eBay was founded in the San Jose living room of Pierre Omidyar back in September 1995. The basic vision Omidyar had when he founded what became eBay was to create a person to person trading community based on democratic market principles; these principles allowed for a free flow of information, communication and ultimately transaction on tens of millions of items through the internet.
Along with the help of Meg Whitman, a skilled branding manager, and a senior staff from such heavily branded companies as PepsiCo and Disney, they established a strong mission for the company- that eBay be a company that is in the business of connecting people, not selling them things. This founding vision set the course for eBay’s explosive growth from 1996-2003, making it the world’s online marketplace for the sale of goods and services by a diverse community of individuals and businesses.
II. eBay’s Business Model Since its inception in 1995, eBay has become the market leader and innovator in the online auction industry and its brand has accordingly become synonymous with e-commerce. Rapid growth and being the first to market served eBay’s competitive strategy of differentiation well; there was really nothing like it out there: unique service, broad range of products and global reach.
In addition, their target audience was quite diverse-on the buyer side you had everyone from hobbyists and collectors to the bargain hunters; on the seller side you had antique dealers, casual sellers, mom-and-pop businesses selling unique items and finally large well-known corporations liquidating their inventory. Buyers and sellers are brought together in a manner where sellers are permitted to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items in a fully automated way.
The items are arranged by topics, where each type of auction has its own category. In terms of its core compentencies, eBay has both streamlined and globalized traditional person-to-person trading in the national and international arena, which had typically been conducted through such forms as garage sales, collectibles shows, flea markets and more, with their web interface. Their web design facilitates easy exploration for buyers and enables the sellers to immediately list an item for sale within minutes of registering. Bay considers the national and international auction operations as two out of their three profit centers. The third profit center is their payment operations, such as their PayPal business; although not considered a core competency, the payment business has grown considerably with eBay’s acquisition of PayPal in 2002. I will discuss the profit center figures in more detail under the financials section. III. Industry Analysis: Background In terms of the online auction industry, eBay’s main competitors have been both the traditional offline auctions, as well as online auction sites.
Both the off- and online companies are fragmented and regional in nature, representing a difficult and expensive way to connect buyers and sellers, and typically offer a narrow group of goods to the consumer. More recently, eBay has ventured into the competitive ring of traditional retailing on the web with their fixed price offerings such as Half. com, competing against other internet retailing powerhouses like Amazon. com. However, eBay is now up against other multi-distribution retailers-those brick and mortar retailers, such as WalMart and Target, who also sell items from their websites.
Internet usage in general grew dramatically in the 1990s. With the internet came online retailing. The U. S. and Western Europe account for a majority of the internet users along with the customers in online retailing. However, internet usage is reaching a saturation point in the U. S. and Western Europe. Yet, this is a factor of the stage of development these countries are in; for developing nations high growth in internet usage is still expected but even that is predicted to slow to no more than 20% annually in the future.
These developing nations are also seen as high growth for the online retailing industry which is forecast to reach $229. 9 billion in 2008. In terms of the online auction industry, it is forecasted to be about 25% of online retailing or approximately $57. 5 billion. In terms of any internet industry, including the online auction industry specifically, technology is vital. Continual innovation is necessary to maintain a competitive advantage. For online auction sites, technology advancements in terms of security, ease of transaction, and communication is a necessity for survival.
The online auction industry is dominated by eBay, holding a 93. 6% market share at the end of the third quarter of 2003. Amazon is the next in line with a meager 1. 1% market share. The remaining competition is very regional in nature which could pose an issue to eBay in looking for expansion opportunities. Porter’s five forces Entry/Exit Barriers: The competitive environment of the online auction industry is dominated by eBay, and has oligopolistic tendencies. However, the market can be entered and exited fairly quickly and easily. Little capital expenditure is required for start up.
New companies can set up auctions at will on their own websites with little hassle and only the software development costs. However, a new entrant into the online auction industry is faced with the dilemma of attracting members. Buyers: Buyers are a heterogeneous group comprised of both private individuals and businesses. These customers of eBay have little bargaining power; only the auction site controls who is on and who is not on its site, yet it is the buyers and sellers who decide and arrange on payment as well as distribution. Bay strives to create flawless software for easy item listing for its sellers. A typical eBay customer pays eBay twice for each transaction, once when the item is listed, and again when the item is sold and the final price is set. For the most part, customers are pleased with this service for a number of reasons depending on the size of the customer-it allows businesses to clear out old inventory, and to sell items without having to spend money on shelf space or storage, while it allows the average person to make some money while at the same time cleaning out their closets’.
Because the eBay bidder network is so large, eBay sellers know that their items get more exposure, which usually equates to a higher price than if they were to sell it locally. Suppliers: The online auction industry is fragmented in this area as some sites such as uBid. com and Amazon. com had their own warehouses which stocked inventory from suppliers, whether it be refurbished goods at uBid. com or books and CDs at Amazon. This has been where eBay has shown great strategic acumen. Bay was not in the business of selling; they did not have the costs of inventory or distribution. eBay was merely a broker, never actually taking possession of any merchandise, which places the company in a much more profitable position than some of its competitors. In addition to these traditional suppliers, there were other suppliers that were unique to e-commerce in general, such as software programmers-security coders, developers of customer service management technology (CTMS) and end stage value chain services such as shipping and distribution.
Again, eBay seemed to have one up on the competition by attending to the entire value chain of an online auction-from the time an item is listed to when it is paid for and shipped to the buyer. eBay formed and strengthened strategic partnerships such as their alliances with companies to ensure the payment of the item to the seller (Tradesafe and I-Escrow), and shipment to the buyer (UPS and USPS). eBay was also not afraid to acquire businesses which may better serve their community such as the online payment service, PayPal. This attention to the value chain eliminates any pressures from suppliers that many online companies face.
Substitutes: The substitutes for eBay are not as clearly defined as for a company like Netflix. com. Many of eBay’s sellers have unique and hard to find products making eBay the primary marketplace for these items. Since eBay sellers offer both new and used products, eBay vendors compete with both online, and bricks and mortar retailers. Competition: eBay is the dominant player in the online auction industry. The strategy mapping of the online auction industry in Exhibit 2 gives a visual of eBay’s three main competitors-Amazon. com, Yahoo. com and uBid. com. Yahoo! nd Amazon were late movers but are now actively competing with eBay. These competitors may have healthy financials, high brand awareness and similar technology and software for their customers, but they have nowhere near the scale of bidders and sellers for their auction sites. In addition, the high brand awareness may not come necessarily from being an online auction site. As a result, their auction variety has never reached the level of eBay because they can not attract the diversity and magnitude of sellers that eBay has.
This is not for a lack of trying from both competitors; what might be the issue is that both Yahoo! nd Amazon. com offer have slightly different core competencies, allowing them to provide different value-added services -Yahoo! as a global search engine and Amazon. com as the book and music mogul turned online superstore. uBid. com had to discontinue its consumer to consumer auction services and now only serves large corporate clients, despite having had almost 15% of the online auction industry market share in 2000. Thus, they have a limited variety of auction items, along with little in the way of brand awareness.
eBay is estimated to have 93. 6% of the market share in late 2003, Amazon auctions is next in line with 1. %; that leaves a little over 5% market share for the rest of the competition. With the advent of fixed price selling, eBay is now facing a new industry structure-that of the broader online retailing. Competition comes in the form of traditional brick and mortar retailers, catalogue sales, and other online retailers, such as Amazon. com. eBay’s SWOT analysis eBay’s SWOT analysis (See Exhibit 3) reveals a dominant company with many strengths and serious weaknesses. So far, eBay has been able to keep their weaknesses in check by addressing each of them.
Out of the three weaknesses, the most significant-inability to sell high volumes-is actually not in line with their vision and may not impact their revenues significantly if those items/sellers are dropped. In terms of their opportunities, eBay is already involved in these opportunities and seeing success. Threats beyond their control-technology threats, political unrest and currency volatility-not only affect them but would also affect their competition. IV. eBay Financials At the time of the case, eBay was going into its fourth year of its five year strategic plan.
They had set incredibly ambitious objectives but they were well on the way to making them-$3 billion in revenues, gross margin target above 80%, and target operating margins of 30-35%. Exhibit 3 reveals that they were already at $2. 1 billion in revenues, gross margin at 81% and an operating margin at 29%. All the company needed was to grow in revenues by 40% and improve another 1% on their operating margin-modest growth compared to the growth experience eBay was used to-and they would hit their targets a year ahead of schedule. In addition, eBay was experiencing phenomenal market response through their stock price.
In just a year (2003-2004), eBay’s stock price climbed over 85% (based on estimate of exhibit 11 in case). In terms of its three profit centers-U. S. operations, International operations, and payment revenues-Exhibit 4 outlines the actual breakdown of revenue in 2001 and 2002. The majority of revenue (48% in 2002) comes from U. S. operations but this is forecast to decline over the coming years. The International operations make up the second largest revenue stream with about 37% in 2002 with some growth beginning in 2005, having jumped some 84% from the year before.
The payment growth had the most outstanding growth rate of 421% for the year from 4. 7% to 15. 1%. However, with the acquisition of PayPal, the continued growth of payments is not to surpass 30% annually from 2004 on. V. Summary and Recommendations EBay’s strong technological competence and sound financial structure have facilitated the organization’s ability to deliver, and continually improve on its core competencies of being an online marketplace and to ultimately achieve its competitive advantage. Losing market share could occur if eBay strays from this core competency.
The formula for eBay’s success has been its remarkable attention and management of its community concept. eBay’s management rightfully believes that their online auction format is competitively superior because of the free flow of information, the sense of community, the global reach and the millions of different items they offer. Their amazing ability to align their competitive strategy with the vision of eBay has attracted many sellers and buyers and built their strong brand image based on the democratic principles of the marketplace.
These principles are a main draw to eBay over the competition and have attracted the attention of not only the casual seller but also the businesses wanting a broader distribution. Which leads me to the following recommendations: For the short term: 1) eBay should not change its policies to appeal to large corporate sellers looking for high volume sales. If they were to change fee structure and policies to meet these sellers demands, they would be going against their founding vision-eBay was meant to connect person to person, not mammoth superstore to person.
This strategy has not been successful for the large sellers and thus, it is not successful to eBay (which means no revenue). Solving this distraction would allow eBay to focus efforts on other growth areas and not tarnish its brand image/loyalty. 2) eBay should continue to find ways to improve on the entire eBay experience. This will not only satisfy current customers which means repeat buyers, but it would draw in new ones: the easier, safer and more appealing it is to sell on eBay, the more customers would respond to their value proposition.
Improvements should include expanding the categories and offerings within categories, continuing to partner along the value chain, and continuing to innovate and improve upon the existing software to promote transaction ease. Management should reinvest revenues into new product development and service enhancements through technology. The performance metrics study conducted by Empirix in 2003 should not be an alarm that customers are not satisfied with eBay.
The metrics under consideration do not seem to be the metrics that eBay customers are concerned with. eBay should continue to use its own measures of customer satisfaction (e. . , town hall meetings, web postings, eBay chats, etc. ) to guide them in improving on their services. 3) eBay should not expand its fixed-price offerings. Currently, they have Half. com and the Buy-it-Now feature for some auctions. This allows choice among members but it does not force the buyer to pay a fixed price. Again, a big draw to eBay is the sense one is getting a good deal and bargain hunters are believed to make up 52% of eBay users. A fixed price, even if below cost, may discourage this large segment to buy because they may think they are not getting a bargain if they can not set the price.
My recommendation is to shelf the expansion of this strategy until the community clamors for it. 4) Finally, with regard to the long term, eBay must concentrate its efforts in geographic expansion. Future estimates of revenue growth have the U. S. operations declining while the international operations begin to slowly rise. There are certain risks to this; unlike its competitors, eBay cannot expand in the traditional sense of offering new product lines. Geographic expansion, particularly in the Asia and Eastern Europe provide real opportunity and this expansion can include establishing joint ventures and equity alliances.
These nations continue to grow in reliance on the Internet and are in the midst of surging economies. eBay’s strong marketing expertise and dominant position in the market should be leveraged in these new markets. Currency, political and legal issues are the major concern with geographic (international) expansion but those same concerns would be faced by the competition. eBay has proven itself successful as the first to market-it should use its experience to be the first to market in places like India or Poland.