CHAPTERCASE 2 Part I Leadership Crisis at Facebook? WITHIN A MERE SIX MONTHS, in the latter half of 2018, Facebook's share price dropped by more than 30 percent, wiping out over $200 billion in shareholder value. Making matters worse was a seeming crisis of leadership swirling around Facebook's two top executives: founder and Chief Executive Officer Mark Zuckerberg and Chief Operating Officer Sheryl Sandberg. After a decade of exponential growth and unabated success, the global social network with its more than 2 billion monthly active users found itself in serious trouble. FACEBOOK'S LEADERSHIP DUO As depicted in the Hollywood movie The Social Network (2010), Facebook began as a startup in 2004 in the Harvard dorm room of then 19-year-old Mark Zuckerberg with the support of three college pals. At the time, Myspace was the leading social networking site, and in 2005, it was acquired by News Corp. for close to $600 million. For several years, Facebook lagged behind Myspace in both investments and users, but it stayed alive thanks to cash injections from Microsoft, Yahoo, and a Russian investment group.In 2003 Mark Zuckerberg made a genius move: He persuaded Sheryl Sandberg, at the time the vice president of global online sales and operations at Google, to leave Google and join Facebook as the new second in command Zucloerberg was a computer hacker at heart. He opted to spend his energy on fullling his vision of Facebook to turn it into a tool that would \"make a more open and connected world."1 He preferred coding to business deals and freely admitted that he did not have the skills to run a business successfully. Sandberg did. She brought with her all the business skills that Zuckerberg lacked. She had demonstrated her superb leadership capabilities at Google and was recognized for her sales, business development, public policy, and communications prowess. Put simply, and partially, Zuckerberg saw his role as bringing in the users; he saw Sandberg's role as bringing in the money. The ZuckerbergSandberg leadership duo would turn out to be pure dynamite. It led to exponential growthfrom [00 million users in 2008 to 1 billion users in 20l2a feat that no other rm has ever accomplished. Just ve years later, in 2017, Facebook crossed the 2 billion users mark. By the summer of 2013, Facebook's market capitalization stood at more than $600 billion, up over I330 percent since its initial public offering UFO} in ZGIZa mere six years earlier. THE END OF THE ZUCKERBERGSANDBEIG ERA? By 20l9, Facebook found itself caught in a perfect storm, and many were demanding that Zuclcerberg and Sandberg step down. What had happened? Due to its lenient privacy controls, third parties were able to siphon off the personal data of tens of millions of Facebook users; lax data oversight also led to other alleged misdeeds, including the enabling of foreign interference during the 2016 US. presidential elections Critics assert that because of its single-minded pursuit of exponential growth, Facebook's leadership failed to consider the potentiality and gravity of negative side effects on the rm, its stakeholders, and its reputation. Facebook's exclusive focus on user growth began in 2012 shortly before its IPO. In a fateful meeting of top executives and lead product developers, Sandberg showed that Facebook's revenues were flat and user growth was slowing considerably. For a social media company to grow, she said, it must pursue a business model that provides free services to the end user but that charges advertisers for placing online ads. Sandberg admonished the lead product developers. saying "things had to change" and 'we have to do something."2 This meant, as one of the software engineers present at the meeting recalls, that \"we needed to pull out all of the stops and to experiment way more aggressively with user engagement with the goal to make money."3 The marching orders were clear: Drive exponential growth and user engagement, while keeping costs down. Very quickly, software engineers and product developers learned that four features could serve as the keys to increasing user engagement and driving future growth: News Feed, Likes, polarizing news, and microtargeting. Facebook's News Feed is akin to a personalized newspaper and gossip page. A proprietary algorithm identies the content that will be most interesting to each m unique user and accordingly compiles a customized News Feed for that user. Meanwhile, the Like button, internally described as a \"social lubricant and social ywheel by which users [feel] they [are] heard,"" has helped Facebook to better understand its users. Product developers noticed that polarizth news and messages were often the most liked. Note that Facebook's algorithm doesn't know which content is good or bad, polarizing or nonpolarizing, fake or real. It only knows to which content users most respond. About two-thirds of all Americans get their news from social media sites such as Facebook, and over lime, hypedup and outrageous content increasingly made its way into users' personal News Feeds. creating a much more polarized and tribal user base. Further compounding this situation is the fact that Facebook does not engage in any editorial review of the content that surfaces on its site. Rather, it relies on its algorithm, netuned to maximize user engagement, to serve as its editor. On top of the data breaches and privacy issues, this polarization of Facebook's users has only exacerbated matters for the rm. Facebook and Google have captured most of the astronomical growth in online advertising spending over the past few years, reaching $100 billion in 1013.5 A massive base of more than 2 billion users, combined with high user engagement, has enabled Facebook to place and sell ads with extreme accuracywhat is known as microtargeting. For microtargeting to work effectively, it relies on accurate user proles. NOW that Facebook owns the photo-sharing app Instagrarn and the messaging service WhatsApp, it has additional data sources at its disposal to help it to create even more accurate user proles. All these data are combined with a user's \"shadow prole,\" which enables Facebook to not only track each of its user's activities, but the activities of his or her friends as well, even as they move across the web visiting other nonAFacebook sites. As a result, Facebook can offer the most detailed, accurate, and targeted data to advertisers. Part II of'lls Chep'berCase appears In Section 2.5. e HON" D0 STRATEGIC LEADERS like Sheryl Sandberg guide their companies to gain and sustain a competitive advantage? How do they make strategic decisions? How do strategic leaders formulate and implement their companies' strategies? HOW do they lead and motivate employees? In Chapter 2, we move from thinking about why strategy is important to what role strategic leaders play, specically how strategic leaders select, guide, and manage the strategy process across different levels in the organization. One of the rst things a strategic leader must do is to shape an organization's vision, mission, and values, as each of these plays an important role in anchoring a winning strategy. We then explore some of the frameworks strategic leaders use to develop strategy and maintain an eective strategic management process. Next we delve deeper into strategic decision making, in particular how biases, even those that strategic leaders and groups may not be consciously aware of, can impact the ability to make rational decisions. Lastly, we summarize some of the most important practical insights in our lmplicarionslfbr Strategic Leaders. LO 2-1 Explain the role of strategic leaders and what they do. Executives whose vision and decisions enable their organizations to achieve competitive advantage demonstrate strategic leadership." Strategic leadership pertains to executives' use of power and influence to direct the activities of others when pursuing an organization's goals. ' Power is defined as the strategic leader's ability to influence the behavior of other organizational members to do things, including things they would not do otherwise." Strategic leaders can draw on position power as vested in their authority, for example as chief executive officer (CEO), as well as informal power, such as persuasion to influence others when implementing strategy.EXHIBIT 2.2 Strategic Leaders: The Level-5 Pyramid Adapted to compare corporations and entrepreneurs Capabilities Corporation Entrepreneur Builds enduring greatness through a combination of willpower and humility. Level 5: Executive Presents compelling vision and mission to iguide groups toward superior performance. Level 4: Does the right things. Effective Leader Is efficient and effective in organizing resources to accomplish stated goals Level 3: :Personal growth in response to business needs Distinct positions within corporate structure and objectives. Does things right. Competent Manager Uses high level of individual capability to work effectively Level 2: with others in order to Contributing Team Member achieve team objectives. Makes productive contributions through Level 1: motivation, talent. Highly Capable Individual knowledge, and skills. Source: Adapted from J. Collins (2001). Good to Great Why Some Companies Make the Leap . . . And Others Don't (New York: HarperCollins). 20.According to the Level5 leadership pyramid, effective strategic leaders go through a natural progression of ve levels. Each level builds upon the previous one; the individual can move on to the next level of leadership only when the current level has been mastered. On the left in Exhibit 2.2 are the capabilities associated with each level. But not all companies are Fortune 500 behemoths. On the right-hand side we suggest that the model is also valuable to the individual looking to develop the capacity for greater professional success. At Level 1, we nd the highly capable individual who makes productive contributions through her motivation, talent, knowledge, and skills. These traits are a necessary but not sufcient condition to move on to Level 2, where the individual attains the next level of strategic leadership by becoming an e'ective team player. As a contributing team member, she works e'ectively with others to achieve common objectives. In Level 3, the team player with a high individual skill set turns into an eecve manager who is able to organize the resources necessary to accomplish the organization's goals. Once these three levels are mastered, in Level 4, the e'ective professional has learned to do the right things, meaning she does not only command a high individual skill set and is an e'ective team player and manager, but she also knows what actions are the right ones in any given situation to pursue an organization's strategy. Combining all four prior levels, at Level 5, the strategic leader builds enduring greatness by combining willpower and humility. This implies that a Level5 executive works to help the organization succeed and others to reach their full potential. As detailed in the ChapterCase, Facebook CEO Mark Zuckerberg highly values COD Sheryl Sandberg. Here he says why: "She could go be the CEO of any company Pm 37 that she wanted, but I think the fact that she really wants to get her hands dirty and work, and doesn't need to be the front person all the time, is the amazing thing about her. It's that low-ego element, where you can help the people around you and not need to be the face of all the stu'."1? Clearly, Sandb-erg appears to be a Level5 executive: She built enduring greatness at Facebook through a combination of skill, willpower, and humility. After a highly successful decade, however, by early 2019 many critics questioned Sandberg and Zuckerberg's leadership skills (see the [g CbapterCase at the beginning of this chapter). Strategic leaders, moreover, need to design a process that supports strategy formulation and implementation. In particular, strategic leaders have three options in their m strategic toolkit: topdow'n strategic planning, scenario planning, and strategy as planned emergence. Each of the three strategy processes has its strengths and weaknesses (see Exhibit 2.8). Strategic leaders also need to consider the rate of change and rm size, two factors that affect the e'ectiveness of a chosen strategy process. The rate of change, internally and externally, can suggest the more useful planning approach. In a slow-moving and stable environment, top-down strategic planning might be the most e'ective. In a fast-moving and changeable environment, strategy as planned emergence might be the most e'ective. As to rm size, larger rms tend to use either a top- down strategic planning process or scenario planning. Smaller rms may nd it easier to implement strategy as planned emergence when feedback loops are short and the ability to respond quickly is keen. For instance, a nuclear power provider such as Framatome in France, providing over if: percent of the country's energy and with the longterm backing of the state, might do well using a top-down strategy approach. Take the issue of disaster planning Nuclear accidents, while rare, have tremendous impact as witnessed in Chernobyl, Russia, and Fukushi ma, Japan, so power providers need to be prepared. Nuclear accidents are considered black swans, low-probability events with high impact. Framatome might use scenario planning to prepare for such a black swan event. Contrast this with fastmoving environments. Internet-based companies, such as Airbnb, Alibaba, Alphabet, Amazon, Facebook, or Uber, tend to use strategy as planned emergence. In this process, every employee plays a strategic role. When a rm is using top-down planning or scenario planning, lowerlevel employees focus mainly on strategy implementation. As the examples in this chapter have shown, however, any empiayee, even at the entry level, can have great ideas that might become strategic initiatives with the potential to transform companies. Even the most well-designed strategic management process will fail if strategic leaders are unable to use the information at their disposal; our ratioaaiity is boundedthat is, while many of us attempt to be rational, we are unable to process a vast amount of information in real time. lndi'viduals are not (yet) cyborgs, after all. Furthermore, every individual, including the most astute strategic leaders, are susceptible to a host of cognitive biases that lead to systematic errors in our decision making. Thus, it is imperative that strategic leaders put in place safeguards, such as devil's advocacy and dialectic inquiry, to improve strategic decision making. The conclusion of our discussion of the strategic management process marks the end of the "getting started" portion of the Analysis, Formulation, Implementation {AFI} strategy framework (see Exhibit 1.4 ). The next three chapters cover the aaaiysis part of the framework, where we begin by studying enemal and internal analyses before taking a closer look at competitive advantage, rm performance, and business models. DURING THE PAST DECADE, the ZuckerbergSandberg leadership duo has created the most successful social network ever. When Sheryl Sandberg joined Facebook ir 2008, her main priority was to develop a sustainable business model from which F acebook could make money. In short, her task was to build a big advertising business. Sandberg used the same playbook that she had used so successfully at Google: rst, build a large user basein this area, Mark Zuckerberg and his team of developers excelled. Second, gather as much personal data as possible from Facebook's users, their friends, and all their activities on the open web. Not only did Facebook excel in this area as well, it also purchased additional personal data from data brokers (such as Acxiom and Epsilon) and consumer credit reporting companies (such as Experian, Equifax, and TransUnion} about each American. From these data, Facebook gathered a wide range of personal information: what each American buys. where each lives, where each works, how much money each makes, each person's trafc patterns, family activities, likes and dislikes, movies watched, restaurants dined at, and much more. Most consumers are unaware that so much personal data are being collected, which has led some critics to accuse Facebook of being a \"surveillance machine.\" Third, place micro-targeted ads using a proprietary algorithm. Facebook managed to collect a breadth of negrained and highquality consumer data, the best in the industry, which it then used to develop unique proles for each user. Advertisers then relied on these proles to place their microtargeted ads. It was precisely for this capability of accurate individual proling that advertisers (ranging from consumer product companies to presidential campaigns) were willing to pay a premium. Facebook's business modeloffering free services to end users while allowing advertisers to place nely targeted ads for a premium priceturned out to be highly protable. It would serve as the foundation for Facebook's decadelong competitive advantage. Now. however, Facebook appears to be in a deep crisis and is struggling to maintain its reputation. It has lost users' trust as well as legitimacy among many m other stakeholders including the media, politicians, and regulators both in the United States and Europe. The demands to regulate its platform more closely are gathering steam. User engagement has fallen, and the company's valuation had dropped by $200 billion during the last six months of 2018 alone. What led to this crisis? First and foremost. user privacy became a growing concern. Facebook has long been criticized for alleged lax handling of user information and an opaque privacy policy that changed frequently. In the spring of 2013, however, things came to a head when it was revealed that Cambridge Analytica, a political consulting rm, used Facebook data from millions of users (and their friends) without their consent to create micro-targeted political advertising campaigns during the 2016 presidential election in the United States. This privacy scandal compelled Zuckerberg to testify before Senate committees. where he declared that Faceboolt users \"have complete control" over which data they share. This turned out not to be true. As was reported in the fall of ZDIE, Facebook had allowed a number of tech companies, including Nettlix, Microsoft, Yahoo, Amazon, Pandora1 and Spotify, access to user data and private messages Second, Faceboolt has been criticized for becoming a news organization rattler than a social network. which has become a serious issue in the era of fake news. Roughly twothirds of Americans of all ages (and a higher percentage of youth) get their political news from social media sites. Critics, therefore, want Facebook to demonstrate a higher degree of editorial oversight, similar to the oversight demonstrated by traditional publishers. Facebook maintains that it is agnostic on news content and points to existing U.S. law (Section 230 of the Communications Decency Act), which states that internet rms are not liable for the content that is published on their platform. Third, critics and even early investors of Facebook allege that Zuckerberg and Sandberg responded too slowly to the various crises they were facing: Russian meddling in U.S. elections, abuse of personal data by third parties such as Cambridge Analytica, and Facebook's abdication of any responsibilities for the content posted on its website. Lastly, Facebook's leaders have been criticized for prioritizing exponential growth above anything else and that it failed to consider the potential downsides of creating an information platform for more than 2 billion people. Many have equated the network to \"a digital nation-state."79 Questions 1. What challenges [as detailed in this ChapterCase) is Facebook facing? How should Mark Zuclnerberg and Sheryl Sandberg deal with each of them? List each of the challenges, and make specic recommendations on how to address them. 2. Compare and contrast the strategic leadership of Mark Zuckerberg and Sheryl Sandberg. Which qualities for each strategic leader stand out to yolL and why? Where would you place each individual on the Level-5 pyramid for strategic leaders (see Exhibit 2.2), and why? Is either of them an effective strategic leader? Explain your answers. 3. Given the apparent leadership crisis at Faceboolt should Mark Zuckerberg and; or Sheryl Sandberg be replaced? Why, or why not? Explain your answers