Tuesday, April 27, 2010

Strategy Exemplified

For the last five decades or so, there has been an intense debate between those who believe that strategy is paramount to success in the business world and those that believe that success is influenced by other factors and that strategy may even be a hindrance. The argument put forth by those that do not view strategy as indispensable goes along the line that in today's business world there is no time to sit back and analyze a business or an industry as a whole and make decisions accordingly - they believe that a business' success is determined rather by the leadership skills of its executive team and the adaptability of an organization's culture to ever more rapid technological changes. Conversely, the proponents of strategy as the sole vehicle towards success advocate careful analysis of the companies' capabilities and its industry's trends through which a path is carefully plotted and consequently executed. While there are surely examples that point out the relevance of each argument and while the truth about the true determinant of success surely lies somewhere between the two extreme views, there is at least one current example of what seems to be a carefully thought out strategy that is being executed before everybody's eyes.

With roughly 400 million users around the world, Facebook is by far and away the largest social networking site in the world. Other, older, sites like MySpace currently pale in comparison and newer services like Google's Buzz have yet to make much of an impression. By all accounts, Facebook is still barely profitable. By the same token, it is widely acknowledged that it is only time before it figures out how to turn all of its users and, more importantly, all the information it has about its users into a reliable and surely extremely profitable revenue stream. While it is certainly the market leader in its domain, Facebook is certainly not resting on its laurels and is constantly looking to venture into other spaces in the online world. Most recently, Facebook has sought to expand its social networking capabilities to the internet as a whole - beyond simply connecting its users, it is now seeking to intimately connect its users to the internet as a whole by tailoring their general online experience to their desires as defined by their Facebook accounts and those of their Facebook friends.

Technological advances are certainly somewhat responsible for Facebook's latest expansion; however, it seems that it is a rather deliberate strategic action taken as a response to some of the underlying threats faced in the online world. For any internet company, the single biggest threat comes from expected new entrants, due to the extremely low barriers to entry and low switching costs. Online companies usually seek to mitigate this risk by providing a better service than its competitors or by amassing a critical mass that provides an enormous advantage to certain sites like eBay or Facebook, whose relevance increases as it gains more and more users. Despite the best efforts of certain companies to provide the best possible services or to amass the most amount of users possible, there have been countless examples of dynamic and innovative start-ups that swoop in and steal users - indeed, Facebook was once such a company, stealing millions of users from MySpace. By attempting to establish itself as its user's online identity, Facebook is seeking to increase the barriers of entry and reduce the risk posed by potential new entrants, all at a minimum cost and while increasing the amount of information it has about its users, in turn increasing its profit potential.

Especially with the proliferation of Beta launches of un-finished online products and services, it has long been argued that strategy is particularly irrelevant for Internet companies. It may therefore come as a bit of a shock to some that such a clear strategic move has come from the likes of Facebook, one of the largest and most technologically-proficient online companies.

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