Introduction
There has been no clear cogent definition of strategic management, but it refers to the organizational culture, leadership and management styles, frequency of crises, business environment, and the interest of the management or executives (Tyndall, et.al., 1990). This is a process of the organization by which "managers understand organizational goals, examine future threats to, and opportunities for, an organization; identify strategies for dealing with these threats and opportunities; ensure organizational capability to implement these strategies; and continually monitor the entire process to provide direction and support for accomplishing the strategic management objectives (Meyer, 1987, p. 135)." This is characterized by the on-going planning of the organization to remove barriers of the organization's growth and to open new opportunities to enhance the potential of the organization to financially benefit from these opportunities. This is achieved through clear purpose and performance of each level of management to articulate the goals of the organization within the planning – directing – controlling principle of management.
Strategic management aligns the organization to its vision and mission statement as a parallel with the expectations of the organization's stakeholders. By coordinating and integrating the activities of the organization, alignment and consistency are achieved in the internal and external environment of the organization. Strategic management is vital to the growth and development of the organization because it is through this process that the organization crafts and formulates both long-term and short-term plans and initiatives that will move in conjunction of the organization's holistic goals. In essence, the strategy can be considered as the highest form of managerial responsibility that affects the direction of the company. It maximizes the efficiency and core competencies of the company to minimize the threats and risks and expound the opportunities of the organization for its expansion and development.
One of the recent Facebook developments is the acquisition of the photo-sharing app Instagram. This is a historic event to Facebook because it is the first time that the social network acquires a company through a purchase. With a massive $1 billion buyout, Facebook acquired Instagram and made it part of the company's expanding portfolio. For Facebook, this is a new direction taken from the perspective of strategic management; while for Instagram, this is also an important part of the company's forward direction. In this paper, I will be reviewing the strategic management of Facebook that motivated the company to acquire Facebook; and I will also expound the decision of Instagram to push through the buyout.
The Body
In a report published by Reuters.com, Oreskovic (2013) noted Facebook's revenue for the first quarter of the year totaling $1.46 billion. This means that the social network experiences at least 43 percent growth rate in its advertising revenue. The company is gaining much from its recent developments and acquisition-expansions, including Instagram. With more than 30 million users already at its helm when Facebook bought it, Instagram adds value to Facebook's 1.1 billion monthly users (Oreskovic, 2013). But prior to the acquisition, there are several factors that were considered by Facebook as part of its strategic management. These factors appear to be the make-and-break of the company to acquire Instagram or to let it go.
Strategic Opportunities and Threats Facing Facebook
For Facebook, a forward direction is the only way to avoid what happened to Friendster and other social networks that succumbed into decline and eventual death. This means that Facebook should look for possible opportunities that can be explored.
- Mobile photo sharing community is growing. Pinterest and Instagram's community has grown in number for the past months. With more than 30 million users for Instagram and more than 40 million users for Pinterest, the photo sharing community is a rich and promising market. It can be a market for the advertising revenue arm of Facebook.
- Stock Market Reputation. Instagram is a stable app that can easily keep stakeholders of Facebook confident and assured. This will keep the company floating and strong amid fears of being thrown from its spot by closest rivals.
On the other hand, when Instagram gained popularity with more than 30 million active users, Facebook faced tremendous threats. Facebook is, by structure and convention, a photo-sharing site that allows people to upload photos, post photos, and share them with others. However, with the advent of mobile social networks, people start to share photos direct from their phones. This method allows users to share photos in a single minute after they capturing it. This allowed them to share photos to friends anywhere at anytime without waiting for time when they come home and get in touch with their laptops or computers. With these situations and events, Facebook faces the following threats:
- Photo-sharing sites are eroding Facebook's importance. Google+, Twitter, and the new-entrant Pinterest are moving forward the mark as photo-sharing sites. These sites allow fast uploading and sharing of photos; Twitter allows users to post photos from their phones. The growing competition among these photo-sharing sites led to the decline of Facebook's importance in the photo-sharing platform. And to be noted, Google+ and Twitter are not just simple competitors, but they are industry leaders that have the resources and capability to knock Facebook off the industry.
- Mobile photo-sharing. More and more people want to share photos from their phones. They want it to be instantly uploaded to their accounts. Mobile gadgets allow users to link their social network accounts to their gadgets for easy uploading and sharing.
- Photo-editing app. Users' behavior is a big factor to the popularity of Instagram. As the mobile photo-sharing activities increase, users want to have their photos properly edited first before sharing, for not all photos are worth-sharing. With Instagram, users can edit their photos before being uploaded and shared. This criterion on photo-sharing is appealing to users who don't want to share photos that are not properly edited.
- Possible buyout. Instagram's threat can still be adjusted by Facebook's innovation, but the possible buyout from other photo-sharing sites such as Pinterest, Twitter, and Google+ is a major threat. Instagram is a free app, and if competitors can buy it out, this app will make the photo-sharing competitor more appealing to users.
Methods of Strategic Development and Growth of Facebook
After determining the different opportunities and threats that Facebook faces, it is necessary to explore the different options or methods that can be used for the strategic development. The three major methods of strategic development are: acquisition, internal development, and joint development, under which the strategic alliance falls (Graham, 2008).
Acquisition allows the organization to take advantage of the synergies of both companies. This is a quicker, less risky, and cheaper way to expand the organization with tremendous benefits such as the elimination of the possible competition, increased of market penetration, and the reduction of competitor's possible advantage (Ulijn, et.al., 2010). By taking advantage of the core competencies and distribution channels of the new company, the acquiring organization can easily grow its market.
Another alternative to the growth of the company is through internal development. It is the utilization of all resources and capabilities of the organization to make the company ready for necessary competition in the future (Henry, 2008). This is sometimes called the organic growth of the company. While joint development seeks to form a mutual agreement of growth between two companies. This allows them to share their assets or resources for them to benefit from each other. The strategic alliance can be of any form, whether sharing of assets, finances, physical resources, or knowledge. More often, joint development does not transcend the entire organization, but focuses only a single project or aspect of the organization.
If we look closely at the threats and opportunities of Facebook, it is easy to rule out internal development. The threat is already real and the creation of a platform that will confront the threat is not a good idea. With an already established threat – and other vertical threats from direct competitors – Facebook does not have to create its own dedicated photo-sharing community. In the same manner, strategic alliance is impossible to form with Instagram because it is a free app that can be bought anytime by competitors. Facebook is fighting against competitors acquiring Instagram and not on Instagram directly.
This leaves the option of acquisition, which is grounded on the following reasons:
- Instagram has 30 million users and Facebook can use that competency as well as the compentencies of Facebook to become a leader in the mobile photo-sharing community. This will provide Facebook a potential to reach out to these users and to earn from this community through the advertising arm of the company.
- Acquisition of Instagram will ensure that Facebook's dominance in the social network industry remains the same. This will eliminate risks of the competitors' acquisition of Instagram and using it against Facebook.
- For long-term, Facebook can use Instagram to develop new products and offerings that will enrich the Facebook market penetration.
Analyzing Instagram's Decision Using the TOWS Matrix
For purposes of understanding the decision of the Instagram management to join the Facebook team, the TOWS Matrix is used below. The diagram will show the different combination of strengths, opportunities, weaknesses and threats of Instagram, which motivated them to ink the acquisition deal with Facebook.
TOWS Strategic Alternative Matrix
| | External Opportunities (O) 1. Mobile photo-sharing community is growing. 2. Users behavior toward photo-sharing has changed. 3. Strengthening of market reputation. | External Threats (T) 1. Growing competition of photo-sharing sites. 2. Changing behavior of users toward photo-sharing. 3. Acquisition of Instagram by competitors. |
| Internal Strengths (S) 1. Facebook has a strong revenue and traffic. 2. Integration with websites and apps. 3. More than a billion active monthly users. 4. Simple user interface. | SO * Use of Facebook's billion active monthly users to improve photo-sharing community influence. * Utilization of Facebook's strong revenue and assets to strength market penetration. | ST * Use of Facebook's revenue to buy Instagram. * Understanding of more than 1 billion Facebook users to understand the changing behavior of users. |
| Internal Weaknesses (W) 1. Heavy reliance on advertising revenue; non-diversified revenue sources. 2. Lack of social network features. 3. Low users protection. | WO * Mobile photo-sharing community diversifies the source of income of Facebook. * Instagram acquisition will add another feature to Facebook making it richer and better. | WT * Clear understanding of what users want and need. * Acquisition of Instagram. |
The TOWS Matrix above expanded the SWOT analysis that was done on Facebook for the strategic management. The Matrix reveals certain strategies that can be used by Facebook to maximize opportunities by using its strengths and to minimize weaknesses by capitalizing on the opportunities (Bamford & West, 2010). In the same manner, the Matrix shows how Facebook can use its strengths to minimize the impact of its external threats and to formulate strategies that will reduce the impact of threats and weaknesses.
At the top of the TOWS Matrix results is the acquisition of Instagram. This is an inevitable course of Facebook's direction. With the growing strength and market of the photo-sharing community and the threat of competitors's acquisition of Instagram, Facebook should be proactive. By acquiring Instagram, Facebook eliminates the threat Google+, Twitter or even pin-board photo-sharing site Pinterest to acquire this application or platform. This reduces the threat to the market penetration of competitors and this increases the feature of Facebook, thereby increasing its market reach.
The long-term impact of Instagram on Facebook is its feature and capability. Facebook can develop new products and offerings that will diversity its revenues using Instagram's functionality. This will enrich the capability and functionality of Facebook to make it more appealing to users and Facebook can use its 1.1 billion users to increase the base of Instagram's market. The combination of Instagram's functionality and Facebook's billion users can easily grow a new product that will bring revenue to Facebook (Luckerson, 2013). As always, the direction of an organization is always forward and on-going; this means that Instagram will be eventually used by Facebook to gain revenue in the future.
In essence, the TOWS Matrix shows how Facebook can use its strengths to explore the opportunities. Facebook's large revenue and capitalization enables the organization to offer Instagram a $1 billion purchase price. The strength of Facebook is used to take advantage of an opportunity rather than allow the opportunity to pass. In the same manner, the combination of the company's opportunities and threats are used to squash the impact of threats and the company's weaknesses.
Conclusion
Facebook's acquisition of Instagram is timely and can be considered a perfect strategic management decision. Instead of waiting for the threat to blow out of proportion that Facebook can no longer control it, it already planned out how to squash it. Strategic management is planning – directing – and controlling, and Facebook's acquisition of Instagram falls just right in place. In ensures the forward the direction of the company by reducing the risks and threats that will eventually lead to decline of the company. By properly placing the company's decision with regards to opportunities and threats, opportunities can be explored and threats are minimized. Otherwise, threats will ruin the opportunities that could have given the company a good advantage in the market.
As much as there are three methods of strategic development, the choice of acquisition is the best option. For a fact that Instagram is a growing community makes it a strong asset for Facebook. Instead of a joint alliance with the company, Facebook acquired to own whatever assets and features it have, rather than help it to grow into a future competitor. There is no need for the company to wait for a competition to become a giant, while it is still young and small, it is necessary to stop its growth, own it, or definitely destroy it.
As per my judgment, Facebook's management knows well when to do actions. First, the acquisition provided them a beneficial way to increase market penetration, reduce competition, and increase revenue. But perhaps, the indirect result is also very important. Why Facebook acquired Instagram? Facebook wants to strengthen it stock market presence after the IPO. This is boosting the image of Facebook and the confidence of investors. Even if Facebook shelled out a $1 billion to acquire Instagram, the result on its stocks meted with the cost.
References:
Bamford, C. & West, P. (2010). Strategic Management. Cengage Learning.
Bers, E., et.al. (1987). Managing urban transportation as a business: proceedings of a specialty conference. The Society.
Graham, A.. (2008). Management Accounting Business Strategy, 2008-09. Elsevier.
Henry, A. (2008). Understanding strategic management. Oxford University Press.
Luckerson, V. (2013). “A Year Later, Instagram Hasn't Made a Dime, Was It Worth $1 Billion.” Times. Retrieved from http://business.time.com/2013/04/09/a-year-later-instagram-hasnt-made-a-dime- was-it-worth-1-billion/
Oreskovic, A. (2013). “Facebook's Mobile Business Expands in first Quarter.” Reuters. Retrieved from http://www.reuters.com/article/2013/05/02/us-facebook-results-idUSBRE9400XD20130502
Tyndall, G., et.al. (1990). Strategic planning and management guidelines for transportation agencies, Issue 331. American Association of State Highway and Transportation Officials.
Ulijn, J.M., et.al. (2010). Strategic Alliances, Mergers and Acquisitions: The Influence of Culture on Successful Cooperation. Edward Elgar Publishing.
Appendix:
TOWS Strategic Alternative Matrix
| | External Opportunities (O) 1. Mobile photo-sharing community is growing. 2. Users behavior toward photo-sharing has changed. 3. Strengthening of market reputation. | External Threats (T) 1. Growing competition of photo-sharing sites. 2. Changing behavior of users toward photo-sharing. 3. Acquisition of Instagram by competitors. |
| Internal Strengths (S) 1. Facebook has a strong revenue and traffic. 2. Integration with websites and apps. 3. More than a billion active monthly users. 4. Simple user interface. | SO * Use of Facebook's billion active monthly users to improve photo-sharing community influence. * Utilization of Facebook's strong revenue and assets to strength market penetration. | ST * Use of Facebook's revenue to buy Instagram. * Understanding of more than 1 billion Facebook users to understand the changing behavior of users. |
| Internal Weaknesses (W) 1. Heavy reliance on advertising revenue; non-diversified revenue sources. 2. Lack of social network features. 3. Low users protection. | WO * Mobile photo-sharing community diversifies the source of income of Facebook. * Instagram acquisition will add another feature to Facebook making it richer and better. | WT * Clear understanding of what users want and need. * Acquisition of Instagram. |
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