Symone AndrewProf. BrutonBUS 497April 7, 2023

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 world’s largest web-based community of

consumer to consumer auctions. Since it’s 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.

eBay’s 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 eBay’s market

position, but eBay’s unique business model and strong competitive strategy have kept the firm

aloft. Despite eBay’s past successes, Wall Street analysts predict a slow down in eBay’s 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.

eBay’s 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 firm’s 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

company’s 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 eBay’s 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 internet’s 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 internet’s global reach allows online retailers to reach customers all over the

world. Retailer’s 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: Porter’s 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 retailer’s terms and conditions. However, collectively, this group could potentially shut

down a retailer’s 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 firm’s 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 eBay’s 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: eBay’s entire operations centers around creating an efficient market place

for buyers and sellers to exchange anything imaginable. To support this vision, Omiydar,

eBay’s 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 firm’s website.

• Operations: eBay’s 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: eBay’s marketing tactics are primarily based on the alliances and

acquisitions that the firm has made. eBay’s banners would be shown on a partner’s website in

exchange for the firm’s cooperation. The aim was to attract new sellers and buyers to eBay’s

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 eBay’s ads.

• Customer service: An important contributor to eBay’s 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 I-escrow, 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: eBay’s management team is a huge part of its success. Pierre

Omiydar’s computer engineering background mixed with the business background that co-

president, Jeffrey Skoll and later the experiences of Margaret Whitman was an essential asset

to eBay’s foundation in the industry. eBay’s board and management team consists od many

heavy hitters who have effectively executed the companies’ strategy thus far.

When examining the firm’s 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 eBay’s 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: eBay’s tangible resources include: the many acquisitions and partnerships

that the firm has formed since its conception.

• Intangible resources: eBay’s 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: eBay’s 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 Valuable? Rare? Inimitable? Nonsubstitutable?

Business Model yes yes no no

Acquisitions/Alliances yes yes no no

Brand Identity yes yes yes yes

Support Services yes yes no no

Product Offering yes yes no no

Reputation yes yes yes yes

Technology yes no no no

Management yes yes yes 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 firm’s 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. eBay’s organizational capabilities and goals

align with the firm’s strategic plan, which effectively keeps eBay ahead of the competition by

addressing key factors that aid in the continuous improvement of eBay’s services. eBay’s

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 eBay’s 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 firm’s 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 eBay’s 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 firm’s strategy falls in line with the company’s

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 eBay’s

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 eBay’s 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.