Strategic management principles and practices

Social Networking Industry

Online social networking is a fairly recent socio-technological phenomenon that has been facilitated by the increased usage of the Internet. Through online social networking, users can expand their professional and personal contacts, by making connections through other individuals. While social networking itself has been around for nearly as long as societies, the Internet has added a new dimension to networking. Social networking websites such as Facebook, Twitter and LinkedIn have sprung up to use the theory of six degrees of separation, that each person on the face of the Earth is only separated by, at most, five other people. Online social networks encourage members to invite their friends, and then these friends to invite friends, etc., multiplying users exponentially and allowing new users to find new contacts through the contacts of their current friends ("Social networking," 2008). This phenomenon has revolutionized the way people interact, giving the general public an online persona they can use to make social connections. To further investigate the online social networking industry, this paper presents a PESTEL analysis of the industry, as well as an analysis using Porter's Five Forces and Complementors.

Social Networking Industry

Introduction:

Online social networking is a fairly recent socio-technological phenomenon that has been facilitated by the increased usage of the Internet. Through online social networking, users can expand their professional and personal contacts, by making connections through other individuals. While social networking itself has been around for nearly as long as societies, the Internet has added a new dimension to networking. Social networking websites such as Facebook, Twitter and LinkedIn have sprung up to use the theory of six degrees of separation, that each person on the face of the Earth is only separated by, at most, five other people. Online social networks encourage members to invite their friends, and then these friends to invite friends, etc., multiplying users exponentially and allowing new users to find new contacts through the contacts of their current friends ("Social networking," 2008). This phenomenon has revolutionized the way people interact, giving the general public an online persona they can use to make social connections. To further investigate the online social networking industry, this paper presents a PESTEL analysis of the industry, as well as an analysis using Porter's Five Forces and Complementors.

PESTEL Analysis:

A PESTEL analysis allows for the analysis of the macro-environment affecting organizations within a specific industry. These factors are: political, economic, social, technological, environmental, and legal. Politically, the government regulations affecting the online social networking industry are relatively minimalistic. Of the greatest concern is the political climates between countries. As an example, in China there are a great deal of restrictions on the Internet, in general, including banning of western social networking sites. Other political factors of importance include the continued Westernization of the world, especially in developing countries, which offer potential growth opportunities for online social networking sites.

The economic factors that affect online social networking vary greatly. First, in difficult economic times, such as being experienced in the United States and much of Western Europe, high levels of unemployment is often associated. Online social networking gives job seekers another tool to utilize during their career search, allowing them to make connections with potential employers in a way that wasn't available even 15 years ago. Second, in an increasingly competitive economic environment, organizations look for ways to garner a competitive advantage, as such social networking has become an important marketing tool for many companies. Through online social networking, these organizations can build brand value, control their brand image and attract new customers. Word of mouth advertising has taken on an entirely new and effective twist, thanks to online social networking, which has resulted in a lucrative revenue stream for top online social networking sites. Challenging economic times also means less disposable income for online users, which can result in increased usage in social networking to keep up-to-date with family and friends that live in different geographic areas.

Social factors are of critical importance in the online social networking industry. Just a generation earlier, communication was conducted primarily face-to-face, by phone and by mail. Networking introductions, in the past, often included physical interaction between the parties involved. Today, it has become more accepted that these introductions are conducted virtually. LinkedIn is a thriving example of professional social networking, where members can search for someone they wish to make contact with and the site will show if the person has any connections to people in their current network of friends. This facilitates introductions even when the connecting link isn't present in the introduction process. Socially, the world has also become a time-challenged, increasingly connected society. Online social networks is just one more way the Internet can help people stay connected, despite different time zones and different geographic boundaries.

Technology too is an important macro-environment factor in the online social networking industry. The pervasive existence of personal computers and the Internet is what has made social networking possible. As more users go online, it only amplifies the possibilities this industry has, plus the potential for even more connections. This is especially true in developing countries where the personal use of computers and the Internet has even greater growth potential.

Environmental factors indirectly affecting the online social networking industry are ancillary. This industry is one of the few industries with a small carbon footprint, and, in fact, has ecological benefits. Networking that used to involve parties traveling to a central meeting place to interact face-to-face, now can happen online, saving the energy and negating the emissions that travel used to incur. This makes it one of the most environmentally friendly industries out there. In addition, as environmental concerns continues to grow in the social consciousness, online social networking offers a new and unique way for environmentalists to not only educate the general public, but also to build support for their causes. Like-minded individuals can come together online to discuss environmental issues and plan to take action in response.

Lastly, legally laws concerning online social networking, vary greatly by country. In the United States, laws concerning illegal online activities also affect social networking, such as gambling and child pornography; however, in some countries there are a significant number of legal challenges, often based in privacy concerns. As an example, "German social networking sites face strict local privacy laws, meaning they must undergo a long process of verification and users positively opting-in before they can be signed up. The sites are also prohibited from sharing certain user data with advertisers" (Nuttney, 2010).

Clearly, there are macro-environment factors affecting the online social networking industry. Although political and legal factors, in the United States, are not of primary concern, the other three factors offer significant opportunities for the industry. Economic challenges can actually facilitate growth in the industry, as will the continued social acceptance of virtual interactions, technological improvements, and increasing environmental concerns. Although the social networking industry has grown by leaps and bounds over recent years, there is still room for considerable growth..

Porter's Five Forces Plus Complementors:

Porter's Five Forces can be utilized to further analyze the factors influencing the online social networking industry that affects the competitiveness, in the industry. These factors are: threat of substitutes, power of end users, power of suppliers, barriers to entry for new competitors, and rivalry among competitors. The sixth force that affects industries is complemetnors. The threat of substitutes in this industry is moderately high. Online social networking is an evolution of traditional networking techniques, such as face-to-face interactions, phone calls, e-mails, and letters. If needed, users can revert back to these processes.

The power of end users is minimal in the online social networking industry. With millions of users and online social networking sites typically free, members have little power in the industry. However, most sites feature user engagement, taking into account the needs of their users to better develop their website.

The bargaining power of suppliers too is negligible. Given the number of suppliers in the Internet industry for the core services social networking sites need, it would be very difficult for an individual supplier to drive up the prices for a website. Switching costs are minimal, when compared with other industries that deal with suppliers of physical products.

The barriers to entry into the industry are moderate in the online social networking industry. Many of the successful social networking sites today were developed by a small group of people -- even students. The start up costs for a site are minimal, when compared to other industries. In addition, given the nature of the industry, much initial marketing will be done by the users themselves, as they invite more of their contacts to join, further lowering the barriers to entry.

Competitive rivalry is one of the most intense factors affecting the industry. There have been more than a dozen online social networking sites established since SixDegrees.com opened their virtual doors in 1997. Today, although Facebook is one of the few that are truly global (Nuttney, 2010), users have numerous choices for making connections virtually with family, friends and business associates. For this reason, these sites often specialize in the type of experience they provide users. For example, YouTube focuses on video connections, Flickr centers of photo connections, and Twitter focuses on brief status opdates.

Complementors are value-added products are services that complement another industries products or services. In the online social networking industry, complementors include user applications for the networking site. As an example, Facebook offers thousands of applications members can choose to add to their member account. These typically focus on games and other fun ways that members can interact with other users. These add an additional dimension to the basic networking features of the site and often give sites a competitive advantage through differentiation.