CHALLENGES FACING EBAY 1

The Challenges Facing eBay in 2008: Time for a Change in Strategy

Josiah Maroko

Metropolitan State University

Abstract

EBay in 2008 announced that its long-time president and CEO, Meg Whitman was to retire and pass on her responsibility to a new president and CEO, John Donahue. After the CEO transition, Donahue faced several significant challenges, including much slower growth in eBay's core online auction business, what to do to make the recent acquisition of Skype profitable, declining numbers of auction customers (chiefly due to increasing competition from Amazon's then new and popular auction site), and weaknesses in key economies across the globe.

Competitive advantage is important role in developing sustain strategies. Using porter’s five forces, this paper analyses the five factors which affect eBay strategies. These factors are major in helping the company to identify the key issues and ways of coping with complexity and change. To determine how profitable and the position of eBay in the current market, a strategic group map, weighted competitive strength assessment and financial ratios analysis were conducted. The three analyses reveal that the company is still in good standing even though there is immerse competition which results in profit margin declines. Finally this analysis looks into problems that top management of eBay is facing. With acquisition of other companies that support the company’s core business and adjusting the current strategy to encompass the company’s globalization efforts in good time the company will have good returns.

What does a five-force analysis reveal about the nature and strength of the various competitive pressures eBay faces? Are the competitive pressures facing eBay and other online auction companies conducive to earning good profits? Why or why not?

Porters Five Forces

There are five factors which affect eBay strategies and helping the company to identify the key issues and ways of coping with complexity and change of potential entrants, competitors, buyers, substitutes and suppliers.
Potential entrants:

EBay is currently in an industry that takes little resources to launch. EBay does not sell, or ship any of the items themselves, they simply act as a platform. This platform could easily be re-created, and would require a limited amount of resources to become successful. Furthermore, with industries as innovative as eBay, companies have to be able to retain new customers, which, judging by the decreasing numbers of active eBay users from 2007 to 2008, could serve as a potential risk to eBay.
Power of buyers:

If buyers are unhappy with the progress of auctions, and feel that they can get an item sooner, rather than waiting for an auction to end and fighting with several other bidders, eBay is potentially losing several customers. The majorities of eBay’s customers tend to be looking for collectors items or are bargain hunting. If eBay’s prices begin to match that of prices at local stores, eBay will lose a significant amount of market share.
Power of buyer has a direct impact to the eBay strategies. As we know, most people prefer to make purchases online in the comfort of their own homes. Adding the auction function that eBay offers, makes shopping interesting. The auction feature brings eBay more benefits by continuing focused on connecting consumers, maintaining financial discipline and capitalizing new opportunities for growth
Power of supplier:

EBay has a significant number of casual sellers and collectors constantly using eBay. Furthermore, many businesses use eBay to conduct their online sales. EBay sets a percentage of the total selling price, and those are the terms that suppliers must agree to. Currently, there are few competitive pressures from suppliers, whose only other option would be to manage their own e-commerce site that would be potentially risky for them to compete against other sellers on a better-known site like eBay.

Substitutes:

There are a number of substitutions that a consumer could make over eBay. Traditional retailers, auctions, search engines, price comparison websites, and bargain websites all threaten product substitution. The market of e-commerce is growing at a fast rate, and thus, there are several methods to purchase a product. The substitute factor reduces demand for a particular class of products as customers switch to other alternatives. EBay sells a lot of products therefore it is extremely exposed with substitutes.

Competitive rivalry:

EBay is in an information technology industry that is currently booming, and they are currently leading the auction portion. There are several companies that offer options that are similar to eBay; such has Amazon, Buy.com, or Craigslist, that all provide a similar platform. Though these companies do not use the same auction interface as eBay, they still offer the same products, at a similar price, with the appeal of many customers. However, these companies do not have the brand recognition that eBay has created. Many other companies are starting to create their online selling presence using EBay as an excellent tool, making eBay a company likely to remain a leader in online auction sales.

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?

For the major players of the online auction industry, eBay seems to be dominant leader. Amazon has a few online auctions, but currently there are not nearly as profitable as the rest of the Amazon’s core business. In terms of specifically the online auctioning industry, eBay is in one of the best positions, offering a vast variety of products, in numerous conditions. EBay also has a very strong base of customers who are loyal and trust the eBay brand, making them in excellent position. Currently and in terms of the online auction industry, Amazon is one of eBay’s biggest competitors, offering similar features for customers with a similar interest as eBay’s. Other competitors that rival with eBay include overstock, buy, and ubid among others that have insignificant effect on the auction industry.

See appendix 2

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.
According to the financial analysis preformed, eBay is currently showing a decrease in profitability over the past several years. When eBay launched, it became highly profitable and showed great growth. For several years it continues to grow till roughly 2005 when it hit a slowing growth stage. Though eBay has excellent numbers and are very profitable still, they are not nearly as profitable as they were. For example, when looking at the return on assets, eBay went from almost 11% to 8.9%, and dropped from 8.9% to a low of 2.31% from 2005 to 2007 (Appendix 1). According to the financial analysis, eBay needs to revitalize themselves, and expand their company both in product and in place, expand globally, in order to achieve high profitability.

See appendix 1

Does your weighted competitive strength assessment (as per the methodology in Table 4.4 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?

According to the competitive strength assessment, eBay currently has advantages in the area of product diversity and brand name. EBay has long been the leader in the online auction industry, giving them an excellent competitive advantage when it comes to branding and reputation of the company. However, eBay does have some disadvantages where Amazon and overstock are gaining ground, particularly in the areas of customer service and guarantees. Amazon and overstock are able to do this, because they are more involved in the selling and buying of products, allowing them to guarantee satisfaction much easier than eBay.

Currently, eBay does not appear to have a far enough advantage to be able to sustain themselves as leaders in the online auction industry. EBay will have to differentiate themselves from their competitors and re-evaluate the main strategies in order to be as profitable and show continued growth in the future.

See appendix 3

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?

EBay’s top management under the direction of John Donahue face several basic problems and issues that they need to address. First, the needs to address its core business, online auctions in a way that that can give the company more market share. Looking in acquisitions that are relevant to the company’s business and those that fit with the preferred strategy can aid the company in achieving its financial goals. Secondly, the eBay need to improve and pay more attention to all of its subsidiaries. Concentrating on improving these subsidiaries and linking all of them together to create a powerful synergy will improve eBay business. Thirdly, the feedback forum is helpful in many ways, re-evaluating and making sure it is organized should be one of eBay’s best moves.

There are some issued that are critical to business operations that should be prioritized to keep the company running well. First, the Company had started towards the right track in acquisition of other companies. Re-defining the company strategy to encompass these acquisitions and expanding business beyond just auctions will positively impact eBay business. Secondly eBay should work on further globalization of its business and expand into emerging markets. By doing this the expected traffic will increase. In addition, increased traffic will help in maintaining a large customer and seller base. This will eventually contribute to overall success.

Works cited

Thompson, A, Strickland, A, & Gamble, A. (2010). Crafting and executing strategy. New York, NY: McGraw-Hill.

APPANDIX 1

EBay Financial Ratios / 2005 / 2006 / 2007
ROA / 10.98 / 8.94 / 2.31
ROE / 12.77 / 10.74 / 3.10
Operating Profit Margin / 31.75 / 23.80 / 8.00
Net Profit Margin / 23.80 / 18.86 / 4.54
Current Ratio / 2.14 / 1.97 / 2.3
Quick Ratio / 1.8 / 1.59 / 1.87

APPENDIX 2

EBAY STRATEGIC GROUP MAP

Amazon

Strong

Weak
Extensive Minimal

APPENDIX 3

EBAY COMPETETIVE STRENGTH ASSESMENT

EBay / Amazon / Overstock
Key Success Factors / Weight / Rating / Score / Rating / Score / Rating / Score
Brand Name / 0.2 / 10 / 2 / 10 / 2 / 9 / 1.8
Customer Service / 0.15 / 7 / 1.05 / 8 / 1.2 / 6 / 0.9
Product Diversity / 0.25 / 10 / 2.5 / 8 / 2 / 6 / 1.5
Guarantees / 0.15 / 6 / 0.9 / 7 / 1.05 / 7 / 1.05
Advertising / 0.1 / 8 / 0.8 / 7 / 0.7 / 6 / 0.6
Technological Advances / 0.15 / 9 / 1.35 / 9 / 1.35 / 8 / 1.2
Overall3 Strength Rating / 1 / 50 / 8.6 / 49 / 8.3 / 42 / 7.05