

In Appendix C, while sales have been on the rise, there is a significant concern in regards to
the dramatic decline in net income in 2012 compared to 2011. In 2011, net income slightly
improved by 39% from 2010; however, in 2012 the net income plummeted by an astounding
negative 1700 percent. Based on the current trend, if the organization does not improve its
business strategy it will soon be operating in the red.

In Appendix C, using the information from Facebook’s financial statements, a comparison

analysis between the industry standard and FB was completed. The current financial standing of
the company seems to beat the industry standard in most categories. The current ratio for the
year ended December 31, 2012, is 10.71, the quick ratio is 10.71, and the gross margin is 73.20
percent. The company’s significant expenditures on R&D have resulted in a weaker operating
margin of 10.57% compared to the industry standard of 20.75%. Additionally, the financial
statements indicate suboptimal management effectiveness ratios as listed, ROA is 0.49%, and the
ROE is 0.38 percent. Facebook’s financial definitions ratify investors’ concerns for long-term
revenue growth and the effectiveness of its competitive strategy.

Recommendation
 Facebook's success in the industry is due in large part to the mission and culture of the
company. As the company accumulated a significant user base, it focused on scaling
horizontality, moving fast, and finding the right people. Facebook continues to attract advertisers
at a high pace due to the large user base and length of time that users spend per day on the site.
Facebook's large total market of business, exceptional corporate governance guidelines, and
constant customer traffic, formulate an opportunistic foundation for business growth and industry
potential. After a detailed analysis of the company and its organizational strategy, it has been
determined that first course of action for Facebook is to utilize human capital from acquisitions
and partnerships to develop more sustainable competitive advantages to generate long-term
revenue growth. Additional recommended solutions are itemized below:

 Continued expansion through acquisitions and strategic alliances to improve market

power and economies of scope. Partnerships will result in increased user engagement
through enhanced advertisement opportunities for businesses and the creation of
engaging applications.
 Sustained enforcement of dominate developer-centered culture through coaching to
provide constant embedding of continuous progression and innovation.
 Seek to improve the multi-purpose business platform to increase advertisement
effectiveness and customer connectivity; implement strategic pricing structure for
advertising opportunities to guarantee increased average revenue per user.
 Service diversification to capitalize on alternative revenue generating opportunities other
than advertising.
 Focus on partnership application development to reduce R&D expenses and product
testing time.
Appendix A – Facebook Consolidated Income Statements

Colsolidated Income statements

2012 2011 2010
Revenue $ 5,089,000,000 $ 3,711,000,000 $ 1,974,000,000
Costs and expenses:
Costs of revenue $ 1,364,000,000 $ 860,000,000 $ 493,000,000
Research and Development $ 1,399,000,000 $ 388,000,000 $ 144,000,000
Total cost and expenses $ 4,551,000,000 $ 1,955,000,000 $ 942,000,000
Income from operations $ 538,000,000 $ 1,756,000,000 $ 1,032,000,000
Net income $ 53,000,000 $ 1,000,000,000 $ 372,000,000

Appendix B – Facebook Revenue 2010 to 2012 (in millions)

6000

5000

4000

3000

2000

1000

0
Revenue Costs of revenue Research and Total cost and Income from Net income
Development expenses operations

2012 2011 2010

 Appendix C – Facebook Net Income Figures and Chart

Colsolidated statements of Cash Flow

2012
Net income $ 53,000,000
Net cash provided by operating activities $ 1,612,000,000
Net cash used in investing activities $ (7,024,000,000)
Net cash provided by financing activities $ 6,283,000,000
Cash and cash equivalents at end of period $ 2,384,000,000
2011 2010
$ 1,000,000,000 $ 606,000,000
$ 1,549,000,000 $ 689,000,000
$ (3,023,000,000) $ (324,000,000)
$ 1,198,000,000 $ 781,000,000
$ 1,512,000,000 $ 1,785,000,000

2010 2011 2012

$1,785,000,000

Cash and cash equivalents at end of period $1,512,000,000

$2,384,000,000

$781,000,000

Net cash provided by financing activities $1,198,000,000

$6,283,000,000

$(324,000,000)

$(3,023,000,000) Net cash used in investing activities

$(7,024,000,000)

$689,000,000

Net cash provided by operating activities $1,549,000,000

$1,612,000,000

$606,000,000

Net income $1,000,000,000

$53,000,000
Appendix D – Facebook (Ratios: FB versus Industry)

Facebook Ratios
Ratios- FB Vs. Industry
For Year Ending December 31, 2012
Ratio FB Industry
Current Ratio 10.71 4
Quick Ratio 10.71 3.21
Gross Margin 73.20% 58.22%
Operating Margin 10.57% 20.75%
EV/EBITDA 54.94% 33.52%
Debt to Equity 0.20% 0.11%
ROA 0.49% 12.76%
ROE 0.38% 17.10%

References