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Symone Andrew Prof.

Bruton BUS 497 May 25, 2012 eBay: King of the Online Auction Industry Overview eBay, the king of the online auction industry, was created by Pierre Omidyar in 1995. Omidyar was a computer scientist who according to legend, created eBay to enable his wife to trade Pez dispensers with other collectors. Omidyar never imaged that his creation would change the course of internet history by becoming the worlds largest web-based community of consumer to consumer auctions. Since its conception, eBay has been extremely popular with three segments of consumers: bargain hunters, hobbyist and collectors, and sellers. By 1999, eBay had over 3 million items listed in over 3,000 categories on its site and more than 10 million registered users, eBay attracted 1.8 million unique visitors daily and had 375,000 items listed on its site every day. The name eBay has now become synonymous with the online auction industry. eBays first mover advantage has catapulted the firm into the realm of success. Despite some potentially devastating short falls, including: the power outages that have plagued the site in the past, trademark and copy right infringement issues and fraudulent online activities, eBay has remained competitive. All of these factors could have been detrimental to eBays market position, but eBays unique business model and strong competitive strategy have kept the firm aloft. Despite eBays past successes, Wall Street analysts predict a slow down in eBays revenue and profit growth as a result of future market share erosion. The issue addressed in this brief focuses on what more eBay could be doing to avoid future market share erosion brought on by increased competition and user risk aversion.

Current Conditions and Strategies eBay essentially created the online auction industry, setting the industry standard and forcing all other competitors to compete with such high standards that no other firm had the same amount of success. The firm had taken a strategic position as a focused differentiator, serving its three segments of consumers, with an emphasis on superior innovation, efficiency and quality. eBays differentiation strategy consists of creating difference in the form of technology, quality of service and strategic alliances. eBay modeled its business on creating a person-to-person trading community where everyone could readily and conveniently exchange information and goods. To its management team, the firms success relied on maintaining a compelling trade environment, a number of trust and safety programs, a cost-effective and convenient trading experience and strong customer affinity. To support its business model, eBay launched strategic initiatives aimed as six specific objectives: 1) growing the eBay community while strengthening the brand, 2) broadening the companys trading platform by growing existing product categories and creating new categories, 3) fostering community affinity and increasing trust and safety through services, 4) enhancing web features and functionality through the introduction of personalized features, 5) expanding pre- and post-trade value added services and 6) developing international markets. In order to pursue those objectives, eBay used three competitive tactics: creating strategic alliances at all stages of the value chain, actively seeking customer feedback in order to make improvements and actively monitoring the external environment. These tactics allowed eBay to focus on improving the firm while keeping the competition at bay.

Analysis This analysis examines conditions in the e-commerce industry. This includes online auction providers, such as eBay, online super retailers, such as Amazon.com and specialty retailers. The creators of these online retail websites offer their products and services exclusively online. The external analysis of the industry revealed many factors that could have worked against eBays growth if their business model and strategy did not contribute so strongly to their success in the industry. The internal analysis of the firm itself revealed many resources and capabilities that aided eBay in meeting its strategic objectives, enough to maintain their position as the top auction firm in the industry.

Remote Environmental Conditions: Battle ground for competition Political/Legal: Due to the growth of the internet and changing attitudes towards online retail activity, the potential for fraudulent or illegal acts, including: misrepresentation of goods, trading of counterfeit or pirated goods, failure to deliver goods, false bidding and failed payments, have become more prevalent. Online retailers must protect users from these risks in order to keep customers loyal to their services. Copyright and Trademark infringement is common online due to the anonymity of the online world. Social/Cultural: Recently, there has been a shift in attitudes towards shopping on the internet. Easy to use interfaces and risk reduction services offered by online retailers have made shopping online more appealing. Due to the fact that online shopping has gained popularity, there has also been the concern about buyer addiction to online auctions. More and more people are using online auctions as a way of escaping their problems or to increase their excitement. Technological: With the rise of the internets popularity, newly emerging internet technologies

are available to online retailers. These technologies consist of auction software packages, site hosting services and independent online auction services that provide retailers with a means of selling goods, allowed retailers to spend minimal time and effort to site upkeep and made it easier for retailers to create and operate their own web sites. International: The internets global reach allows online retailers to reach customers all over the world. Retailers websites can be accessed on a global scale, increasing the likelihood of reaching more markets. This also presents itself as a major factor in the types of partnerships and alliances that online retailers could establish, allowing them to easily create regional distinction. Demographics: Online auction participants could be grouped into three categories: bargain hunters, hobbyists/collectors and sellers.

Industry Conditions: Strong, Growing Industry Growth stage of the life cycle: In terms of growth, the e-commerce industry has ballooned, servicing millions of people around the world and bringing in billions of dollars in sales every year. It is important for firms to differentiate themselves from one another to capture market share. Global market: The growing popularity of the internet has created many opportunities for retailers to reach potential customers on an international level. As competition increases, retailers will have to increasingly differentiate themselves and solidify their presence in different regions of the world. Fragmented market: There are many different types of products, collectibles and services that can be bought and sold in various types of settings.

Industry Competitive Conditions: Porters Five-Forces reveals low profit potential Rivalry: High. The e-commerce industry is extremely competitive because of the social change in attitude towards online shopping. Many people with internet access have begun to shop online, making the online retail industry attractive to all types of online retail firms. Power of Customers: Moderate. Customers in the e-commerce industry are the buyers of the retail goods being offered for sale and the users of the services that online retail firms provide. Individual buyers have little leveraging power over large companies, forcing buyers to agree to the retailers terms and conditions. However, collectively, this group could potentially shut down a retailers operations if they were to boycott the retailer into compliance. On the other hand, users of the services that these retailers provide, such as eBay and Amazon.com power sellers carry much more weight because of the volume of sales that they bring to these firms. Power of Suppliers: Low. The suppliers of the auction software programs, web hosting, and other independent online services have little bargaining power, because of the many suppliers that are available to online retailers in the industry. However, there are some switching costs involved in changing web host or software programs. Threat of New Entrants: High. It is relatively easy and inexpensive for anybody to create their own website where they could sell clothing, collectibles or any of the other products that online retailers sell. There are few barriers to entry in the industry and the capital requirements to enter into business are minimal. The high, estimated growth in global e-commerce in the near future is attractive to new entrants who consider the large profit potential of the industry. Availability of Substitutes: High. There are numerous alternatives to online auctions and retail stores, these alternatives include: classified ads, garage sales, flea markets, collectible shows, auction houses and traditional, brick and mortar retail stores. Due to the large number of

substitutes, there are virtually no switching costs for consumers; substitutes are a significant threat to the online auction segment. Overall, the e-commerce industry shows potential for growth, but indicates that profit potential may be limited. The high degree of rivalry from both existing and potential competitors along with the availability of copious substitutes makes it increasingly difficult for firms to capture and secure market share. Companies competing in this industry will need to address the issue of differentiation to stay afloat, allowing them to maintain a strong customer base in order to ward off the competition.

Value Chain Analysis: Value-creating activities create distinction The value chain is composed of primary and support activities that sequentially add value, while revealing the key components of competitive advantage. In eBays case, the primary activities that add significant value are operations, outbound logistics, marketing and sales and customer service. The support activities that add significant value are technology development and human resource management.

Inbound Logistics: eBays entire operations centers around creating an efficient market place for buyers and sellers to exchange anything imaginable. To support this vision, Omiydar, eBays founder, developed the virtual marketplace through intricate computer networks, systems and coding. In addition to what he developed, eBay acquired data management systems and larger servers to accommodate the large amount of data needed to efficiently facilitate the transactions that were to take place on the firms website.

Operations: eBays market place serves as an online catalog where buyers can search for any item that they are looking for, while sellers can list any item that they would like to part ways with. The market place platform has been enhanced by countless features, such as picture services, which allows sellers to post pictures of the items they have for sale. In addition, eBay has two type of listing structures to accommodate sellers and their customers, these are: auction style listings and fixed price listings. Both sellers and buyers have the choice of which type of listings they will participate in. Outbound logistics: eBay serves as a meeting place for sellers and buyers, and has a responsibility to its users to aid in finalizing the transactions by processing payments, encouraging fairness and simplifying the shipping process. The firm has partnered up with other firms in order to accommodate its users. By forming alliances with firms such as: Parcel Plus, a shipping service, Trade safe, an insurance provider for sellers that guaranteed funds up to $1,200, and I-escrow, an escrow account that held money in an escrow account until the buyer received the merchandise they paid for, eBay has the capacity to support its buyers and sellers. Marketing and sales: eBays marketing tactics are primarily based on the alliances and acquisitions that the firm has made. eBays banners would be shown on a partners website in exchange for the firms cooperation. The aim was to attract new sellers and buyers to eBays online community. eBay also relied on word-of-mouth advertising, supplemented by public relations initiatives such as executive interviews and speaking engagements to successfully reach out to potential users and investors alike. Also, many national and international magazines featured eBays ads. Customer service: An important contributor to eBays success is the support that it has provided to the buyers and sellers that use its market place. Through partnerships and acquisitions, eBay

has been able to provide necessary services to both markets. For buyers, eBay partnered with Iescrow, an escrow service that ensured that buyers would receive their goods. For sellers, eBay partnered with Billpoint, a company that specialized in person-to-person credit card payment. Both buyers and sellers could benefit from the feedback system put in place to deter negative practices on behalf of both parties. Technology development: R&D is extremely important to a company like eBay, who used emerging internet technology to create a new segment in the online retail industry, that differentiated the company from its competitors. In the e-commerce industry, the emphasis on technological development is essential if eBay is to hold on to its top spot in the industry, warding off the competition. Continued efforts should be put forth, as the company continues to grow, to ensure that the marketplace can handle the amount of users and data required to run the eBay website. Human resource Management: eBays management team is a huge part of its success. Pierre Omiydars computer engineering background mixed with the business background that copresident, Jeffrey Skoll and later the experiences of Margaret Whitman was an essential asset to eBays foundation in the industry. eBays board and management team consists od many heavy hitters who have effectively executed the companies strategy thus far. When examining the firms assets and capabilities, it becomes evident that eBay has many potential competitive advantages. In order to add more value in the minds of consumers, eBay should work on creating value in the areas in which it lacks. The company should focus on the interrelationships that exist between links in the value chain, in order to capitalize on the value it could potentially create.

Resource Based View: The Resource Based View evaluates the assets and capabilities that are key to the firm. In eBays case, there are many resources, both tangible and intangible, along with capabilities that have been exploited. The resources and capabilities will be analyzed to determine if they will lead to competitive advantage for the firm.

Tangible resources: eBays tangible resources include: the many acquisitions and partnerships that the firm has formed since its conception. Intangible resources: eBays intangible resources include: their shining reputation as a safe, reliable company, their brand name which has become synonymous with online auction segment of the e-commerce industry, and the talented management the firm has in place. Capabilities: eBays capabilities include: its business model based on acting as a value added facilitator of online buyer-seller transactions, effective support services, extensive product offering, and technological expertise.

VRIN analysis: Competency Business Model Acquisitions/Alliances Brand Identity Support Services Product Offering Valuable? yes yes yes yes yes Rare? yes yes yes yes yes Inimitable? no no yes no no Nonsubstitutable? no no yes no no

Reputation Technology Management

yes yes yes

yes no yes

yes no yes

yes no no

According to the VRIN analysis, the only sustained competitive advantage that eBay has would be its reputation and brand identity, largely due to the fact that it was the first mover in the industry. eBay does have many temporary competitive advantages, including: its business model, the partnerships it has formed, the firms management team, the support services and large product offering it offers its users. In addition, eBay has competitive parity in regards to its technology development. It is clear that eBay has many valuable resources and capabilities which it has exploited to remain in the dominant position in the industry. In order to continue being the most dominant firm in the online auction segment of the e-commerce industry, eBay must find ways to create more sustainable advantages in the resources and capabilities that the firm already has.

Diagnosis In the industry life cycle, the growth stage is characterized by a fast rate of market growth, a smaller number of segments and increasing levels of competition. According to my analysis, the online auction segment of the e-commerce industry is in the growth stage of the life cycle and is categorized by those exact characteristics. The general environment posed an opportunity for eBay to prosper, as attitudes towards retail shopping online were shifting, becoming more positive and the growth of the internet allowed retailers to infiltrate new markets, domestically and internationally. Because of the opportunities presented by the general

environment, competitors soon flocked behind eBay, to share in the enormous profit potential of the new industry. Luckily for eBay, their first mover advantage along with a solid strategy process gave them enough leverage to fight off the competition. eBays organizational capabilities and goals align with the firms strategic plan, which effectively keeps eBay ahead of the competition by addressing key factors that aid in the continuous improvement of eBays services. eBays strategic plan seems to be continuously evaluated in response to the general environment and industry competitive conditions. This is a necessary step in maintaining a superior position above the competition. The firm uses it many resources and capabilities to implement its strategic plan, which has yielded profitable results for the firm as it creates distinction, increasing customer perception of eBays services. It seems as if eBay is doing everything right. To maintain its advantage, eBay should place its focus on the two main issues that may impede its growth: competition and user risk aversion, while actively seeking opportunities to diversify its product offering.

Conclusions and Recommendations To respond to the market conditions, eBay should continue to find new ways to differentiate itself in line with the six strategic objectives that the firms management team outlined for the company, as well as making an effort to curtail user concerns over the security of the online exchanges that take place in the eBay community. eBay should apply innovative thinking to all the components of the value chain processes, with an emphasis on the areas in which it lacks, such as procurement and general administration, while improving upon the components where the firm already excels. The perceived value in the minds of consumers as a result of these changes may be enough to secure eBays market share during the maturity stage,

the next approaching stage of the industry life cycle. eBay effectively leverages its core competencies by ensuring that all of its assets and capabilities fall in line with its strategy. The firms strategy falls in line with the companys mission. In short, eBay does what it set out to do. It acts as a value added facilitator of online seller to buyer transactions. eBay already integrates consumer feedback into the value chain, markets itself well, offer vast amounts of products and expands its product lines to include other types of online services to new segments of customers. The partnerships that eBay has formed over the course of its history have been an invaluable resource that if continued will keep eBays growth ahead of the competition, as the value being added to its service will continue to differentiate the firm from other firms who may be able to imitate eBays non-sustainable competitive advantages. To soothe over customer concerns over their safety online, eBay should make a greater effort to protect both sellers and buyers from fraud, non-payment, non-receipt and misrepresentation of merchandise by practicing functional benchmarking. eBay could seek out examples of the best security practices by turning its attention to banks, auction houses, museums, all of which use strict authentication and anti-fraud measures. If eBay can manage to give its users peace of mind, while expanding its global reach, the company should have no problems staying ahead of the competition.