a case analysis of ebay4143

7/29/2019 A Case Analysis of Ebay4143

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A Written AnalysisOf the eBay Case Study

Presented To:Professor Patrick Kreiser

Ohio UniversityCollege of Business

Athens, Ohio


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Athens, OhioNovember 9, 2004

eBayStrategic Analysis

eBay is currently the top-ranked online auction company within its

industry, with nearly one-third of U.S. internet users registered on its site. The

company is a substantial threat internationally as well, competing in the Asian,

European, and Latin American markets. The online auction industry commands

significant revenues that continue to increase to the projected amount of $229.9

billion by 2008. (Appendix A) The outlook for both eBay and the online auction

industry holds great promise, as is evidenced through the study of Porters five

forces, the driving forces of the industry, key success factors, a SWOT analysis,

a breakdown of strategy and business model, eBays financial status, and eBays

positioning in the market. eBay must also keep in mind the key strategic issues

facing the company.

Key strategic issues include the need to reach international markets, the


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potential entry, threat of substitutes, power of suppliers, and power of buyers.

The strongest of these forces in the online auction industry are the threat of

potential entry and the threat of substitutes. The attractiveness of the industry

and the increasing buyer demand for services such as eBay contribute to the

strong threat of potential entry. The threat of substitutes, such as Amazon.com

or Yahoo auctions, is significant because there is a low cost incurred in switching

to these substitutes and the substitutes are readily available.

The power of buyers in the industry is moderate. Buyers have somewhat

of an influence on online auction companies; however, the power is neutralized

by the high demand from buyers and the need for a strong brand reputation. The

rivalry among competitors and the power of suppliers are considered to be weak

forces for the industry.

The driving forces of an industry are the factors that will influence the changes

that are likely to occur within the industry and is competitive environment. The

most significant driving forces within the online auction industry are: growing use


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meet the demands of its customers and maintain a strong position in the market.

The key success factors of the online auction industry are: a breadth of product

categories and selection, strong e-commerce capabilities, the ability to generate

traffic to the site, and the ability to build online trust and protect community

members. eBay is very competent in these areas. The company provides the

largest variety of products for sale. Its services are well-known throughout the

industry, and they provide customers with comfort and a piece of mind that they

are safe and protected.

A SWOT analysis allows a company to determine its strengths,

weaknesses, opportunities and threats. A companys strengths are its

competencies within the company, while its weaknesses are the areas it needs to

work on within the company. Both opportunities and threats are present within

the industry, and both represent changes that could change the positioning of a

company. eBay has several strengths. Within this category, its distinctive

competencies include: a strong business model and effective strategy, a variety


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Potential threats for eBay include the threat of substitutes and supply

imbalances.

eBays strategy is a global one, given the fact that they compete in both

domestic and international markets. The companys corporate strategy

incorporates the ideas of expanding services and the trade platform, building the

markets, enhancing its current services, and fostering community affinity within

eBay. These elements of the corporate strategy were designed to figure into the

companywide game plan that sets the standards for the business.

eBays business strategy uses broad differentiation to attract customers.

The companys goal is to stand out as a leader in the industry, providing unique

services and opportunities for its customers. Two of these services that are keys

in eBays differentiation approach are My eBay and About Me. eBay also

attempts to differentiate itself from its competition by creating a user-friendly and

more reliable site.

The business model used by eBay is based on the belief that the company


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A weighted competitive strength assessment of eBay and its competitors

uses the key success factors of the industry and weights them to determine a

companys standing within the industry. Five of the eight key success factors

were given a weight of 0.15, the highest ranking, while a network of buyers and

sellers was given the lowest weight of 0.5. eBay received the highest score

followed by Amazon and Yahoo.

Financially eBay has been almost literally an overnight success. Its current

ratio percentages, which have always been above 300%, peaked in 1999 due

largely due to a highly successful second offering of stock that produced and

additional $600 million in capitol (See Appendix _, Current Ratios). Although

eBay experienced a lower then average return on total assets in 1999, most

likely due to the second release of stock, the firm has enjoyed a positive return

on total assets from 1996 through 2003. This implying that eBay does have the

capitol to invest in itself, and/or further integrate vertically.

A strategic group map shows the positioning of the companies within an


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The key strategic issues that face eBay translate into recommendations

for the company. Our first recommendation for eBay is to take advantage of the

growing internet usage occurring in international markets. Developing countries

are seeing a significant growth in internet usage; therefore, eBay needs to

explore the opportunities these markets provide. By advertising and creating

partnerships with local portals, eBay will be able to establish itself as the industry

standard in the online auction industry.

A second recommendation that we have for eBay is centered on its

relationship with large corporate sellers. Corporations have expressed

dissatisfaction with eBays fairness policy that does not provide them with extra

incentives. We suggest a separate community within the eBay site that allows

professional organizations to conduct business-to-business transactions. By

creating a special site for these users, eBay is not alienating its bargain hunters,

hobbyists, collectors, small professional buyers, casual sellers, and hobbyist and

collector sellers, and it is not compensating its fairness policy.


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from UPS shipments of eBay products in return for guaranteeing a certain

amount of product to be shipped. UPS would be ensured of a certain volume of

shipping and would then receive complementary advertising on the eBay website

to encourage users to use the service even when not transacting on eBay.

eBay is currently the leader in the online auction industry; however, it is

important for the company not to lose sight of its goals and opportunities. The

company must continue to update and strengthen its strategy, improve upon its

weaknesses, and take advantage of its opportunities. eBay must also compare

its position in the industry by utilizing a strategic group map and competitive

strength assessment to see that its still at the top. Finally, by considering the

previously stated recommendations, eBay will have the capability to maintain its

position as the industry leader as well as the financial backing to consider new

horizons.


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APPENDEX A:Dominant Economic Characteristics of the Online Auction Industry

*Market Size:a. 2004 e-commerce revenues forecasted to be $6.79 trillionb. Online retail is expected to reach $229.9 billion by 2008, which

represents a 19% growth since 2003, and 25%, or $57.5 billion, ofthe expected 2008 figure is expected to come from online auctionsales.

*Scope of Competitive Rivalry:c. Rivalry has the ability to occur on a global level because industry is

completely available online in numerous languages and countries.d. It is becoming increasingly important for members of this industry to

have an international presence, especially in Europe wherebusiness-to-business e-commerce is expected to triple between theyears 2003 and 2006.

*Number of Rivals:e. There are currently too many rivals to count in this industry, and the

number of potential rivals is potentially infinite.f. The key rivals in the industry include: Amazon auctions, BidVille,

eBay, ePeir, uBid, and Yahoo Auctions.g. Other mentionable rivals include: portals (Yahoo,) search providers

(Google,) online retailers (Wal-Mart,) catalog/mail-order companies,

import/export companies, brick-and-mortar retailers, and specialtyretailers (Blockbuster, Home Depot, Ticket Master).

*Buyer Needs and Requirements:


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k. Technology advancements are a key to differentiating in thisindustry, thus the pace is rapid and ongoing. At the same a firm that

is constantly upgrading and change its appearance and functionsmay frustrate users who are forced to continuously re-learn to howuse a site. In turn these frustrated users my switch site, which iseasy to do since there is a zero dollar switching cost.

*Vertical integration:l. Some of the larger competitors in the industry are taking measures

to increase integration levels.

i. eBay purchased PayPal to ensure heightenedsecurity/privacy to its users when for items off of its site.

ii. Many online auction firms have partnerships with shippingcompanies which they then encourage/require their buyersand sellers to use

*Service Innovation:m. Service innovation is not a key success factor because users often

prefer a site that is not constantly changing and offering all sorts ofnew capabilities. At the same time is important for the firms to up todate on the services offered.

n. First to market tactics has thus far proved beneficial and arerecommended in offering next generation services.

*Degree of Product Differentiation:o. Several of the smaller firms in the industry were created to be eBay

look-a-likes; however, these firms are not seeing great financialrewards from their look-a-like strategy.

p. Other firms, not wishing to compete directly with eBay are taking


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t. Yahoo Auctions, on the other hand, did learn that by charging toohigh of a listing fee to users listing will decrease dramatically.


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APPENDIX B:Porters Five Forces

*Rivalry Among Competitors (Weak)-Low switching costs-Rapidly growing demand and market-Different sizes and different capabilities of companies-Different services provided by different companies-Fewer than five major competitors in online auction industry

*Threat of Potential Entry (Strong)-Pool of entry candidates is small-Strong companies in industry are earning sufficient profits-Buyer demand is growing rapidly-Existing competitors in industry are looking to expand into growing

geographicmarkets

*Threat of Substitutes (Strong)-Good substitutes are readily available-Low cost in switching to substitutes-Price of substitutes is comparable-Substitutes dont always offer comparable service and variety

*Power of Suppliers (Weak)-Items are readily available from many suppliers-Low switching costs to different suppliers-Substitute suppliers are readily available-Suppliers are very unlikely to integrate forwards into online auction


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APPENDIX C:Driving Forces

*Growing use of the internetAs internet usage increases, more businesses and individuals will look

online to purchase goods that they normally purchased elsewhere, thusincreasing internet sales. Internet usage is expected to grow especially indeveloping countries, which will also drive the online auction industry.

*Increasing globalization

In order to stay competitive in the online auction industry, it is imperativefor companies to take advantage of the increasingly globalized market. Theglobal market is expected to expand drastically in the near future, so companiesmust take advantage of this segment.

*Technological changesAs technology changes, companies will be forced to stay competitive with

the new available services they are able to offer customers.

*Changes in the long-term industry growth rateThe online auction industry is expected to grow significantly over the

coming years; therefore, companies will be forced to capture as much of theexpected revenue as possible.


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APPENDIX D:Key Success Factors

*Breadth of Product Categories and SelectionHaving a wide variety of products and product categories for users tochoose from is key. Providing customers with extensive productinformation and including pictures of the merchandise will make thesite more useful for them.

*Strong E-Commerce CapabilitiesHaving a user friendly web site that is understandable, easilynavigable, and easy to use is important. Providing the customer withan emotionally engaging web experience by some personalizedaspects will help the customer feel more comfortable. Having the abilityto handle the large amounts of traffic and transactions will alsocontribute to the ease of use for the customer.

*Ability to Generate Traffic to the SiteGenerating traffic in the form of both new and returning customers isvery important. A site has to have enough new things happening tokeep customers coming back and it also must have the outlets to reachnew customers.

*Ability to Build Trust Online and Protect Community MembersAuction web sites have to appease customers concerns about the

possible theft of credit card numbers and the possible sale of personalinformation to marketing firms. They must also protect customers fromfraudulent sellers. Another key thing for auction web sites to do is tofoster trust between bidders and sellers and to instill a sense of


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APPENDIX E:SWOT Analysis

*StrengthsCompetence

Good customer service

Large volume of transactions

Core Competence

Recognized market leader

Strong brand name image

Low transaction costs

Solid financial condition

High global presence

Feedback forum

Compelling and entertaining trading environment

Fixed-price capabilities and specialty sites

Established trust and safety programs

Intuitive user interface that was easy to understand and navigatethrough by both buyers and sellers

Distinctive Competence

Strong business model and effective strategy

Variety and breadth of product selection and categories

Strategic alliances, partnerships, and acquisitions

Competitive Advantage


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Changing customer needs for new products/services (specialty sites)

*Threats

Competition

Industry going into maturity phase

Threat of substitutes (retail shopping, other e-commerce shopping, fixedprice shopping, etc.)

Supply imbalances as the number of sellers grow, supply will begin tooutstrip demand, or as the number of buyers grow, demand will begin tooutstrip supply


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APPENDIX F:Strategy and Business Model

*Corporate Strategy-Broaden the existing trade platform-Foster eBay community affinity-Enhance features and functionality-Expand value-added services-Continue to develop U.S. and international markets

*Business-Level Strategy: Broad DifferentiationeBay uses a broad differentiation strategy in order to attract customers

and encourage them to prefer eBays services over its competitors. eBaydifferentiates itself by offering unique services such as My eBay and About Me.My eBay allows customers to acquire access to information regarding theirbuying and selling activities. About Me is designed to allow users to createpersonal home pages that feature user ratings, a list of items that they areselling, and personal information with pictures. eBay also differentiates itself with

its easier to use, more reliable site that features the largest amount of items forsale.

*Business ModeleBays business model is designed to:

-create and maintain a person-to-person trading community inwhich

buyers and sellers can readily and conveniently exchangeinformation

and goods-function as a facilitator that supports trading


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APPENDIX G:Competitive Strength Assessment (Weighted)

Rating scale: 1=VeryWeak; 10=Very Strong

Key Success Factors /Strength Measure

ImportanceWeight e

Bay'sRating

eBay'sScore

Amazon's

Rating

Amazon's

Score

Yahoo'sRating

Yahoo'sScore

uBid'sRat

ing

uBid'sSco

re

BidVille'sRating

BidVille'sScore

ePier'sRating

ePier'sScore

Reputation / Image 0.10 8 0.8 8 0.8 7 0.7 7 0.7 5 0.5 5 0.5

Financial Resources 0.10 9 0.9 8 0.8 7 0.7 6 0.6 5 0.5 5 0.5Customer Service

Capabilities 0.15 8 1.2 8 1.2 7 1.1 7 1.1 5 0.8 4 0.6Variety and Breadth ofProduct Selection 0.15 10 1.5 7 1.1 7 1.1 7 1.1 6 0.9 5 0.8

Web Site Traffic 0.15 8 1.2 7 1.1 7 1.1 6 0.9 5 0.8 4 0.6Network of Buyers andSellers 0.05 7 0.4 7 0.4 6 0.3 7 0.4 5 0.3 5 0.3

Sense of Community 0.15 7 1.1 5 0.8 5 0.8 4 0.6 4 0.6 3 0.5

Security 0.15 8 1.2 8 1.2 6 0.9 7 1.1 6 0.9 5 0.8Sum of Importance

Weights 1.00 Weighted Overall

St th R ti 8 2 7 2 6 5 6 3 5 2 4 4


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APPENDIX H:Competitive Market Positions of Selected Online Auction Providers

eBay

Amazon

BidVille

uBib

Yahoo


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APPENDIX I:An Analysis of eBays Financial Performance

2003 2002 2001 2000 1999 1998 1997Net Profit Margin 20.7% 20.6% 12.1% 11.2% 4.3% 8.4% 17.1%

equals NI/sales

Return on total assets 7.7% 6.2% 5.4% 4.1% 1.0% 4.9% 125.7%

equals NI/total assets

Gross Profit Margin 80.8% 82.4% 82.0% 77.9% 74.4% 81.3% 79.7%

equals (sales - cogs)/sales

Return on Stockholders Equity 7.7% 6.1% 5.4% 4.1% 1.0% 4.9% 125.7%equals NI/total stockholder equity

Operating Profit Margin 29.1% 29.2% 18.8% 8.1% -1.5% 14.8% 24.1%

equals profs. before taxes & interest/Sales

Current Ratio 331.5% 380.2% 490.6% 491.5% 517.7% 395.8% 441.9%

equals current assets/ct. liabilities

Debt-to-assets ratio 15.9% 12.0% 14.9% 14.3% 11.6% 32.8% 28.2%

equals total debt/total assets

* All numbers in thousands of dollars.

2003 2002 2001 2000 1999 1998 1997

Current Assets2,145,8

821,468,4

58883,8

05675,4

64459,8

3497,590

4,967

Total Assets5,820,1

344,040,2

261,678,5

291,182,4

03963,9

42149,5

365,619

Professor Kreiser

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Current Liabilities647,2

76386,2

24180,1

39137,4

4288,825

24,656

1,124

Total Liabilities923,8

92483,7

53249,3

91168,6

43111,4

7548,998

1,586

Sales2,165,0

961,214,1

00748,8

21431,4

24224,7

2486,129

41,370

Cost of Goods Sold416,0

58213,8

76134,8

1695,453

57,588

16,094

8,404

Net Income447,1

84249,8

9190,448

48,294

9,567

7,273

7,061

Total Stockholders' Equity5,820,1

344,124,4

441,678,5

291,182,4

03963,9

42149,5

365,619

Profits (Loss) Before Taxes & Interest629,241

354,197

140,426

34,994

(3,373)

12,765

9,983

Total Debt923,8

92483,7

53249,3

91168,6

43111,4

7548,998

1,586

Professor Kreiser

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a case analysis of ebay4143

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