Strategic Management of Ebay
Brief Synopsis of Case Analysis & History of eBay eBay, formerly known as Echo Bay technology, formerly known as Auction Web, was the brain child of founders Pierre Omidyar and Jeff Skoll. In 1995 Omidyar was intrigued by the idea of creating an auction site with the feel of an online garage sale Community. Rumors surfaced that Omidyar’s wife asked for the techy to create a website for her in order for her to buy, sell and trade into her collection of PEZ dispensers and other rare obscure items.
Once the website went online, the garage sale hype created a plethora of activity, forcing Omidyar and Skoll to move the site onto a business account and begin charging users a listing fee. eBay stuck to its roots of “community membership” environment, creating member feedback mechanisms, building a certain level of trust for its end users. In 1998 eBay hired current CEO Meg Whitman, who brought substantial business experience from her Harvard Business school degree and her previous ventures with Pepsi, Procter ; Gamble and Bain ; Co.
Whitman from a professional perspective implemented a focus on gathering and analyzing data in order to make capital investment decisions. eBay went public in 1998 with its stock tripling in value before the end of its first full day of trading. In the third quarter of 2004, eBay’s net revenue exceeded $800,000,000. 00. Not bad for a 9 year return on investment. During its yearly years, eBay’s revenue was mostly from collectibles (true garage sale style). Post Whitman’s entry, eBay has capitalized on product diversification by opening other product categories and specialty sites (e. g.
motor vehicles/eBay Motors) which spanned over 16,000 types of goods and they have moved into e-tailing, contrasting their auction based business by bringing about half. com. In addition to diversification, Whitman has capitalized on expansion at a multi-national level going into 28 international markets with eBay International. As recent as 2004, eBay has created economies of scope, by venturing into the online payment scene by acquiring PayPal, a well known established leader in the industry. Yet another source of competitive advantage for eBay has been via economies of scale given their sheer number of registered users.
By 2004 eBay reported 114 million registered users of which 41 million were considered active. In comparison to its competitors Yahoo Shopping and Overstock. com, eBay has an overwhelming advantage in Web presence and brand recognition. In 2004-05 an estimated average of 15. 47 million users visited eBay on a weekly basis; this compared to 2. 92 million and 1. 62 million respectively for Yahoo and Overstock. In 2001 eBay gained 64. 3% of all spending on online auctions. In 2005 there were estimates and projections indicating that 1.
807 billion items would be listed by its community of users for that fiscal year alone. Three final sources of competitive advantage for eBay have been first mover advantage by being first to market and by establishing a unique proprietary technology platform (program and code) which has been difficult even impossible to copy or imitate and finally the trust created by their unique community feedback oriented environment. A previously discussed this has allowed eBay to create and solidify brand name recognition and has created a remarkable level of trust attached to its name.
eBay has taken advantage of a successful new concept and consumer business model and good old fashioned execution by using Managerial Know-How. A new opportunity has risen for eBay to improve on its active user ratio which has become one of Whitman’s concerns. (114 million registered users of which 41 million are active) Why have the other 73 million users abandoned the site? Enter stage left, internet drop off stores. As eBay has done remarkably well, they have presented new business opportunities for many entrepreneurs. Internet Auction drop-off stores act on a consignee, consignor basis.
As the name describes, consignees drop off items they wish to sell at a certain location, allowing the consignor to list the item up for auction for a set fee plus listing costs. This allows users and even businesses who would otherwise not contemplate the navigation of the site due to time or other constraints to get rid off and profit from items they need to dispose of or in the case of business, overstock and slow moving items. The business potential of these brick and mortar stores is estimated to grow into a $20-$25 billion dollar industry.
Does Meg Whitman, on behalf of eBay want a piece of this pie? Will this help her reach segments of the population she would not have reached otherwise? Executive Summary Given eBay’s clear cut domination of the online auction industry, the focus of Whitman and the rest of the management team have been redirected onto how to maintain a strong competitive advantage over its rivals and increase economies of scope. Brick and mortar stores have not been part of their repertoire and considering the uncertainty or risk of these drop-off store ventures, what should eBay’s engagement strategy be.
Some of the challenges facing eBay concerning this venture, its growing pains and general business obstacles are, the severe fragmentation of the drop-off store industry despite a small number of major players, each of the players having a unique business format and fee structure, the lack of control over fraud due to size, diverse competition who appears to be using specialization to capture niche markets, the increase in Web-site attacks, outages and faulty billing complaints and finally the seasonality of eBay’s overall revenue as indicated by their financial statements probably due to their strategy of using only word of mouth and or online advertising.
When referring to the volatility and uncertainty of the drop-off store industry eBay should strategically consider “Vertical Integration and flexibility”. By moving from its forte business environment as is the online market, eBay is treading unknown waters. Although vertical integration into this industry would appear to be a logical step (why share the $20-25 billion potential profits with these independents) based on the uncertainty factor eBay need consider a strategic alliances more specifically non-equity alliances via licensing agreements with these independent drop-off stores to manage this exchange. By doing so eBay reduces the transaction specific investment and converts these costs into fixed rather than variable in nature. It consolidates a severely fragmented industry.
It creates value by improving current operations and facilitates entry into a potential segment of the market which hopefully encompasses the 70 plus million of inactive registered users. By being the first online company to exploit this new resource (brick and mortar drop-off stores) eBay can create unique historical conditions continuing with their first mover advantage motto. It would behoove eBay to aid in the education, of employees and managers at these stores, since using their great management and organizational prowess they will create social complexity and allow for a consistent culture up and down organization; one voice, one experience.
The control provided by these strategic alliances will allow addressing some of eBay’s most common complaints; post purchase service in the form of lack of consistency in shipping times and billing errors via requirements in contracts. One last area of concern for eBay and these independents is the variability in pricing structures. If eBay controls these price structures (Create a structured fee schedule for organization), it will be able to maintain fixed costs for consumers in order to challenge the threat of substitutes. In breaking down eBay’s value chain and in discussing one other area of concern as per the study, we address web-site attacks, faulty billing complaints and customer service.
Given these are considerable weaknesses in eBay’s organizational structure the solution could be “Vertical disintegration”. In taking this approach, eBay should seek an outsourcing strategy. Given that these services are no longer a source of competitive advantage for eBay or any other organization due to lack of rarity and reduced imitation costs, they should follow in the footsteps of other successful organizations such as Dell in order to concentrate on what they do best; online auctions. By outsourcing these services to specialized companies, they will enhance the user experience and therefore deter any attrition in their overwhelmingly superior customer base.
For both the vertical integration and vertical disintegration, the biggest setback is the potential loss of control. As we previously mentioned, it would behoove eBay to develop and maintain an educational structure for their strategic alliance partners and their potential customer service, web-site security and billing services providers, in an effort to maintain the brand name image. The external analysis performed for eBay has revealed the need to come up with new and innovating ways to: 1) make it easier for the seller to put an item up for sale and 2) give the buyer re-assurance that the item they have just purchased is what they expected.
Mergers, acquisitions and partnerships would be the strategic approach to tackle these concerns. In order to make it easier for Sellers to sell, eBay will make negotiations with top shipping companies such as UPS, FedEx, DHL and potentially seek to take over in a hostile or non-hostile manner the top three Auction drop-off companies (AuctionDrop, QuikDrop and trading circuit). These facilities will have what will be called “eBay selling stations” also known as Drop off locations where customers can drop off the items they want to sell and eBay will handle the rest. These selling stations will be aimed more for items that have a perceived value of 100 dollars or more.
The reason being is that these selling stations will ship the merchandise over to one of the eBay inspection hubs throughout the U. S. There the items will go through rigorous tests to make sure it is working properly. The selling stations will be a positive step forward for buyers because they know that the expensive item they are going to purchase has gone through an eBay inspection facility. This will reduce fraud from occurring on high end products. The cons on the other hand are that the seller will need to wait an additional 3-5 days to receive payment due to the fact that the item they want to sell will go to a facility where it will get inspected, cleaned, and categorized before going on sale.
eBay’s brand name has become highly recognized by the public as a place where you can buy and sell whatever “it” is you are interested in. In order to take it to the next level eBay will be going into a new niche market. The “it” will now also include foreclosed properties. eBay will partner up with top banks nationwide such as: Citibank, Bank of America, Wachovia, and even JP Morgan in order to bring foreclosed properties out to the public’s eye. eBay, working together with banks will provide a network of foreclosed properties for sale to the highest eBay bidder. There will be a guarantee that the properties purchased through eBay have had the titles thoroughly inspected in order to avoid fraudulent activities.
The pros to this niche market are that the eBay’s brand name will be solidified in the business world as a reputable high end dealer and a definite “one stop shop” to its consumers looking for a misc. item to buy or geared towards investing in property. The cons on the other hand are not only that eBay will going into a more expensive field of business but also the higher the possibility of fraud. Another negative aspect is the fact that there will be more legality issues in making sure the titles for certain properties are clean. Depending on the location (state) of the property there might be different regulations for purchase. These expenses have to be coordinated between eBay and the specific bank before it can be listed.
Based on the financial information on the case study it seems that eBay suffers severe downward seasonal fluctuations in revenue during the second and third quarters of their fiscal years. This is not atypical of the normal business patterns in the United States. This creates an opportunity to increase revenues during the slower quarters and create consistency throughout the year in order to simplify the process of resource planning. Based on current observations, eBay can foster sales activity by focusing on seasonal and major events advertising and also target an often neglected demographic that is the Hispanic population in the US which is projected to lose its minority status by the year 2050.
For example, for 3rd quarter earnings eBay should advertise summer related items and services including for example summer vacation packages, as well as last minute specials which would encourage people to look into eBay before going through a travel agency or websites such as priceline. com. As part of eBay’s strengths, they excel at matching a large number of buyers to a large number of sellers, therefore instead of losing their vacation packages; sellers that may be dealing with unforeseen events could recover some money back by selling it on eBay. eBay is known for adhering to advertising via word of mouth and online cross sales. By increasing advertising on media outlets such as the newspaper, radio and television they will attract customers who do not use today’s technology to compare prices when shopping.
Even though some of these customers may not be familiar with technology, when hearing the “key word” of great savings on eBay, consumers might be inclined to find a way to look into it and end up buying through eBay. Ebay should also target major media events such as the Super Bowl, Copa America in the U. S. and Copa de Oro in Venezuela to make their services known. Advertising such as the one proposed would increase traffic through the site allowing vendors of specialized items such as team shirts, hats, other apparel and memorabilia to use eBay as their sales platform instead of choosing e-tail or brick and mortar outlets. Finally, in terms of demographics and as previously mentioned, the current Hispanic population in the US is projected to increase exponentially throughout the next 40 years.
This represents a significant wealth of consumer spending for all companies not only eBay. By capitalizing on the Hispanic culture of trust and loyalty, if eBay can capture the attention of this market early in its development they could position them to be a service provider for the Hispanic community for years to come. The only setback to increased advertising is in terms of expense dollars spent, however based on the foreseeable rate of return on this investment it would be money well spent. Conclusion Based on the analysis conducted the “Vertical Integration and flexibility” suggestion appears to be the more feasible strategic managerial option.
Although vertical integration into the drop-off store industry would appear to be a logical step (why share the $20-25 billion potential profits with these independents) based on the uncertainty factor eBay need consider a strategic alliances more specifically non-equity alliances via licensing agreements with these independent drop-off stores to manage this exchange. As indicated this strategy would address some of eBay’s major concerns by improving current operations and facilitating entry into a potential segment of the market which hopefully encompasses the 70 plus million of inactive registered users. If eBay can successfully coordinate the education of employees and managers at these stores they will create social complexity and allow for a consistent culture up and down organization; one voice, one experience. They will allow address the issues of post purchase service and consistent pricing structures.
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