Facebook Inc. Five Forces Analysis & Recommendations (Porter’s Model)

Facebook Inc. Five Forces Analysis Porters, competition, buyers, suppliers, substitution, new entrants, social media, case study
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 Review24(1), 32-45.
  • Facebook Inc. Form 10-K, 2015.
  • Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change15(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.