What is ebay's competitive advantage

Teaching Note: Case 38 eBay: Expanding into Asia

Case Objectives
1. To discuss the decisions and actions that a firm has to undertake to sustain a competitive advantage, especially when pursuing international growth.

See the table below to determine where to use this case:

Chapter Use

Key Concepts

Additional Readings or Exercises

2: External Environment

External environmental forces

NOTE – additional reading, web links, embedded video. Also see Case DVD.

3: Internal Analysis

Tangible vs. intangible resources

4: Intellectual Assets

Human capital; intellectual capital

5: Business-Level Strategy

Generic strategies

6: Corporate-Level Strategy

Corporate strategy; synergy; acquisition

7: International Strategy

International expansion; transnational, global strategies

NOTE – additional reading, web links

Case Synopsis
Since its inception in 1995, eBay had enjoyed strong revenue growth, and was a dominant player in the worldwide online auction industy. In 2008, new CEO John Donahoe reported an impressive 11 percent increase in revenue from the previous year, with an operating margin of 24 percent. EBay created revenue from three sources through multiple online products and services: eBay’s marketplace received merchandise fees from items sold either by auction or fixed-price transaction; the payment division received financial transaction fees from its PayPal service; and communication fees were received primarily via customer use of Skype.

Despite eBay’s outstanding growth performance, achieved mainly through both foreign and U.S. acquisitions, the company still faced a number of challenges in both domestic and international markets. As a growth strategy, eBay had created options and targeted distinct market niches to distinguish itself from competitors. This was particularly important because as e-commerce and Internet usage rates continued to grow, so would the market opportunity for eBay. Because of its market-leading brand, eBay was in a unique position to capture a significant share of the market at an early stage. eBay had grown to successfully compete in certain international markets, including Europe and Latin America, but had been unable to penetrate the Asia Pacific market.

eBay’s joint ventures in Asia, first with Tom Online in China, and then with Gmarket in South Korea, had not yet allowed it to achieve significant market share. Considering that the Asia Pacific region had more than 50 percent of the world’s population and was experiencing some of the largest online usage growth percentages in the world, tapping into this market was critical for eBay to expand. Why had it been unsuccessful?

Teaching Plan
The eBay case is an investigation of a company that chose to pursue growth into an international environment where it had little experience. A discussion of eBay’s difficulties can provide an opportunity for comparison to the other international cases such as Heineken, Lenovo, Geely, and McDonald’s. As such, this case is best positioned mid-way through the course, after students have had an introduction to the concepts of strategy analysis and formulation.

Summary of Discussion Questions
Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table to identify any additional readings and/or exercises so they can be assigned in advance.

Discussion Questions:

1. How did eBay pursue international growth?

2. What source of competitive advantage does eBay have, and is that position supported by its resources and assets? Does eBay deal effectively with its external environment in Asia?

Discussion Questions and Responses
1. How did eBay pursue international growth?

Referencing Chapter 6: Formulating Corporate-Level Strategies

Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create “synergy” – creating value through entering new markets or developing new technologies, either through related or unrelated diversification.

Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include:

· Mergers and acquisitions

· Strategic alliances

· Joint ventures

· Internal development

Whatever the choice, it should create value for all stakeholders – employees, suppliers, distributors, and the organization’s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own.

When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities.

Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions.

eBay had countered the intense competition in the online auction industry by engaging in aggressive acquisitions of online businesses worldwide, and by forming joint venture partnerships with providers and marketers in both related and unrelated businesses. In addition, eBay pursued strategic alliances, both with its joint venture partners like Tom Online, and competitors such as Yahoo, partly to minimize the intense competition from rivals like Google.

eBay also expanded into new markets by focusing on business-to-consumer in addition to consumer-to-consumer transactions, and by generating revenue through fees from PayPal and Skype in addition to fees from merchandise listings.

With increased competition from Google and other major online companies, eBay had to continue to diversify and provide depth in its product offerings to remain competitive. In most cases, eBay expanded into new markets through acquisitions and slowly incorporated the newly acquired site into its global platform. This approach had been ineffective in the Asia Pacific region, and therefore prevented eBay from successfully competing in key markets like China and Japan. In the case, eBay ex-CEO Meg Whitman indicated that eBay competed through its specialties in e-commerce, payment, and voice communication, and was primarily focused on these areas, not competing with the likes of Google in search, or Yahoo in content. As of 2008, eBay therefore had no plans for further big acquisitions, intending instead to grow by identifying synergies in its existing businesses.

Growth strategies should create value for all stakeholders: employees, strategic partners, and owners. The choice of growth strategy should create synergy so all parties gain something they would not have on their own. Corporations can achieve synergy by sharing tangible and value-creating activities across their business units; or through the use of common facilities, distribution channels, and sales forces, or through venture partnerships. However, cultural issues can doom intended benefits.

Referencing Chapter 7: International Strategy: Creating Value in Global Markets
International expansion is a viable diversification strategy, however before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country. When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management.

In Asia Pacific, eBay’s management risks might have included:

· Language & culture

· Managing employees

· Managing technical processes

· Handling customer preferences

There are two opposing forces that firms face when entering international markets: cost reduction, and adaptation to local markets. Therefore there are four basic strategies firms can use: international, global, multidomestic, and transnational. See Chapter 7, Exhibit 7.4.

eBay followed a global strategy. Advantages of a global strategy included a unified approach that allowed users to conduct transactions in an online global community. Users could interact and purchase or sell items with anyone in the world over a single platform. Having a single platform also minimized company costs, such as maintenance and development. Disadvantages were evident by eBay’s inability to truly meet specific local business needs. Having a single platform provided standardization across all markets, which may or may not have been effective in certain markets with customers that had specific needs and expectations.

eBay’s decision to use a single platform to provide online trading in all its markets had been successful in most of its global communities. However, this decision appeared to have hindered eBay’s ability to compete in the Asia Pacific region. eBay was perhaps uncomfortable turning control over to local partners, and fully leveraging local expertise.

A transnational strategy, where the company could provide a standard product and meet specific local needs, would be the optimal strategy for eBay to adopt for competing in the Asia Pacific region. The company could achieve this strategy through its local acquisitions and realize further benefits by tailoring customized local sites for each market. A transnational strategy would allow eBay to sustain costs while meeting specific market needs. The company had a global strategy that prevented it from successfully competing in certain markets. A transnational approach would instill consistency across eBay’s global platform and at the same time provide flexibility when entering new markets. A transnational approach would also allow eBay to retain central control in the U.S. and enable local management in each of its markets. It would therefore allow eBay to share knowledge among its various worldwide holdings.

Entry modes available for international expansion differ based on the extent of investment and risk, and the degree of ownership and control. See Chapter 7, Exhibit 7.10. In order from low to high, they include:

· Exporting

· Licensing

· Franchising

· Strategic Alliances

· Joint Venture

Wholly Owned Subsidiary

eBay’s entry mode choices for international expansion included: alliances, joint ventures, and wholly owned subsidiaries. eBay’s joint venture with Tom Online had provided it local expertise, but eBay’s past experience with Eachnet demonstrated the company’s inability to understand local business needs and acquire market share from China’s online auction giant Taobao. With Tom Online’s intimate local knowledge and eBay’s financial strength and experience in the online auction industry, the joint venture should have helped eBay increase its position in China’s market. The enhanced communication channel was meant to appeal to a broader market that preferred direct communication and interaction between users. This was consistent with eBay’s other acquisition of communication giant Skype, and the company’s stated intent to improve communication to enhance the customer experience in the online marketplace.

With low entry barriers, many believed online companies would eventually consolidate to a few dominating firms; those containing the most traffic. eBay’s investments in communication companies, such as Skype and Tom Online, raised questions regarding the company’s strategic moves and whether or not it was deviating from its overall strategy. While it was obvious eBay was trying to acquire as much market share as possible, entering into the communication space allowed eBay to broaden its product mix and target a much larger customer base. The enhanced communication capabilities were expected to attract users who preferred more convenient and direct interaction with other buyers and sellers. This was particularly critical for competing successfully in markets like Asia, where users preferred more direct communication, enabling them to complete transactions more quickly.

eBay’s decision to buy a joint venture stake in South Korea’s Gmarket was part of a similar strategy to broaden eBay’s market coverage. However, Gmarket was a competitior, and had already entered into an agreement with Yahoo. Gmarket used a different model from eBay, mainly offering fixed price transactions and cheaper listings. Gmarket also frequently introduced new seller options to attract customers. At the end of the case, it was unclear how eBay would handle this relationship with Gmarket.

NOTE - ADDITIONAL READING, WEB LINKS:

In general, since 2007 eBay has been losing ground:

http://www.businessweek.com/technology/content/sep2007/tc20070917_750709.htm

With global expansion a concern for almost all firms, what specific issues might affect eBay’s global growth strategy?

EBay tried to expand in China with mixed results. Commentary about the differences between eBay EachNet and major competitor Taobao in 2005 was that Taobao understood the local needs of buyers:

See http://www.chinadaily.com.cn/english/doc/2005-05/09/content_440384.htm

And http://helenwang.rdvp.org/pacific/2005/11/taobao-vs-ebay-china.html

In 2006 the situation was as follows regarding eBay’s EachNet’s inability to accommodate the Chinese parton: - “This is a very unique market, and if eBay doesn’t learn how to properly navigate it, they could be at serious risk of losing their grip on one of the fastest growing and most lucrative markets in the world.”

http://seekingalpha.com/article/14162-online-auction-market-in-china-ebay-eachnet-vs-yahoo-taobao

eBay’s joint venture with Tom Online was seen by some as “another failed attempt by a U.S. behemoth to extend its dominance to Chinese cyberspace”:

http://www.businessweek.com/globalbiz/content/dec2006/gb20061219_738124.htm?chan=search

In 2007 eBay changed its relationship with Tom Online, and as of September EachNet was a joint venture between the two companies, with eBay products PayPal and Skype apparently out of the picture:

http://www.chinatechnews.com/2007/09/11/5867-eachnet-chooses-yeepay-for-online-payment-in-china/

Then in 2008 Tom Online CEO was unhappy with the joint venture, subsequently resigning:

http://www.chinatechnews.com/2008/06/04/6839-rumor-tom-onlines-ceo-will-resign/

In 2009 there were rumors that PayPal might be “contemplating a Chinese acquisition. Chinese independent third-party online payment company 99bill.com has signed an agreement with PayPal to jointly improve its international payment efficiency and promote international trade settlement.”

http://www.chinatechnews.com/2009/02/27/9012-chinas-99billcom-teams-with-paypal-to-explore-international-payments/

In Korea, the acquisition of Gmarket was completed in June 2009. Gmarket is said to operate “a bit differently from eBay. For one thing, Gmarket places less emphasis on an open-auction format, instead focusing on selling goods at fixed prices, with an option to negotiate with a seller on an exclusive basis. This allows buyers to conclude deals instantly instead of having to wait until an auction deadline.” See more of the story at:

http://www.businessweek.com/globalbiz/content/apr2009/gb20090416_364057.htm

The Asia-Pacific environment is still volatile and the differences between this region’s consumer shopping culture and the rest of eBay’s customer experience seem to have required significant retooling. Do you think eBay will eventually be able to gain any significant share of the Asian consumer-to-consumer market?

2. What source of competitive advantage does eBay have, and is that position supported by its resources and assets? Does eBay deal effectively with its external environment in Asia?

In order to fully appreciate eBay’s difficulties with its growth strategies in Asia, it may help if students can step back and consider eBay’s need for a strategic analysis and formulation. eBay had already been a success in North America before it ventured abroad. That success was based on a specific competitive strategy.

Referencing Chapter 5: Formulating Business-Level Strategies

In order to achieve a sustainable competitive advantage, eBay had to assess its ability to contend with other online auctioneers. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage:

· Overall cost leadership

· Low-cost-position relative to a firm’s peers

· Manage relationships throughout the entire value chain

· Differentiation

· Create products and/or services that are unique and valued

· Non-price attributes for which customers will pay a premium

· Focus strategy

· Narrow product lines, buyer segments, or targeted geographic markets

· Attain advantages either through differentiation or cost leadership

Ask the students which strategy they think eBay pursued, and why. Their answers may include some of the following points:
eBay competed by creating customer options that were uniquely different from those of its competitors. It also targeted distinct market niches. Because of its reputation and longevity in providing value to its customer segments, eBay was in a unique position to continue to capture a significant share of the growing online market. Therefore, eBay pursued a combination strategy of focused differentiation.

Regarding its competitive strategy in Asia, in order to maintain control over costs, eBay had kept central management control in the U.S. Although this centralized decision structure allowed eBay to keep to a consistent global platform, it made it more difficult to be responsive to local needs. Therefore, the value of eBay’s service in Asia did not yet convince users to either seek out the service or pay a premium.

Referencing Chapter 3: Analyzing the Internal Environment

To answer the question of how to support a competitive strategy, it’s important to consider the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Chapter 3, Exhibit 3.6. eBay’s profile might look like this:

Tangible Resources:

Financial – strong financial growth

Physical – unknown, but not that essential a resource in a service business

Technological – assumed very strong, given the nature of eBay’s business model, and its success

Intangible Resources:

Organizational – centralized decision-making worked well except in Asia

Human – based on the commitment and loyalty of Whitman & Donahoe, very capable and dedicated human resources

Innovation – major strength

Reputation – another major strength – essential in this service business

Organizational Capabilities:

Competencies – eBay had the critical strengths in its human, technological, innovative and reputational resources that should allow it to sustain a competitive advantage with its chosen business model

Referencing Chapter 4: Assessing Intellectual Capital
See the concepts of intellectual capital, human capital and social capital, all of which are intangible assets that a company such as eBay needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm’s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company’s employees and managers. Social capital is a function of the network of relationships that individuals have throughout the organization. If employees are working effectively in teams, across business divisions, and sharing their knowledge and learning from each other, not only will they be more likely to add value to the firm, but they also will be less likely to leave the organization. This applies to strategic alliance partners as well.

Both Meg Whitman and John Donahoe were examples of the dedication, experience and skills of eBay’s intellectual capital. Since eBay was in the knowledge business, the capabilities of its employees and managers were essential assets. However, especially in Asia, social capital was critical. Think of social networks like marketing by word-of-mouth. As eBay founder Omidyar said, eBay was envisioned as a community built on commerce, but sustained by trust, and inspired by opportunity. The social network of buyers, sellers, browsers, technical support gurus, managers, corporate employees, local partners, all had to see the same opportunity, and trust that commerce would happen.

It appeared possible that eBay had not yet understood how to leverage social capital in Asia. A telling comment was rival Alibaba.com’s CEO Jack Ma’s observation that eBay moved too quickly to replace local management with foreigners, and tried to create a market through spending rather than through a ground up process of networked local involvement.

Contrasting eBay with Yahoo, when Yahoo chose to partner with Taobao and Gmarket, both Taobao and GMarket had an in-depth understanding of the Asian culture and local market needs. They allowed users to conveniently interact with each other by offering alternate communication channels such as instant messaging and voice-over-IP (VOP). This enabled sellers to respond to buyer questions more quickly, completing the transaction in a timelier manner. Both companies also offered fixed pricing at an early stage which allowed buyers to purchase items without having to spend time on negotiations. Despite Yahoo’s involvement with both companies, local management control was retained allowing Taobao and GMarket to meet local market needs.

Referencing Chapter 2: Analyzing the External Environment
Regarding the general external environment, eBay must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its services and sustain its business. See which factors in the general environment students might pick that have a significant impact on the online auction industry. Students might respond as follows:

Political-Legal – trade and tariff issues, local and national regulations

Economic – currency fluctuations

Demographic – population growth outside of North America; Asia & Africa had the most population, least Internet penetration

Sociocultural – people worldwide paying increasing attention to social issues, global poverty, the environment; on the Internet, increasing move away from auctions to quicker transactions based on fixed price arrangements

Technological – Internet users had increasing concerns with online privacy, fraud
The above analysis indicates that eBay should have been well positioned with both resources and a competitive strategy to deal effectively with its external environment, including its competition. However, eBay’s insistence on a single global platform may not be appropriate for all markets. This is why eBay might want to consider developing a more adaptive transnational strategy. Giving up some corporate control in Asia to rely on more local expertise might be critical for success in this market.

Also see the CASE DVD, which has a clip of an interview with Meg Whitman.

NOTE – ADDITIONAL READING, WEB LINKS, EMBEDDED VIDEO:

Use the tools available at this link to examine the performance of eBay’s stock over the last five years: http://finance.yahoo.com/q?s=ebay

Jim Cramer’s The Street believes eBay is a good stock pick in July 2009 based on what new CEO John Donahoe has done over the year he’s been in charge. See the video report here:

http://www.thestreet.com/_yahoo/video/10540172/online-stock-to-love.html?cm_ven=YAHOOV&cm_cat=FREE&cm_ite=NA&s=1#29241765001

What do you believe explains the stock’s performance? Would you expect the current trend to continue? Why or why not?

Here is a video reportedly produced for eBay’s employees in 2005 on the occasion of its tenth anniversary. It interviews eBay users from different perspectives, one of whom is a Chinese seller using Eachnet.

http://www.youtube.com/watch?v=lw793h14eD0&feature=PlayList&p=879A61950594D1F2&playnext=1&playnext_from=PL&index=2

Watch the video interview of eBay outgoing CEO Meg Whitman and incoming CEO John Donahoe dated January 2008 on the transition in leadership and projected changes:

http://video.nytimes.com/video/2008/01/24/technology/1194817093417/ebay-after-whitman.html

Focus is on making eBay “easier and safer to shop”. Changes were announced regarding product and pricing. Some eBay patrons have been getting increasingly upset with eBay policies. See, for instance, the following series of blogs from Australia starting in 2008. Sellers are upset that they have to use PayPal exclusively:

http://www.bloggernews.net/115079 and sellers are upset that eBay has prevented them from leaving bad feedback about buyers. The implication is that buyers are more important than sellers, at least in eBay Australia:

http://www.bloggernews.net/121382

U.S. eBay patrons have been complaining also. See this article and the comments from August 2008:

http://blogs.wsj.com/independentstreet/2008/08/12/four-big-gripes-of-ebay-sellers/

and http://www.ebaystrategies.blogs.com/

In the attempt to make it safer for buyers to shop, has eBay alienated the sellers?

How successful do you expect eBay to be going forward?