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By, R. Ahilan
Student Number: 09-9053
MN 5206 Marketing Management Department of Computer Science University of Moratuwa Sri Lanka 4th Nov 2009
Being the pioneer of the online auction industry, the eBay’s objective is to enable the community commerce via auctions. This industry began its extraordinary market boom in the late nineties. The eBay has been the company that has paved the way for this ever growing industry. The company has been formed for love and affection of the founder Peirre Omdiyar toward his (now) wife. Because of she wanted to find people with Pez dispensers to trade, Omidiyar developed a program that would allow her to trade items with other collector. He had no idea the potential that the industry held for him and many other hopeful online auctioneers when he started this for his wife.
eBay went public in September 1998 at $18 a share. By the end of February 1999, the stock was trading at $282 per share. The company market capitalization had surpassed that of even Amazon.com, making it the world’s most valuable Internet retailer. The product is Online Auction: Every day, 24 hours a day, 7 days a week, 365 days a year, millions of people from all over the world go shopping at online auctions.
The given case has the background of the eBay and its external market place with the statistics of their business performance till the year 1999. It has no analysis or evaluation of the organization and its market place. No recommendation to eBay given in the case to confront the challenges from Amazon.
The purpose of this document is to continue the case eBay, Inc with the analysis of macro environment, evaluation of business performance, analysis of the business model and recommendation to challenge the Amazon, of eBay.
2. The eBay’s Macro Environment and Online Auction Industry
Key Economic Characteristics and Conditions: The economic characteristics and conditions attracts to the firms looking for the entry into this market place (See Exhibit 2). Since the originating point of the market in 1995,
the market size and the growth rate have been increasing in speed. Because of the fact the scope of the market place is global, that is it is a large market, it is favorable for the new entries. Still there are plenty of rooms for the new competitors, because of industry is still in the growth process. There is also high profitability for firms in the online auction industry. The Competitive Forces: The industry’s competitive forces have been determined by examining the Porter’s Five Forces model (See Exhibit 2). In the industry in light, the rivalry is moderate but not too rigorous. In the analysis it has been found that, the low switching costs made the rivalry stronger with the fact that the industry is growing in the global markets weaken rivalry. Concerning the strongest forces, threat of substitutes and the potential of new entrants, the auction industry has the potential for high profits making. It attracts the new firms to enter. And also the substitutes are readily available with attractive prices. Furthermore, these are available in numerous distribution channels including the other auction sites, online stores such as WalMart. The Driving Forces: It has been identified the below as the driving forces that determine the online auction industry: 1) Growing Use of Internet: In early nineties internet was being an education tool, where it was used mainly for the academic careers. In late nineties it became a fashion. Having email accounts and being registered in famous sites like yahoo gave respects to the people. Hence more people are becoming the users of the internet, especially, in Asia and Europe. It is accessible than ever before. Since
this is creating new customers and suppliers, it has been considered as major driving force for this industry. 2) Increasing Globalization: The industry has begun to boom in America. The success of this industry has made some of the largest contenders’ branch out into the global community. eBay started to do joint venture programs to dominate in the foreign market ( e.g., eBay and AOL program, eBay and Skytel program). Amazon.com one of the eBay’s main competitors also has begun to branch out in the global market. But Yahoo.com is not interested in the global expansion, will expected to turn to failure. 3) Market Innovation: This is to spark interest in buyers to buy or sellers to sell using the online auction services. The competitors in the market are looking for ways to market their services and make it to be in a user friendly environment to attract the users. eBay is constantly adding new aspects to build customer loyalty and build a sense of community around their business. The Strategic Group Maps: The strategic group map shows where the main competitors lie with the eBay, in the industry (See Exhibit 3). The differentiating characteristics those have been taken for this determination are Degree of Service Offered and Daily Successful Auctions. The former differentiates the companies with their quality of the service in the industry and the later do the same with the daily success stories led to their profits. eBay pride themselves in leading their customers through the buying and selling process from beginning to end and beyond. Amazon.Com also offer the high degree of services as eBay but other companies are not as in depth with their services and keep to a no frill
state of mind. Yahoo.com is next to eBay in Daily Successful Auctions but it is acceptable because of their free of charge service offerings. Analysis of Competition: Based on the strategic group maps, it has been identified that Amazon and Yahoo auctions are the main competitors of eBay. A S.W.O.T analysis has been done for these competitors (See Exhibit 4), according to that it has been identified that, eBay is the dominant firm in the online industry followed by Amazon.com. Amazon.com has the best strategy to take them into the future. Other firms in the industry hold a much smaller market share compared to eBay and Amazon. Yahoo auction has also had many problems gaining ground in the industry. They were not successful in most of their global ventures and also changing fees for customers cut their membership in half. The Overall Attractiveness: The online industry is an attractive industry because of it’s below features: • • • • • Large Market Size- Global Fast growing in the market Market is still not fully saturated – More opportunities are there Good profitability Competitors: Not too many large competitors
Hence, if a firm can develop a business plan which makes them diverse, customer oriented, and unique, the potential of success is possible.
3. Business Performance Evaluation of eBay up to 1999
Gross Merchandise Scale: It has been seen continues improvement in the Gross Merchandise Scale from year 1996 to 1999. The high difference of the scale has been encountered in first quarter (1Q) of 1999 compared to the 4Q of 1998. The difference is $234000. In 2Q of 1999, $81,000 has been detected as the difference from 1Q of 1999. Registered Users: The users count has started to boom up from 3Q98. Till then it is observed that the difference of count increments are comparatively same. Auctions Listed: The number of auctions listed has the similar impact as the Gross Merchandise Scale. The reason for this could be the increase in the budget allocation in year 1999. They have doubled it compare to the allocation in 1999. Net Revenue: With just starting with $372,000, they went to $92,280,000 in 1999. This is the 45% increment from 1998 net revenue. We can see drastic improvement in their sales in year 1999. Total Assets: Believe it or not, the increment of total assets in 1999 from 1998 is nearly $830,000,000.
4. Business Model of eBay
The introduction of the business model of the eBay can be given as following: The person-to-person trading community on the internet using World Wide Web (WWW) technologies. The buyers and sellers are having the access for the trading any time and any where. They are brought together in a manner where sellers are permitted to list items for sale, buyers to bid on the items they wish. All these actions are carried forward in a fully automated way. The items are arranged by topics, and each type of the auction has its own strategy.
The eBay has its own streamlined and globalized traditional person-to-person trading with their web interface. The buyers are being facilitated by easy exploration and sellers are being enabled to immediately list an item for sale within a minute of registering. The business model has been shown in the UML use case diagram in exhibit 6.
5. Recommendation to eBay to confront the Challenges from Amazon
Expand the auction market from collectors to others by differentiating them selves by integrating the secured and cheap rate payment system. And further this will increase the credit card usage by reducing the payment amounts. Acquire a greater online auction market share by educating online customers Perfect its proprietary fraud prevention system, which is essential to its success eBay should let its customers feel that transaction through eBay will lower their costs and be more valuable eBay should cooperate with shipping companies, and ship the sellers product with their safeguards by giving a separate web page to track the status of shipping to the customer Should take action to fake online auction sites taking its market share and damaging the whole market’s reputation Should work with software developers to improve the security, efficiency and adaptability of its database Should develop real name feature for customers Should convince customers that there is no intentional bidding up behavior involved in its online auction practice Put some restrictions on new sellers in expensive merchandise transaction or large volume sale until they have a good track record Mediate between buyers and seller at Security Center. Respect both sides’ privacy. Globalization. Since eBay is a virtual marketplace, eBay can establish language localized sites in other countries that have access eBay’s full auction database. To encourage fair transactions, provide an efficient feedback system to allow buyers and sellers to benefit from collective experience, giving customers a strong social incentive to honor each transaction.
Exhibit 1: Dominant economic characteristics of the Online Auction industry in 1999
Market Size: Relatively large size of market. Expected $3.7 billion expected in year 2000 as annual revenues. Scope of competitive rivalry: Global Market growth rate: The industry is in the fastest growth and takeoff stage of the business model which makes it appealing for new firms to enter. This is because it is still not overly saturated with competitors. Number of rivals: Including eBay -5 closest competitors: eBay, Yahoo, Amazon.com, Excite and Auction Universe. The industry is not crowded with too many large competitors. Number of Registered Users: 5.4 Million (eBay with 4.75 million,80% control of whole market) Backward / Forward Integration: There is an intense drive to integrate operations. Some competitors in the industry are partially integrated. Technology/innovation: Continual advancements. Each firm can make their product superior to the others by adding new features or continually making online buying and selling easier for customer. Product/service differentiation: Minimal variation in pricing; service essentially identical. Entry/exit: Low entry barriers, less amount of capital for web site developments and hosting but large amount of capital required for marketing. Economics of Scale: Do not exist because large production does not lower cost for any of the firms in the industry. Online auctions are services.
Exhibit 2: Analysis of Competition in the Online Auction Industry
• (+)Attractively priced Substitutes products with attractive services • (+)Low switching costs to other’s services and products • (+)Products and services are readily available
• (-) Very low Seller switching costs • (-)Good substitutes exist
• (-) Rapidly growing buyer demands globally • (+) The cost offered for brands switching is very low • (+) eBay and Amazon both have powerful strategies with good business model, while the other firms are trying to catch up. • (+)Rivals are located globally
• (-) There is no standard products for buyers • (+)Low switching costs • (+)Sellers are available globally • (-)Small quantity of purchases
POTENTIAL NEW ENTRANTS-HIGH
• (+)Very low entry barriers • (+)Market is attractive • (+)Profit earnings for new firms are attractive • (+) No economies of scale • (+)Buyer demand is - 10 high. -
Exhibit 3: Strategic Group Maps
Full Amazon.com eBay
DEGREE OF SERVICE Limited OFFERED Yahoo.com
Excite Auction Universe Low High
DAILY SUCCESSFUL AUCTIONS
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Exhibit 4: S.W.O.T Analysis of Main Competitors of eBay
This S.W.O.T analysis has been performed for the main competitors of eBay: Amazon.com and Yahoo.com. This is compiled from the given information in the eBay case Amazon.com STRENGTHS 101 million U.S. adults recognized • the Amazon brand, ranking no 1 in • e-com • 8.3 million pre-registered users Facility for safe auction through insurance 95% users do credit card transactions High budget for sales and marketing-$60.7Mn $294Mn revenue only 1/8 of it is lost Well known name-High degree of service Extensive reviews of each item listed on site A9 search tool Alliances with other companies OPPORTUNITIES Continuing strategic alliances Continuing globalization Acquiring smaller auction sites to broaden and diversify their product • •
• • • • • • • • • • • • •
WEAKNESSES Free shipping policy 1.1% web traffic to auction sites Expanding globally pushed them out of number one spot
THREATS EBay’s success in the global market New entrants to the online auction industry
The degree of service is being offered by the Amazon.com is up to the standard. Since they have the best strategy like eBay, have the opportunity for continues growth and improvement. Also, they have begun to expand into global markets. Global expansion will be crucial to the future of online auction sites.
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Yahoo.com- Auctions • • • • • STRENGTHS Best known brand name Service for free of charge Numerous alliances to generate traffic Investment in technology to improve sites overall aesthetic feel Offering of extra services to users such as the Premium Sellers Program OPPORTUNITIES Joint ventures Diversification of products offered • • • • WEAKNESSES Known for anonymous email domain- Issue with trust and safety Failure in many foreign markets Decreased use after change in list fee requirements Little advertising and marketing
THREATS Globalization of online auction industry EBay’s commitment to building a sense of community to keep customers
Yahoo.com Auction is week in the online auction industry. The brand is well known for its email, search engine and other news sites, but still it is know for anonymous email domain. Yahoo must create a distinctive feature which makes them stand out from the larger competitors if it wants to survive in this industry
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Exhibit 5: S.W.O.T Analysis of eBay
Positive Strengths • • • • • • • • • • •
eBay is the pioneer of online auctions presence and recognition out side of US globally
Negative Weaknesses • • • • No verification of products being auctioned- Need search engine for the verification-Proposed No modern trends and technology used at the max level No new ventures No insurance for the product delivery, buyers have to depend on sellers. No interaction of eBay after the closer of auction Accommodate changing customer expectations, web application problems, and corporate seller difficulties
No geographical boundaries
Very good brand building Very good business model
Variety of products auctioned JV with AOL High availability- Accessible any time any where User friendly environment Preventive measures taken on trading certain items sold has established a trust on eBay Anti-fraud measures - establish a strong brand name for eBay
Opportunities • Increased market penetration • Chance to broad the trading platform into new and emerging markets • Market development in many countries outside the US • Acquisitions made and alliances formed, has given eBay to venture into new strategic paths.
Threats • Need of high tech staffs to compete- More salary • Threats from substitutes • Industry going into mature phase • eBay has not been welcomed by the culture of certain counties Ex. Japan • Attack by illegal practices. Ex. Distributed Denial of Service attacks on eBay web pages
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Exhibit 6: UML Use Case Diagram of eBay’s Business Model
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