Facebook was founded in 2004 by Mark Zuckerberg with the concept of allowing users to interact with friends and other interest groups. Since its development it has gone on to become one of the largest social networking sites in the world (Laudon & Laudon, 2010). Throughout its rapid growth Facebook has encountered a number of challenges that have defined the way the organisation conducts its business. With the millions of users that currently access the site, Facebook is faced with the endless challenge of protecting the privacy of users and the information they provide, whilst still managing to use the available information to grow revenues and profits. Through the use of Web 2.0 and e-Commerce technologies, Facebook has been able to continually improve its services and grow its business. This has enabled the continuation of product development and alteration in order to maintain its competitive advantage over other social networking sites.
Facebook has gained and maintained its popularity amongst consumers and suppliers by utilizing new technology available through Web 2.0 technologies and e-Commerce. Web 1.0 was the first level of the Internet where users would search a URL or use a search engine to find WebPages. Webpages would contain static information that the user could scroll through and read but not interact with. With the introduction of Web 2.0 the user can now manipulate, change and create information on the internet. Examples of this new technology includes Blog’s, RSS feeds and Wiki’s; the major advancement in these technologies is that they are based on the internet not on the consumer’s desktop computer. A Blog is a place on the Internet where people can write their own stories and opinions; other people can subscribe to the blog so they can read what the author is writing, a great example of a Blog was used in the movie ‘Julie and Julia’ released in 2009. The use of blogs is not only an activity of the public; but many businesses use this format to pass information to colleagues through their company portals, the Accor Hotel chain which is based in France uses a Blog called ‘Ambassador’ to communicate to its assistant managers all over the world.
RSS (Rich Site Summary) feeds give a user the ability to set a program to collect all the new postings on a particular topic or website and download it to the desktop of the user. Using the previous example of Julie and Julia, readers could subscribe to her Blogs via an RSS feed and every time there was a new posting to the Blog the information would automatically be sent to the readers Desktop computer.
A Wiki is similar to a Blog but anybody can alter, delete or adjust the information on the site. The best example of a Wiki is Wikipedia. Several businesses use Wikis to communicate a message that is open to ideas from the staff or customers. Facebook incorporate the above technologies with email to give consumers the power to develop their own profile on the Internet, on the other hand Facebook also meets the needs of suppliers buy using e-Commerce to sell products via their website.
Kenneth Laudon (2010, pg.125) defines e-Commerce as “digitally enabled commercial transactions between and among organizations and individuals”. This does not necessarily mean that the sale occurs online it merely means that a portion of the purchase occurs online, this could include the research a consumer does prior to purchase or the shopping around on certain company websites before going to the store to purchase the product. E-Commerce has steadily increased year by year as businesses are realizing that they can send a more precise and clear image of their product out into the market at a fraction of the cost. This new form of selling has brought rise to online businesses that sell direct to the public from their websites. This is not only a cheaper alternative for the business; but by selling direct the business can lower their prices by cutting out the distributors and retailers therefore a product can be sold for a larger profit at a lower price. Facebook makes use of banner ads which use the profile of the user to personalize the ads; for example a user who lives in Brighton, Victoria during the AFL grandfinal would find commercials relating to AFL merchandise and other local commercials. The user is probably unaware that the commercials have been personalized by using their information.
The main culprit in contributing to Facebook’s weaknesses of privacy is Beacon advertising service; an online ad system. Beacon was originally designed to inform user’s of when their friends made purchases or engaged in activities outside Facebook which made them aware of the products and services that their friends were using, however the problem with this feature was that beacon was using private information of user’s without the awareness of the user or the consent. The article Facebook Lets Users Opt-Out of Beacon, written by Geoff Duncan (2007a), states that “Facebook originally rolled out Facebook as an opt-out system; that is, Beacon was fully enabled (and sharing information about Facebook users) by default. This created a groundswell of protest, not only because Beacon had a tendency to spoil surprises and create social awkward faux pas when it "shared" what users were buying for (say) a surprise party or a birthday, but also because of the program’s privacy implications: the data Beacon freely shared with other Facebook users (and Facebook itself) was potentially very private, and there was no way for users to prevent that information from being shared”.
Beacon continued to collect data from user’s and forward to Facebook even though the user had elected to opt out of the particular service with Juan Perez (2007) finding that “Beacon will report back to Facebook on members' activities on third-party sites that participate in Beacon even if the users are logged off from Facebook and have declined having their activities broadcast to their Facebook friends. Of particular concern is that users aren't informed that data on their activities at these sites is flowing back to Facebook, nor given the option to block that information from being transmitted”.
After much controversy, media attention and group protests on Facebook regarding the Beacon debacle, Facebook decided to change Beacon to an opt in service and also allowed user’s to disable it completely, however this isn’t entirely true as the opt out function only applies to some with Geoff Duncan (2007b) stating “... Facebook’s Beacon opt-out tool is only available to Facebook members; non-Facebook users and former Facebook users apparently have no way to prevent Beacon from collecting information on their actions at partner sites. Although Facebook says this data is deleted, many Internet users still feel they have no reason to take Facebook at their word.”
If a user does delete there profile, is their information that was used during their time as a member of Facebook deleted as well or do Facebook think they have the right to retain this private information once a user has opted out of a Facebook membership? One will never know, as major a company as Facebook has become they would never reveal to the general public that they retain the personal and private information of a user that no longer uses their service, which is the key to the revenue building profits through advertising.
Product differentiation, defined by Laudon and Laudon (2010, pg.125) as “the use of Information systems to enable new products and services, or greatly change the customer convenience in using their existing products and services”, is the strategy employed by Facebook. The developers provide a free flowing interface for users through the constant updating of their site. The goal here is to keep, and increase, the edge of competitive advantage they hold over rivals such as MySpace, with Facebook being “a part of millions of people’s lives all around the world providing unparalleled distribution potential for applications and the opportunity to build a business that is highly relevant to people’s lives” (Facebook, 2010a). This edge is a natural consequence of Facebook (2010b,c) “developing technologies that facilitate the sharing of information through the social graph, the digital mapping of people’s real-world social connections” and also of the “enablement of companies and engineers to deeply integrate with the Facebook website and gain access to millions of users through this social graph”.
An example of a way in which the developers of Facebook have been able to harness the potential of their social networking site is through user defined functionality. Users are able to define their experience through information input and Facebook uses this data to feedback information that is relevant to each individual’s use of the site. No longer is the end user, or customer, fed information that is irrelevant but provided with information, such as interest groups and advertising, that is relevant to their personally defined profiles. This dynamic approach employed by Facebook has created a unique and highly successful platform for their product.
Whilst MySpace clearly uses some of the same applications as Facebook, it would seem that they have failed to integrate these as well as Facebook, providing a ‘stiffer’ more unmalleable platform for users to experience. The difference in the success of Facebook’s employment of product differentiation strategy would seem to be due to their developer’s ability to harness the full potential of the application of these widgets with the use of “more than 550, 000 active applications” and “over 900 million objects that people interact with, including pages and groups” (Facebook,2010d,e).
When looking at Facebook’s use of product differentiation strategy it becomes clear that this strategy depends highly on the customer influence, and whilst all of Porter’s five forces (customer, supplier, existing competitors, new entrants and substitute products) have relevance when applied to Facebook, by far the most impact would seem to be experienced from the influences of the customer force. High customer power over Facebook is a bi-product of the very nature of Facebook’s functionality with the site currently having “more than 500 million active users” (Facebook, 2010f). Without these viewers, Facebook as a product would not be of any use, let alone successful. Due to the fact that Facebook is a social networking site, people must find their product engaging enough to entice them to keep coming back with Facebook (2010g) themselves stating that “they let people connect and share in a rich and engaging way”.
With this “information technology providing the impetus for changes in the control consumers have over what they see, hear, interact with, and therefore buy” (Peattie & Peters, 1997, pg 146), the customer force is also empowered by having high levels of influence when it comes to determining whether or not Facebook can make a profit. As the organisation does not charge its viewers, it must look to advertising and the development of applications to bring in revenue with Laudon and Laudon (2010, pg 435) finding that “currently, Facebook’s most promising prospects to become more profitable involve the development of applications”. However without Facebook’s viewers the company provides no benefit to the advertisers thus causing them to not want to invest in advertising space on Facebook, although with the current existence of viewers that Facebook enjoys “any marketer worth his pay cheque is flocking to Facebook and poring over the pages to get a hold on the psyche of this important demographic” (Raskin, 2006).
Customer control is also high in the area of the level of access to personal information that can be used by Facebook to sell highly customised and personalised advertising space to specialised advertisers, providing a personally relevant experience for viewers, with (Harris & Rae, 2009, pg 26) finding that “businesses are now recognising the potential of these communities for the development of their brands and to build relationships with key customers”. Customers would appear to be becoming more aware of the privacy issues involved in social networking, with “the consequences of excessive disclosure of personal information and false senses of security just beginning to emerge” (Jones & Soltren, 2005, pg 35). This allows the viewers the ability to apply pressure upon Facebook as to exactly what can be done with their personal information thus causing the organisation to try and find a solution that will allow them to profit from the use of customer information without violating the privacy of their users with Laudon & Laudon (2010, pg 435) stating that “Facebook needs to innovate and find new ways to grow revenue that do not alienate the very users that the company is depending on to spur it’s growth”.
The rise of social networking sites has opened up a whole new world of commercial possibilities and created one of the most successful Internet phenomena’s the world has seen so far. Facebook created an opportunity for people to find and contact others all over the world, and to become part of online communities of like-minded people, providing access and reach to others far beyond the normal social environment. Facebook provides opportunity for people to become part of a community based on shared interests and hobbies and overcomes the traditional geographical boundaries of being part of a social group (Ellison, Steinfield & Lampe 2007). The use of sites such as Facebook has many benefits and the resources provided through social networking sites (information, employment, relationships, and emotional support) can contribute to the emotional health and self-esteem of its users.
Facebook began as a social networking site for HarvardUniversity students, and gradually grew to include other university students, High School students and businesses. By the time the site eventually opened to the general public in 2006 (Pick 2007), there was already a large base of users from which to grow. Being one of the largest social networking sites in the world attracts more new members and maintains its existing memberships for the simple fact that there are more people to find and interact with. Maintaining existing memberships is important for the future growth of Facebook for this reason. To achieve this Facebook must continue to interest its users with new applications, designing and implementing them first or better than its rivals. Collecting and sorting data on current and future trends, from within and external to the company will help Facebook to remain a frontrunner in the industry. Other contributing factors to the success of Facebook include the simplicity of navigating the site in comparison to its rivals, and the diversity and quantity of applications available to users.
Advertising success on Facebook can be attributed to the way advertisers can target specific audiences, control their advertising to be viewed by targeted audiences, as well as utilising the online relationships of users to spread advertising messages. Clever applications from advertisers allow users to recommend products and services to likeminded friends, without realising they are even advertising for the company. A recommendation of a product or service from a friend would rarely be viewed as advertising; also people are less likely to ignore the advertising in this way as they would with other forms such as pop-up ads. Social networking sites have revolutionised the way companies advertise and the options available to them.
Concerns for the privacy rights of Facebook users has been a recurring topic in the media, and these issues must be resolved in order to grow and increase profitability without attracting negative media that will cause companies to withdraw advertising contracts and the site to lose members or traffic. While most default settings on the site allow third party access to information, increasing awareness of privacy concerns result in more people changing their settings to restrict access to information. Facebook has been making changes to the way users can set their privacy settings, but must find a way to collect and sort data while still meeting the privacy expectations of users and the ethical concerns of the general public. To continue to grow Facebook must find a way to use the information provided by its users to attract advertisers, without exploiting the right to privacy of its users.
Facebook Platform is an example of the way of the future. This initiative is different because rather than taking the traditional ‘walled garden’ approach of big-business sites, Facebook encourages the use of other services and sites (Pick 2007). Users can then access these through their Facebook site, therefore providing an Internet ‘home base’ which increases the traffic on the site rather than decreasing it. This means more users are logging on to the site more often, and spending more time on the website, therefore providing opportunity for Facebook to increase revenue from advertisers.
To successfully balance the desire to become increasingly profitable and the privacy of users, it is necessary to first understand the role and the importance that both users and advertisers have to the organisation. In 2008, Facebook reported that it had over 90 million users (Scale, 2008) and this shear volume in potential customers would be enough to attract any advertiser. As a result of these ever increasing volumes many advertisers are enthralled by the prospect of promoting their brands to an audience of this quantity (Strategic Direction, 2008). It is therefore evident that without the users of Facebook, the appeal that Facebook has to advertisers would not be as strong, thus providing direction that the success of the business is heavily reliant on users and their satisfaction.
In order to maintain this satisfaction, it is important to make sure that a thorough analysis of why it is that users are attracted to the site; and why it is that they remain with the site needs to be undertaken. Research has shown that the ‘primary activities’ (Laudon & Laudon 2010) of social networking sites such as Facebook, are to attract users to the opportunities they provide, for ‘like minded individuals’ (Arthur et al. 2006)and friends to communicate and interact from all corners of the globe. According to Laudon & Laudon (2010), once users are amassed they ‘are reluctant to leave due to the fear of leaving the rest of their friends behind’. However, just hoping that users will stay because their friends are users, is too narrow-minded.
With the current issues Facebook has of not violating the privacy of users (Laudon & Laudon 2010), it is essential to investigate the competitive forces that exist. Of the 5 Competitive Forces (Laudon & Laudon 2010) that exist two have the potential to heavily impact on the sites users and thus the overall attraction the site has to advertisers. With the global growth of the Internet and subsequent social networking sites, it is only a matter of time before other competitors and alternative services are offered. This, on top of the existing products that are out there, with the likes of MySpace and Twitter, provides Facebook with another dilemma of not just managing user privacy but ensuring that it maintains a competitive advantage over rival organisations. To maintain this competitive advantage Facebook needs to ensure users that its ethical standards are at the core of its business. To do this it would be beneficial to undertake and ethical analysis and the potential impacts that either favouring users or advertisers will have on one another and ultimately the survival of the organisation. According to Gibbs (2007) value systems are hierarchical and corporate ethical values that underpin all specific value systems, including quality management. This is also supported by Hunt et al. (1989) in Gibbs (2007), who states that ‘corporate ethical values may be a key ingredient to success’.
It is clear that understanding users concerns and protecting their personal information is a high priority. However, by enforcing too many rules and restricting valuable information that may help attract advertisers, this may also prove counter-productive to the organisation. It is therefore important that various controls around accountability, responsibility and liability be in place so that the information provided in good faith by users, is not accessible by the entire network of users (including advertisers). One way to reduce the risk of private information being obtained by the wrong hands is to ensure that only general user information is stored and that masses of confidential and personal information is not stored in the database but are erased after they have served their purpose (Elovici et al.2005). With users satisfied and a bounty of information available that users have consented to social networking sites can maintain their competitive advantage and still appeal to advertisers.
This approach is consistent with the current strategy being undertaken by Facebook, which allows users to restrict their information to specific friends or groups of friends (Laudon & Laudon, 2010). As has been seen since the development of Facebook, when it was initially only opened to a select group of university students (Richardson & Hessey 2008) in 2004, the number of users has grown remarkably and with that growth has come the business opportunities for advertisers. Providing that Facebook manages its responsibility to users regarding the privacy of information, there is no reason why advertisers will not continue to do business with them and thus continue to grow profitability.
The introduction of Web 2.0 allows users of Facebook to control and manipulate the information they apply to its interface and as a consequence the application of technology such as Blogs, RSS feeds and Wikis has enabled the user to completely personalise, and therefore customise, their Internet experience. E-Commerce also plays a role in the popularity of the user experience provided by Facebook; with many businesses choosing to purchase, and use, Facebook provided user information to personalise their advertising campaigns. This is in an attempt to narrow specific target audiences at a much cheaper cost than the use of traditional research and advertising, thus Facebook is making the most of modern technology in an effort to create and sustain its popularity.
With all this new technology and availability of information comes an obvious privacy risk. The weaknesses of Facebook’s privacy policies have been identified as including the irresponsible and uninformed use of contributor’s personal information, along with the failure of Facebook to take into account the privacy issues involved in everyday use of their product, such as status updates ultimately becoming the property of Facebook. This is not only true in the case of status updating but also when it comes to comments, photographs, likes and dislikes and Facebook’s use of participant’s information is evident within the case of their employment of Beacon, where, as a result users became more aware of this targeted marketing and the use of their information, thus forcing Facebook to amend it use of the program.
The introduction of Beacon was, however, a good example of Facebook’s attempts to apply product differentiation strategy. The organisations use of this strategy has successfully set them apart from their competitors by utilising applications to enhance their user’s experience, thus providing a far more interactive interface through the use of widgets has made all the difference in illuminating Facebook within the social networking market. However, the success of these applications depends on the engagement of the user, making the customer force’s power highly influential on the outcome of Facebook’s product differentiation strategy and on the organisation as a whole. This impact can be seen directly when looking at what information Facebook has access to and rights to redistribute to third parties in order to make a profit and clearly enables the profit vs. privacy argument with Facebook constantly juggling the privacy of its users with its ability to obtain revenue. The organisation could achieve a better balance of profit and privacy by completing a comprehensive analysis of what attracts users to their website and also by investigating their competitors, in an effort to make decisions that are likely to foster and enhance Facebook’s incoming revenue capabilities and competitive edge whilst not alienating their users.
When Facebook has managed to balance these elements evenly it has created their sudden success, which can not only be attributed to this but also to their websites ability to allow users to connect with, and share information with, likeminded people from the comfort of their own home. This breaks boundaries such as geographical location and even language barriers allowing all to participate on an even footing. Once people are connected, in order for it to grow, Facebook must focus towards maintaining those users by enhancing current applications along with the development and introduction of other applications not used by its competitors.