External environment of EBay within the framework of Porters Five Force analysis

Bizning Vakil By Bizning Vakil, 9th Jul 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/15qyvbgr/
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This paper critically analyzes key problems that EBay faces and a competitive external environment of the industry by use of Porters Five Force analysis. Then, it uses VRIO analysis to focus internally at eBay’s core competencies in order to determine whether those strengths provide with competitive advantages. Value Chain analysis is done and Porters generic strategy and Ansoff Matrix is applied to strategic planning use of IS in future. Finally recommendations based on analysis undertaken

Introduction

IT has been developing very fast and affecting business environment all over the world. Some businesses have taken the use of the IT technology development as a key advantage and attribute whilst others fail to face immense competition in the new era of technology (as an example Kodak). EBay is one of the internet based businesses which has been using IT and IS as tool to make money and create value to its customers. EBay is an Internet auction site, which was founded by Pierre Omidyar, a computer programmer, who devised a code to make online auction available through internet and sold broken laser for $14.83 as an experiment in 1995(1). EBay’s mission statement “is to provide a global trading platform where practically anyone can trade practically anything.”(2) There is millions of people trade on eBay every day, and it gets a commission from sellers at every transaction made. EBay provides free service to buyers and cheap for sellers. By only charging the sellers, it makes sure that buyers don’t have to worry about accidental charges from shopping there and sellers learn not to over-list and abuse the system. EBay is also good for the environment in that many things that would have otherwise ended up in landfills instead end up in a new home. It lowers the barriers of trade due to ease of use. It also does not feel very artificial in that a lot of the things you need to worry about in real world transactions also apply to eBay such as the integrity of the sellers/buyers.

Key Problems

There are two main issues faced by eBay that it is trying to address. The first and most obvious of which is competition. Just like practically every industry, there are other players that want a slice of that market. These competitors include Yahoo! Auctions and Overstock.com. EBay wants to have the largest user base to try to fend off this competition, so in this market, it has to try to lure those customers over from its competitors. Also with competition, it wants to limit the power of Drop-Off sites while they are still relatively small so that they don’t pose more of a threat in the future. While eBay may be ahead in the US market, Yahoo! Auctions is more popular in Asia. EBay must consider its competition in each different market because, as was just mentioned, in some they may have the lead whereas in others they may not. The second issue has to do with the perception of risk in purchasing from online auctions. Because, for the most part, all the sellers are unknown to the buyers, they cannot be completely sure that the seller is legitimate. While the option of feedback does help to ease that fear to an extent, the feedback can also be faked relatively easily. While most people feel relatively comfortable buying smaller to midsized items online, they tend to not be as comfortable when buying big-ticket items. For example, an average customer would feel perfectly fine when buying a book or a movie, but they would be far more hesitant when buying a car or a house on eBay. While you generally don’t have to worry about the smaller items, with the large items, most people like to inspect the items before the purchase. Unfortunately, because of the nature of the eBay ecosystem, that item could be on the other side of the planet, which makes it very unlikely that you will be able to inspect it beforehand to make sure that it comes as advertised. Therefore, the fears are easily justified and difficult to overcome.

Porter’s Five Force Analysis

Porter’s Five Forces Model is an important tool to analyze an external competitive environment of the industry. The model includes threat of entry, threat of rivalry, threat of suppliers, threat of buyers and threat of substitutes(3) .

Threat of Entry

This business is an Internet driven service industry, where there is a low barriers to entry. The main barrier might that some products are not permitted to be sold in certain states and country. So, the main barriers may come from government regulation thus any online auction should not violate those laws. EBay has established blocks that take care of legislation side of the law. EBay has created its brand name among users of its services and it is really hard to enter a market where safety and brand recognition are this important in the industry. It is found that the barriers to entry others are low, however it is hard to be successful in the industry where the safety and brand recognition is essential to the users of the services.

Threat of Rivalry

Yahoo! Auctions, Google and Overstock.com have been the most important competitors of eBay. They have been fighting eBay for a piece of the market in the industry. Moreover, one of biggest competitor of eBay is the drop off industry, however many drop off companies also use eBay services. There is an immense competition because of low entry barriers. EBay continues to attract its customers by providing best possible services at the lowest cost (Porter’s generic strategy: cost leadership strategy at low cost competence in broad market)(4) . They are also continuing to expand horizontally into new markets. With good brand identity and recognition comes safety and security, which is vital in this industry. There are also low exit barriers in this industry. EBay owns 35.14 % of the market as of 21st of February, 2012, which leaves room for them to grow(5). EBay needs to keep up with consumers needs and wants along with keeping an eye on its competitors in order to be successful.

Threat of Suppliers

Every single user of internet services might be a ‘player’ of eBay. So, there are a vast number of suppliers and everyone can sell something as a potential supplier for eBay. EBay business model provides a service that brings the buyers and sellers together. The suppliers do not have much power except in the case of transaction of the high-end items in other words expensive goods: real estate or cars or equipments. It is obvious that both the buyers and sellers want protection for their items. EBay uses PayPal in order to provide for smooth and quick payment of items where the sellers want to get their money quickly. But it is complicated to sell expensive where the suppliers have more power. In order to help facilitate the selling expensive items, eBay purchased Skype where to side can easily communicate and exchange information(6) . The suppliers as a whole do not have much power unless they are dealing with high-end items.

Threat of Buyers

There is limitless number of buyers and that what makes eBay powerful and profitable. Anyone around the world can see and buy the any item listed on eBay which means that the buyers don’t have any real power in influencing eBay. However, eBay does listen to their customers, which is why they instituted the customer feedback program. This has helped to weed out the bad sellers and buyers. Overall, eBay’s buyers do not have much influence unless they are dealing with expensive items.

Threat of Substitutes

There are few substitutes to trading online. One them is to go back to trading at an auction house. Another option is to sell the items directly instead of placing them on an auction. Placing the small items on a traditional auction is not cost effective approach and there would be a limited number of buyers. This is might not be a realistic option to sellers because the Internet and eBay opens up millions of buyer and sellers worldwide through Internet. The Internet has especially opened up the market for specialty items such as first edition cookbooks or traditional lunchboxes with superheroes on them. This is not possible without a service such as eBay. In brief, the threat of substitutes is found as very low as long as eBay keeps up its positive image and appeal.

VRIO Analysis

Now, VRIO analysis is used to focus internally at eBay’s core competencies in order to determine whether the strengths provide them with competitive advantages. This tool measures each capability against whether it creates value for the company, it is rare in the industry, it is costly to imitate and if it is exploited by the organization. Possible core competency of eBay discussed more deeply below.

Business Model

The business mode of eBay is very valuable to the organization because it is what developed the industry they are in. Because of the model they created, EBay has been one the successful player of the online auction industry. Both the buyers and sellers on eBay have open communication with each other and this creates value and because of this model was and is successful, it is no longer rare and not costly to imitate. EBay still exploits this model and it became powerful attribute to eBay which leads to a temporary competitive advantage.

Brand Identity/Recognition

EBay has created a well-recognized brand because of its business model has been very successful since its establishment. So brand recognition is the next core competence of eBay. Brand name creates value to the organization and however, nowadays, there are some other players such as Yahoo! Auction and Google have extreme brand identities, which illustrates that a powerful brand identity is not rare, but it is certainly costly to imitate because it requires a substantial funding, time and success. As it is obvious in every business exploiting in brand is long term activity and essential in order to achieve a success. The brand identity creates a temporary competitive advantage for eBay.

Product Offering

Product Offering is the next attribute of this analysis. EBay currently lists different types and immense quantity of products online which creates value within the company because it gives value and options to the consumer and hence, it is rare in any other online auction sites. EBay has a capacity to be able to support and recruit this amount of products which creates economies of scale to the organization. So, it keeps exploiting its unique product offerings to benefit their organization with the lower cost than other online auctions. EBay uses this element model to set them apart from the competition and create a sustained competitive advantage.

Customer Service

The last but not the least attribute of eBay is a customer service. It is the last core competency within the VRIO analysis. Customer’s service is not costly to imitate in eBay’s position and it is not rare in today’s business. Customer service program is not exploited in the case of eBay; it only creates value but does not provide anything else that why it is found as a competitive disadvantage for the company.

Porter’s Generic Strategy

According to the model a company can follow a cost leadership or differention strategy by acacquire the most successful Drop-Off sites; AuctionDrop, QuikDrop and Trading Circuit. The Drop-Off industry has been growing and it is popular because the average consumer is too busy to spend their time posting on eBay. The person would rather drop off their item to be sold by another company even if this means they take a lower profit. That’s why first option to eBay would be to purchase powerful Drop-Off companies.

Option two would be that eBay could pursue new markets in other countries like there are untapped markets in South Africa, South America, and Mexico other developed counties. This strategy would be, market penetration strategy by use of information system available, not necessarily have overnight results, however it has the potential for long-term gains.

Recommendation

First option is a more practical, less risky and more profitable option to eBay currently considering the external political factors that would affect the business negatively. Moreover it can be is easily adaptable to the company’s current structure. EBay currently facilitates online auctions, and this is just another way to help extend their influence and control. Acquiring powerful Drop-Off markets can increase eBay’s market share, which increase its competence in existing rivalry. In this way, eBay can reach out to consumers who are too busy or are uncertain about selling items online, which further differentiates eBays activities form other competitors. Because of the expansion and increased control, eBay will be creating a stronger barrier to entry by increasing its market share.

Reference

(1) History of the eBay Auction: http://www.ehow.com/about_6496604_history-ebay-auction.html

(2)Ebay mission Statement: http://www.samples-help.org.uk/mission-statements/ebay-mission-statement.htm

(3)Kotler P, (2001), Marketing Management (11e), International Edition, Prentice Hall

(4)Porter's Generic Competitive Strategies: http://www.ifm.eng.cam.ac.uk/dstools/paradigm/genstrat.html

(5)EBay, http://finance.yahoo.com/q/ks?s=EBAY

(6)PCWORLD-Tech industry: http://www.pcworld.com/article/122516/ebay_buys_skype_for_26_billion.html

Tags

Ebay, External Business Analysis, External Environment, Porters Five Force

Meet the author

author avatar Bizning Vakil
An economist by definition, a teacher by practice, a journalist by nature, I find it hard to find any one permanent place to settle down...

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Comments

author avatar Jerry Walch
9th Jul 2012 (#)

This was a very informative and interesting article. I wasn't aware of most of these details.

Excellent work.

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author avatar Bizning Vakil
9th Jul 2012 (#)

Thank you

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author avatar MyShoh
14th Jul 2012 (#)

Is it a university paper?

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author avatar MyShoh
14th Jul 2012 (#)

A very nice piece of work. Keep on

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author avatar Md Rezaul Karim
14th Jul 2012 (#)

Well written and thank you for sharing.

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author avatar MyShoh
9th Aug 2012 (#)

I need a paper on "new opportunities for business start-ups online"

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