Facebook Is an Advertising Company Built on Essay

Excerpt from Essay :

Facebook is an advertising company built on a social media platform. How Facebook works is that it attracts a large audience (over 1 billion) of users, and the users are entering personal information about themselves and their friends into the site. The site collects all of this data, and the data is then used to target advertisers. So Facebook knows a lot about a person -- where they are, what things they like, and what demographic they are. The company sells advertisements based on this information. The key resource for Facebook is the data, which allows for such refined targeting of the ads, but of course the data is only acquired by the fact that Facebook has a platform that proved attractive to users in the first place. At this point, the company's size and installed user base is a key manifestation of that asset -- people are on Facebook because you sort of have to be, because everybody else is. The rest of the company's critical resources are the ones that are used to support this system -- the financial resources and physical infrastructure to run the site; the technological skill that allows Facebook to acquire so much data and then convert that into targeted advertising; and the sales team that sells this to advertisers.

The key value added is that Facebook knows a lot about its members. Normally, advertising is like using a shotgun - a television advertiser knows that a show appeals roughly to a certain demo, and blasts away. Some of the demo is hit, some other audiences are hit, and it can be difficult to tell how well the demo was hit. Facebook's data allows for much more refined understanding of the target demographic, so the advertising can be very specifically targeted. While something like TV or radio advertising reaches a lot of people, but a relatively low number in the target audience and costs little per person reached, FB allows companies to target small audience, but ones much more likely to be interested, and pays more per person reached as a result. It is more like a sharpshooter approach than a shotgun approach, so it quite different from conventional advertising. Not only is this valuable to advertisers who benefit from such an approach (niche advertisers like local realtors, for example), but only a couple of companies in the world have anything close to Facebook's capabilities in this regard.

Facebook's performance the past few years has been exceptional. In 2010, the company had revenue of $1.97 billion and profit of $606 million, and last year it had revenue of $12.46 billion and profit of $2.94 billion. This success has allowed the company to increase its equity from $2.1 billion to $36.1 billion in that time, and Facebook is presently sitting on over $11 billion in cash. So the company's financial performance in recent years has been very good.

Unit 2, Discussion Board 2

Return on capital employed is calculated as EBIT / capital employed, and is sometimes seen as an alternate measure to return on equity. Capital employed is usually taken as total assets -- current liabilities (Investopedia, 2015). The strength of the measure is that it more accurately reflects the return of the company, by taking into account the long-term debt in addition to the equity. The current liabilities are not part of capital employed, so return on assets cannot be substituted. The composition of ROCE is therefore in between ROA and ROE. By adding the long-term debt, the evaluation of the company's returns removes the effect of leverage -- ROE can be skewed when a firm is highly leveraged.

Another benefit is that ROCE allows for the comparison of profitability across companies that have differing degrees of leverage (Investopedia, 2015). This can be important when there are firms in the same industry that differ significantly in this regard, to the point where ROE is not going to be particularly useful as a comparable. ROCE is a good means of handling such situations, and is in that respect a little more accurate means of comparing different companies, so helpful in making investment decisions.

There is no particular downside to this measure. As with any measure, it is not something to be relied upon in exclusivity. For an equity shareholder, there are other ways to understand the role that leverage plays in the equity returns (DuPont analysis, etc.) so this is just another tool. If ROCE was the only tool being used to evaluate a company, an interesting issue would be that it does not look at current liabilities, which can include current portions of long-term debt, or can signal other issues such as excessive accounts payable. Ultimately, however, ROCE is one of many tools, none of which are necessarily all that valuable when examined in isolation. A financial analysis of a company is usually conducted by looking at many different metrics, and this is one of the many metrics that is available.

Unit 2, Discussion Board 3

The five forces that shape competitive strategy are the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitutes and the intensity of rivalry within the industry (Porter, 2008). The bargaining power of buyers depends on how much they need the product and other forms of leverage such as how many other buyers, how much they buy, brand identity, price sensitivity, and how differentiated the products in the industry are (QuickMBA, 2010). The bargaining power of suppliers works in a similar fashion -- how many buyers are there, what volume is being purchased, differentiation of inputs, switching costs and the cost relative to total industry purchases are all factors that affect the bargaining power of suppliers.

The threat of substitutes and the threat of new entrants affect profitability in similar ways. Both new entrants and substitutes reduce the bargaining power of existing firms in the industry. The threat of new entrants is determined by the barriers to entry that exist such as absolute cost advantages, switching costs, economies of scale and capital requirements (QuickMBA, 2010). The threat of substitutes is affected by the propensity to substitute, switching costs and the price-performance trade-off of substitutes (QuickMBA, 2010).

The intensity of rivalry within the industry will also be a factor in its profitability. Oligopoly firms have high intensity, competing directly against each other, which reduces the opportunity to earn monopoly rents on a good. Where there is more competition, a firm can differentiate itself better, which is the principle behind the idea of monopolistic competition. Brand identity, corporate stakes and product differences, as well overcapacity, all affect the intensity of rivalry. Taken together, the five forces is a good analytical tool that provides insight into whether an industry is attractive or not. An attractive industry is one where the forces are generally in favor of a company, such that it has greater potential for profit. Where most forces are negative, the industry is less favorable as there are fewer avenues by which the industry can be profitable. Thus, the five forces analysis is a useful tool for understanding profitability.

Unit 2, Individual Project

The company from the Dow that I have selected is Nike. Nike is a designer and marketer of athletic apparel (it contracts out the manufacturing). The company sells through company-owned stores, and third party stores. Nike breaks down its apparel by sport and gender, and also offers a wide range of relatively generic (non-sport specific) apparel as well. Nike targets a younger audiences who typically wear athletic apparel for any occasion and athletes of all ages, who have a need for specialized apparel. The company competes with companies like Adidas, Puma, Reebok and a host of smaller competitors as well for this market. In some sports, competition is intense, while in other sports there is less competition. Footwear is the largest component of the market (54%) and apparel constitutes a further 27%. Nike has a 31% share of the global athletic apparel market, nearby double the share of nearest competitor Adidas (16%). Other major brands include Asics, New Balance and Converse, but this market is fairly fragmented with many players having a 2% or lower market share (TradeForecast, 2015).

Nike's success derives from a number of different factors. The first of these is that it has a tremendous brand name. Interbrand has Nike listed as the 22nd-most valuable brand in the world. In its industry, Adidas ranks #59 and no other competitors rank in the top 100 (Interbrand, 2014). Nike has relies on its reputation -- it has always positioned itself as number one, and seeks out endorsements with the best athletes in their respective fields who are title winners for endorsement deals. This endorsement strategy has allowed Nike to grow rapidly, even in fields where it was weak. The company's emergence as a major player in the soccer business is reflective of the success of this strategy.

Nike is performing well because it has continued to successfully…

Sources Used in Document:


CNN Money. (2015). Dow Jones industrial average. Retrieved July 18, 2015 from http://money.cnn.com/data/dow30

Greeley, B. (2014). World Cup shootout: Can Nike beat Adidas at soccer? Bloomberg Business. Retrieved July 18, 2015 from http://www.bloomberg.com/bw/articles/2014-05-15/2014-world-cup-nike-adidas-gear-up-for-soccer-duels-next-round

Interbrand (2014). Best global brands. Interbrand. Retrieved July 18, 2015 from http://www.bestglobalbrands.com/2014/ranking/

Investopedia (2015). Definition of return on capital employed. Investopedia. Retrieved July 18, 2015 from http://www.investopedia.com/terms/r/roce.asp

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