Page 1004.1 Looking Inside the Firm for Core Competencies.docx

4.1 Looking Inside the Firm for Core Competencies
LO 4-1
Differentiate among a firm's resources, capabilities, core
competencies, and activities.1.
Let's begin by taking a closer look at core competencies. These
are unique strengths, embedded deep within
a firm. Core competencies allow a firm to differentiate its
products and services from those of its rivals,
creating higher value for the customer or offering products and
services of comparable value at lower cost.
The important point here is that competitive advantage can be
driven by core competencies.5
Company examples of core competencies abound: Honda's life
began with a small two-cycle motorbike
engine. Through continuous learning over several decades, and
often from lessons learned from failure,
Honda built the core competency to design and manufacture
small but powerful and highly reliable engines
for which it now is famous. This core competency results from
superior engineering know-how and skills
carefully nurtured and honed over several decades. Today,
Honda engines can be found everywhere: in cars,
SUVs, vans, trucks, motorcycles, ATVs, boats, airplanes,
generators, snow blowers, lawn mowers and other
yard equipment, and so on. Due to their superior performance,
Honda engines have been the only ones used
in the Indy Racing League (IRL) since 2006. Not coincidentally,
this was also the first year in its long history

that the Indy 500 was run without a single engine problem. One
way to look at Honda is to view it as a
company with a distinct competency in engines and a business
model of finding places to put its engines.
That is, underneath the products and services that make up the
visible side of competition lies a diverse set of
invisible competencies that make this happen. These invisible
core competencies reside deep within the firm.
Companies, therefore, compete as much in the product and
service markets as they do in developing and
leveraging core competencies. Although invisible by
themselves, core competencies find their expression in
superior products and services. Exhibit 4.3 identifies the core
competencies of a number of companies, with
application examples.
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EXHIBIT 4.3
EXHIBIT 4.3 Company Examples of Core Competencies and
Applications
D
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Since core competencies are critical to gaining and sustaining
competitive advantage, it is important to
understand how they are created. Core competencies are built
through the interplay of resources and

capabilities. Exhibit 4.4 shows this relationship. Resources are
any assets such as cash, buildings, machinery,
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or intellectual property that a company can draw on when
crafting and executing a strategy. Resources can be
either tangible or intangible. Capabilities are the organizational
and managerial skills necessary to
orchestrate a diverse set of resources and to deploy them
strategically. Capabilities are by nature intangible.
They find their expression in a company's structure, routines,
and culture. Activities are distinct and
fine-grained business processes such as order taking, the
physical delivery of products, or invoicing
customers. Each distinct activity enables firms to add
incremental value by transforming inputs into goods
and services. In the interplay of resources and capabilities,
resources reinforce core competencies, while
capabilities allow managers to orchestrate their core
competencies. Strategic choices find their expression in
a set of specific firm activities, which leverage core
competencies for competitive advantage. The arrows
leading back from performance to resources and capabilities
indicate that superior performance in the
marketplace generates profits that can be reinvested into the
firm (retained earnings) to further hone and
upgrade a firm's resources and capabilities in its pursuit of
achieving and maintaining a strategic fit within a
dynamic environment.

EXHIBIT 4.4
EXHIBIT 4.4 Linking Resources, Capabilities, Core
Competencies, and Activities to Competitive Advantage
and Superior Firm Performance
Core competencies that are not continuously nourished will
eventually lose their ability to yield a competitive
advantage. In the consumer electronics industry, Best Buy
outperformed Circuit City based on its strengths in
customer-centricity (segmenting customers based on
demographic, attitudinal, and value tiers, and
configuring stores to serve the needs of the customer segments
in that region), employee development, and
exclusive branding. Although Best Buy outperformed Circuit
City (which filed for bankruptcy in 2009), more
recently Best Buy did not hone and upgrade its core
competencies sufficiently to compete effectively against
Amazon.com, the world's largest online retailer. As such,
Amazon does not have the overhead expenses
associated with maintaining buildings or human sales forces,
and can therefore undercut in-store retailers on
price. When a firm does not invest in continual upgrading or
improving core competencies, its competitors
are more likely to develop equivalent or superior skills, as did
Amazon. This insight will allow us to explain
differences between firms in the same industry, as well as
competitive dynamics, over time. It also will help
us identify strategies with which firms gain and sustain a
competitive advantage and weather an adverse
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external environment.
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Teaching Note
1
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No reproduction or distribution without the prior written
consent of
McGraw-Hill Education.
TEACHING NOTE
Facebook (in 2013):
Will Wall Street Hit the “Like” Button?
Structure of the Case
The case opens with Sheryl Sandberg finding herself in the role
of chief operating officer for

Facebook alongside its 28-year-old founder/CEO, Mark
Zuckerberg. She has just watched
Zuckerberg deliver a keynote speech about the company’s latest
product, Graph Search,
which empowers users to search the social network for specific
information regarding their
connections. Since Sandberg became COO, she has faced
mounting pressures to deliver on
the company’s $100 billion valuation, especially as news hit
Wall Street that the company
was filing for an initial public offering.
The case looks back at the history of Facebook, detailing its
growth from Harvard’s campus
to Silicon Valley. Facebook went from a Harvard online student
directory to a social
network that included 800 colleges and universities and a $12.7
million investment by 2005.
Monthly active users (MAUs) continued to grow and a few more
investors joined subsequent
rounds of funding. In 2012, Facebook surpassed one billion
MAUs, giving the company an
enviable amount of reach as well as a massive collection of user
information. Revenues

reached $5.09 billion in 2012, with the majority of sales
generated from ad revenues, and
everything else coming from its gaming platform and platform
developers. Still, Facebook
was making only $15 per account, whereas Google and Yahoo
averaged about $88 per user.
Facebook’s founder/CEO, Mark Zuckerberg, continues to drive
strategy around product
development, although he no longer directly develops for the
website. Zuckerberg received
much criticism over his casual appearance and inexperience. In
2008, he recruited Sheryl
Sandberg as his chief operating officer. He thought she would
be comfortable as his number
two. Sandberg’s recruitment has softened the criticism against
the young CEO while
bringing a sense of urgency to monetizing Facebook’s billion-
user base of subscribers.
Zuckerberg brings in the users while Sandberg brings in the
money. Sandberg’s impressive
background has brought greater credibility to Facebook’s
future.

Newsfeed, Timeline, and Graph Search make up the three
“pillars” of Facebook’s product
offering. Newsfeed tells users what is going on in the part of
the social graph that they’re a
part of. Timeline provides a quick way to answer the question
“who is this person?” since it
provides a chronological ordering of a person’s life posts to the
website. Graph Search is the
latest pillar that allows users to query their connections for
information unique to them.
Zuckerberg also sees this search feature as a way for users to
make new connections. In
addition to the pillars, Facebook has various features that users
find useful: a messaging
Teaching Note
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service, photo sharing and storage, calendar and event
management, notifications,
personalized pages, and a gifting service.

Facebook creates value for marketers and advertisers as well as
for application developers.
For marketers, Facebook touts four value propositions: reach,
relevance, social context, and
engagement. Online advertising continues to grow and so does
the value of Facebook’s
advertising business. With the growing popularity of mobile
computing, monetizing these
smaller screens has become a challenge. Advertisements are not
the only revenue source for
Facebook; 15 percent of revenues come from its developer
platform. Developers can use a
variety of application programming interfaces (API) that allow
developers to connect their
products to a user’s social network. Some examples include
posting to a user’s newsfeed,
logging in using Facebook credentials, and integrating “Like”
and “Subscribe” buttons.
Facebook competes with other social networks including the
professional site LinkedIn, the
micro-blogging network Twitter, and the photo-sharing service
Instagram. Although

Facebook acquired Instagram on April 19, 2012, for one billion
dollars, Twitter and
LinkedIn remain active competitors. By July 2012, Twitter had
500 million accounts, with
27 percent classified as active users. However, Facebook users
spend more time on the
website than Twitter users. Facebook ad revenues in 2011 were
$3.15 billion compared to
Twitter’s $139.5 million. Unlike Twitter but similar to
Facebook, LinkedIn required users to
approve connections. It serves the professional community by
creating profiles that are
work-oriented and makes connections more exclusive for
networking purposes. In 2012,
LinkedIn was responsible for one million job applications.
While LinkedIn does not generate
as much ad revenue or traffic as does Facebook, its stock price
doubled quickly after its IPO
and led to a valuation of $9 billion.
Technology giants Microsoft and Google are also competing
with Facebook. Microsoft has a
10 percent stake in Facebook and a partnership that uses Skype
for Facebook’s video chat

service. There is tension in the online advertising space between
Facebook and both
Microsoft and Google. Google’s online advertising services are
exhaustive and dominant
compared to Facebook. Immense value for both online
marketers stems from their extensive,
intimate knowledge about users of their services. As of yet,
Google’s social network,
Google+, has not figured out how to acquire as large an
installed base as Facebook.
The Facebook IPO, which took place on May 18, 2012, was rife
with trouble. Technical
glitches that shut down trading for several hours and a price
that was set too high culminated
in a closing price well below the initial offering. Investors were
irate, and court cases were
brought against NASDAQ. Facebook continues to deal with the
aftermath of the fumbled
exchange especially as investors demand a return.
Facebook’s network of one billion monthly active users is an
enviable number to other
advertising agencies. However, how does Sandberg balance
Zuckerberg’s ideal Facebook

interface, users’ privacy concerns, and shareholders’ financial
expectations? The answer
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became more complicated with consumers’ increased
connectivity through mobile devices.
What business model and monetization strategy should Sheryl
Sandberg propose?
Suggested Questions
Analysis: Focus on External and/or Internal Environments
1. What are the vision, mission, and values of Facebook?
Critically evaluate their
usefulness to the company’s leaders in formulating strategic
intent.
2. What is Graph Search, and why is it so important for
Facebook?

3. What “industry” is Facebook competing in, and how is this
industry changing? Who
are Facebook’s most important competitors? Why?
4. What are Facebook’s resources and capabilities? What is
Facebook’s core competency?
Can its resources and capabilities form the basis of a
competitive advantage? Why or
why not?
Formulation: Focus on Business, Corporate, and/or Global
Strategy
5. What is Facebook’s business model? How is it currently
making money?
6. Which business model would you recommend Sheryl
Sandberg implement to justify a
firm valuation of over $100 billon? Does Facebook need to
modify its current
approach?
Implementation: Focus on Recommendations and How to
Execute Them
7. Given the business model you identified, which

implementation roadblocks do you
anticipate? How should Sheryl Sandberg address them?
Analysis: Focus on External and/or Internal Environments
1. What are the vision, mission, and values of Facebook?
Critically evaluate their
usefulness to the company’s leaders in formulating strategic
intent?
Facebook’s official mission, as stated on its own page, is “to
give people the power to share
and make the world more open and connected.”
1
This mission has manifested itself
throughout Facebook’s product development. In order to
connect the world’s more than two
billion Internet users, Facebook must overcome a few
roadblocks including: Germany where
users are fiercely concerned about privacy issues; Brazil where
Google’s social network has
deep roots; Russia where VKontakte has social media
dominance; and China where

Facebook is blocked and the Chinese social network RenRen
operates free of competition
from Facebook.
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Facebook’s values are consistent with upholding an innovative
software development culture
by empowering and encouraging employees to take on difficult
problems. Specifically,
Facebook’s values are:
ct
o To have the biggest impact, we need to focus on solving the
most important
problems. It sounds simple, but most companies do this poorly
and waste a lot of
time. We expect everyone at Facebook to be good at finding the

biggest problems
to work on.
o We have a saying: “Move fast and break things.” The idea is
that if you never
break anything, you’re probably not moving fast enough. At
Facebook, we’re less
afraid of making mistakes than we are of losing opportunities.
old
o We have another saying: “The riskiest thing is to take no
risks.” In a world that’s
changing so quickly, you’re guaranteed to fail if you don’t take
any risks. We
encourage everyone to make bold decisions, even if that means
being wrong
some of the time.
o We believe that a more open world is a better world. The same
goes for our
company. Informed people make better decisions and have a
greater impact,
which is why we work hard to make sure everyone at Facebook

has access to as
much information about the company as possible.
o Facebook was created to make the world more open and
connected, not just to
build a company. We expect everyone at Facebook to focus
every day on how to
build real value for the world in everything they do.
2
For pre-IPO Facebook, these values and the mission statement
seemed to be very effective at
developing products that grew the user base. The Facebook
website has reached over a
billion people and is a globally recognized brand.
However, after its IPO, Facebook has struggled to reach the
valuation expected by the public.
Zuckerberg has been quoted as saying that at Facebook, “We
don’t build services to make
money; we make money because we build services.” Since the
beginning of Facebook, his
focus has been on developing great products that engage users.

Because of this, revenues
would naturally follow the great user experience. The question
to ask here is, “Would a user
pay for the services provided by Facebook if they were not
free?” Zuckerberg has mentioned
in board meetings that he believes in his strategy, and that firm
valuations are not important
to him. Investors would like to see another value added to the
list along the lines of “Deliver
on Shareholder Expectations.”
As mentioned in the case, the roles of Zuckerberg and Sandberg
have been described as
Zuckerberg brings in the users while Sandberg brings in the
money. Sheryl Sandberg’s track
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record as a hardnosed manager who made Google highly
profitable as the vice president of

Global Online Sales and Operations has led to a shift in attitude
at Facebook toward
delivering on investor expectations. As a Harvard MBA, she
focuses on the “show me the
money” attitude in Facebook’s daily operations.
At one point on the Facebook campus in May 2012, posters
were put up saying “Advertisers
are users too.*” and below it, “* no srsly,” to indicate in
Internet speech, “no seriously.”
3
These posters were obviously a move to shift internal sentiment
for advertisers and provoke
innovative solutions for marketers to drive ad revenue.
2. What is Graph Search, and why is it so important for
Facebook?
Zuckerberg calls the network of connections between people the
social graph. Facebook, as
a product, is an attempt to map the global social graph in the
form of a massive database.
Graph Search is a search bar that hovers at the top of every
Facebook page. In addition to

acting as a title for the content of that page, Graph Search also
allows users to search for
people, places, photos, and interests in their portion of the
social graph (i.e., compare the
interests and likes with those of friends and friends of friends.)
Zuckerberg stated that Graph
Search is meant to help people “discover and make new
connections,” whereas the previous
two pillars helped people maintain their connections. Later
releases of the tool will include
information from Open Graph (a tool that allows developers to
write coherent stories to a
person’s timeline) and allow users to search Facebook posts. It
is also expected to migrate to
Facebook mobile in the future.
Zuckerberg was careful to mention that Graph Search is not like
traditional Internet searches
such as Google because it retrieves and organizes content
according to the searcher’s
connection with other people and their likes and interests. He
was also careful to say that it
was not trying to replace traditional online search engines, that
instead it would give more

personally meaningful results for users. Despite his careful
introduction of Graph Search, it
has been perceived as a big step toward competing with
Google’s search engine. The years
that Facebook spent attracting users and their personal
information have come together to
give Facebook an edge over Google’s user database.
In fact, in anticipation of such a move by Facebook, Google
launched its own social
networking tool, Google+, in 2011. So far, Google+ has made
little headway against
Facebook’s massive head start in the social network space.
Facebook search capabilities will
also directly compete with other social-based information
services like Yelp, LinkedIn, and
Amazon.com in the areas of finding restaurants and shops,
making business connections, and
buying goods.
Graph Search is important to advertisers as well. Lars
Rasmussen, a product engineer at
Facebook, mentioned using Graph Search to find a local dentist
he could trust based on

pages his friends had liked. These kinds of results could bring
in advertising funds from
many local small- to medium-sized businesses.
4
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Google aggregates and organizes information across the Internet
to make it quick and easy
for users to retrieve what they need in a search; however,
Google does not have access to the
information stored in Facebook’s database to guide the
searches. Facebook has gained a
clear competitive advantage over Google with the sheer amount
and type of information it
has collected on one billion users of the Internet.
3. What “industry” is Facebook competing in, and how is this

industry changing? Who are
Facebook’s most important competitors? Why?
Facebook, like other social media companies, is difficult to
place into a specific industry. As
far as industry standard classifications, Facebook is classified
with:
services (SIC 7370)
ing and broadcasting and web search portals
(NAICS 519130)
The social media sector has been moving toward the mobile
Internet. To be successful in this
space, a company’s product must be everywhere a user goes.
Thus, it has become mandatory
to keep up with the rapid pace of mobile-device technologies
for the three major mobile
platforms while keeping an eye on emerging technology. This
trend is evident in the
evolution of the type of media shared. Originally, only text was
exchanged on the social
network. Pictures were the next step, but now users expect
video sharing. As an example,

Facebook witnessed the need for innovative photo capabilities
as it watched the photo-
sharing service, Instagram, rise in popularity.
In these categories, Facebook is competing with other social
media networks such as Twitter
and LinkedIn. These companies have served many of the same
users, are promoted by many
of the same webpages and companies, and also link their
services for the convenience of
users. Despite the similarity of their services, Facebook
continues to draw the most attention
with 62.4 percent of all media site visits in October 2012. (See
Case Exhibit 7.)
The reality is that Facebook provides the services just
mentioned but also is an online
advertising agency, electronic gaming platform, and e-
commerce retailer. Facebook’s growth
into these categories pits it against other technology giants such
as Google, Amazon, and
Microsoft. The industry convergence amongst these technology
companies is increasingly
complicating the products offered.

Teaching Note
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Table 1: Industry Convergence
Industry Facebook Google Amazon Microsoft
Social
Network
Online
Search

eCommerce
Wallet, Shopping,
Local, Play
affiliate sites
Mobile
Devices
Nexus
(phone/tablet)

(phone/tablet)
Productivity
Software
tore
4. What are Facebook’s resources and capabilities? What is
Facebook’s core competency?
Can its resources and capabilities form the basis of a
competitive advantage? Why or
why not?
CORE COMPETENCIES

Tangible
Resources
- Server facilities
- Cash on-hand
Intangible
Resources
- Website
- Software
- Network effects (billion+ users)
- Talented engineers and managers
- Business processes
- User-generated content
- Map of social graph
- Instagram
- Partnership with Microsoft
Several resources and capabilities work together to form a
competitive advantage for
Facebook.

Before Facebook, the dominant social network was MySpace
(now spelled “Myspace”).
MySpace, started in 2003, was acquired by NewsCorp in 2005.
After the acquisition, the
company shifted focus from growing its user base to generating
revenue. By the economic
downturn of 2008, Facebook surpassed MySpace as the most
popular social network because
Teaching Note
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it had been able to focus on growing subscribers without outside
pressure to grow the bottom
line. In a market where network effects have a strong influence
on the value of your product,
larger user bases give your firm an exponential advantage over
competitors. (See
ChapterCase 9 for more information about the
Facebook/MySpace rivalry.)

Facebook’s core competency is designing web and mobile tools
for mapping the social graph
by engaging users to share information privately and, more
importantly, publicly. The
“public” posts are very important for marketers who want to
leverage social media to spark
interest in their brand. When users “like” a subscriber or leave
comments about a brand, they
are becoming engaged with that product in a way that spreads
interest by virtual “word-of-
mouth” and by increasing the user’s likelihood of recalling that
product.
Of the resources that Facebook has acquired over time, without
its strong user base,
Facebook would not have as compelling an argument for
advertisers and marketers. Without
the ability to manage and interpret big data, Facebook would
not be able to deliver results to
advertisers. Before all of these, Facebook needed the website to
draw in users and convince
them to share vast amounts of information.
Table 2: Resource-Based View – VRIO Framework

Subscriber Base Website Big Data IP Developer Platform
Valuable Yes Yes Yes Yes
Rare Yes (on this scale) No Yes (for now) No
Costly to Imitate Yes No Yes No
Organized to
Capture Value
Could improve Yes Yes Yes
Facebook has formed a clear competitive advantage with its
resources. In order to maintain
this advantage, it must be flexible and sensitive to the wave of
changes in how its users are
engaging the world through newer technology. Moreover,
startups and other competitors are
trying to enter the valuable social media space.
Formulation: Focus on Business, Corporate, and Global
Strategies
5. What is Facebook’s business model? How is it currently
making money?
Facebook operates a two-sided platform with a large base of
users that act as content

generators on one side of the market, with marketers,
advertisers, and developers on the
other side trying to reach them. The marketers act as content
generators when they create
free business fan pages, which are similar to users’ timelines.
Developers are co-creators
with Facebook in delivering products that keep users engaged.
Each party creates value in the Facebook ecosystem. While
users access content and
participate in the social graph for free, their participation is
valuable to the advertisers and
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marketers who are willing to pay per click for highly targeted
advertisement banners located
on the right side of a user’s newsfeed. These advertisements are
targeted toward users based

on their profile information. Thus, Facebook benefits greatly
from attracting new users and
making it easy, fun, and meaningful to volunteer detailed
information about them. In
addition to banner ads, marketers can pay Facebook to promote
posts to users with the same
targeting mechanics as with banner ads.
Each customer has at least one channel for generating revenue
for Facebook. Users can buy
gifts for each other through Facebook, and a small percentage of
those transactions become
revenue. Advertisers pay Facebook for the target ads and
promoted posts based on the
number of people who interact or see them. Developers make
money through in-game
purchases and share a portion of those proceeds with Facebook.
Facebook has invested in products and tools for each participant
in their ecosystem. Users
have the many features of the website to access for free. Most
user products entice users to
volunteer more information about themselves which can be used
to better target ads.

Advertisers have the products mentioned earlier that include a
dashboard tool for creating
advertisements, selecting customer profiles, monitoring
campaigns, and controlling the
payments for campaigns. Developers have access to many tools
that help them integrate
websites and applications with Facebook profiles and develop
games for the Facebook
platform.
Table 3: Business Model – Two-Sided Platform Participants
Social Subscribers Developers Advertisers/Marketers
Role/Level of Engagement - Content generators - Co-creators -
Content generators
Cost to User
- Free access to social
graph
- % of proceeds from
gift purchases
- Free access to
Software Development

Kit (SDK)
- % of proceeds from
in-game purchases
- Pay per click
- Pay to promote posts
- Free access to company
pages
Products
- Newsfeed
- Timeline
- Graph Search
- Messages
- Photos/Video
- Subscribe
- Pages
- Events
- Places
- Gifts

- SDK
- Open Graph
- Social plugins
- Social channels
- Graph API
- Login
- Payments
- Banner ads
- Business fan pages
- Promoted posts
6. Which business model would you recommend Sheryl
Sandberg implement to justify a firm
valuation of over $100 billion? Does Facebook need to modify
its current approach?
The answers to this question could be many and varied;
however, the key is that Facebook’s
business model as of January 15, 2013, is not likely to yield a
$100 billion valuation.

Teaching Note
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A firm valuation at the time of the case would be helpful, if not
necessary, for the analysis of
this question. At first glance, a $100 billion valuation would
suggest that, at a discount rate
of 15 percent, Facebook needs a terminal value net income of
$15 billion. The average
revenue per user (ARPU) required is then $50, assuming the
user base of one billion remains
constant and a profit margin of 30 percent is achieved. In
comparison, Google and Yahoo
currently capture about $88 per user, suggesting that it is
feasible for Facebook to achieve
$50 per user. Facebook captures $15 per account during the
time of the case; therefore, the
current business model is not sufficient, and Facebook must
contrive one that more than
triples ARPU.

Possible business models may include:
users a nominal fee to access the website.
o Charge everyone. While this approach would bring in
additional revenue, it is
not likely to be a complete remedy in itself and would certainly
remove some
users from filling in gaps in the social graph. Zuckerberg is not
likely to
approve of such a move. (Note: Facebook’s login page promises
users that the
service “is free and always will be.”)
o Implement a freemium model, similar to LinkedIn, in which
users are granted
privileged access for a nominal fee. The widely debatable
questions here are:
How many users would adopt a premium account? And, what is
their
willingness to pay compared to the incremental cost to
Facebook for such
accounts?
o Charge access fees for company pages. At the time of the

case, Facebook
allowed companies to create business fan pages for free. By
either charging
companies a fee to maintain these pages or by adding premium
services,
Facebook could increase ad revenues substantially. The
downside to this
strategy is that some small businesses might be priced out of the
ecosystem
which not only would reflect poorly on Facebook but also would
alienate a
large demographic who adds value for subscribers.
o Create a dynamic variety of products for the diverse
companies interested in
social media. A Wall Street Journal article posted after the case
date talks
about Facebook’s success with this approach. The article
mentioned that the
online men’s shopping retailer, JackThreads.com, doubled its
spending
because it found more products with which to experiment.
JackThreads had
moved from purchasing only right-hand column ads to using
photo and link

ads as well as mobile newsfeed promotions.
5
d out additional ad features for mobile users that
capitalize on the unique abilities
of the mobile platform.
on its core
competencies.
h this solution
is that the cost to
acquire a new customer will grow as the users left to acquire
become increasingly
harder to reach.
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Implementation: Focus on Recommendations and How to
Implement Them
7. Given the business model you identified, which
implementation roadblocks do you
anticipate? How should Sheryl Sandberg address them?
No matter which business model is suggested, it will likely
involve a significant change to
the way Facebook managers and engineers think about which
problems to address, as well as
the solutions to those problems. In fact, since the event data for
this case, the culture at
Facebook has undergone a change to its organizational design
and organizational structure.
Managers and some engineers at Facebook have shifted their
focus from growing the user
base to growing revenue by giving them responsibility for
revenue targets. The result has
been a 36 percent growth in ad revenues from the previous
quarter. Despite the significant
change, the stock price remained 31 percent below the initial
offering price at the time the
article commented on the change. It was at this time that

Facebook started running ads on
mobile devices through posts to a user’s newsfeed. David
Fischer, vice president of
marketing commented that, “More leaders need to be
accountable [for revenue].” Engineers
were asked to solve revenue-related problems. In fact, some of
them changed positions. The
creator of the Newsfeed became the head of advertising
engineering.
The fact that many within Facebook were able to change and
create new positions indicates
that Facebook is, at least in part, an organic organization. Other
changes that empowered
change within the organization were the education of managers
about how their products
influenced advertisers and revenue. Next, teams were formed
between ad employees and
product developers to disseminate knowledge throughout
Facebook. Finally, select
employees were taken to P&G to undertake a crash course in
advertising.
6

Elements of the “Unfreeze – Change – Refreeze” model of
change management can be seen
in the shift from a user growth–oriented to a revenue growth–
oriented business model.
Step 1: Unfreeze the culture (get the organization ready for
change).
- Establish a sense of urgency to change the culture by
communicating a new vision
and strategic initiatives.
- Form a coalition with enough power to lead the change.
Facebook has developed a strong culture focused on innovative
product design. Much of the
development has centered on developing “neat” products for
users. According to Facebook’s
stated values, engineers have the autonomy to pursue projects
that they believe solve the
biggest challenges at Facebook. Graph Search itself was created
from this mentality. Two
engineers saw an opportunity to create a search engine that
could navigate the privacy-
restricted content tailored to each user.

Teaching Note
12
consent of
With a culture used to a high degree of autonomy and freedom
to explore almost any idea, it
becomes a significant effort to direct their efforts to focus on
something as stifling as
revenue generation. For Sandberg to make this happen, she must
strategically communicate
the changes that need to take place, their significance, and how
the change is consistent with
the current culture while driving Facebook to a profitable
future. Sandberg must show
managers and engineers how concerning themselves with
revenue in every activity
ultimately is an excellent exercise of their tremendous talent
and not a waste of that talent.
Furthermore, she must punctuate her message with how the
company’s mission of creating a
more open and connected world is achieved through the focus

on revenue.
Step 2: Change the culture (implement the changes).
- Put managers in place who agree with the new strategy.
- Empower employees to act on the new vision.
As mentioned in the Wall Street Journal article cited at the
beginning of this question,
Sandberg can employee many techniques for creating the
revenue-centric culture needed to
drive innovative ad / mobile ad products. First, identify a few
key leaders who are willing
and enthusiastic about taking on new roles, such as advertising
engineer. Encourage these
leaders to spread the word and ignite a new passion for the
change by espousing the benefits
communicated in step one.
Next, Sandberg can provide educational opportunities for
managers and engineers to learn
about marketing techniques through traditional workshops
(sending employees to a P&G
advertising bootcamp) and creating cross-functional teams to
expedite knowledge transfer

and collaboration. Finally, by encouraging employees to move
between product development
and marketing functions, Sandberg may encourage faster
dissemination of knowledge
between these business units.
Step 3: Refreeze the culture (solidify the change into the “new
normal”).
Finally, Sandberg must continue to monitor, adjust, and
reinforce the changes that have
taken place. Otherwise, the new culture will relapse into old
habits. Many of Facebook’s
product innovations have been a result of an emergent strategy.
The move to drive forward a
culture that seeks revenue opportunities while developing great
products is the intended
strategy.
Teaching Note
13

consent of
Recent Updates
of creating a more
open and connected world, Zuckerberg announced that
Facebook will be involved in
a program called internet.org to provide Internet access for the
four billion people in
the world who cannot afford Internet services.
7
newsreader application that
would aggregate information from several sources. The play is
an attempt to get users
to use the Facebook mobile application more frequently while
consuming more ad
content.
8

percent in July 2013.
9
market capitalization has
finally surpassed its IPO market capitalization. The stock price
has grown 55 percent
in 2013, compared to the S&P 500’s 16 percent growth.
10
Exhibit 1 in these teaching
notes is an extension of Exhibit 13 in the main case. This figure
includes what has
happened since the case’s end date.
advertisers since the summer
of 2013 that they would be able to show short (15-second) clips
in users’ newsfeeds.
Technical obstacles have slowed and delayed progress. This
service could generate
$2.2 million per day per brand.
11

on November 7, 2013.
Trying not to repeat Facebook’s fumbled IPO, Twitter was
listed on the New York
Stock Exchange instead of the NASDAQ. The company
experienced an opening
“pop” of 73 percent in its price and closed $19 above the initial
price.
12
monetization strategy,
Facebook intends to display ads within Instagram. Facebook has
not made a return
on the billion-dollar investment yet. The goal is to start
inserting a few photos and
videos from major brands. The problem is that major brands
(Nike) have already
figured out how to launch viral campaigns on Instagram without
paying for it. Sheryl
Sandberg was instrumental in bringing Emily White, a former
Google executive, to
Instagram. She will be leading the advertising rollout.
13

een usage has gone
down and an ad-density
limit has been reached,
14
but the Snapchat acquisition hoped to boost those numbers
while following new media trends.
15
Facebook’s teen policy was such that their posts
could only be posted privately. However, Facebook has decided
to allow teens to
post publicly, opening the door for advertisers to reach these
previously inaccessible
users.
16
Teaching Note
14
consent of

Case Strategic Financial Analysis (SFA)
Financial analysis spreadsheets for this case can be found in
Connect.
Additional Resources (Videos)
1. Building Graph Search.
https://www.facebook.com/about/graphsearch (3:19). Facebook.
2. Why We Have too Few Women Leaders.
http://bit.ly/hcnwRz (14.58). TED Talk, Sheryl Sandberg.
Exhibit 1 Update to Facebook’s Historical Market
Capitalization
Source: Authors’ depiction and extension of data from
“Facebook Investors Cash Out,” The Wall Street
Journal, August 17, 2012, http://on.wsj.com/ZX1r4W.

https://www.facebook.com/about/graphsearch
http://bit.ly/hcnwRz
http://on.wsj.com/ZX1r4W
Teaching Note
15
consent of McGraw-Hill Education.
Exhibit 2 Update to Financial Statements through Q2 2013
Fiscal Year/Quarter 2010 2011
2012 2013
03/31/2012 06/30/2012 09/30/2012 12/31/2012 03/31/2013
06/30/2013
Cash and short-term investments 1,785 3,908 3,910 10,188
10,452 9,626 9,472 10,252
Receivables – total 373 547 482 1,145 1,202 1,170 1,085 782
Inventories – total - - - - - - - -
Property, plant, and equipment – total (net) 574 1,475 1,855
2,105 2,289 2,391 2,533 2,577
Depreciation, depletion, and amortization
(accumulated)

246 450 537 629 734 882 1,002 1,014
Assets – total 2,990 6,331 6,859 14,928 16,038 15,103 15,163
15,724
Accounts payable – trade 29 63 129 43 59 65 75 55
Long-term debt 367 398 404 394 530 1,991 1,920 1,851
Liabilities – total 828 1,432 1,587 1,619 1,864 3,348 3,339
3,375
Stockholders’ equity – total 2,162 4,899 5,272 13,309 14,174
11,755 11,824 12,349
Sales (net) 1,974 3,711 1,058 1,184 1,262 1,585 1,458 1,813
Cost of goods sold 354 537 167 228 147 173 180 235
Selling, general, and administrative expense 449 1,095 400
1,560 562 665 672 786
Income taxes 402 695 177 (608) 431 441 134 212
Income before extraordinary items 606 1,000 205 (157) (59) 64
219 333
Net income (loss) 606 1,000 205 (157) (59) 64 219 333
Earnings per share (basic) excluding extraordinary
items
0.28 0.47 0.10 (0.07) (0.02) 0.03 0.09 0.14
Earnings per share (diluted) excluding extraordinary

items
0.28 0.47 0.10 (0.07) (0.02) 0.03 0.09 0.13
Source: Compustat.
Teaching Note
16
consent of
Exhibit 3 Facebook Cost-per-Click in Various Countries for
November 2012
Country Cost-per-Click
Russia 1.26
Japan 1.25
Australia 1.08
United States 1.05
Norway 0.82
United Kingdom 0.81

Nigeria 0.78
Switzerland 0.78
New Zealand 0.75
American Samoa 0.73
Guernsey 0.72
South Africa 0.70
Canada 0.67
Sweden 0.66
Denmark 0.65
Source: Statista Industry Statistics (STATIS), November 10,
2013. http://bit.ly/18fk8ng.
http://bit.ly/18fk8ng
Teaching Note
17
consent of

1
“Facebook’s profile,” Facebook,
http://www.facebook.com/facebook.
2
“Careers,” Facebook, http://on.fb.me/1jcQ50X.
3
Rusli, E. M. (2013), “After IPO, Facebook gets serious about
making money,” The Wall Street Journal, May
16. http://on.wsj.com/1ijwjTB.
4
“Building Graph Search,” Facebook. http://on.fb.me/1in4tpA
(3:19).
5
Rusli, E. M. (2103), “After IPO, Facebook gets serious about
making money.”
6
Ibid.
7
Rusli, E., and D. Clark (2013), “Facebook’s Zuckerberg sets
forth web access program,” The Wall Street
Journal, August 21. http://on.wsj.com/1bkXlFy.
8
Rusli, E. (2013), “Facebook, with a focus on mobile, works on
project for news via users,” The Wall Street
Journal, June 23. http://on.wsj.com/1aae6Rh.
9
Winkler, R. (2013),“Facebook is on road to redemption,” The

Wall Street Journal, July 25.
http://on.wsj.com/1bW0i3F.
10
Womack, B. (2013), “Facebook market value tops $100 billion
amid mobile push,” Bloomberg, August 26.
http://bloom.bg/17YqjbY.
11
Rusli, E., and S. Vranica (2013), “Facebook’s slow-motion
video push,” The Wall Street Journal, August 9.
12
Demos, T., C. Dieterich, and Y. Kohn (2013), “Twitter IPO:
Relief, riches and a $25 billion finish,” The Wall
Street Journal. http://on.wsj.com/HQvl3h.
13
Albergotti, R. (2013) “Instagram will begin carrying ads,” The
Wall Street Journal, October 3.
http://on.wsj.com/1gbtnYn.
14
Albergotti, R. (2013), “Facebook status: Big gains, but worries
ahead,” The Wall Street Journal, October 31.
http://on.wsj.com/1d2eIQq.
15
Rusli, E. M. and D. MacMillan, (2013),“Messaging service
Snapchat spurned $3 billion Facebook bid.” The

Wall Street Journal. November 13. http://on.wsj.com/18AD6kr.
16
Albergotti, R. (2013), “Facebook’s new teen policy draws fire,”
The Wall Street Journal, October 17.
http://on.wsj.com/18qGe5y.
Facebook Case Study
Directions: First, Read over the entire attachment labeled,
“TN”, which are the Teachers Notes on the case. Then read this
entire document for directions and the assignment info.
On the Teachers Notes attachment, there is an overview of the
case study on Facebook and then there suggested questions on
the case in purple and their answers. The case structure
overview and the suggested questions in purple, with their
answers will help you answer the assignment questions below.
PLEASE DO NOT COPY AND PASTE the answers from the
Teachers Notes to answer the assignment questions. The
answers to the questions below MUST be in your own words.
The Teachers Notes are to be used as a guide. PLEASE READ
OVER THIS ENTIRE DOCUMENT AND THE ASSIGNMENT
TIPS ON PAGE 2 THOROUGHLY!
There are three essential components to this assignment that
need to be answered.
1. Key concepts
2. Application to the case
3. Application to your work/company (use a university or
college setting as the work/company)
ASSIGNMENT: After you have read over the Teacher Notes -
“TN” attachment and then have read over this entire document,

complete the following three components for the case study on
Facebook.
1. Key concepts. Summarize the key concepts or frameworks
from the assignment. For the Facebook case study, it is
competitive advantage and business models. Use the Teachers
Notes (TN) to help answer this.
2. Application to the case. Apply the concept/framework to the
case. Do this by answering the following questions (use the
Teachers Notes – “TN” to help answer these):
· Does Facebook have a competitive advantage? What evidence
supports your answer?
· What industry does Facebook compete in? Who are its closest
competitors? What do your answers say about industry
convergence?
· What are Facebooks’ Core Competencies?
· What is Facebooks’ business model?
· Is Facebooks’ business model sustainable? What changes do
you foresee?
Notes to help you answer the bullet questions above:
• Note, question #1 has a specific meaning. The text defines
competitive advantage as “superior performance relative to
industry competitors.” To answer this question the performance
of the focal firm must be compared to the industry competitors.
There are numerous ways to measure performance, so the
answer could be yes or no, depending on the performance
measures chosen for the analysis. For example, McDonald’s
return to shareholders may be leading the industry, but sales
growth is lagging. The important point is that competitive
advantage or disadvantage must be based on performance
metrics, not intuition or popular opinion (unless of course
popular opinion is an important performance metric – media
industry for example).
• Question #2. You may like add a strategic group map (SGM)

to your answer. There could be different variations of the SGM
depending on how you view the industry and competitors.
• In answering question #3 consider the diagram (Exhibit 4.4)
on page 3 of the attachment labeled “Exhibit”. Core
Competencies are built on the Resources (VRIO) and
Capabilities of the Firm. The Core Competencies are then
Leveraged and implemented through specific firm Activities.
The combination and interplay of all of these elements are the
basis for Competitive Advantage and Superior Performance for
the firm. Note that resources, core competencies and
differentiation are all different things. Watch that you don’t get
these mixed up when you identify the core competencies. For
example, a cool product (think i-phone) is a point of difference,
but it is not a core competence. However, the capability to
create and market cool products consistently is a core
competence – innovation (think Apple). Innovation is also built
on valuable resources in the form of superior engineering and
design talent, and access to capital needed to finance product
introductions (Apple again). To bring it full circle, the
differentiated product is a manifestation of core competencies,
but it is not the competency itself.
• Questions #4 and# 5 have to do with Business Models. A
business model is essentially the design for how the firm makes
money. Be as descriptive as you can in question #4. For
question #5, think about where Facebook is now, where it needs
to go, and the paths that some of its competitors, both
successful and unsuccessful, have taken.
3. Application to your work/company. Apply the key
concepts/framework to a situation at a higher education college
or university (you will have to make up a situation that would
apply to a university or college setting). First, pose the issue or
situation. Make sure the situation you describe is relevant to
the key concepts so you can successfully apply it in the next

step. Second, apply the concept/framework to this situation.
Please be thorough in your analysis. Finally, draw a
conclusion and make recommendations. Make sure your
conclusions and recommendations follow from the analysis you
applied in the previous step.
TIPS for completing this assignment
· Do not assume the discussion lead presentations represented
the best answers to the case questions, or necessarily applied
the concepts thoroughly or correctly to the case. Do your own
analysis.
· The first question in most of the case assignments is “Does
name of company have a competitive advantage? What
evidence supports your answer?”
· Note this question has a specific meaning and requires a
specific answer. The text defines competitive advantage as
“superior performance relative to industry competitors.” To
answer this question, the performance of the focal firm must be
compared to the industry competitors. There are numerous
ways to measure performance, so the answer could be yes or no,
depending on the performance measures chosen for the analysis.
Frame your answer to this question according to (at least one)
of the performance measures discussed in Chapter 5. The
important point is that competitive advantage or disadvantage
must be based on performance metrics, not intuition or popular
opinion (unless of course popular opinion is an important
performance metric – media industry for example).
· Likewise for question 3 (in most case assignments),
“performance” is a specific term. Please specify which
performance metric you are using as a reference point when you
answer this question.

· Credibility of outside sources. Although you are not required
to use external sources of information to update the case or
answer the questions, you may choose to use these sources, with
proper citations and references, in your analysis. If you do use
outside sources it is up to you to verify the credibility of the
sources. Students have recently referenced sources that appear
credible, but are nothing more than student papers posted
online. These include citations to …academia.edu, and
…Harvard.edu. I’ve also seen several citations to papers posted
on individual LinkedIn profiles. These are no no’s. Student
papers are not a credible source. Student presentations are
widely available on the internet, and they appear to be just the
information you are looking for. After all, students who take
strategic management at the Undergraduate or Graduate level
across the country and the world are likely to have similar
assignments. It is up to you to check the real source of these
papers, or anything else you find on the internet. If this issue
did not occur frequently, I would not make a big deal out of it.
Note, there is a heavy grade penalty associated with using these
sources.
· How long should the assignment be? Complete the
assignment, nothing more – nothing less. Clear and concise is a
blessing. Be thorough and complete all of the requirements
outlined in the directions. At the same time stay focused on the
key issues.
· When applying the framework to the case or situation take
care to include all components of the concept/framework in
your analysis. This is the place for detail, avoid the temptation
to apply the framework at too high a level. On the other hand,
not all elements of the framework are equally relevant to a
particular case or situation. For example, if threat of substitutes
(5 forces) is not particularly relevant, briefly describe why and
move on. Do not try to contrive a detailed analysis for a
component that doesn’t really apply. This generally distracts
from the quality of your assignment.

· Check that your conclusions follow from your analysis. Too
often you can present a sound analysis, and then offer a
conclusion based on an opinion that is not connected to the
informed analysis.

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