Structure of the Case

The case opens with Sheryl Sandberg reviewing the company’s 1Q2015 earning data in preparation for the ensuing earnings call. Notably, the company continued a strong run in the mobile ad space and subsequent revenue data that Facebook had generated. But as chief operating officer (COO), she is looking to take the company to the next level: not only to continued growth in mobile ads, but to dominance in the digital ad space. For this to occur, Facebook would somehow have to top Google in both display and search ads, despite only having nominal presence and expertise in display ads.

The case looks back at the history of Facebook, detailing its growth from Harvard’s campus to Silicon Valley. Facebook went from a Harvard online student directory to a social network that included 800 colleges and universities and a $12.7 million investment by 2005. Monthly active users (MAUs) continued to grow and a few more investors joined subsequent rounds of funding. In 2012, Facebook surpassed one billion MAUs, giving the company an enviable amount of reach as well as a massive collection of user information. Revenues reached $12.46 billion in 2014, with the majority of sales generated from ad revenues, and everything else coming from its gaming platform and platform developers. Still, Facebook was making an average revenue per user (ARPU) of $9 in North America, whereas Google was generating ARPU of $45.

Facebook’s founder/CEO, Mark Zuckerberg, continues to drive strategy around product development, although he no longer directly develops for the website. Zuckerberg received much criticism over his casual appearance and inexperience. In 2008, he recruited Sheryl Sandberg as his COO. He thought she would be comfortable as his number two. Sandberg’s recruitment has softened the criticism against the young CEO while bringing a sense of urgency to monetizing Facebook’s billion-user base of subscribers. Zuckerberg brings in the users while Sandberg brings in the money. Sandberg’s impressive background has brought greater credibility to Facebook’s future.

News Feed, Timeline, and Graph Search make up the three “pillars” of Facebook’s product offering. News Feed tells users what is going on in their part of the social graph that they’re a part of. Timeline provides a quick way to answer the question “who is this person?” because it provides a chronological ordering of a person’s life posts to the website. Graph Search is the latest pillar that allows users to query their connections for information unique to them. Zuckerberg also sees this search feature as a way for users to make new connections. In addition to the pillars, Facebook has various features that

Professor Frank T. Rothaermel and Research Associate Michael McKay prepared this case from public sources. The authors are indebted to Professor Marne Arthaud-Day and Research Associate Seth Taylor for contributions to an earlier version of this case. This case is developed for the purpose of class discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and omissions, are entirely the authors. © by Rothaermel and McKay, 2015.

The Facebook IPO, which took place on May 18, 2012, was lackluster and proved to be a catalyst for a company-wide refocusing. For starters, Zuckerberg was forced to grow up as a business leader and dedicate attention to the company bottom line, whereas before it was less of a focus for the young CEO. Second, it highlighted how woefully unprepared the company was for the rise of mobile and the implications the shift in consumer habits had on its core products. As a result, the company evolved on its ad capabilities, focusing on a mobile-centric platform and placing ads in user News Feeds, selling ad space not tied to user “likes,” and sacrificing the traditionally sacred user experience in favor of higher ad revenue.

Facebook creates value for marketers and advertisers as well as for application developers. For marketers, Facebook touts four value propositions: reach, relevance, social context, and engagement. Online advertising continues to grow and so does the value of Facebook’s advertising business. Advertisements are not the only revenue source for Facebook; 8 percent of revenues come from its developer platform. Developers can use a variety of application programming interfaces (API) that allow them to connect their products to a user’s social network. Some examples include posting to a user’s news feed, logging in using Facebook credentials, and integrating Like and Subscribe buttons.

The company continues to develop new products that help nurture the meteoric growth in mobile and ad revenues. Key to new products is the company’s ability to leverage the “holy grail” of the user Facebook ID, which allows users to login across a number of devices and, in turn, enables marketers to better track consumer interactions and behavior.

Facebook competes in the advertising ecosystem with social networks like Twitter, and the photo-sharing service Instagram. Although Facebook acquired Instagram on April 19, 2012, for one billion dollars, Twitter remains an active competitor. As of December 2014, Twitter had 288 million MAUs. However, Facebook users spend more time on the website than Twitter users. Facebook ad revenues in 2014 were $11.4 billion compared to Twitter’s $830 million.

Technology giants Microsoft and Google are also competing with Facebook. Microsoft has a 10 per-cent stake in Facebook and a partnership that uses Skype for Facebook’s video chat service. There is tension in the online advertising space between Facebook and both Microsoft and Google. Google’s online advertising services are exhaustive and dominant compared to Facebook. Immense value for both online marketers stems from their extensive, intimate knowledge about users of their services. As of yet, Google’s social network, Google+, has not figured out how to acquire as large an installed base as Facebook.

Facebook’s network of over one billion monthly active users is an enviable number to other advertising agencies. Perhaps even more enviable was the company’s current ability to offer users connectivity across multiple mobile devices, something that was highly attractive to advertisers. Yet, mobile was where the company’s dominance ended. How could Sandberg and her team begin to challenge Google beyond the realm of mobile?

Questions

Analysis: Focus on External and/or Internal Environments

What are the vision, mission, and values of Facebook? Critically evaluate their usefulness to the company’s leaders in formulating strategic intent.

What “industry” is Facebook competing in, and how is this industry changing? Who are Facebook’s most important competitors? Why?

What are Facebook’s resources and capabilities? What is Facebook’s core competency? Can its resources and capabilities form the basis of a competitive advantage? Why or why not?

Formulation: Focus on Business, Corporate, and/or Global Strategy

What is Facebook’s business model? How is it currently making money?

Given Facebook’s competitive advantage, core competency, and business model, is it possible to compete with Google’s dominance? How might it overcome the advantage Google has in the area of search advertising?

Implementation: Focus on Recommendations and How to Execute Them

Given the increasingly important role that mobile will play in the Facebook machine, what should Sheryl Sandberg prioritize as she seeks to organize to maintain and grow Facebook’s competitive advantage in the mobile space? How does this help Facebook in competing with Google?