Documente Academic
Documente Profesional
Documente Cultură
of Global Growth
Overview
This version of the eBay case has been substantially revised and extensively updated from the version that
appeared in the 14th edition. While some of the fundamental material remains the same, the case includes
new data and strategic issues that eBay’s managers must address as the company moves beyond the
traditional auction niche that it now dominates largely unchallenged and as the company drives to
continue its phenomenal growth by expanding into international markets.
In 2005 when people thought about online auctions the first name that popped into their heads was eBay.
In fact, eBay was the largely unchallenged leader in the online auction industry. Benefiting from the
network effect, eBay had created the world’s largest Webbased community of consumertoconsumer
auctions using an entertaining format that allowed people to buy and sell collectibles, automobiles,
jewelry, highend and premium art items, antiques, coins and stamps, dolls and figures, pottery and glass,
sports memorabilia, toys, consumer electronics products, and a host of other practical and miscellaneous
items. The company had also become a businesstobusiness and businesstoconsumer clearing house for
Fortune 500 companies and large governmental agencies seeking to liquidate inventories and/or other
assets as eBay’s core buyers changed from collectors to bargain hunters. Ebay’s business model had
further evolved to include more fixed price transactions with the increasing popularity of the buyitnow
option, the acquisition of Half.com and the promotion of eBay. Ebay’s product mix also broadened to
include more bigticket auctions including auto mobile, real estate, and boat sales. In 2003, eBay engaged
in forward vertical integration through the purchase of the online payment service PayPal. At yearend
2005, eBay held more than 4 million auctions per day and had over 168 million registered users. The
company’s revenues had grown from approximately $431 million in 2000 to over $3 billion in 2004. In
addition, with 2004 net income of $778.2 million, eBay was among the Internet’s elite in terms of
financial performance.
Heading into 2006 eBay had achieved the ambitious goals it set for itself in 2000 of yearly revenue of $3
billion with gross margins above 80% and operating margins of 3035%. In managing this explosive
growth eBay had successfully met a number of challenges including calming the fears of smaller sellers
that the company had “sold out” to large corporations, besting rival upstarts and large competitors, and
integrating the acquisitions of Half.com and PayPal. However, growth was slowing in the domestic
market and one issue continued to linger for eBay: international expansion.
While eBay had successfully expanded into a number of international markets, the company had
experienced grave difficulty in the large markets of Japan and China. In fact, losses were so significant
and consistent in Japan that eBay withdrew from this market in 2002. While eBay had greater success in
China in terms of users, 13.2 million, the company was still losing money in this strategically important
market by the end of 2005. To make matters worse, Yahoo! had become quite successful in China, often
at eBay’s expense, using the local knowledge of adept and unconventional management. In spite of this
intense competition and competition to come in the form of Amazon.com, eBay has repeatedly committed
itself to succeeding in the Chinese market with great potential. Thus, eBay looked ahead to new
challenges. Chief among these new challenges were the following:
(1) How could the company maintain its stellar growth rates in the face of a maturing domestic
market and an increasing threat of competition from substitutes for online auctions?
(2) How could the company successfully penetrate the Chinese market? How would they overcome
the key obstacles in successfully entering this market?
(3) What was the best way to expand internationally into countries other than China?
(4) As eBay expanded beyond the online auction industry through the use of fixed price formats, how
could it position visE0vis well entrenched rivals?
Assignment Questions
1. What is competition like in the online auction industry? What do we learn about the nature and
strength of the competitive pressures eBay faces from doing a fiveforces analysis of each segment?
2. What do you see as the key success factors for firms in the online auction industry?
3. What forces are operating in the online auction macroenvironment that have the power to alter the
nature and structure of competition in the online auction industry?
4. What does a strategic group map reveal about the positions of the major players in the online auction
industry? Is eBay in a good position on the map? Why or why not? Who are eBay’s closest
competitors?
5. What does a SWOT analysis reveal about eBay’s situation? Just how attractive is the company’s
situation and position?
6. What is your assessment of eBay’s financial performance and financial condition? Is the company in good
financial shape? Why or why not? Please use the summary of financial ratios in Table 4.1 in Chapter 4 to
guide your calculations and support your assessment of the company’s financial performance.
7. Does your competitive strength analysis like that presented in Table 4.5 in Chapter 4 for eBay and its
rivals reveal that eBay has a competitive advantage or a disadvantage in the online auction industry?
What are the sources of the advantage or disadvantage? Does eBay have a sustainable competitive
advantage in the online auction industry?
8. Is competition in the online auctions industry best described as global or multicountry? Why? Which
type of international strategy is eBay using in its international operations?
9. What types of issues does eBay need to consider when entering the Chinese market? Do you believe
the entry mode they chose was the best one? Why or why not?
10. Based on your analysis of the industry and eBay’s situation, what problems and issues does eBay’s
top management need to address? Which ones are top priorities? Which are low priorities?
11. What actions would you recommend to Ms. Whitman and Mr. Omidyar to improve the company’s
competitive position, especially its international operations, and its longterm financial performance?
Bargaining Power of Suppliers and SellerSupplier Collaboration in Online Auctions (Weak)
Software, servers, and website hosting services are readily available at competitive prices from
multiple sources. ()
Sellersupplier collaboration does not appear to be a competitive factor. ()
The only “suppliers” with bargaining clout are other high traffic websites that may be a source for
attracting Internet users to auction sites (we see these more as marketingrelated alliances for
which cash payments may be made). But such alliances/partnerships do create a “supply”
relationship of sorts, and some students may include this competitive force here (rather than in the
rivalry portion where we put it).
Competitive Pressures from Substitutes for Online Auctions (Weak)
There are lots of substitutes — classified ads, garage sales, flea markets, and live auctions but
they suffer deficiencies visE0vis online auctions: ()
High transaction costs (time, convenience)
Cover only a limited market area in terms of ability to engage and match buyers and sellers
The rapid growth and popularity of online auctions suggests that online auctions are siphoning
business away from the substitutes (a signal that substitutes are weak) rather than the other way
around (substitutes would be considered a strong competitive force if they were draining revenues
and patronage away from online auctions). So even though there are lots of substitutes, it doesn’t
follow in this instance that they represent a strong source of competitive pressure. ()
The Threat of Additional Entry into the Online Auction Industry (Moderate)
Capital requirements are relatively low except for the marketing/advertising costs of attracting
site users. (+)
Launching a website for online auctions entails costs that many entry candidates can easily
surmount.
It is hard for incumbents to retaliate with actions to cut off a newcomer’s opportunities to gain a
market foothold. (+)
The industry is growing and appears to have attractive profit prospects (a stronger likelihood of
entry). High profit potentials lure new competitors. (+)
Likely entry candidates include other Internet portals, existing online auctions looking to enter
new geographic arenas where they do not have a presence, and startups looking to establish a
niche auction for a particular product category. Startups are likely to be most successful entering
country markets where online auctions are just starting to become popular. (+)
However, the network effect is very strong and provides a significant entry barrier to potential
entrants. ()
The learning curve effect is also very strong, providing another entry barrier. ()
Customers in the online auction industry tend to have strong brand preferences and loyalty. ()
Bargaining Power of Customers of Online Auctions (Weak to Moderate)
Individuals have little if any leverage to bargain for more favorable terms of use from an auction
site operator — no one user accounts for a significant fraction of total industry sales (there are
millions of customers). However, eBay does pay close attention to what its users think—it listens
to them and responds when it thinks they have a valid point about what eBay should and should
not do. Therefore, students have a valid point when they argue that individuals are not without
some ability to express their opinion and try to influence the practices of online auction rivals. ()
Power sellers (especially sellers who list hundreds or thousands of items or bigticket items)
probably have some bargaining leverage because they list items on a regular basis: (+)
Power sellers are likely to gather information about the fees/commissions/services of rival
online auction sites.
Commissions/fees charged by an online auction site can represent a significant dollar cost to
power sellers.
Differences in fees/commissions from site to site may be great enough to induce a power
seller to switch sites (something a power seller can utilize in bargaining or at least trying to
influence the practices of online auction companies).
The products of alternative sites are largely undifferentiated (unless a power seller’s items,
for whatever reason, sell better on one site than another), which lowers switching costs.
Most switching costs are likely to be low for both individuals and power sellers; the only
significant exception would be the feedback rating that eBay members build. (+)
Site users can “vote” by their volume of items listed and by the number of bids entered;
collectively, these votes may result in “bargaining power,” but individually they are likely to
count for little (except in the case of power seller). ()
Buyer demand is growing which lessens the effect that any one user can cause. ()
Overall assessment: Students should recognize that eBay’s dominance of the online auction industry
has made that industry a fairly stable and profitable venue for incumbents. Rivalry has quieted down,
and there is no longer a battle for market share in the United States. Neither buyers nor suppliers have
significant power and there are likely to be relatively few new entrants in the domestic market.
However, it is worthwhile to push students to examine the international market and they should
realize that rivalry is much more intense in these markets due to the high strategic stakes in countries
such as India and China. Therefore, profitability in these markets may be somewhat less in the near
future.
3. What do you see as the key success factors for firms in the
online auction industry?
When considering the online auction industry, students ought to pinpoint the following KSF’s:
The ability to leverage network effects by having a large number of users and an appealing
number and variety of items auctioned
Strong image/reputation/awareness among Internet users
Appealing website features and functionality
Marketing skills in attracting quality buyers and sellers in adequate/growing numbers
Competitive fees and commissions
Costeffective website operations
Skills in creating a pleasant, compelling, and entertaining trading environment built on trust,
security/safety, and customer confidence
Figure 2
A Representative Strategic Group Map for the
Online Auction Industry and Auction Substitutes
The strategic group map reveals that eBay is in an excellent market position — it is in the best
position on the map, we think. While Yahoo! Auctions, and Amazon.com Auctions were previously
strong competitors, both have experienced significant setbacks. The most powerful
substitute/competitor is Amazon.com and as eBay continues to expand its fixed price format, the two
will come into more direct competition. Overstock.com and uBid are both poorly positioned relative
to eBay because products are exposed to a fewer number of potential buyers in these outlets and these
competitors are unable to offer a broad array of products.
Table 2
Competitive Strength Assessment of eBay and
Selected Rivals
Rating Scale: 1 = very weak; 10 = very strong
Amazon.com
Competitive Strength eBay uBid Yahoo! Auctions Auctions
Measures Weight Rating Score Rating Score Rating Score Rating Score
Image/Reputation 0.15 10 1.50 5 0.75 6 0.90 8 1.20
Size of customer base 0.20 10 2.00 5 1.00 4 0.80 4 0.80
Number/types of auctions 0.15 10 1.50 3 0.45 5 0.75 5 0.75
Website functionality
and resources 0.10 7 0.70 4 0.40 8 0.80 10 1.00
Relative fees/commissions 0.10 5 0.50 7 0.70 5 0.50 8 0.80
Relative costA0position 0.05 8 0.40 7 0.35 7 0.35 4 0.20
Global success 0.10 5 0.50 5 0.50 8 0.80 7 0.70
Customer services 0.05 8 0.40 5 0.25 6 0.30 9 0.45
User confidence 0.10
9
0.90
7
0.70
8
0.80
9
0.90
Total Rating/Score 1.00 72 8.40 48 5.10 57 6.00 64 6.80
In completing the CSA it is worthwhile to push students to justify which factors they chose to assign
the most weight. Given the importance of network effects in the online auction industry, those factors
that are most likely to attract customers — the number and type of auctions and the image/reputation
of the company — have been given the highest weight.
One might conclude that eBay has a competitive advantage in online auctions because it has
a user base exclusively related to auctions (this is not true for Yahoo! and Amazon)
a high number and wide variety of auctions
a substantial market share
seen rapid growth of power sellers
successfully launched bigticket item auctions
achieved strong financial performance
Based on the SWOT analysis and the competitor analysis, it is worthwhile to ask students if they
believe eBay has achieved a sustainable competitive advantage in the online auction industry.
Students should remember that to have a sustainable competitive advantage a firm must have
resources that are valuable, rare, imperfectly imitable, and unsubstitutable. Students are likely to
conclude that eBay does have a sustainable competitive advantage but they should be pushed to
identify the specific resources that underlie this position. They will tend to list resources such as
brand name, image, reputation, wide variety of auctions, etc. While all of these are important, most
can be summarized by the term network effect. Basically eBay capitalized on its first mover
advantage and achieved a critical mass in the online auction industry. Competitors will not be able to
build a similar resource due to path dependencies, causal ambiguity and social complexity. This
resource is also difficult to substitute since there is no equivalent strategic resource in the online
auction industry. However, it is less certain that this competitive advantage is sustainable in the more
general etailing segment where the network effect is not as important. In general etailing a
company’s reputation and their product offerings may be enough to match eBay’s network effect thus
decreasing the rarity of this resource.
11. What actions would you recommend to Ms. Whitman and Mr.
Omidyar to improve the company’s competitive position,
especially its international operations, and its long-term
financial performance?
We think the following recommendations are appropriate:
First and foremost, eBay must maintain consumer confidence and trust by:
Improving its customer service. While eBay is well positioned visE0vis online auction sites
(see Case Exhibit 8) it is marginally below the average for ecommerce retail and well below
Amazon.com. One reason for this differenomers are willing to sacrifice service for bargain prices
available on auctions, they expect more from general etailing.
Continuing to invest in technological infrastructure
The case insinuated that eBay’s performance has been unstable at best when undergoing large
growth. As the leader in the online auction industry, eBay needs to have the best
performance.
This investment may be costly but the downside of not making it is significant.
The technology improvements should help customer service. However, improving customer
service may also require the establishment of a more formal customer service department to
handle customer concerns and complaints. This would require a relatively significant
investment and would be a departure from eBay’s traditional business model. As such it
would require significant consideration prior to its implementation.
Responding to the concerns of larger sellers
Smaller sellers gave eBay its start and continue to be the lifeblood of the company. However,
if eBay is to continue its phenomenal growth it cannot ignore the needs of the larger sellers.
The best way to do this might be to continue to develop the businesstobusiness capabilities
of eBay with a separate site as it has done with eBay Motors. This site could be tailored to
large companies who want to move a significant amount of merchandise.
— This site would also allow eBay to charge different fees to the larger customers who sell
on it, thus maintaining its fairness policy and maintaining the eBay culture.
Continue strong efforts to guard against fraud by users
Threatens eBay’s reputation and can cause users to lose confidence in online auctions
Continue to aggressively police fraud and quickly suspend accounts involved in fraudulent
activity
Publicize cases of offenders who are caught and prosecuted; this would increase perceptions
of safety on the site
Next, eBay should concentrate on expansion efforts that can be implemented throughout its
international operations including:
Continue to add more auction categories
It can be challenging for users to locate the correct category for goods on eBay. Occasionally
the needed goods are located in an “other” category that is very laborious to wade through.
Additional categories would ease this concern.
This recommendation has very low incremental costs and may enhance confidence in using
online auctions
Additionally, regional/local users may become users of “main” auction site
Continue to expand fixed price sales
Customers seem to be accepting the fixed price method of selling and this provides a viable
means for continuing growth. However, to be successful in this area eBay needs to determine
if it has the skills necessary to meet customer expectations in this venue.
Fixed price transactions make eBay a stronger rival to WalMart and other brickandmortar
retailers
Fixed price transactions, like bigticket item auctions, may generate larger fees
In expanding fixed price sales, eBay needs to be careful that it maintains its culture and does
not simply become a virtual flea market selling shoddy merchandise.
Generate larger fees that will promote faster revenue growth by
Continuing to expand big ticket item auctions like used and new motor vehicles through
alliances with local dealers or regional sellers
Collaborating with local real estate brokers in conducting absolute auctions and foreclosure
auctions
Continue to explore avenues to expand through quasivertical integration including the use of
alliances.
To successfully compete against rivals in the general etailing segment and to improve
customer service, eBay will need to increase its control over the auction value chain.
For example, eBay could include a tracking system to allow customers immediate feedback
on where their purchases are in the delivery process.
Utilize cobranding and brand sharing if possible
Form partnerships with the largest eBay drop off stores or offer classes to help trading
assistants open their own eBay drop off stores
Engage in advertising/promotions designed to attract users of the Internet to visit eBay and ally
with Internet search engines such as Google.
While search engines are becoming more aggressive in commerce related activities (e.g.,
Google’s site Froogle), Whitman saw them as an enabler of eBay. Perhaps eBay could form
an alliance that allows items on eBay to be displayed on sites such as Froogle, in return for
free advertising on the eBay website.
Use banner ads on portals
Offer a free email service to eBay customers
Finally, in order to continue meeting the company’s growth goals, the company must concentrate on
continuing international expansion by:
Choosing countries where there are a considerable amount of Internet users and where use is
growing, plus where auctions are popular and customary
Considering acquisition as a means of entry, using startups when no attractive acquisition can be
found
Expanding auctions featuring large ticket items to other countries. For example, a UK, French or
German version of eBay Motors would be beneficial.
Exploring ways to meaningfully integrate the various international auction sites into a global
market
When expanding, find competent local management that understands how to market and how to
conduct business in that country. In other words, rely on a multicountry strategy.
When establishing a new user base in a new country, look to do this using one or more of three
methods:
Acquire an online auction company with a substantial and growing consumer base that has
actually turned profits and controlled costs.
Engage large, foreign corporations to use eBay as a means of distribution both globally and
locally. Specifically target companies that are well known within their country, so that this
recognition may be used for promotional purposes for eBay. Perhaps an exchange in
advertising promotions would be in line.
For countries with small but growing Internet usage, partner with Internet providers to
promote eBay and have an eBay account setup as part of the Internet setup.
Epilogue
On January 18th, 2006 eBay released its operating results for the full year of 2005. eBay performed well
and the results are provided in Table 3. Excerpts from the announcement available at http://investor.ebay.
com/financial.cfm included:
Full Year Key Financial and Operating Metrics
Consolidated Net Revenues — Consolidated net revenues totaled a record $4.552 billion, which
represented an increase of 39% from the $3.271 billion reported in the full year 2004.
Listings — eBay listings totaled a record 1.9 billion in the full year 2005, 33% higher than the 1.4
billion listings reported in the full year 2004.
Gross Merchandise Volume (GMV) — eBay GMV, the total value of all successfully closed
listings on eBay’s trading platforms, was a record $44.3 billion, representing a 30% year over year
increase from the $34.2 billion reported in the full year 2004.
Confirmed Registered Users — eBay cumulative confirmed registered users at the end of Q405
totaled 180.6 million, representing a 33% increase over the 135.5 million users reported at the end of
Q404.
Active Users — eBay active users, the number of users on the eBay platform who bid, bought, or
listed an item within the previous 12month period, increased to a record 71.8 million in Q405, a
28% increase over the 56.1 million active users reported in the same period a year ago.
Listings — eBay new listings totaled a record 546.4 million in Q405, 35% higher than the 404.6
million new listings reported in Q404.
Fixed Price Trading — eBay’s fixed price trading contributed approximately $4.0 billion or 34% of
total GMV during Q405, primarily from eBay’s “Buy It Now” feature.
Ebay Stores — At the end of Q405, eBay hosted approximately 383,000 stores worldwide, with
approximately 212,000 stores hosted on the US site.
For further updates, please check our periodically updated case epilogues at the passwordprotected
Instructor Center (www.mhhe.com/thompson) for the latest information. The online epilogues are
updated whenever we become aware of pertinent breaking news about the company and/or developments
relating to the specific issues contained in the case. Also, eBay updates can be found at eBay’s investor
relations site (http://investor.ebay.com).