The Strategic Position of E-Bay - Essay Example

Running Head: THE STRATEGIC POSITION OF E-BAY The Strategic Position of E-Bay in Harvard Style by Table of Contents Abstract 3 Introduction 3 Internal Analysis 3 Financial Analysis 3 Marketing Analysis 4 Human Resource Management Analysis 5 Operations Analysis 5 Strengths and Weaknesses 6 External Environment Analysis 7 PESTEL Analysis 7 Porter's Five Forces Model 8 Key Success Factors 9 Opportunities and Threats 9 The Strategic Position of eBay 11 Recommendation 11 Appendix 1 13 Appendix 2 14 Appendix 3 15 Appendix 4 16 References 17 Bibliography 19 1.0. Abstract This report aims to recommend the most efficient strategic direction that eBay can take in order to cope with its maturing market. In order to do so, it will look at the strategic direction of the company through the use of strategic management techniques. The internal factors affecting eBay are evaluated through financial, operations, human resource management, and marketing analyses. On the other hand, the company's external environment is considered through PESTEL, Five-Forces Model, and Key Success Factors. In the end, this report recommends that eBay develop and implement a business to business exchange. 2.0. Introduction The success and even the mere survival of a business organization are strongly linked to its ability of utilizing its core competencies in crafting an efficient strategy as a response to the trends and challenges in its business environment. The phenomenal success of eBay is one of the most documented dotcom stories as it features the specific factors that an online retailer needs in order to survive. However, with the maturity of its market, the online auction store is threatened by a market slowdown and other environmental pressures (Thomson, Strickland, and Gamble 2006). Thus, the organization needs to put in place a strategy which can bolster its growth. 3.0. Internal Analysis 3.1. Financial Analysis The financial situation of eBay can be best understood by using an annual statement analysis which considers the trend and the significant financial ratios of the business organization. Appendix 1 highlights the computed financial ratios of eBay based on the audited annual report that it filed in the SEC during 2005. During 2005, eBay generates total revenue of $4.55 billion, a double digit growth of 39% from the 2004 level. Of this, 82% accounts for gross profit, 32% translated into operating income, and 24% is recorded as net profit. eBay finances its resources with less risky equity. In fact, the company has a resource structure of 15:85 in favor of stocks. This implies that the online auction firm has a relatively smaller amount of interest obligation which it can easily pay with its huge income. The company can more than pay off its immediate obligation, having a current asset account which is more than twice its current liabilities. eBay, though, has a low return to equity of 11% (see Apendix 1). 3.2. Marketing Analysis The phenomenal success of eBay is directly linked to its efficient marketing strategy. The business organization segments its market according to their interests into six categories namely, bargain hunters, hobbyist and collector buyers, professional buyers, casual sellers, hobbyist and collector sellers, and power and corporate sellers (Thomson, Strickland,& Gamble 2006). Being an online operator, eBay has succeeded to provide a user friendly website with unique features to make buying and selling easier and more convenient to customers. As a global player, eBay captures each locale through the use of customized platform that reflects the unique culture, values, and language of each country (eBay 2007). The company succeeds in satisfying the needs and wants of its various customers through the provision of venue where buyers and sellers can find the items that they want with the price that they are willing to pay (eBay.com 2007). Ebay should is also widely recognized because of its success in advertising its services (Woda 2006). 3.3. Human Resource Management Analysis As of December 2005, eBay reports that it employs approximately 11,600 people (excluding 1,000 employees), 6500 of whom are located in the United States. Due to its global operation, the company has also resorted to hiring employees outside the United States (eBay Annual Report 2005). The company strongly supports workforce diversification giving an equal opportunity for employment regardless of the applicant's race, color, religion, marital status, sex, national origin, and "physical or mental disability or medical condition" (eBay.com 2007). Aside from monetary compensation, eBay motivates its workforce through the use of non-monetary incentives, benefits, and rewards like pet insurance, onsite massage, hot oil, hair cut, and others. 3.4. Operations Analysis The business organization's value chain is simple and is quite easy to comprehend. It should be noted that eBay is a mere provider of venue where buyers and sellers can directly interact with each other. One of the loopholes in the company's operation is its very complicated pricing scheme-there are fees when a seller lists a products and when the item is finally sold together with optional fees which are based on various factors and scales (eBay 2007). This complex fee system lessens the operational efficiency of eBay. It should be noted that this fee structure also varies from region to region. Because it is only a provider of trading platform, eBay also has little control of the transaction between its customers exposing itself to risks and threats of fraudulent activities which can taint its reputation and can adversely affect its operation (Woda 2007). Ebay's operational results have also been seasonal with revenues strongest during the first and the fourth quarter (eBay Annual Report 2005). 3.5. Strengths and Weaknesses The strengths of eBay can be listed as follows: Size and Scope. It is irrefutable that eBay is the world's largest online auction store with the largest customer base and the highest website traffic (Thomson, Strickland, and Gamble 2006). The company's international and online operation enables it to reach its customers anywhere in the world. Wide Selection of Goods. Compared to other online auction stores, eBay is not constrained in offering a certain product line or product category. The company offers almost anything on earth enabling it to attract customers with diverse interests and buying habits. Strong Brand Equity. Being one of the first movers in its industry, eBay has already established a name in online auctions (eBay 2007). This is coupled with the efficient marketing strategy of the firm which bolsters "brand recognition" in customers. Financial Strengths. Ebay continues to post growth in total revenues, gross margin, and net income. The company's preference of using equity in financing its resources gives it a less risky financial structure (Richardson 2006). On the other hand, eBay's weaknesses are as follows: Operational Problems. As discussed above, eBay's efficiency is adversely affected by operational problems like its complex fee structure, seasonal sales, and lack of control in its customers' transactions and interactions. Technological Problems. The online business model of eBay which requires the intensive use of technology posts several problems like outages and service downtime (eBay Annual Report 2005). Recently, the security of eBay's information system is questioned (Goodin 2007). Slower Growth. Analysts have expressed their concerns regarding the slower growth of eBay (Richardson 2006). This presents speculations on the company's ability to sustain its market leadership. 4.0. External Environment Analysis 4.1. PESTLE Analysis Political. Being an international player, eBay is required to adjust to the political systems and regulations present in the countries where it operates. For instance, eBay needs to face the challenge in dealing with the Chinese government as the latter strongly favors local companies (eBay Annual Report 2005). Economic. The global economic landscape becomes more favorable for eBay and other online auction stores. It should be noted that Asian economies like China and India are rapidly catching up with the rest of the western world (Teeling 2006). Economic development boosts the purchasing power of buyers and encouraging spending. Social. There is an ever increasing usage of internet worldwide (Internet World Statistics 2007). However, social factors have not yet fully eroded the wariness of customers in online shopping. Technological. Technological advancement has facilitated the creation of internet capable mobile handsets which makes online shopping more accessible. Legal. Online auctions have become the subject of tighter legal regulations due to alleged violations of intellectual property rights, fraud, and other unethical practices (eBay 2007). Environmental. Companies are increasingly becoming concerned about sustainable development and social corporate responsibility (Thomson, Strickland, & Gamble 2006). 4.2. Porter's Five Forces Analysis Barriers to Entry/Exit: Moderate to Low Establishing online presence entails very low start-up costs. What a potential entrant needs is an efficient marketing strategy to attract new customers and build a name in the industry. Ebay is partly insulated from the threat of new entrants because of its relative size, scope, and brand equity. Supplier Power: Low The operations of eBay and other online operators are typically companies which provide the domain name and other strategic partners like shipping and credit card companies. Ebay's operation has a higher leverage compared to its suppliers. Buyer Power: High Due to the intense rivalry in online auction, technological development, availability of information, and lack of switching costs customers can easily seek the services of other competitors. Intensity of Rivalry: High With the slower growth and influx of new participants, industry players are enhancing their services lowering their costs, and adding attractive features in a quest to retain and snatch market share. Threats of Substitutes: High Aside from other online auction stores, eBay competes with traditional market for goods. The company is also in competition with stronger domestic firms in foreign countries. 4.3. Key Success Factors An online retailer's success is strongly linked with its ability to create and bring traffic to its website or stickiness, expertise to provide a user friendly platform which facilitates easy and convenient transactions, and capability of eliminating the wariness of customers to shop online (Thomson, Strickland and Gamble 2006). Secondary to these are the provision of a wide array of choices for customers, adequate and correct product information, excellent customer support, system reliability, and quality of search tools (eBay Annual Report 2005). 4.4. Opportunities and Threats The opportunities for eBay are listed as follows: Deeper Penetration in International Markets. As internet becomes widely available to more users, eBay can take advantage of this through a more extensive advertising strategy. Elimination of Information Asymmetry. This can boost the confidence of customers in online shopping and eliminate fraudulent activities. Ebay can do this by a seller certification process. Making PayPal Services Available to Other Countries. Economic developments abroad should encourage eBay to offer PayPal services in nations where these are currently unavailable. This will facilitate trade within geographical boundaries. Offer Business to Business Services. Ebay can use its competencies in designing a venue where business to business e-commerce can be facilitated. The threats that eBay faces are listed as follows: Regulatory Requirements and Legal Uncertainty. This include "regulation of internet services, auctioneering, professional selling, distance selling, communications, banking, and money transmitting" (eBay Annual Report 2005). This poses threats as these regulations can prohibit eBay from selling certain products or prevent enforceable agreements between buyers and sellers. Exchange Rate Fluctuations. As an international player, eBay can be adversely affected by foreign currency devaluation which can make its revenues and income significantly lower when reported in dollars (eBay Annual Report 2005). Online Security Risks. Online auction stores are exposed to threats from hackers which can access private information about the company and customers. Hypercompetitive Environment. As discussed above, eBay currently operates in an environment where rivalry among participants is more intense and higher bargaining power is higher. This requires eBay to launch more aggressive strategies to depend its market share. 5.0. The Strategic Position of eBay After its phenomenal success, eBay is facing the challenge that every business organization in a maturing industry. The company has succeeded in establishing a name in the industry. With its quest for growth, eBay becomes an international player further giving it access to profitable markets. However, the company suffers from operational problems, slow market and revenue growth, and negative publicity. In summary, eBay requires a potent strategy in order to sustain its growth and take advantage of the market opportunities. The company is operating in a hypercompetitive industry where intense competition and higher buyer bargaining power are the key concerns. 6.0. Recommendation Based on the analysis of alternative strategies for eBay (shown in Appendices 3 and 4), it is recommended that the business organization develop and implement a business to business exchange for manufacturers, suppliers, distributors, retailers to use. Ebay can market this service to its large number of affiliates and partners allowing them to enhance efficiency while lowering the overall costs of the company through economies of scale. It is irrefutable that the transaction in business to business e-commerce is mounting both in volume and amount. Since the company is already employing an online business model, it can readily use its resources and capabilities in capturing this segment. This will give eBay a new market and open up a new business opportunity. In developing this new service, eBay should create a website which will be exclusively devoted to its new customers. Since business to business exchange requires more excellent customer service, eBay should hire more personnel and assign a staff to each account in order to build lasting relationships. The company can use its strong brand equity to market this service to potential clients. This strategy is expected to generate higher revenue for eBay. Since the company will be seeking out small and medium business organizations, the chance of fraudulent activities will be unlikely. Thus, eBay is also building confidence in its whole community eliminating customers' wariness of shopping online. In the case of corporate clients, this new service will significantly bring down the cost of sourcing inputs and other needed materials and simplify buying process. Appendix 1. Computed Financial Ratios for eBay (2005) Financial Ratios 2005 Gross Profit Margin 0.82 Asset Turnover 0.39 Operating Margin 0.32 Net Profit Margin 0.24 Return on Equity 0.11 Interest Coverage 446.48 Debt to Equity 0.17 Current Ratio 2.14 Appendix 2. Porter's Five Forces Model Appendix 3. Alternative Strategies for eBay Appendix 4. The Winning Strategy References eBay 2007, Retrieved 28 February 2007, from http://en.wikipedia.org/wiki/EBay eBay Annual Report 2005, Retrieved 28 February 2007, from http://files.shareholder.com/downloads/ebay/99177895x0x43771/6D8B8042-3A58-4050-BF9F-52D1F5BE5F06/AnnualReport2005.pdf eBay's Year-End Earnings Report 2007, Retrieved 28 February 2007, from http://blog.tmcnet.com/beyond-voip/fundinginvestments/ebays-yearend-earnings-report.asp eBay.com. 2007, Retrieved 28 February 2007, from http://www.ebay.com Goodin, D. 2007, Mysterious "Vladuz" Again Hacks Employee's Servers, Retrieved 27 February 2007, from http://www.theregister.co.uk/2007/02/23/vladuz_strikes_again/ Richardson, T. 2006, eBay Revs Up But Disappoints Market, Retrieved 28 February 2007, from http://www.theregister.co.uk/2006/04/20/ebay_disappoints/ Teeling, E. 2006, Ebay Quitting China, Retrieved 28 February 2007, from http://www.bivingsreport.com/2006/ebay-quitting-china/ Thomson, A., Strickland, A.J. & Gamble, J. 2006, Strategy: Winning in the Marketplace: Core Concepts, Analytical Tools, Cases, New Jersey: Mc-Graw-Hill Woda, S. 2006, How Do You Sell Profitability at eBay, Retrieved 28 February 2007, from http://blog.swoda.com/blog/2006/09/whats_wrong_wit.html Bibliography Adams, J. 2005, Analyze Your Company Using SWOTs, Supply House Times, Vol. 48 Issue 7, pp. 26-28. 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