The smart phone industry is growing by the day and we are at the threshold of unpacking it’s true worth by integrating it deeply with the social network. Our company, Facebook, has derived the opportunity to invest in the project that will enable us to incarcerate market share in the smart phone industry. The perseverance and hard work of our employees has made sure that we advance in this new venture. There are several alternatives that facilitate us to enter this market,which have been discussed in this report. To best estimate the possibility of our investment, the risk and profit factors have been estimated against a spectrum of parameters. These factors include manufacturing cost, revenues, market equity, marketing time, risk and profit evaluations. Some of the traditional industrial tools such as The NPV model and the Weighted Factor Scoring (WFS)Model have helped us with the strategic analysis. Using these tools, we were able to catalog the investments into the best fit, the most likely and the pessimistic cases. Eventually, based upon an in depth research and analysis, the most likely case was:collaborating with an OEM for joint development of the smart-phone.
Table 1: WFS Model used for analysis; BC(Best Case), MLC(Most Likely Case), P(Pessimistic Case)
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In the WFS Model as in Table 1, the architectural development of the options was placed in a pool comprising of several factors representing the company’s interest. These major factors include initial investments, operating costs, revenue stream over a five year period, market equity, and time to market while safeguarding the respected brand name. To justify the importance of these factors against the investment options, each of them were braced and weighed against one another. The WFS governs on the principle of comparing the individual cases by summing up the points assigned to them based upon realistic approximations. The upshot of this analysis is that the risk to the brand name and market equity were the most important factors while evaluating the options. This was followed by future investments and profits, marketing time, cost to manufacture, and the value above zero that the NPV analysis yielded. Each NPV analysis used a required rate of return (ROR) of 15%, an inflation rate of 3% and a projected lifespan of five years.
The best investment option for Facebook to enter into the Smartphone market would be to develop a device from its conceptualization to commercialization.This would include setting up units for the entire Smartphone value chain i.e. hardware and software manufacturing, marketing and setting up the distribution channels for sales. This is the best case because it offers maximum shareholder value weighed against the factors mentioned in the WFS. Let us first look at the advantages it offers:
Highest return on investment- the entire profit share control stays with Facebook by being the sole investor and provides opportunity for lateral and longitudinal development of its product and services using the returns
Direct competition to current Smartphone manufacturers- complete control of product architecture, R&D and addition of unique features to the device would rest with Facebook.
Brand name enrichment- Facebook would be the exclusive benefiter of the added value from its product design i.e. there will be no brand dependency.
However, with this potential for increased value, there also existsa number of impending risks as discussed under.
New realm -Since Facebook would be just starting out in the Smartphone market, it would be an entirely new trading arena where they have no prior experience, but awaits tough competition.
Start up Investments- Anew business would require a new staff, manufacturing facility, infrastructure and supply chain channels. Since, the learning curve for hardware production would be low; it would also require hiring external consultants, more R&D, thereby increasing the investments.
Yearly Investments- The recurring maintenance costs are likely to be higher due to rapid and continuous up gradation of technology interface and operating costs.
Domination-Establishing the device into the market would take more time due to the existing Smartphone market competition.
We regard this as the best fit after a synchronized analysis of the WFS model and the above mentioned advantages and disadvantages.
Table 2: Best Case NPV Analysis
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The Net Present Value (NPV) of this proposal is analyzed as above in Table 2. It is observed that the time taken to attain the break-even point (i.e. 1-2 years) is the least compared to the other two cases. A changing repair and maintenance cost throughout the life cycle of the project would be required and the net profit would be high as it would only belong to Facebook. Hence the NCF in 5 year period is the maximum in this case.
MOST LIKELY CASE:
The most likely investment for Facebook would be to start a joint venture with an established Smartphone manufacturer and integrate the mobile computing architecture. Being in such an alliance would supplement us with their abilities and resources; such as manufacturing expertise, distribution channels and technology finesse.
This option represents a good balance between risk factors and returns with respect to initial investments, brand preservation and potential revenue generation.Meeting the needs of finance & manpower and at the same time reducing the risk of huge capital losses is a joint venture advantage.
- Quote paper
- Rohan Handa (Author), 2011, Facebook Smartphones - A Financial Analysis, Munich, GRIN Verlag, https://www.grin.com/document/182278