Wednesday, April 2, 2014

Porter’s Five Force Model Applied to Facebook

The porter’s five-force model is a famous and powerful business framework to analyze where power resides in a business model. The main purpose of the Porter’s five-force model is to find a position in an industry where a company or business model can defend itself against competitive forces or can influence them in its favor. More so, it helps analyzing the present strength of the current competitive position and strength of a position the business proposition is trying to fit itself. Hence, an analysis based on this model not only tells about the profit potential of product or service but also about the balance of power in various scenarios. A strategist can rate each competitive force by ranking it as high, medium or low. With a clear analysis, a business model can take advantage of the strengths and improve upon the possible weakness before the full-blown launch or adjust in accordance to the ambient business conditions. Let us discuss the five salient features of the model in general. [1] Corresponding to each force, I will draw an analogy to the business model of Facebook- the leading social media platform.[2]

1.      The power of Customers/buyers: This is an assessment of how easy it is for the buyers to drive the price fluctuations. The various factors are :
·         number of buyers in the market
·         cost buyers bear to switch from one supplier to the other
·         relevance of each individual buyer to the organization
Evidently, if the business has a few potential powerful buyers, then they are able to dictate terms.

Analogy: For Facebook the advertisers advertising in its platform are its customers. After Facebook has triggered, and is now easily the leading social platform, it attracts a large number of advertisers who want to advertise in the platform. Hence, as of now, the bargaining power of customer is low. However, if Facebook looses its shine in the coming years and people do not use the network, due to numerous unseen reasons, then advertisers will also loose business interest in Facebook and they will have a larger say. Such a scenario will flip the power of buyers from low to high.

2.      The power of supplier: This is an analysis of how easy it is for suppliers to raise and control the prices of manufacturing. This is largely a function of
·         number of suppliers of the key components
·         uniqueness of their product or service
·         relative strength and size of the supplier
·         relative cost of switching from one supplier to the other
It is evident that fewer the number of suppliers, the lesser the number of choice, which in turn means higher supplier power.

Analogy: For Facebook its suppliers are its users. Again, now, Facebook has a huge user base globally. Facebook earns by selling the social sentiments of its complex social graph. At present, the power of suppliers is low. However, Facebook has the looming danger of users migrating to other appealing present or future social platforms. In addition, Facebook has to keep growing its global footprint both on mobile devices and on web.

3.      The threat of substitute products: This is an evaluation of the customer’s ability to pursue a different way of doing what the product or service does. The various factors are:
·         buyer’s willingness to substitute
·         relative price performance of substitute
·         switching cost of buyers
·         the range of product differentiation
·         the range of quality
The markets where close substitute products exist, the likelihood of the customers switching to alternatives in response to price increases. Hence, in such scenarios, the power of suppliers and attractiveness to enter the market decreases.

 Analogy:  Various other products are providing functionalities similar to that of Facebook. Products such as Skype, WhatsApp, Google+, etc. are always a danger being substitutes for Facebook. Hence, the threat of substitute product is high. To maintain dominance, they always have to stay ahead of the curve and outperform possible substitute products.

4.      The threat of new entrants: Usually a lucrative market attracts new entrants, this leads to erosion and sharing of profit. If entry is less costly and less time intensive, the numerous entrants drive a monopolistic market to a perfect competition. The various factors that determine the entry of new player are:
·         barriers to entry(patents, government regulations & policies)
·         ease to achieve economies of scales
·         switching cost
·         customer loyalty of existing brands
·         brand loyalty of  exiting players
·         ability to produce product differentiation
·         ease of access to distribution channels
If the initial barrier to entry is low, and players see a scope for customers to switch, more players will enter the marker.

Analogy:  For Facebook the threat of new entrants is high.  There are always disruptive innovations happening in the social space. As a result new similar products keep creeping. Facebook especially needs to improve its product in the mobile space and needs to better monetize it.

5.      The competitive rivalry: In this analysis, this force is considered the center of all analyses. The number and capability of all competitors is very important to gauze. Many competitors, offering undifferentiated products and services definitely reduce the market shine for entry. So the important factors are:
·         firm concentration ratio
·         degree of transparency
·         level of innovation capability required
·         sustainable competitive advantage required

Analogy:  The playing field for Facebook is highly competitive. The most recent example was when Google launched the rival social network Google+ that could be accessed by all Gmail users through the web as well as Android devices. Although Google+ has not been greatly successful in outwitting Facebook, we cannot rightly predict what lies ahead in future. Hence, the competitive rivalry that Facebook faces is high.

Weighted Model on Porter’s Competition Analysis on Facebook
Porter's Competition Analysis on Facebook



The power of supplier
Low
3
3
Risk Weights
The power of buyers
Low
3
3
Low
3
The threat of substitute products
High
1
3
Medium
2
The threat of new entrants
High
1
3
High
1
The competitive Rivalry
High
1
3


9
15

Competitive Score
%age Score(9/15)
60.00%







[1] http://www.slideshare.net/manan/firm-strategy-analysis-facebook

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