A Written Analysis Of the eBay Case Study

Presented To: Professor Patrick Kreiser Ohio University College of Business Athens, Ohio

Presented By: Tamesha Acoff, Jeff Kurt & Ashley Smith Ohio University College of Business

Athens, Ohio November 9, 2004 eBay Strategic 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 need to create an environment that encourage large corporations to buy and sell, and the opportunity to explore possibilities for further vertical integration. Early in the case analysis it was mentioned that the internet usage was high in the United States and expected to increase dramatically through out Europe, the Asia Pacific region, and Latin America. This in mind, eBay needs to evaluate its strategies to ensure it can hold a dominant presence as a global online auction firm. These strategic issues can be translated into recommendations for eBay There are five external forces that impact businesses. These forces, known as Porters Five Forces, are: rivalry among competitors, threat of Professor Kreiser 9/21/2013 Page 2

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 of the internet, increasing globalization, technological change, and changes in the long-term industry growth rate. These driving forces will all have an impact on the industry, determining the direction in which it is headed. eBays ability to keep pace with these changing driving forces will determine whether or not it is likely to stay competitive within its industry. The key success factors of an industry determine whether or not a company is competitive within certain areas that are considered important within the industry. If a company takes advantage of these factors, it is better able to Professor Kreiser 9/21/2013 Page 3

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 and breadth of product selection and categories, and strategic alliances, partnerships, and acquisitions. The weaknesses that eBay needs to focus on center around changing customer expectations, web application problems, and corporate seller difficulties. eBay has numerous opportunities that should be taken advantage of if it hopes to continue to play a dominant role in the industry. For example, t has the potential to explore international markets and broaden the trading platform.

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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 should act as a support system responsible for maintaining a trading environment that is helpful and appealing to sellers and buyers. eBays business model incorporates trust and safety programs, cost-effective and convenient services, and the philosophy of strong community affinity to help it act as a facilitator of trade. The business model developed by eBay allows the company to set forth the ways in which it will follow through on its goals for customers and the business alike.

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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 industry in regards to two main categories that competitive companies are likely to possess. The two proficiencies that are important within the online auction industry are a strong amount of security for consumers and a sense of community within the trading environment. eBay has both a high amount of security and sense of community, placing it in the best position on the map relative to its competitors. Amazon is eBays most significant competitor, with positioning just slightly below eBay, while BidVille and ePier prove to be the least significant competitively. Professor Kreiser 9/21/2013 Page 6

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. Our final recommendation for eBay is for the company to explore its options with vertical integration. eBays established brand name and reputation make it a considerable to be considered. We recommend for eBay to integrate into the shipping aspect of the buying and selling experience. An ideal partnership would require all eBay buyers and sellers to use UPS as the primary shipper in all geographic locations where UPS is available. This partnership would provide incentives for eBay as well as advertising opportunities on the eBay website for UPS. eBay would share in a percentage of the profits resulting Professor Kreiser 9/21/2013 Page 7

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 trillion b. Online retail is expected to reach $229.9 billion by 2008, which represents a 19% growth since 2003, and 25%, or $57.5 billion, of the expected 2008 figure is expected to come from online auction sales. *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 where business-to-business e-commerce is expected to triple between the years 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 specialty retailers (Blockbuster, Home Depot, Ticket Master). *Buyer Needs and Requirements: h. Users are looking for firms that are highly user friendly and provide excellent customer service. New users are often concerned about the potential risks of e-commerce and these users want a firm with a positive reputation that will ensure their private information will be safeguarded. i. Users technological needs/wants are becoming increasingly diverse, but this is large due to, and in correlation, with the overall technological advancements that are occurring regularly. *Production Capacity: j. New competitors have entered the industry but have not yet been able to take any considerable market share from the industry leader, eBay. Further, the increase in competition does not appear to have any effect on listing prices or profit margins. *Pace of Technology Change: Professor Kreiser 9/21/2013 Page 9

k. Technology advancements are a key to differentiating in this industry, thus the pace is rapid and ongoing. At the same a firm that is constantly upgrading and change its appearance and functions may frustrate users who are forced to continuously re-learn to how use a site. In turn these frustrated users my switch site, which is easy 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 heightened security/privacy to its users when for items off of its site. ii. Many online auction firms have partnerships with shipping companies which they then encourage/require their buyers and 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 of new capabilities. At the same time is important for the firms to up to date on the services offered. n. First to market tactics has thus far proved beneficial and are recommended 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 financial rewards from their look-a-like strategy. p. Other firms, not wishing to compete directly with eBay are taking differentiation approaches that will put them into new markets, both nationally and abroad. *Economies of Sales: q. The only strong presence of economies of scales in the industry is in advertising. A big reason why eBay is so much more successful hem its competitors is because most of the general public has never heard of uBid and doesnt know that Amazon.com offers online auctioning. *Learning and Experience Curve Effects: r. No single firm is experiencing significant cost advantages, due to learning curve effects, that are unavailable to other firms. s. eBay learned in the mid 1990s that it would not experience a decreasing in listing due to charging sellers a reasonable listing price, which allowed eBay to expand and become incredibly lucrative. Professor Kreiser 9/21/2013 Page 10

t. Yahoo Auctions, on the other hand, did learn that by charging too high 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 geographic markets *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 industry *Power of Buyers (Moderate) -Buyer demand is strongly increasing -Buyer switching costs are low -Sellers brand reputation is important -Quantity and quality of information about the products and their sellers are available to the buyer

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APPENDIX C: Driving Forces *Growing use of the internet As internet usage increases, more businesses and individuals will look online to purchase goods that they normally purchased elsewhere, thus increasing internet sales. Internet usage is expected to grow especially in developing countries, which will also drive the online auction industry. *Increasing globalization In order to stay competitive in the online auction industry, it is imperative for companies to take advantage of the increasingly globalized market. The global market is expected to expand drastically in the near future, so companies must take advantage of this segment. *Technological changes As 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 rate The online auction industry is expected to grow significantly over the coming years; therefore, companies will be forced to capture as much of the expected revenue as possible.

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APPENDIX D: Key Success Factors *Breadth of Product Categories and Selection Having a wide variety of products and product categories for users to choose from is key. Providing customers with extensive product information and including pictures of the merchandise will make the site more useful for them. *Strong E-Commerce Capabilities Having a user friendly web site that is understandable, easily navigable, and easy to use is important. Providing the customer with an emotionally engaging web experience by some personalized aspects will help the customer feel more comfortable. Having the ability to handle the large amounts of traffic and transactions will also contribute to the ease of use for the customer. *Ability to Generate Traffic to the Site Generating traffic in the form of both new and returning customers is very important. A site has to have enough new things happening to keep customers coming back and it also must have the outlets to reach new customers. *Ability to Build Trust Online and Protect Community Members Auction web sites have to appease customers concerns about the possible theft of credit card numbers and the possible sale of personal information to marketing firms. They must also protect customers from fraudulent sellers. Another key thing for auction web sites to do is to foster trust between bidders and sellers and to instill a sense of security among traders.

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APPENDIX E: SWOT Analysis *Strengths Competence 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 navigate through 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 eBay is the best place to trade person-to-person. It has a large local, national, and global presence, which makes its customer base so wide, that a customer can virtually find anything that they wanted or needed on eBay. And for the sellers, they have the largest customer base that they could have amongst the online auction sites. *Weaknesses Increased expectations Web applications are slower and more error prone Not able to support the needs/wants of large corporate sellers *Opportunities Growth in internet usage in international markets Broaden the existing trading platform Increase the use of Trading Assistants and Drop-off eBay consignment services Professor Kreiser 9/21/2013 Page 15

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, fixed price shopping, etc.) Supply imbalances as the number of sellers grow, supply will begin to outstrip demand, or as the number of buyers grow, demand will begin to outstrip 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 Differentiation eBay uses a broad differentiation strategy in order to attract customers and encourage them to prefer eBays services over its competitors. eBay differentiates itself by offering unique services such as My eBay and About Me. My eBay allows customers to acquire access to information regarding their buying and selling activities. About Me is designed to allow users to create personal home pages that feature user ratings, a list of items that they are selling, and personal information with pictures. eBay also differentiates itself with its easier to use, more reliable site that features the largest amount of items for sale. *Business Model eBays business model is designed to: -create and maintain a person-to-person trading community in which buyers and sellers can readily and conveniently exchange information and goods -function as a facilitator that supports trading -maintain a competitive trading environment with trust and safety programs, cost-effective and convenient services, and strong community affinity -revolve around three profit centers: the domestic business, the international business, and payments

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APPENDIX G: Competitive Strength Assessment (Weighted)

Rating scale: 1=Very Weak; 10=Very Strong

Amazon's Rating

BidVille's Rating

Amazon's Score

BidVille's Score

Yahoo's Rating

Yahoo's Score

ePier's Rating 5 5 4 5 4 5 3 5

eBay's Rating

uBid's Rating

Key Success Factors / Strength Measure Reputation / Image Financial Resources Customer Service Capabilities Variety and Breadth of Product Selection Web Site Traffic Network of Buyers and Sellers Sense of Community Security Sum of Importance Weights Weighted Overall Strength Rating

Importance Weight 0.10 0.10 0.15 0.15 0.15 0.05 0.15 0.15 1.00

8 9 8 10 8 7 7 8

0.8 0.9 1.2 1.5 1.2 0.4 1.1 1.2

8 8 8 7 7 7 5 8

0.8 0.8 1.2 1.1 1.1 0.4 0.8 1.2

7 7 7 7 7 6 5 6

0.7 0.7 1.1 1.1 1.1 0.3 0.8 0.9

7 6 7 7 6 7 4 7

0.7 0.6 1.1 1.1 0.9 0.4 0.6 1.1

5 5 5 6 5 5 4 6

0.5 0.5 0.8 0.9 0.8 0.3 0.6 0.9

0.5 0.5 0.6 0.8 0.6 0.3 0.5 0.8

8.2

7.2

6.5

6.3

5.2

4.4

After completing the Competitive Strength Assessment (Weighted), the results show that eBay is ranked first among online auction sites. EBay has the dominant amount of market share so them ranking in first place is no surprise, they obviously have to be doing something right to keep the large amount of market share that they have.

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ePier's Score

eBay's Score

uBid's Score

APPENDIX H: Competitive Market Positions of Selected Online Auction Providers

eBay Amazon

uBib

Yahoo

BidVille

ePier

High

Low

Sense of Community
* Circles are drawn roughly proportional to the size of each companys financial resources.

Through out the case study it was stated that eBays upper management believe that the keys to eBay are to provide an online community to its users and ensure a high level of security to in order to combat against any apprehensions users may have about making transaction online. Viewing this strategic group map it is apparent that eBays tactics prove valid.

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APPENDIX I: An Analysis of eBays Financial Performance 2003

Net Profit Margin
equals NI/sales

2002
20.6%

2001
12.1%

2000
11.2%

1999
4.3%

1998
8.4%

1997
17.1%

20.7%

Return on total assets

equals NI/total assets

7.7%

6.2%

5.4%

4.1%

1.0%

4.9%

125.7%

Gross Profit Margin

equals (sales - cogs)/sales

80.8%

82.4%

82.0%

77.9%

74.4%

81.3%

79.7%

Return on Stockholders Equity

equals NI/total stockholder equity

7.7%

6.1%

5.4%

4.1%

1.0%

4.9%

125.7%

Operating Profit Margin

equals profs. before taxes & interest/Sales

29.1%

29.2%

18.8%

8.1%

-1.5%

14.8%

24.1%

Current Ratio
equals current assets/ct. liabilities

331.5%

380.2%

490.6%

491.5%

517.7%

395.8%

441.9%

Debt-to-assets ratio
equals total debt/total assets

15.9%

12.0%

14.9%

14.3%

11.6%

32.8%

28.2%

* All numbers in thousands of dollars.

2003
Current Assets Total Assets 2,145,8 82 5,820,1 34

2002
1,468,4 58 4,040,2 26

2001
883,8 05 1,678,5 29

2000
675,4 64 1,182,4 03

1999
459,8 34 963,9 42

1998
97,5 90 149,5 36

1997
4,9 67 5,6 19

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Current Liabilities Total Liabilities Sales Cost of Goods Sold Net Income Total Stockholders' Equity Profits (Loss) Before Taxes & Interest Total Debt

647,2 76 923,8 92 2,165,0 96 416,0 58 447,1 84 5,820,1 34 629,2 41 923,8 92

386,2 24 483,7 53 1,214,1 00 213,8 76 249,8 91 4,124,4 44 354,1 97 483,7 53

180,1 39 249,3 91 748,8 21 134,8 16 90,4 48 1,678,5 29 140,4 26 249,3 91

137,4 42 168,6 43 431,4 24 95,4 53 48,2 94 1,182,4 03 34,9 94 168,6 43

88,8 25 111,4 75 224,7 24 57,5 88 9,5 67 963,9 42 (3,37 3) 111,4 75

24,6 56 48,9 98 86,1 29 16,0 94 7,2 73 149,5 36 12,7 65 48,9 98

1,1 24 1,5 86 41,37 0 8,4 04 7,0 61 5,6 19 9,9 83 1,5 86

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