Investors and analysts like to use the Porter five forces model because its methodology is simple but powerful. By following through each of the five forces that Harvard Business School professor Michael E. Porter identified in his 1979 Harvard Business Review article, "How Competitive Forces Shape Strategy," an analyst or potential investor can gain a better comprehension of where a company stands relative to its industry.
This understanding can help that person make a more informed decision about whether to recommend or invest in the company based on how it stands relative to its rivals. It is particularly useful in situations where rivalry may not be direct as, for example, the fast food competition between McDonald's and Burger King or the ongoing struggles for soft drink domination between Pepsi and Coca-Cola.
Facebook, Inc. (NASDAQ: FB) is a prime example. The company has several platforms, from its original social networking site to its other offerings such as Messenger, Instagram and WhatsApp. While there have been some competitors who have tried to break into the space, including Alphabet's Google Plus network and Yahoo's Tumblr, none (as yet) have really put a dent in Facebook's user numbers or usage. However, that does not mean that Facebook is not vulnerable. An analysis framework such as Porter's five forces helps to clarify those threats.
Understanding Current Competitors
The Porter five forces model begins by looking at the current competition. Facebook is in competition with a variety of social networks, from full-featured ones such as Google Plus or Tumblr to more niche sites such as Twitter and LinkedIn.
Facebook has several different platforms, which helps it compete more directly with those competitors, but they do not appeal to all demographics equally. For instance, many younger users prefer Facebook's WhatsApp or its rival Snapchat, while professional users may look more towards LinkedIn, Twitter or Facebook Pages. In this sense, Facebook faces a moderately high risk.
Facebook's Customer Bargaining Power
Moreover, many people have and use accounts on several different social media platforms. The more a user engages outside the Facebook family, the less time he spends on Facebook or its other platforms.
This gives Facebook’s customers quite a fair amount of bargaining power. After all, Facebook is free to use, so it does not cost anything for a user to switch networks – and social media platforms are not exclusive.
Even if Facebook can keep its users checking in at least once in a while, the company needs them to be actively using the site if it is to make any money on ad space or the market research that can come from all the data Facebook collects. In other words, Facebook has to work extra hard to keep users actively using its services. That can mean limiting the number of ads, spending money on research and development (R&D) to create more robust features and working hard to create integrations with Facebook and other sites or services.
Assessing the Threat of New Entrants
The world of smartphone applications and platforms is fairly inexpensive to enter, so the threat of new entrants is definitely present. All you need is an excellent programmer and a secure server. The trick is in getting enough brand recognition to attract users, inspiring enough confidence that users feel safe to share their personal information on the platform, and creating enough economies of scale and economies of scope to compete effectively with a company as large as Facebook.
So far, Facebook has been king, but all it takes is one new entrant that beats the odds. More importantly, it would not mean that all users need to abandon Facebook. In fact, it would just take a single demographic, such as teenagers. That is why Facebook’s share price takes a dip almost every time a new report comes out saying that teens are not active on the network. If an app comes out that really trends with teenagers, that could be all it takes to really hit Facebook hard. The risk here is moderately low – for now.
Determining Supplier Bargaining Power
Facebook's suppliers also have bargaining power. Suppliers in this sense include everyone from the people who build and maintain their servers to the software that runs Facebook's different social media platforms.
Obviously, Facebook is large enough and powerful enough that supplier bargaining power is less of an issue than it may be for a smaller company, but that does not mean the issue is completely negated. Suppliers in this sense can also be complements that allow Facebook to operate as it does, such as the Internet.
For instance, if Internet usage becomes capped or very expensive after reaching a set limit, users could be forced to reduce the time they spend on social media, even if Facebook does everything right. The cost and availability of fast Internet speeds could impact the amount of time Facebook users spend on the site.
Another factor could be the sites and services that offer Facebook login for identification purposes. This helps provide Facebook with new information every time a user logs into an outside site this way, but if that technology were to go out of favor or be replaced by a more secure identifier, such as a thumbprint reader, Facebook could lose out on that integration.
Facebook's Threat of Substitutes
Facebook has an enormous user base, but social networking as a whole is very vulnerable to new technologies and shifting trends. If social networking becomes unfashionable, Facebook will lose many of those current participants.
Similarly, much of Facebook’s competition comes from niche sites. It could happen that instead of users switching to a more direct competitor, they simply choose a substitute. New parents may opt to share photos about their baby on a parenting site instead of Facebook or cooking enthusiasts may want to interface more on recipe websites than Facebook.
Besides, as companies such as Apple could develop services that allow families and groups to share photos and messages easily (and securely) among themselves, some close-knit groups may be less likely to use Facebook and choose this type of inter-family messaging instead.