Strategic Evaluation of eBay

by Marlena Zakrzewska on December 9, 2014

Strategy implemented by eBayimages

It can be argued that eBay’s strategy consists of elements of all four growth strategies, identified as:

  • market penetration,
  • market development,
  • product development
  • and diversification.

eBay began operating in one market and over the years expanded its business to others, currently having a global presence in 37 markets (eBay). Companies that adopt market development strategy aim to enter new markets where there is little or no competition (Small Business).

In order to succeed in the markets, eBay has been reinforcing the sales development activities through providing trainings to both sellers and buyers. Owing to creating brand new services that deliver more significant changes than new products, eBay is a leader in e-commerce industry. eBay’s unique business model is a perfect example of its innovative services.

Since eBay is a multi-business company offering a wide range of products that serve customers in many different markets, it might be claimed that it has been implementing diversification as its main strategy .

One of major reasons why organisations adopt diversification is that it gives great growth prospects and extends a brand reputation into other markets (The Startups Team,). Such strategy makes eBay recognisable nearly in every country in the world.

VRIO framework

vrio-analysis2

The value-rarity-imitability-organisation (VRIO) framework is a common method used by organisations to assess the particular resources and their ability to contribute to competitive advantage (Lynch, Strategic Management).

Hence, the VRIO model can be a very useful tool that allows deciding which strategic option should lead to competitive disadvantage, competitive parity, temporary competitive strategy or sustained competitive advantage. This model determines whether a particular strategy is valuable, rare, costly to imitate and exploited by organisation. Also, the VRIO framework helps to predict the level of company’s economic performance (Peng).

As the VRIO framework demonstrates, market penetration and market development can lead only to competitive parity, which might result from the fact that most of eBay’s competitors adopt these strategies.

Product development can cause temporary competitive advantage, since not all e-commerce companies create new products and services. In accordance with the VRIO analysis, diversification is the most beneficial strategic option, since it can bring about sustained competitive advantage.

Consequently, diversification ought to have a positive impact on company’s economic performance. Since eBay is one of many enterprises that offer a diversified portfolio of products, sustaining a competitive advantage is very challenging.

Evaluation of strategy impact

eBay has adopted diversification by vertical integration, relying on merging together two businesses that are at different stages of production (Economist).

eBay collaborates with a number of businesses, forming a strong global corporation that offers diverse products and services. In 2002, eBay acquired PayPal, a simple, convenient and secured payment method that facilitates payments and money transfers. Moreover, eBay’s collaboration with Skype since 2005 facilitates effective communication among traders.

Apart from forming a partnership with Baidu, eBay also made significant deals with companies like Yahoo or Google. eBay is argued to have been managing its portfolio of businesses effectively and efficiently, which creates synergies amongst all the businesses it has been cooperating with. Owing to vertical integration, the company is capable to control the cost, quality and delivery times of inputs.

images-1 eBay was set up in order to enable people to buy and sell all kinds of items in one place on a level playing field

Therefore, strategy adopted by eBay matches its mission and vision. eBay’s way of doing business is unique, since buyers and sellers have most functions. They are the organisation’s product development team, sales and marketing force and also merchandising and the security department.This indicates eBay has adopted a democratic leadership style.

eBay as vertically diversified company might be achieving a competitive advantage due to the right incentives for the optimal degree of asset-specific investment through the proper reassignment of property rights .

In spite of many benefits diversification offers, it also can lead to some problems. Since eBay is an auction platform, its financial performance is dependent on the number of transactions, which is hard to predict, especially after entering a new market. There can occur various difficulties related to transferring management skills to a new area of business.

Also, lack of research on new markets before diversifying usually results in no resonance with the newly targeted customers (The Startups Team). Therefore, marketing plays a crucial role in making diversification successful. Although diversification is likely to streamline the company’s growth, there is a risk that if such strategy fails, the company loses a lot of money. Expanding the company’s product range can increase its turnover, but simultaneously, an increase in costs may cause a reduction of the profits .

As an e-commerce enterprise, eBay has been developing new services, which unfortunately are likely to be imitated by competitors. Therefore, what would be a reasonable idea for eBay is to focus on product development and create goods of its own brand.

Product development is a rewarding way to strengthen a company’s development efforts and what makes it successful is the innovative input from customers and markets.

About Marlena Zakrzewska :

Marlena is a consultant with Bearing, with a strong background in analysis, cognitive and behavioural studies and innovation.

Marlena was educated at King’s College London and Humboldt University Berlin, and has been involved in extensive studies regarding social psychology and consumer behaviour.

She believes that by understanding what affects behaviour and, by extension, how to influence behaviour, both organisations and individuals can become more successful. Understanding exactly how small changes to the details of an offer can influence the way people react to it is crucial to unlock significant value.

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