Facebook Five Forces Analysis

Facebook is the world’s leading social media platform founded by Mark Zuckerberg. It is a technology company whose mission is to give people the power to build community and bring people close together. The parent company of Facebook is Meta which also owns Instagram, Messenger and WhatsApp.

Facebook is the leading player in the social media sector as well as digital advertising. Google and Facebook dominate digital advertising together. While Google, which is its biggest competitor in digital advertising and social media has diversified its business to include more non-advertising channels of revenue, Facebook relies mainly on digital advertising for revenue.

The number of Facebook daily active users has climbed to 2.085 billion by the end of September 2023 while that of its Monthly Active Users has climbed to more than 3 billion.

The company has achieved impressive revenue growth over the past few years. In the first three quarters of 2023, it has generated around $11 billion higher revenue compared to the same period in the previous year.

In this five forces analysis, we will analyse the competitive position of Facebook and how the company is positioned in an intensely competitive environment in the social media and tech sector. Porter’s five forces analysis is an analytical tool that is used for analyzing and understanding the competitive position of a business in any industry sector. This analytical framework has been named after its creator Michael E Porter.

Bargaining power of suppliers: Moderate

Facebook’s suppliers are mainly technological products and services providers from various parts of the globe. Some of its leading suppliers that have been supplying it with technological products and services include some well known names from the technology industry like Intel, Qualcomm, AMD, Broadcom, Quanta etc. Many of them are large companies dealing in specialized products and services used by companies like Facebook and Apple.

The size and financial strength of these supplier companies gives them strong bargaining power. However, Facebook itself is a technology company and has also switched to reducing its dependence on suppliers by inhouse production. While the threat of forward integration from the suppliers is low, that of backward integration from a leading technology player like facebook is high.

This reduces the bargaining power of the supplier firms which also include several much smaller suppliers. Overall, the bargaining power of Facebook suppliers is low. The company has also been investing in research and development to improve its own capabilities rather than depend on external suppliers for technological products and services to run its global operations.

Bargaining power of buyers: Moderate

The bargaining power of Facebook buyers is moderately high. Facebook is a dominant player in the social media sector. It is also a leading tech brand that is financially strong and has experienced solid financial growth over the past several years. Its buyers include several small and large companies from all over the world. Facebook is also a favorite of marketers and businesses run marketing campaigns from this platform because of its huge reach and competitive pricing. However, most of its leading buyers are also leading names in their industry sectors like Disney in entertainment products and Walmart in the retail sector.

The leading buyers like the big brands whose advertising expenditures run in millions and billions and which mainly depend on social media and other online channels for promotions. However, there are also several factors that moderate the bargaining power of buyers like the dominant position of the company in the social media sector and its huge global customer base. Facebook has also become a dominant player in mobile advertising. Its focus on technological innovation and customer experience also moderate the bargaining power of buyers. Overall, the bargaining power of buyers is moderate.

Threat of substitute products:- Moderate

The threat of substitute products for Facebook comes from the other social media brands as well as entertainment providers and gaming providers. Facebook is also a leader in digital advertising. However, in the digital advertising sector, the threat of substitute products comes mainly from Google, which is the most dominant player in this sector. In the special media sector too, Google owned YouTube is a significant rival of Facebook alongwith several more rivals like Twitter and other social sites.

However, despite the presence of more players in the market, Facebook is the dominant player in the social media sector and second to Google in digital advertising. The large user base of the company moderates the threat of substitute products. Through its focus on innovation and user experience, the company has been able to maintain its market leadership in the social media sector and strengthened its position in mobile advertising. It cannot be denied that the threat from Google in digital advertising and social media both is strong and yet there are several factors that have strengthened the competitive position of Facebook and moderated the threat of substitute products for it. The overall threat of substitute products for Facebook is moderate.

Threat of new entrants: Low

The threat of new entrants for Facebook is minimal. Facebook is also among the leading technology brands and financially strong. There are several factors that moderate the threat from new entrants. Technology is the central factor that drives competitive strength in the social media and digital advertising sectors. Facebook is a leading player in both the sectors.

New players will need the required technological knowhow and the financial strength required to build a social media brand.

However, that is not an easy task. Since in social media and digital marketing sectors both, companies deal with several regulatory barriers. Operating expenses are quite high and therefore companies with significant financial clout and technological knowhow can enter this sector. Google acquired YouTube and the video sharing platform saw strong growth in user base since then. It closed its own Google plus. So, a company trying to enter this sector needs to be a financially very strong business like a tech giant Google or it must have the technological knowhow to build and fast grow a brand in the way facebook itself was founded.

Existing social media players are also aggressive about retaining their user base and market share and invest heavily in research and development and marketing. The competitive pressure in this sector also bars the entry of new players. Acquiring a large market share is also not easily possible and therefore new entrants cannot threaten Facebook’s market share.

Intensity of competitive rivalry in the industry: High

Despite the presence of few players in the social media sector, the intensity of competition is quite high. Competitive pressure does not come only from the other social networking sites, but also from online entertainment, gaming, and other types of websites that include large blogging platforms. The company generates most of its revenue from digital advertising. The main competitors of Facebook in digital advertising include Google and Amazon1. Other platforms like TikTok are also making their presence felt despite their market shares being much lower. Google and Amazon are strong players in the tech and digital advertising sectors.

As the competition for their share of digital advertising dollars continues to intensify among the leading players2, they are investing huge sums in research and development to continuously improve their targeting methods and provide marketers with better tools to advertise on their platforms. Amazon is the largest R&D spender in the industry having spent more than $70 billion on research and development in 2022. Google and Facebook spent somewhat comparable sums on research and development in 2022. These companies are also spending a lot on marketing to attract user traffic.

All these factors demonstrate that the world’s leading social media network is operating in an intensely competitive environment. Overall, the intensity of competitive rivalry faced by Facebook is high.