Analysis of EBay’s Business Strategy

 

 

 

 

 

Introduction & Overall Strategy

Founded in September 1995, eBay is currently one of the world’s largest online trading marketplaces for both individual and corporate users, providing an internet-based platform where buyers and sellers browse and interact. The online platform is fully automated, offering both auction-style and fixed-price services by category, allowing sellers to list items for sale and buyers finding and quoting things of interest. eBay allows buying and selling a wide variety of products, and has a wide range of target markets and customers due to the various products available on its website. To be more specific, eBay mainly targets online auction and shopping communities, and targets almost everyone especially those who prefer the convenience of online shopping. eBay’s value proposition for sellers is the access to broad global markets, and efficient marketing and distribution. Sellers can also reach customers who are interested in used or vintage products through eBay’s marketplace. For customers, eBay aims to offer a wide choice of products and trusted customer services. Therefore, its customer value proposition is trust, value, selection and convenience (Chaffey, 2018). Besides its main business – online marketplace, eBay also has a payments business – PayPal, which was acquired by eBay in 2002 and has become one of eBay’s main payment channels. 

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As mentioned in its 2017’s 10-K report, eBay’s overall strategy is “to deliver the best choice, the most relevance and the most powerful selling platform for its buyers and sellers (10-K, 5)”. eBay aims to attract and retain various sellers and brands to provide differentiated goods, in order to deliver the best choice to its customers by offering them great products and services. Furthermore, eBay frequently updates the shopping experience to best match each user’s expectation, to make user experience better, and ultimately to deliver the most relevance. Also, eBay aims to be the most powerful selling platform for both individual and business sellers by expanding and adding new features for its sellers to drive more sales (10-K, 2017). The objective for eBay is to augment revenue and gross merchandise volume from its marketplaces by different strategic approaches. Firstly, eBay aims to acquire new users to expand its customer pool. eBay also seeks to activate more registered users to become active buyers and sellers. Lastly, eBay hopes to increase both the value and volume of transactions by active users (Chaffey, 2018)

Key Strategic Risks

eBay faces strong competition from all over the world. In order to distinguish itself, eBay has to overcome the competitor risk. In the Porter’s Five Forces Model analysis of eBay, competitive rivalry in the industry and the bargaining power of customers are the two most significant forces that pose a threat to eBay’s market share. eBay’s competitive rivalry within the industry is high since the company faces tough competition in both marketplaces and payments businesses. eBay’s main business faces competition from both offline and online players, such as Amazon, Alibaba, Walmart, Target, etc. As for the payments business, eBay faces competition from traditional sources such as credit cards and wire transfers, and also from online payment services such as Apple Pay, Alipay, etc. A main contributor to the strong competitor risk is low switching costs for consumers. What consumers can buy on eBay can also be bought through a wide range of alternatives including traditional department, warehouse, boutique and general merchandise stores (10-K, 2017). The same is true for PayPal. The cost for customers to switch from one service provider to another is low, so the competitors compete on the basis of prices, services and product selections. Besides low switching costs, another two factors – high price sensitivity and the availability of information through the Internet also result in high bargaining power of customers on the e-commerce market. If eBay charge a higher price or lacks certain services for a similar product, customers may easily switch over to other ecommerce. Contrarily, the bargaining power of suppliers is relatively low because there are many sellers listing various products on eBay and these sellers can also list on other sites. Moreover, since eBay provides a wide range of products, the threat of substitutes is low. Lastly, the threat of new entrants is a moderate threat. Although the e-commerce market has low barriers to entry and some new players have sufficient startup capital, it is difficult for them to have economics of scale and to gain brand recognition. Yet, established strong players can dent the position of eBay. Referring to PESTLE analysis, political factors such as increasing governmental support on e-commerce, and social factors such as consumers’ changing preference for online shopping convenience also create intense competition. Competitor risk is an essential strategic risk because eBay has to develop its competitive advantage to stabilize its position; otherwise it will be left far behind its competitors and eventually be eliminated by the market.

International risk is another key risk because eBay expands its business worldwide and operate globally, which can be regarded as market development in the context of Ansoff Matrix. However, because eBay reports its financial results in U.S. dollars, it is subject to foreign exchange rate fluctuations and other trade barriers. From the time of receiving the order to the purchase, delivery, and payment of funds, there will inevitably be exchange rate changes in a cross-border electronic transaction, which lead eBay to face the dual pressures of price competition and exchange rate fluctuations. eBay’s financial reports for second quarter 2018 states a loss of $89 millions in cash flow due to the effect of exchange rate changes (eBay, 2018). For another example, if the U.S. dollar depreciates against foreign currencies, the conversion of these foreign currency-denominated income or expenses will result in an increase in the U.S. denominated income and expenses (10-K, 2017). The recent US-China trade war and increasing tariffs also adversely impact ecommerce sales since people buy and sell products from different countries on eBay, which may eventually reduce cross-border trades and harm eBay’s business.

Supply chain risk, more specifically seller risk in eBay’s case, is another critical strategic risk. The main role of eBay is an intermediary, allowing sellers and buyers to agree to a price and then make transactions. Although suppliers are vital for eBay, they also bring substantial risks. Once eBay lacks vendors or sellers listing their items for sale, eBay will be short of supply and the gross merchandise volume will drop, making it impossible to provide enough product selections to its consumers. In addition, sellers are likely to move their business away from eBay if they are unsatisfied with eBay’s policies and terms. eBay’s inadequate protection of sellers could also increase its cost and loss rate. Moreover, sellers may fail to consider the age limit of consumers when selling the goods, for example to sell adult products to minors. Sometimes, sellers may list the legitimate products but in fact sell improper items privately, such as the selling of firearms, which violates political and legal factors in PESTLE analysis. Sellers are important to eBay because they directly affect revenues and profitability of eBay.

Mitigation Strategies

 Facing intense competition within the industry, eBay should adopt mitigation strategies to minimize the gap. One important mitigation is innovation. For example, as a socio-cultural trend, mobile devices are increasingly used for ecommerce transaction. In order to keep pace with rapidly involving technologies, eBay needs to develop better apps and strengthen users’ mobile and multi-screen experiences. Although eBay’s business has already covered many countries, it can continue market development – using existing offerings to expand into new markets, especially into developing countries where online retail business is not so popular or where people’s online shopping awareness is weak. Another recommendation as indicated in Ansoff Matrix would be low-risk market penetration, meaning to increase the market share by using current products within the existing markets. eBay should focus on improving the quality of services by promotional offers, speedy shipping services, high-tech information system and reducing PayPal fees, in order to improve the reputation and thus increase the market share. As for product and service development, it would be useful for eBay to develop long-term strategic partnerships with trustworthy third parties such as courier companies and software development companies to make services more reliable and less risky. Furthermore, eBay should use better advertisement strategies and partners so that it can attract customers from its competitors’ sides.

 To mitigate international risks, the most helpful recommendation is to use hedging techniques, such as exchange-traded funds (ETFs), forward contracts, and current options (Anthony, 2016). For example, buying a currency option enables the right to pay for a lower rate when the actual rate is unfavorable to eBay. Spot contracts, for another example, also help to fix exchange rates against fluctuations. These hedging techniques will not benefit eBay from positive swings but ensure the company not to get hurt from negative swings (Lander, 2018). When dealing with international business, eBay could also buy insurance against currency risk to protect the company.

Since eBay does not really have any inventories, it is the sellers who are responsible for offering products to eBay’s consumers. It is essential for eBay to retain and manage its suppliers to mitigate the shortage of sellers and improper trading. eBay, as recommended, needs to establish code of business conduct and ethics for its suppliers, outlining guidance that all vendors must follow and obey to be consistent with eBay’s mission and value proposition. eBay has to develop and periodically upgrade its own system and criteria to verify suppliers’ information and review its listings in order to avoid fraudulent and immoral trading. Also, eBay should trust and protect its suppliers so that they will be satisfied with eBay’s service and continue to stay on eBay. However, avoiding supplier failure with 100% certainty seems impossible, so it is crucial for eBay to proactively prepare a backup and contingency plan, which will resume eBay’s normal operations once failure takes place.

Conclusion – Opine on eBay’s Overall Strategy

 By overcoming the three above-mentioned key strategic risks – competitor risk, international risk and supplier risk, eBay is able to provide wide product selections and superior services, which eventually enable the company to not only fulfill its mission but also distinguish itself from its competitors. Although the competitive rivalry within the industry is high, innovation and stable strategic partnership and suppliers grow both eBay’s customer base and its online marketplace effectiveness and reliability. Additionally, stable suppliers and reliable services can alleviate the problem of overly high bargaining power of customers. Also, mitigation strategies mentioned above are able to enhance the attractiveness and competitiveness of eBay, thus allowing the company to overcome the threat of new entrants and substitutions.

When expanding its business worldwide, eBay should use different hedging methods to overcome international business risks such as currency risk and other trade barriers so that it can reach more consumers, increase sales and gain access to new talent pools. International expansion also allows eBay to diversify its assets to protect the company against unforeseen events. For example, eBay can offset negative incomes in one market by successfully operating in another. As for supplier management, carefully reviewing sellers’ information and listings can make customers more satisfied and trustful with eBay’s services and thus choose to stay with eBay. Building and maintaining good relationship with sellers can boost communication, coordination and collaboration, thus raising output and business profit level. Only if the sellers are well managed and satisfied, eBay’s customers can enjoy better products and services. To sum up, eBay has to apply different mitigations to overcome the three key strategic risks – competitor risk, international risk and supplier risk, in order to move forward and remain competitive in the industry.

References:

 

Anthony, Craig. “3 Strategies to Mitigate Currency Risk (EUFX).” Investopedia, Investopedia, 20 Apr. 2016, www.investopedia.com/articles/investing/041916/3-strategies-mitigate-currency-risk-eufx.asp.

“EBay Case Study.” Smart Insights, 6 Jan. 2018, www.smartinsights.com/ecommerce/ecommerce-strategy/ebay-case-study-2/.

“EBay Inc. Reports Second Quarter 2018 Results.” Who We Are – EBay Inc., 18 July 2018, www.ebayinc.com/stories/news/ebay-q2-2018-results/.

“EBay: Number of Users 2018 | Statistic.” Statista, www.statista.com/statistics/242235/number-of-ebays-total-active-users/.

“How the Trade War Affects Ecommerce and the U.S. Economy.” Practical Ecommerce, Practical Ecommerce, 26 July 2018, www.practicalecommerce.com/trade-war-affects-ecommerce-u-s-economy.

Lander, Steve. “How Do Companies Mitigate the Risk of Foreign Currency?” Small Business – Chron.com, Chron.com, 26 Oct. 2016, http://smallbusiness.chron.com/companies-mitigate-risk-foreign-currency-73294.html.

Mitchell, Christopher. “EBay Inc. Five Forces Analysis (Porter’s Model) & Recommendations.” Panmore Institute, 1 Dec. 2017, http://panmore.com/ebay-inc-five-forces-analysis-porters-recommendations

Mitchell, Christopher. “EBay Inc. PESTEL/PESTLE Analysis & Recommendations.” Panmore Institute, 1 Dec. 2017, http://panmore.com/ebay-inc-pestel-pestle-analysis-recommendations

Team, Trefis. “EBay Through The Lens Of Porter’s Five Forces.” Forbes, Forbes Magazine, 24 Nov. 2014, www.forbes.com/sites/greatspeculations/2014/11/24/ebay-through-the-lens-of-porters-five-forces/#532e02f1dd14.