EBay Value Chain Competitive Analysis

Running head: VALUE CHAIN AND COMPETITIVE ANALYSIS

Value Chain and Competitive Analysis

By Troy Johnson

Argosy University

MSM program

Date: 07/14/10

The auction juggernaut EBay is continuing to make the world smaller with its unique communication portal. The system takes advantage of social computing technologies which helps EBay display the most relevant information. Their business model allows a 1% to 5% fee for each item sold. Over the past decade they have connected millions of buyers and sellers, but the company is not without threats. During the first quarter of 2002 they noticed a drop in revenues due to an apparent loss of confidence between buyers and sellers. To remedy this EBay created a system that enables customers to rate their sellers. This step helped to improve consumer comfort, which is a key factor in e-procurement strategies. Although more recently EBay has had to compete with free alternatives and merchant seller backlash they still have the most recognized name in internet auctions. Additionally they continue to have an advantage over the standard brick and mortar firms. "In the real world, retailers have to deal with thieves, rent payments and regulations. The virtual world has fewer obstacles to doing business." (Lorek, 2002)

EBay dominates the auction market because of the experiential curve and significant cost of market entry. However, each year the cost to create such advanced internet technologies drops due to Moore's law. That law states that approximately every 18 months computing storage and speed doubles. How can increased computing power damage EBay? In short the answer is craigslist.com. As computing power increases the cost to store data falls, which opens up the doorway for competition. Competition is not what scares EBay it is the paradigm shift to free that scares them. Since operating costs keep falling new web entrepreneurs have started using free as a business model looking for income through non-traditional side door sources.

Craigslist.com for example is a free online classified service that connects millions of people. Their strategy is to let people communicate free and earn money by advertising to the millions of people that visit each day. This strategy has earned craigslist nearly 100 million dollars in 2008. Craigslist is a market disruptor because it provided a free alternative to expensive newspaper classifieds effectively wiping out billions of dollars worth of newspaper advertising. Similarly Snowbirdseeker.com, a seasonal rentals by owner website, uses a hybrid business model blending free services with paid rental advertising. While EBay continues to be a viable internet auction service, they are vulnerable because they still charge as much as the market will bear rather than looking for revenue from side door sources. EBay is versatile, but remains vulnerable like the waning newspaper classified industry.

Crafting the right vision statement that fosters innovation may help maximize shareholder value and ensure the longevity of the firm. For instance, EBay is well known for connecting people that want unique items, so to compete with craigslist they have added a free geo targeted classified system. This system will bring millions in additional traffic and may lead to more sellers exchanging items leading to higher revenues.

Board members of EBay usually paint a rosy picture for their earnings forecasts. The reality is that competitors are multiplying and those that use free as a business model may legitimately capture market share. In order for EBay to remain on top of the internet auction industry they need to reduce the price to exchange items on their system thereby increasing the value of there value chain. The direct result of this action will be much higher traffic and brand loyalty. Traffic can be monetized using highly targeted advertisements through Google adsense or an internal advertising program. Although EBay is a successful virtual pure play company they need to ask themselves what would Google do. Google made a reported $4 billion in net income during the 2008 fiscal year simply by leveraging its search traffic domination. EBay needs to increase the value of its core competencies by lowering prices and then capitalize on the additional traffic with targeted advertising.

To further strengthen its position they should add strategic alliances as part of their diversification strategy. Acquiring companies that have similar product lines will broaden product lines and it will take advantage of existing marketing channels. EBay may find opportunities in B2B as well. "Most sales today are in used, outdated or overstocked merchandise that can be discounted. The site has become a big outlet for large corporations like Sun Microsystems and Dell that look to sell refurbished or used computer equipment." (Lorek, 2002) forging partnerships will ensure repeat business as long as no cheaper alternative enters the market.

Another strategy EBay may use is to tap the minds and creative powers of their members. People like to talk and there are an infinite number of focus groups on EBay, so they could create a productpedia tool that enables users to post product reviews and descriptions. Similar to Wikipedia this resource would be free and would improve over time because web 2.0 technologies would allow editing and article improvement. EBay would benefit from this because they can automatically show ads that link to related products on eBay's site leading to more sales. Additionally this tactic would be rewarded with higher page rank on Google because of the increase in website quality content. Higher page rank on Google means more traffic and more conversions.

References:

L.A. Lorek L.A. Lorek Cyber-commerce ; More than just an online garage sale ; Internet eBay auctions are creating a new venue for formerly traditional retailers. EXPRESS-NEWS BUSINESS WRITER

San Antonio Express-News

07-07-2002

EBay Value Chain Competitive Analysis

By: Troy Johnson

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