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Running Head: CHALLENGES FACING EBAY
The Challenges Facing eBay in 2008: Time for a Change in Strategy
Josiah Maroko
Metropolitan State University
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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.
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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
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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
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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
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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
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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.
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Works cited
Thompson, A, Strickland, A, & Gamble, A. (2010). Crafting and executing strategy. New York,
NY: McGraw-Hill.
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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
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APPENDIX 2
EBAY STRATEGIC GROUP MAP
Amazon
Amazon
Buy.c
om
EBAY
Strong
OVESTOCK
.COM
UBID.C
OM
Weak
Extensive
Minimal
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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