MBA Mini Class on Business Strategy

I want to give you a brief taste of a case study discussion where a lot of what you'll be exposed to in a graduate business program is where we try to put you in the shoes of a manager and making a business decision so rather than just tell you how things work and what the theories are behind them a lot of the different pedagogy that we try to bring to a graduate class room is more experiential so one of the ways that I like to teach us through the case method where you'll in advance of the class you'll have to read a case study prepare do some analysis and come into class ready to sort of make decisions and and argue how a company or an organization nonprofit or government or manager should act in a given situation now we didn't make you read any case studies here so I chose one that should be familiar to many of us and this comes from about two-thirds of the way through the strategy course and the full-time MBA program that I've taught the last couple years where we have a major acquisition by a major company in 2014 Facebook paid 22 billion dollars for this small messaging a company called whatsapp anybody heard of this and then this fits within the the strategy course this is a piece of corporate strategy on mergers and acquisitions so there's all sorts of theory behind it there are toolkits and you would have prepped those and read up on them and done some analysis of the case but for now we can just jump right into it so I'll give you a few a few facts here whatsapp at the time of the acquisition this is this is 2014 at 50 employees they made 10 million dollars in revenue and their profits or negative one hundred and thirty million dollars twenty two billion dollar purchase Facebook meanwhile has about one point three five billion monthly average users so these are users who go on and log on at least once a month they made eight billion in revenue of that one and a half billion dollars was earned as profits and then many of you probably know this but to refresh it they bought Instagram just two years before this for about a billion dollars whatsapp has 600 million monthly average users so start with who here has whatsapp get to sit here Matt so why do you have it ease of use and then you can send videos and photos as well yeah okay well you're getting ahead of 2014 so I won't write that up there yet they didn't have that then but what could you send in 2014 messages right okay so send messages view data um I know you had your hand up as well why do you of what's that okay so friends are on it so if you're not if you don't have it then you won't be able to get the delightful group messages that that people use to communicate yeah real-time so what is what do you mean by that okay yeah so real-time messaging this is sort of like this little bit like texting a little bit other except you can you can see what they're saying okay why else might might you have downloaded whatsapp Christine okay so you can there's through route chats or something like that okay which is a bit more private yeah okay okay so and how much does it cost to send a message internationally nothing right so you can International and it's free what else gives WhatsApp users value here yeah okay well I'm not sure we were sharing files yet here but back in 2014 but you sort of you can for shout out some of what new features might unrolled yeah okay so maybe we can say that the interface you like the new interface how would you describe the whatsapp user interface simple anything else normal so we've got simple user friendly and clean then it's multi-platform multi-country anything else here yeah Sam encrypted yeah it absolutely was so and then for those of us who weren't data security people what does encrypted mean for a regular user secure okay okay missing you anything here Harvey okay so it's simple clean and then it's really high performance right fast and this gets to the real-time messaging what about its price it's free yeah initially good good technological history like this it starts out at this time the pricing model was free for the first year and then $0.99 yearly after ok so we have this great thing right it's real-time it's clean its secure you can send these messages and and and group messages through data it's easy to use multi-platform multi country and you don't have to pay anything for it what's not look to like right this is a twenty two billion dollar dollar company so is this a good just a good business yeah absolutely right great product it's free works really well does that make it a good business oh we've got a problem right so not only does it make money it's bleeding money for the privilege of this their investors are paying a hundred and thirty million dollars per year so why doesn't it make any money Justin yeah okay it's good point yeah so it's free free to user but still has some costs associated with it right millions of messages are crossing through its networks on a daily basis I forget the staff but you know you need servers and infrastructure and all this to deal with is that it is that our only problem with this as a business business model we don't we're not charging anything and and we have to pay for customers imagine if there were a restaurant like this great food fast service and it didn't cost anything would you pay twenty two billion dollars for that restaurant what else is wrong with that the business model here or the business yeah uh-huh so so there's no clear path to revenue that right or no clear source of revenue what about this a Buccaneer does that pay the bills okay 600 million that's not bad so once your if you're collecting a dollar from everyone six hundred million dollars can you cover costs yeah right so maybe you can make a few hundred million dollars a year with this if everybody's paying yeah replaceable what do you mean by that okay imitable another company could imitate this business so is anybody else doing messaging back in 2014 mm-hmm all right so we look around the world we've got WeChat which is sort of this similar size whereas we chats customer base mostly China viber anybody remember viber anybody still using viber not so much line Japan nice Kakao Korea okay so there's already a bunch of messaging apps um how do these guys make their money are they all like offering this free delicious meal okay so another thing that we like about this clean fast interface is that there's no ads so these guys we've got ads how else do they make their money right you can download electronic stickers right that's stickers and Mota cons and you can you can pay for those what about WeChat how did they make their money back then well you could download these same sort of stickers and stuff but they also had games so once you're in the app you can play a game and pay for that game so not only can another company create a company that does this but others have they have hundreds of millions of users and some of them have found ways to make revenue are these relevant for whatsapp as they consider their their growth strategy is that what their founders are imagining that they're they're gonna do me what's wrong with whatsapp selling stickers and games okay so a might not differentiate them what does differentiate them so we've said a bunch of stuff that's great about them but some of these apply to their competitors too okay so maybe their competitive advantage is how clean the interfaces okay it's secure it's clean it's no junk on the screen and so if they're gonna be trying to market stickers to you you imagine you know you're seeing which friends are online or something you mention you know you can buy a smiley face or something and send it to them okay yeah so in addition to all these great product features they have users and that's why we said my friends are on it right why is existing users valuable for a company okay because maybe you'd have to pay more for new users yeah okay so maybe maybe this is just a teaser and then eventually like Netflix it's just gonna ramp up you know you $7.99 becomes $13.99 so they have a potential so here we could say can monetize later but we're still I mean and then coming back to this users bit so what's the value of users to a to a company did you have something yeah okay so the more users they have the more money they can have okay yeah okay you're getting ahead of my discussion so in a second we're gonna come to Facebook's logic but even when you're thinking from Facebook's perspective so we can go there what's the value of whatsapp user base so one is they might have some overlap what's the intrinsic value of the user base when we can charge more people a dollar or if we what we decided to sell emoticons which we said isn't gonna be in our core competency okay so there's what we'd like is some customer loyalty does whatsapp have that and what drives that loyalty I mean it's pretty it's fast it's secure its reliable you're used to it it's free what else keeps you on it everybody else is on it okay good so this is also becomes a source of differentiating advantage which is that when there's other users on it what's worth more to me right now if you're sitting at home and you're like I need to hang out a bit more should I download whatsapp or should i download cacao cacao has great features I can play games in it there's much cuter stickers I can download but there's only one problem right if you're here which is that all of Kakao is users are in a different country so it's it's of less value to you one of the that's the sort of benefits here is that it's each additional user signs up for a platform like whatsapp it increases the value to other users because now you're connected to a larger potential group of of people so we call this net a network effect and network effects in many industries especially in the tech side can can become really important okay so we have this awesome business with some sources of competitive advantage which in strategy we define is what what you can do relative to other firms in your industry that can put you towards a path of higher profitability whatsapp has a bunch of these things but we have some problems they're not making any money and someone could come along and and repeat it so now we come to Facebook Facebook Christine said is interested in whatsapp because of their users and there's similar users to Facebook so that might be good right you grab current users who are maybe flirting with another company and you keep them in your orbit okay one of the reasons my Facebook be interested in whatsapp okay so not just overlap with users but new users uh-huh okay so Facebook's having this perennial popularity issue right because of the fads that come in and out with social media and they're always terrified they're going to lose their teenagers and and so on who will be the future users but now we've got all these you know younger people the average user of whatsapp is probably mostly in like that 25 to 35 but then there's a tons of under 25 as well as under 45 whereas Facebook's users are getting a little bit older so we've got new users we've got existing users what else ok so what does that mean okay so so I guess you've said two things one of them is there he said earlier they were a potential threat and then now you're saying there's maybe a set of different social media applications that could be involved in one company so I might go to the same umbrella company for my messaging as I do for my whatever time line and so on and then so some cross-platform returns and how do how do they make money in this world in which I mean there's two kinds of what we could say multi business unit businesses one it owns unrelated businesses you might own a drugstore and a restaurant and a parking garage and you can say oh yeah well you can park at the garage and go the restaurant but really there's separate businesses and it doesn't matter too much and another one they're really related in terms of yeah the businesses the business and one overlaps with the business in another so for example you make steel and you own an iron ore mine and then we could say those are really you know related to one another how is messaging and going into Facebook and posting pictures possibly related data so then we have a problem here though that whatsapp is encrypted and therefore won't be producing useful data for Facebook oh so maybe it used to be hard to identify remember at the time all you needed to sign up for whatsapp was your phone number and so you know maybe they can run some maybe they can ask their Facebook users what their phone number is and then cross-reference it and get something but we've got a problem here which is that whatsapp doesn't create much data for the parent company and that's part of their value proposition to potential new customers but we said maybe in the future Facebook can do something okay um there's something else here data on the user's oh well anyhow let's go back what what what else is in this for Facebook to to acquire what's up Kevin right okay so tried launching messenger and it didn't work so in strategy we say the number one reason to acquire a new company is because you have a strategic resource gap your firm has a capability or an asset or something that it needs in order to be more successful now Facebook already has a messaging app it's called Facebook Messenger but maybe they're not good enough okay they're restricted to Facebook users why would they want to restrict the value of a messaging app okay so yeah they want to steer traffic to their their website with this maybe um so what do you do if you can't if you have a strategic resource gap let's say your Ford Motor Company and you're like well we think the electric car might be a big deal we don't make one now pretend this they do like that see something oh the fusions electric now they had this really small nice good yeah it's Emacs that's right so it's sort of in a world just before the c-max they're like well electric might be important how should they get it should they go buy Tesla or Fisher that's sort of the equivalent here right or they could just put some of their engineers to work come up with an electric car maybe they'll buy a small battery company or something like that if they figure that's the thing that they need but Ford knows how to design and build cars can Facebook design and build a messaging platform how long would it take there how much would it cost for them build something like this in the back nothing how much less than twenty two billion existing engineers remember there's 50 employees here it was founded in 2009 so maybe Facebook puts a hundred people on it doing a year we could do the math it's gonna be less than twenty two billion and they have one so what is their strategic resource gap that they see that it's worth paying some money a lot of money ten percent of Facebook's market value for what's that okay okay so we've got cost of acquisition of new customers so you do some math here twenty two billion six hundred million customers what is that ten forty bucks or something the customer can't you get a new one for less than $40 but then also the user base gets divided because everyone was already using what's that okay so maybe you can't get them because they're already they're happy with this whole this whole set of things now how does Facebook make their money ads okay at the time here the global market mobile is around 20 billion growing pretty quickly that's just mobile Facebook gets at this point a little over half of their ad revenue from desktop users is this helpful to them for getting ads ad revenue yeah uh-huh okay so we've got this move to mobile what's apps like good at mobile yeah it was yeah they had started it just before that is its standalone and then they eventually forced everybody that sign up for it um but is this is whatsapp business gonna help Facebook's revenue model of selling ads mobile ads we've said part of the value of this thing is that it doesn't sell it so why did they pay 10% of their market value for this company it doesn't feed into their business model tell it 50 engineers well maybe 40 engineers and then 10 businesspeople you hear about these Accra hires we could put some talent here imagine the salaries they could pay these guys so to less than 22 billion what challenge are they hiring okay so what do you mean by that okay right so we've got prevent printing Google or Apple now another rule of acquisition is that for the acquired company should be worth more in the acquiring company then on its own then it makes sense to do it so this is whatsapp a more valuable company if it's in the Facebook ecosystem or if it's on its own so you've said maybe it's not so much about that it's just about might be worth more to Google to have whatsapp in its orbit so does whatsapp's value emerge when it's owned by a Google or a Facebook okay so that's sort of we're back to this there's going to be a bunch of platforms and we should be active in all of them but Google sells ads Facebook sells ads whatsapp doesn't sell that okay so all right well let me just wrap it so we'll hand it back to Kristen um you have a little taste of the MBA case method approach and the concept that we're that we're trying to look at here is fits within strategy course which is how do I get my firm or business unit to have a competitive advantage to be better than other firms in the industry of making money then the bigger goal is how do I get a sustainable competitive advantage which is to not just do it today but to do so in a way that will allow me to prevent others from taking my position in the future and then within strategy which by the way is just one of the dozen or so core areas of management addition you'd have accounting finance marketing leadership organizations sustainability lots of other areas all of which have all these moving parts that you'll be trying to assemble and get a grasp on so within strategy this fits into the area of corporate strategy which is how I think about a business that may have multiple products under it we first looked at it just as a standalone business which is messaging and then we began to consider it as part of the broader umbrella of a Facebook or a Google and the different kinds of value or profitability that can emerge when you're managing a suite of companies now as it turns out lots of acquisitions aren't successful so then you need to understand reasons for that managers have hubris or they fail to take into account the costs of absorbing and integrating the the acquired company but in the case of Facebook looking back many people would argue that even at the time though this decision was ridiculed this was seen as a good move Instagram seemed like a lot of money when they paid a billion dollars for it and clearly that's been a homerun for Facebook initially they brought it on they promise no ads and stuff out until a few years and then gradually they started letting these you know nice photograph ads enter and begin to monetize it and then in the case of whatsapp Facebook is thinking along these multiple platforms as well as it just came out in the news yesterday I don't know if anybody saw it but a bunch of the internal emails from Facebook were released as part of an antitrust case where they highlighted the messaging vertical or industry as one of the most existential threats to their future business and so they were interested in acquiring it to prevent whatsapp itself from being a competitor and then of course thinking along this cross-platform side to look at the potential benefits and then of course they moved to monetize things in the ensuing years as you've probably seen with whatsapp business and considering peer-to-peer payments and then integrating the data more deeply into Facebook to be able to understand how to target users Facebook's cost revenue per ad or per thousand views was much lower than Google's at the time so they were much blunter instrument for selling ads so in the NBA classroom what might have gone differently is you would have brought more analysis you would have come with harder views that you would have walked into the classroom with you would have run some number would have had the underlying frameworks and and and argued on how to put these into the sort of data from this case to understand it in those frameworks so let me wrap it here and I'll hand it back to my colleagues and thanks to your contributions [Applause] you

Channel: SFU Beedie School of Business

Views: 23,700

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Id: Zz7vZXV-ASM

Length: 41min 36sec (2496 seconds)

Published: Thu Nov 14 2019