Pacific Lutheran University
Strategic Analysis & Recommendation: eBay Restructuring Process to Retain and Grow Core Business
Kevin Dickson, Siavash Nourozi , Hung Li 5/14/2009
Table of Contents CHAPTER PAGE Executive Summary......................................................................................................2 External Industry Analysis......................................................................................... 3 PEST Analysis................................................................................................................3 Five Forces......................................................................................................................9 Industry Life Cycle.......................................................................................................12 Internal Industry Analysis.........................................................................................13 Key Success Factors......................................................................................................13 Industry Value Chain....................................................................................................16 Industry Forecast...........................................................................................................21 eBay Strategic Profile...................................................................................................22 • Resources and Capabilities...............................................................................22 • Financial Ratios.................................................................................................24 • Core Competencies...........................................................................................28 • Value Chain.......................................................................................................29 • SWOT Analysis................................................................................................33 Yahoo Strategic Profile.................................................................................................36 • Resources and Capabilities...............................................................................37 • Financial Ratios.................................................................................................38 • Value Chain.......................................................................................................39 • Core Competencies...........................................................................................45 • SWOT Analysis................................................................................................47 Amazon Strategic Profile..............................................................................................52 • Resources and Capabilities...............................................................................53 • Core Competencies...........................................................................................54 • Value Chain.......................................................................................................56 • SWOT Analysis................................................................................................58 • Financial Ratios.................................................................................................60 Strategic Recommendation and Implementation.....................................................61 • Strategy 1..........................................................................................................61 • Strategy 2..........................................................................................................63 • Strategy 3..........................................................................................................65 • Synergy.............................................................................................................67 Timeline........................................................................................................................68 Economic Value Added..............................................................................................70 Financial Forecasts.....................................................................................................72 References....................................................................................................................74
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Executive Summary The following analysis has been completed after substantial research has been analyzed by our team of consultants in order to understand the eBay company and its surrounding factors. This includes an industry analysis to understand the general type of business where eBay places its self and how they fit into the industry as a whole. Following the industry analysis will come an internal analysis of the company and also its top competitors. With this information it is possible to gauge the eBay company in regards to those in which they are competing to reach a broad understanding of what needs to be completed internally to become a more successful company. With this previously stated information obtained we will be able to apply our team’s recommendations and strategies to solve to issues which are currently being seen in eBay. The final step in our company research and analysis will come from forecast of the eBay financials to understand where they currently sit and where they are and should be valued. An external industry analysis has taken place through a PEST analysis, studying how Porter’s Five Forces fit into this company, and understanding where the industry currently sits in terms of its life cycle. Our completion of these topics on the Catalog and Mail Order Houses industry has returned results which can be further used in our in-depth study internally of the eBay company. The internal industry analysis has been completed in order to understand the eBay company and its competitors. This has been completed through the study of the industry value chain, key success factors for the companies in this industry, an industry forecast and also details for eBay and two of its main competitors, Yahoo! and Amazon. The steps in the process of studying each of these companies individually provides us information on, in what areas the business of eBay could be improved or retained in order to beat their competitors in this market. These details can be used further as we move on into our strategic recommendation to increase the performance of the company. Our consulting services have provided in-depth recommendations on what would benefit eBay and also how these can be implemented within their company. The main focus of bettering the company’s success will be on retaining and growing their core business. This will allow their managers to focus on the business in which they have the greatest expertise and also to offer a diversified product. This section includes detailed steps on how each strategy should be used with the company. Also included is a timeline of when each of these strategies should occur, in order to maximize the benefits of our recommendations. Finally, our research analysis involves financial forecasts for the company, including but not limited to the actual worth of the company rather than where their company stands currently. The previously mentioned topics will be discussed in detail here within, in order to conclude our analysis for the successful organizational change to occur at eBay.
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External Industry Analysis PEST Political Taxes The internet has always been a tax free zone. With the recession pummeling states' budgets, their governments increasingly want to fill the gaps by collecting taxes on Internet sales, which are growing even as the economy shudders. And that is sparking conflict with industries that do business online only and have enjoyed being able to offer sales-tax free shopping. The amount of money at stake nationwide is unclear; online sales were expected to make up about 8 percent of all retail sales in 2008 and total $204 billion, according to Forrester Research. This is up from $175 billion in 2007. Based on that 2008 figure, Forrester analyst Sucharita Mulpuru says her rough estimate is that if Web retailers had to collect taxes on all sales to consumers, it could generate $3 billion in new revenue for governments. It's uncertain how much more could come as well from unpaid sales taxes on Internet transactions between businesses. But even with both kinds of taxes available, state budgets would need more help. The Center on Budget and Policy Priorities estimates that the states' budget gaps in the current fiscal year will total $89 billion. (Never a right time to tax Internet, 2007.) The Internet has provided a powerful economic boost to our nation, and has become an important everyday tool for millions of Americans. By keeping Internet access tax-free and affordable, Congress can encourage Internet use for distance learning, telemedicine, commerce and other important services. Levels of Government Influence It is the federal government that passes and enforces legislation concerning the entire country. Actions by the federal government affect a large number of firms and are consistent across state boundaries. Environmental analysis, however, should not overlook actions by both state and local governments. Local governments used to have the potential to affect business practices significantly. Some local governments may be willing to provide incentives to attract business to the area. Some may build industrial parks, service roads, and provide low-interest bonds to encourage a desirable business to move into the community. However, the potential of local governments don’t affect the Catalog & Mail Order Houses Industry as much as other industries. Most businesses in Catalog & Mail Order Houses Industry have shifted the business online; therefore federal government has more direct influence to Catalog & Mail Order Houses Industry.
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Eco-Friendly Most businesses in Catalog & Mail Order industries are doing business online. Their models are based on the efficiencies of the internet, empowering people to do more with less, to shop without driving to the mall, to pay without a paper check, and to connect and communicate without special equipment and without travel. Researchers have compared the energy use and carbon dioxide emissions associated with delivering a flash drive from a manufacturer to a home via the traditional retail channel and via ecommerce channel. In one scenario tested, the researchers found that buying from internet reduced environmental impact with 35% less energy consumption and carbon dioxide emissions than that produced in the traditional retail shopping model. (Clark, 2009.) The largest contributors to energy consumption and carbon dioxide emissions were from customer transport for traditional retail, and packaging and 'last mile' delivery to customer homes for ecommerce. Approximately 65% percent of total emissions generated by the traditional retail model stemmed from customer transport to and from retail stores. (Clark, 2009.) This business model fits nicely with current America’s Green policy. State and local governments and a handful of advocacy groups are releasing green-collar jobs. Venture capitalists are making significant investments in the companies that will develop the technologies behind the green economy. (America's Green Policy Vacuum, 2008) Economic The economic situation of this industry has been strong over the last decade as it has seen large increases in growth due to a successful economy and providing a product which the economy desires. The industry has generated approximately $68.1 billion in revenues, up significantly from just $19.3 billion in 1990. From 1990 to 1996, mail order sales grew at a rate of more than 9.9 percent per year, about 1.7 times the average growth of general merchandise, apparel, and furniture store sales. Recently the use of technological aspects in this industry has provided a service to consumers which has even more increased their economical position. As of 1999, an estimated 90 percent of catalog sellers who were members of the Direct Marketing Association were online in some way, and 60 percent of them were selling over the Internet. Catalog retailers' Internet sales represented a high growth area in the late 1990s, with some major companies reporting the doubling and tripling of online sales growth annually. Although, with these strong numbers it is not sufficient to believe that this industry is always successful. As with other sales based industries, this industry has been susceptible to economic downturns. This includes the recession of 2001 and also the current recession of 2007. The catalog industry had a rough start to the twenty-first century after a decade of exceptional growth. According to Catalog Age's, "Benchmark Report on Critical Issues & Trends" survey, 24 percent of the survey's respondents reported missing profit goals by more than 10 percent for 2001. Additionally, 29 percent missed the mark by 1 to 10 percent, meaning well over 50 percent of the industry did not make their profitability goals. Whereas downtrends in 2001 can be blamed on the aftermath of the terrorist attacks that had devastating effects on the fourth quarter, the industry did not rebound completely in 2002, and sales once again fell off in the fourth quarter of 2002. Despite the difficulties caused by a recessionary economy, the catalog and e-commerce sectors are expected to continue to
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expand as the U.S. population continues to increase its Internet use to purchase products. According to the U.S. Census Bureau in 2000, the latest statistics available, electronic shopping and catalog houses accounted for 19.1 percent of all retail activity in the United States, with sales valued at $21.4 billion. Currently the global internet and catalog retail industry grew by 7.7% in 2008 to reach a value of $699.9 billion. Catalog retail sales proved the most lucrative for the global internet and catalog retail industry in 2008, generating total revenues of $374.7 billion, equivalent to 53.5% of the industry's overall value. In comparison, Internet retail generated revenues of $325.2 billion in 2008, equating to the remaining 46.5% of the industry's aggregate revenues.
This industry has seen strong economic growth throughout its life and is expected to continue to see this into the future. The use of the internet as a tool for this industry has stimulated growth in the past and this is supposed to help the industry grow in the future. This provides a situation for the right company to be able to take advantage of this high growth sector. The below graph details the expected growth over the next five years, going out to 2013 and it can be seen that this industry is expected to see almost double digit growth moving into the future.
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Figure 1: Global Internet & Catalog Retail Industry Value: $ billion, 2004-2008 Social Virtual Community A virtual community refers to a network of people with shared interests communicating with each other electronically. Using bulletin boards, chat rooms, e-mail lists, blogs, and virtual spaces, the Internet provides creative ways for different forms of real or imagined communities to exist. A virtual community can offer resources and social opportunities for a wide audience because it transcends geographical and spatial boundaries. Today, virtual community members self-select into the electronic social networks for on-demand information and resources. In addition, members join virtual communities for social support, share stories, exchange ideas, and conduct commerce. Through electronic communication and interaction, members develop bonds and authentic personal relationships. Catalog & Mail Order industry organizes and supports many virtual communities; the industry would create a specific consumption-related activity and encourage people to share their enthusiasm for and knowledge of the activity. Consumption activities or products are used to identify members of virtual communities with each other in a symbolic and meaningful way. Devoted or loyal users of a product/brand form an environment within the virtual community where consumption of the product/brand is socially reinforced and encouraged. From the industries’ standpoint, virtual communities offer a tremendous opportunity for companies to understand their customers and foster a sense of loyalty to the product or brand, thereby improving profitability and brand value. Virtual communities of this nature can provide benefits for both companies and consumers. First, for the company, useful information traditionally acquired from communication between the consumer and the business can be derived from the dialogue among consumers. Marketers are able to analyze how their brands are perceived and whether they meet consumer expectations. Second, consumers form bonds with
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each other that stem from their interest in brands and products, resulting in a brand community that serves as an important word-of-mouth marketing tool. Members become influential in changing and shaping other members’ consumer decisions. And finally, the consumer community becomes a rich resource for solving product related problems and a breeding ground for creative ideas leading to new product or service opportunities. Rising Educational Levels Rising educational levels also have an impact in Catalog & Mail Order industry. Higher educational levels allow people to earn higher incomes than would have been possible otherwise. The increase in income has created opportunities to purchase additional goods and services, and to raise the overall standard of living of a large segment of the population. The educational level has also led to increased use of technology. These people are using the internet more regularly, which has led them to use cell phones to check emails and current news. Because of the increasing usage of internet, the Catalog & Mail Order Industry has shifted much of its operations to the internet. By moving much of their business operations online, many firms have experienced growth in this area. Norms and Values Norms (standard accepted forms of behavior) and values (attitudes toward right and wrong), differ across time and between geographical areas. Lifestyles differ as well among different ethnic groups. As an example, the application in the United States of Japanese-influenced approaches to management has caused firms to reevaluate the concept of quality. Customers have also come to expect increasing quality in products. Many firms have found it necessary to reexamine production and marketing strategies to respond to changes in consumer expectations. Population Changes Changes in population demographics have many potential consequences for organizations. As the total population changes, the demand for products and services also changes. For instance, the decline in the birthrate and improvement in health care have contributed to an increase in the average age of the population in the United States. Many firms that traditionally marketed their products toward youth are developing product lines that appeal to an older market. Clothing from Levi Strauss & Co. was traditionally popular among young adults. While its popularity in this market has waned, the firm has been able to develop a strong following in the adult market with its Dockers label. Other firms are developing strategies that will allow them to capitalize on the aging population. Firms in the health-care industry and firms providing funeral services are expected to do well given the increasing age of the U.S. population. They are projected as a growth segment of U.S. industry simply because of the population demographics.
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Porter’s Five Forces Analysis Power of Suppliers Every person who has something to sell can be a potential supplier in the mail order industry, so the suppliers are countless. The mail order industry doesn’t have chain of traditional manufacturers, but instead provides services that bring buyers and sellers together. So, there is not an imminent threat from suppliers, because most of the time anyone can become one. EBay and other online auctioneers also have several thousands of online store suppliers, who use their site to reach out to new customers. In order for an online store to successful on eBay it must, first of all, establish a brand and make sure their brand becomes well known. Things customers look at when choosing a product to buy from a store online is the price, feedback number, and brand name. As internet become more available to people in the United States and the rest of the world. This gives firms using the online catalog business a chance to obtain new customers and reach out to people they couldn’t before. Firms in the online auction industry are constantly looking for ways to market their services and make it easiest to use. Distinction is the key in the mail order catalog industry, because of the countless suppliers on these sites. In order to be successful sellers need to be distinct in price, reputation and quality. Because there are so many sellers in this industry, the competition is very strict and sellers will not just stratify consumers by just offering products. The distance between competitors is also vanishing. The online catalog business has also increased the intensity of competition by allowing new competitors into the market. Due to the enormous number of people visiting these sites on regular bases, not only individuals or small businesses have discovered, but also companies like Dell has discovered auctions sites as a great opportunity for expanding their business. The industry has enabled opportunities for businesses by locating on one point numerous customers from local, national and international markets and allowing them to enjoy the benefits. Suppliers have also found they can increase margins by using these sites to bypass intermediaries. We can fairly say that this industry is fairly diversified, in terms where they get their products. Some of the “players” in this industry have their own warehouses and inventory set ups. Ebay for example have a strategic partnership with IBM, which uses ebay to sell their newest products and offer services using competitive auctions and fixed-priced storefronts. Amazon relies on its own warehouses to supply its customers, and it has managed to do it in the most cost saving way. The advantage this industry has over other traditional retailers is that their warehouses and inventory can be located in strategic locations around the, from which they can distribute their product from (skipping the cost of a middle man). Others in this industry relay on its seller and buyers to make the market (eBay). Bills of materials in Ebay can be identified as small businesses selling used cars, books, music, and cloths etc. They can be private sellers who want to get rid of their old car or used book. So, Ebay is not dependent on its suppliers, but its sellers and buyers who operate on its site. Sellers in turn relay on their suppliers to provide them with the materials they need in order to produce their products. Ubid.com relays on its suppliers to auction off refurbished products from
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manufacturers. So, there are millions of suppliers linked to these sites. Yahoo shopping relays on businesses to list competitive prices on its site (Kelkoo price comparison). So, the price and the safety of transactions is key when a consumer decides to buy a product. Overall this industry is highly dependent on the economic condition that lies ahead. The winner is the one who can think outside the box and offer products at lowest price with the maximum return. The innovative and the consumer aware in this industry are “Kings”. The only leader we can identify in this industry being heavily dependent on materials is Amazon.com. They are dependent on wholesalers to get their products.... who in turn are dependent from their suppliers to get their raw materials in order for them to make the final product. Power of Buyers One of the main advantages the industry has are its millions of buyers that view there company’s goods each day. Each item listed on these sites can be seen by customers all around the world. The advantage it gives its customer is the million of items that is can be listed in a short amount of time. They operate 24 hours a day, and that gives the buyer the option to buy anything they want at anytime. The buyers can come from Asia, Europe, America and other parts of the world. The buyers can be small businesses, ordinary people and big corporations. They make the buying experience pleasant for the buyers because of their highly developed feedback system and rating features. One can easily study the item they are going to buy before making a purchase. The buyers can sell and buy items which have made these sites even more popular. You can easily compare prices between many items and make your purchase based on your preference. Buyers can easily communicate with their sellers and rate them. Buyers are given the option to study the background of a particular seller. The buyer can even save a lot of money, because many items end below market price of their value. There is also a large assortment of the items listed on the site. We can identify these two challenges that the industry has to cope with in the near future. We think the biggest advantage these companies have is the countless items they are able to offer at such low prices. Threat of New Entrants There are some factors which occur in the industries of internet auctions and catalog & mail order houses that have to do with new entrants. It is necessary to consider the two types of businesses which make up these industries and how they function. The boom of e-commerce has had an effect on these industries and has made much advancement in the way these businesses are run. These industries have also had a history of being suitable to new entrants because of the minimum capital needed to operate. The e-commerce sector is an area which has changed the way businesses construct their strategies in order to hold their market position. In a brick and mortar organization, companies have the use of infrastructure to keep new entrants out of their industry. This is the case in the industries eBay is in, with companies of a traditional set-up. With property, plant and equipment (supplies) necessary to run the company, the cost of a new entrant beginning business is high. The organization of the industry in this way works to keep power in the hands of the current companies in the market. The advancement of the e-commerce sector of business has had a great influence on the way the traditional business model works. The ability of new companies entering a market, and in our case the industry’s eBay fits itself, is increased by the limited tools needed to start business. Access to the internet is universal and because of such an online “trade
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channel”, such as online catalogs and online auctions can be set up with relative ease. The physical assets needed to set up these businesses are small and are commercially available. The other factor to consider in the catalog and mail order houses industry is in addition to the capital needed, which has been previously stated, and is the amount of inventory needed on hand. This industry requires a minimum amount of inventory in control at any given time. This occurs because the companies are able to have the products shipped at the time of sale from the retailer to either the customer or briefly to the company to ship on. The catalog and mail order houses industry, along with the internet auctions industry have advanced from its traditional brick and mortar business strategy to technological based services. Because of such, and the tradition of these industries being one susceptible to new entrants because of low inventory levels, it has become easy for new companies to enter the industry. Threat of Substitutions Buyers and sellers are strong supporters of the companies in these industries and to them switching costs on an emotional and financial level exists. On the emotional side, buyers and suppliers must take their trust they have applied to the companies in which they feel comfortable, and “switch” it to another company which they have not been exposed. In order for a substitute product to succeed it must enter the market with a product which is differentiated from the rest. In order to gain some of the market share from the leaders in this industry these substitutes must introduce a product at a lower price, of more value or something extraordinary in order to force loyal customers to leave their trusted company and accept the new substitutable product. The businesses making up these industries have worked to counteract the threat of substitutions through the use of differentiated products which cannot be easily copied by its competitors. This includes offering products of value to its buyers and sellers. Products of value in these industries mean having the most up-to-date technological systems applied to their business in order to create the most user friendly interface, adding additional tools for use beyond the traditional marketplace and offering a price which cannot be competed with by any direct competitors. Rivalry Rivalry in the e-commerce sector has always been an area of competition since its boom began in the late 1990’s and will continue as the increase in internet usage continues on. The e-commerce industry is expected to see double digit growth rates over the next five years (Shopall, 2008), and this increase will continue to attract more and more businesses hoping to take advantage of the profits. This intense rivalry which has been seen and will continue to be seen by eBay and its competitors means it is necessary to determine exactly what the customers want and what should be done to win the market share. Customers using the internet as a shopping tool are in the market to receive the lowest costs possible for a product while sacrificing personal customer service and the benefit of seeing a product “hands-on”. It is important to understand this trend among internet users in order to cater to their wants and needs. eBay has begun a system of customer satisfaction in order to give its customers a feeling that they are cared about which they would receive in most brick-and-mortar stores. eBay is ranked in the top 20 for customer service for retail companies by the National
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Retail Federation (EBay Ink, 2008), which shows their commitment to customers in an industry which traditionally is solely focused on price slashing. When rivalry exists within an industry its necessary to take other firms actions into consideration to determine if it will effect market share and if their strategy is a technique which should be adopted. An example of this approach taken by EBay is their inclusion of the ‘Buy it now’ option to make purchases. This update was included in order to spread their service into the market share held by more traditional internet stores, with a regular click and buy option at a set price. This gives them a variety of services which allows them to build a returning customer base because of the functionality available with the use of their site. eBay is in a position to continuously improve their product to reach customers with numerous wants and to give them the best experience possible. The use of an online community created through the EBay website and easily accessible through the front page gives customers and suppliers an opportunity to share their desires and suggestions for improvements. By continuously monitoring these community boards eBay is able to obtain necessary information to improve their company and remain in the top of their market by implementing certain requirements from those surrounding them. This also allows them to introduce these improvements before their competitors are able to because of the relationship they have built with those fueling the profits of the company. While rivalry is very much existent and intense in the industry which EBay exists, they are building a system to match customer’s wants and needs more effectively than their competitors.
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Industry Life Cycle Online retail spending declined 3% in the fourth quarter of 2008 from the year-earlier period, according to comScore, which said that was the first recorded quarter of negative growth since it began tracking e-commerce spending in 2001. (U.S. E-Commerce Down 3% in Q408, Up 6% for Year). Nonetheless, for the full year (2008) retail e-commerce grew 6%, to $130.1 billion—a substantially lower growth rate than in previous years, however. The fourth quarter rounded out what was a particularly challenging year for online retailers. The reduced growth rate is caused by the financial market meltdown that began in the fall, and dramatically reduced consumers’ discretionary spending power, resulting in the first quarter of negative growth (U.S. ECommerce Down 3% in Q408, Up 6% for Year). A review of quarterly retail e-commerce growth rates depicts the slowdown in the US retail economy during the past two years:
Throughout much of 2007, quarterly growth rates remained in the vicinity of 20%. However, beginning with Q1 2008 the growth rates began to de-accelerate, culminating in a 3-percent decline in the final quarter of 2008.
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Internal Industry Analysis Industry Key Success Factors Expertise in Technology The shift toward e-commerce has created some new potential areas of success for the Catalog & Mail Order Industry. E-commerce is a logical next step in the evolution of Catalog & Mail Order Houses Industry. E-commerce consists of the buying and selling of products or services over electronic systems such as the Internet and other computer networks. The amount of trade conducted electronically has grown extraordinarily with widespread Internet usage. The historical focus of Mail Order is mainly placing an order for the desired products with the merchant through a telephone call or mail. As e-commerce continues to develop, companies will have to shift their focus to include e-commerce in their compound pipelines. E-commerce also offers a much higher growth rate than any other trading method. A wide variety of commerce is conducted in this way, spurring and drawing on innovations in electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. The appeal of e-commerce is obvious; much higher potential returns on investment due to economically efficient marketplace. Rivalry in the e-commerce sector has also been an area of competition since its boom began in the late 1990’s and will continue as the increase in internet usage continues on. In order to stay competitive, companies in Catalog & Mail Order Houses Industry have to innovate and adapt new internet services. The benefits of technology adoption are the keys to their market penetration, central to competitive differentiation, and vital to their supply chain and distribution strategies. Services Multi-focused Model The services shared in multi-focused companies typically include business functions like finance, purchasing, information technology, human resources, and executive training. The scale advantages they provide are straightforward and include pooled purchasing, preferred access to credit, and other cost-related benefits. Economies of experience are more difficult to realize but can also be more valuable. Here, the successful companies in the industry have used knowledge gained in one service model to strengthen the performance of the others. To a limited extent, this kind of knowledge transfer occurs informally; this has always been the hope and promise of diversified companies. The important difference in successful multi-focused firms is that they formalize the process, designing very explicit ways of leveraging experience across service
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models. Knowledge transfer is facilitated by deliberate investments in such programs as formal best-practice sharing; centralized, dynamic employee training; and the rotation of managers among models. This industry shows that the best means of sustaining growth is to employ the multi-focused model, yet it is also evident that this model requires concentrated effort to defend. Leaders of individual service models constantly assert that dedicated, rather than shared, resources would do more to strengthen their own businesses. Operations managers, meanwhile, raise a chorus of complaint that shared services require more- vigilant control "below the line" if they are to deliver the necessary economies of scope and experience. Given the perpetual assault on the model, it may not be surprising that another common characteristic of successful multi focused firms is directive (even autocratic) leadership. This leadership style accommodates different personalities, but it always relies on senior managers who are able and willing to exert strong influence on subordinates. They must be, in order to balance the competitive autonomy of individual service models with the collective value of shared services. Without strong, centralized leadership, revenue-generating line managers typically overrule shared-services managers, particularly in moments of strategic distress. Indeed, companies often stack the deck by placing stronger leaders in the service models than in the shared services, effectively undermining the performance of the system. Marketing Consumer Reviews On-line consumer reviews, functioning both as informants and as recommenders, are important in making purchase decisions and for product sales. Their persuasive impact depends on both their quality and their quantity. The industry shows three major findings: (1) the quality of online reviews has a positive effect on consumers’ purchasing intention, (2) purchasing intention increases as the number of reviews increases, and (3) low-involvement consumers are affected by the quantity rather than the quality of reviews, but high-involvement consumers are affected by review quantity mainly when the review quality is high. These findings have implications for on-line sellers in terms of how to manage on-line consumer reviews. Mail Order Industry consumers cannot touch or smell products, as would be possible in traditional retail outlets, so their purchase judgments must be based on the product information presented on the Web site. On-line sellers seek to overcome this limitation by giving consumers the opportunity to share product evaluations on-line. This consumer-created information is helpful in making purchase decisions because it provides indirect experiences of products. Gaining a large subscriber base Content owners and distributors are competing not only to attract new customers, but also to build loyalty and retention rates among existing customers. Today's mandate for "reinvention" means the future depends not only on incremental improvements, but on quantum-leap breakthroughs as well. Subscription-based operators are constantly developing strategies to maintain and grow ARPU (Average Revenue Per User) through customer retention, process improvement, and product innovation. In the wider sphere, across the E&M landscape cable and
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satellite TV operators, broadcast and cable networks, cinema owners, newspaper and magazine publishers, and Internet portals are struggling to enhance their customer care and management operations. Companies in the industry are always seeking to derive value from the entire customer management value chain, from database interrogation to inform and drive marketing and cost-reduction strategies, to development of powerful people and systems strategies which can deliver the highest level of customer service. Standard and Custom Catalogs On-target award options is the way to engage emotions. The catalog's design might catch the participant's attention, but it's the merchandise that keeps it. The first thing to consider when selecting merchandise is that there are two types of catalogs: standard and custom. The merchandise in the standard is usually chosen by the catalog supplier, not the incentive planner. Standard catalogs work well with a diverse audiences. With the custom catalog, the incentive planner and supplier work together to find merchandise for very specific target audiences. Amazon.com, for example, uses recommendation to personalize the online store for each customer. The store radically changes based on customer interests, showing programming titles to a software engineer and baby toys to a new mother. The bottom line is tailoring the merchandise.
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Industry Value Chain Included below is a chart of the main functions within the industry in which they provide services to their customers. These are high level descriptions of steps which occur and are relevant to the industry as a whole whether it be the traditional type of Catalog and Mail Order Company and also the newly formed technological based businesses.
Primary Activities Raw materials The main materials that are critical towards the success of the Catalog & Mail Order Houses Industry are their networking related equipments, software used on the websites, catalog printing and electricity. Most of the companies in the industry are shifting, or have shifted, their business online. Doing business online requires servers for outside users to access services and products. In addition, these servers are dependent on Dell, IBM, Sun Microsystems, etc, to manufacture. These servers also require huge electricity to operate, so the companies have to form contracts with local electricity providers. Backup generators are also necessary for the servers, in case there is a blackout, backup generators would kick in and provide powers to the main servers. Companies also have to create contracts with network providers to connect all there servers to the World Wide Web. In order to remain successful and competitive within the industry, companies need to obtain the most technological advanced software to build their websites. Users are expecting secure, reliable and fast access when they use the websites. However, some
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companies in the industry are still not fully internet based; they are still using print catalogs and mail them to customers. And this requires partnering with paper suppliers. Inbound Logistics Every person who has something to sell can be a potential supplier in the mail order industry, so the suppliers are countless. The mail order industry doesn’t have chain of traditional manufacturers, but instead provides services that bring buyers and sellers together. So, there is not an imminent threat from suppliers, because most of the time anyone can become one. EBay and other online auctioneers also have several thousands of online store suppliers, who use their site to reach out to new customers. In order for an online store to successful on eBay it must, first of all, establish a brand and make sure their brand becomes well known. Things customers look at when choosing a product to buy from a store online is the price, feedback number, and brand name. As internet become more available to people in the United States and the rest of the world. This gives firms using the online catalog business a chance to obtain new customers and reach out to people they couldn’t before. Firms in the online auction industry are constantly looking for ways to market their services and make it easiest to use. Distinction is the key in the mail order catalog industry, because of the countless suppliers on these sites. In order to be successful sellers need to be distinct in price, reputation and quality. Because there are so many sellers in this industry, the competition is very strict and sellers will not just stratify consumers by just offering products. The distance between competitors is also vanishing. The online catalog business has also increased the intensity of competition by allowing new competitors into the market. Due to the enormous number of people visiting these sites on regular bases, not only individuals or small businesses have discovered, but also companies like Dell has discovered auctions sites as a great opportunity for expanding their business. The industry has enabled opportunities for businesses by locating on one point numerous customers from local, national and international markets and allowing them to enjoy the benefits. Suppliers have also found they can increase margins by using these sites to bypass intermediaries. We can fairly say that this industry is fairly diversified, in terms where they get their products. Some of the “players” in this industry have their own warehouses and inventory set ups. EBay for example has a strategic partnership with IBM, which uses eBay to sell their newest products and offer services using competitive auctions and fixed-priced storefronts. Amazon relies on its own warehouses to supply its customers, and it has managed to do it in the most cost saving way. The advantage this industry has over other traditional retailers is that their warehouses and inventory can be located in strategic locations around the world, from which they can distribute their product from (skipping the cost of a middle man). Others in this industry rely on its sellers and buyers to make the market (eBay). Bills of materials in eBay can be identified as small businesses selling used cars, books, music, and cloths etc. They can be private sellers who want to get rid of their old car or used book. So, eBay is not dependent on its suppliers, but its sellers and buyers who operate on its site. Sellers in turn rely on their suppliers to provide them with the materials they need in order to produce their products. Ubid.com relies on its suppliers to auction off refurbished products from manufacturers. So, there are millions of suppliers linked to these sites. Yahoo shopping relies on
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businesses to list competitive prices on its site (Kelkoo price comparison). So, the price and the safety of transactions is key when a consumer decides to buy a product. Overall this industry is highly dependent on the economic condition that lies ahead. The winner is the one who can think outside the box and offer products at lowest price with the maximum return. The innovative and the consumer aware in this industry are “Kings”. The only leader we can identify in this industry being heavily dependent on materials is Amazon.com. They are dependent on wholesalers to get their products, who in turn are dependent from their suppliers to get their raw materials in order for them to make the final product. Operations The catalog and mail order industry is focused on the development of marketplaces in order to bring their suppliers and buyers together in a single platform. The traditional businesses in this industry compete with hard-copy catalogs which display and list the each suppliers good to be viewed and purchased by buyers. Currently, newly formed electronic functions of catalogs have entered the market and include television, telephone and e-commerce. Revenues are generated through the sale of retail goods via mail order, television and catalog channels. Hard-copy catalogs are produced by taking the goods received by the supplier and listing this in one catalog with a combination of goods from other suppliers. The construction of these catalogs means assembling various components together to make a whole, working product. This allows information to be available to distribute to buyers through sales and marketing. Recently the growth of electronic forms of catalogs has cut costs and added competition into the industry. Their operations and activities focus on developing marketplace platforms for products to exist, which have the capability of being shopped by buyers. These companies go through the process of collecting supplier’s goods, much the same way as hard-copy catalogs do, and place them into virtual marketplaces. This includes using various tools to sell the products, such as fixed-price listings, auctions, trading and various other methods which will transfer the product from the supplier to the buyer. Marketing and Sales After the operations have been completed in developing product marketplaces it is necessary to effective distribute and market the catalog. An investment is needed in the presentation of the catalog in order to attract buyers through highlighting the products. This is also very important in this industry as customers are able to control how and when they decide to shop because this industry is constantly open for shopping. By distributing a quality, eye-catching product the catalog company is more likely able to attract buyers. General advertising is also being completed by these companies and has seen its advances with the introduction of the internet. Also important to consider in the marketing and sales of the catalog industry is the brand image created around the product. Those who work on marketing their brand name and spreading this to customers are seen to have the best success in this industry. When customers receive quality service, which will be discussed later, they relate the catalogs image and name to a company they will remember and wish to do business with in the future. This is aided through the creation of a
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catching company name which both relates to the industry the company is in and the type of products/services they offer. Outbound Logistics There are two aspects pertaining towards outbound logistics in Catalog & Mail Order Houses Industry. First, companies would have to distribute catalogs either over by the internet or print. If it is distributed by the internet, the search engine plays the main role for customers to locate the product. Keyword is used in a search query initiated by a user or when specific content is being viewed by a user on the website. Companies also would distribute print catalogs to the customers. Second aspect would be delivering purchased products to the buyers. Catalog & Mail Order Houses Industry depend on suppliers to finalizing the purchases to the buyers. After-Sales Services Although the suppliers in this industry are not the companies producing and distributing the catalogs, they still take a great deal of pride in taking care of their customers. Most commonly in this industry the catalog and mail order house is the face of the product and service, so in turn they will be first responsible for customer satisfaction. As with traditional retail companies they develop return policies, which are negotiated earlier with the suppliers, and dedicated customer service/support communications to handle any problem which may arise. In following this process a company participating in this industry can build a name for themselves in reliability, trust and reputation, all of which are very important to customers. This value given to the customer will create return customers, who will also advertise through word-of-mouth to those surrounding them. By finishing the value chain in this manner will leave the customer with the best possible image of your company, rather than ruining their experience. This is a goal commonly shared by both the suppliers to the catalogs and the catalogs themselves in order to create a shared vision for customer satisfaction. Secondary Activities Firm Infrastructure Specification applies to the industry in a variety ways. These include government relations, company policies, financial regulations and environmental policies. While meeting these rules and regulations, the companies of this industry must also focus on scanning the external environment for potential business opportunities. Human Resources Management Companies in Catalog & Mail Order Houses Industry have to effectively hire, train, and manage new employees. The employees needed cover wide range of skill sets to meet product demands such as marketing, finance, engineering and others. If their new hires perform poorly, if they are unsuccessful in hiring, training, managing, and integrating these new employees, or if they are not successful in retaining their existing employees, their business may be harmed. To manage the expected growth of their operations and personnel, they will need to improve their transaction processing, operational and financial systems, procedures and controls.
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Technology Development Within this industry, technology has played an important role in the way in which the companies function and the future of the industry. The internet has played an important role in allowing new entrants to enter the market while also making a cost cutting business which is meets the wants and needs of today’s customers. Procurement Procurement for Catalog & Mail Order Houses Industry is the section of companies that oversees the purchasing of the materials that are necessary for the company to operate. These include purchase networking related equipments from their manufactures, conducting contracts with its local electricity suppliers, forming agreements with Internet Service Providers, printing companies and delivery companies.
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Industry Outlook According to Reuters the growth of e-commerce in the US is expected to slow down to 11% in 2009 as consumers will reduce their spending due to the global economic recession. The growth is projected to slip from 13% in 2008 and 18% in 2007. Moreover, present economic situation and weak consumer confidence due to decline in discretionary income and increasing unemployment will keep the consumers away from the online retail business in 2009. The country is expected to see online expenditures of US$ 156 billion this year, higher than the US$ 141 billion recorded last year. Narrowing our research of the industry eBay is in Yahoo finance. The estimate shows that the industry will grow only with 0.2% this year and 13.8% next year. The industry is expected to grow an average of 11.98% per annum the next 5 years. Furthering our research of sector of that industry, it shows that the sector will contract with -2.6% this year and grow 18.3% next year. For next 5 years the sector is expected to grow with 11.19% per annum. This concludes our research that the industry is still growing, and there are plenty of opportunities for EBay to expand its business and operations.
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eBay – Strategic Profile Overview eBay is an online company that provides online marketplaces for the sale of goods and services. It also provides commerce, platforms, online payments services and online communications offerings to individuals and businesses.The company primarily operates in the US. It is headquartered in San Jose, California and employs 15,500 people. The company recorded revenues of $7,672.3 million during the financial year ended December 2007 (FY07), an increase of 28.5% over FY06. The operating profit of the company was $613.2 million during FY2007, a decrease of 56.9% compared to FY06. The net profit was $348.3 million in FY07, a decrease of 69.1% over FY06. Key Facts Head Office
eBay Inc. eBay 2145 Hamilton Avenue San Jose California 95125 USA
Phone
1 408 376 7400
Fax
1 408 369 4855
Web Address
http://www.ebay.com
Revenue / turnover (USD Mn)
7,672.3
Financial Year End
December
Employees
15,500
NASDAQ Ticker
EBAY
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Financial eBay currently has set itself into a position of strong financial success and growth in the key areas of its business. Sales have increased due to the strengths of past acquisitions and low costs have returned high profits back into free cash flow. Cash is being held and used to advance success in fast-growing businesses in order to receive quick returns for stockholders. Cash is currently listed at $3.8 billion and with borrowing power increase by $1B to about $2B, they are in a strong position to continue their advancement in key acquisitions. Another strong financial factor to consider for eBay is that it has permitted leverage of 3x EBITDA, up from their past permitted leverage of 2x, allowing for the use of more debt in their cost of capital structure. The stock market seeing eBay as a strong company has been important when they are adding capital and their current market capitalization is $15.70B. Through the use of this capital being raised through the sale of its own stock eBay has built two strong forces to finance their growth, debt and equity. Organizational The executive team has been built in order to provide management among a variety of business areas which are especially specific to eBay. These include senior managers of human resources, platform technology, general counsel, corporate communications, marketplaces, finance, and PayPal. These managers report to the CEO and then to the board of directors, who are actively involved with the company and include former CEO Meg Whitman. Within the organization eBay has made many advances to aid in their growth. Three operating segments have been designed within the company to handle the commonly used marketplaces, along with the additions of payments and communications. Marketplaces are made up through the use of eBay auction listings, fixed price listings, as well as the additions of their other online platforms, Half.com, Rent.com, Shopping.com and StubHub. The payments segment is made up of PayPal, and communications consists of the acquired Skype VoIP. Physical eBay works out of facilities throughout the U.S. and also located in 25 different countries. These are used for executive and administrative offices, data centers, product development offices and customer service offices. The development of new properties is important to acquire in the eBay strategy. One of the property acquisitions included a new data center in South Jordan, Utah to be opened which will create about 50 jobs. The employees in this location are proposed to receive 50% more than the county median wage. The development of facilities in locations such as this one, which will improve its community has made tax credits available from the government, including $27.3M for this project. The human capital currently held across all eBay locations is vast and increasing with its growth. As of December 31, 2007, eBay Inc. and its subsidiaries employed approximately 15,500 people, approximately 9,500 of whom were located in the U.S. Technological
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Technology becomes an important factor when considering an e-commerce based company. eBay has incorporated a large amount of technology into their company in order to make everything run efficiently. Starting from the original auction-board coding put into place to initial start the company, many resources have become available for the use by eBay. These include advanced software tools and services to support their core online platform, eBay.com and also its adjacent platforms including Half.com, Rent.com, Shopping.com and StubHub. Currently Sun Technologies is providing software and programming to support eBay in its database management. Also used are the improvements to the eBay.com homepage, the site’s search functionality, the ease with which sellers can list items, visual search, and the expansion of our customer support infrastructure. eBay has filed for patents on their implemented technology and so far have received 8, protecting them against competitor infringement. Recently a suit was settled with the tech firm MercExchange which will give eBay control of three disputed patents, including the Buy It Now service. This chart provides financial ratios for eBay going back to 2005. All data used is year end, and with such we can determine how eBay has done over time. As can be seen in the above financials there are several areas which we must focus our attention. Comparison of Competition, 2005-2008
2005
2006
2007
2008
Profitability ROA
10.96%
8.9%
2.41%
11.11%
ROE
12.77%
10.74%
3.08%
14.92%
Operating Profit Margin
31.7%
23.8%
8%
23.25%
Net Profit Margin
23.8%
18.86%
4.54%
20.04%
2.144
1.97
2.3
1.7
1.80
1.59
1.87
1.6
Debt/Assets
0.139
-
-
.064
Debt/Equity
0
0
0
0
Liquidity Current Ratio Quick Ratio Leverage
Interest Coverage
272.7
Activity Fixed Asset Turnover
6.0
6.6
7.2
7.4
Receivables Turnover
16.153
16.7
17.6
18.7
Total Asset Turnover
0.460
.47
.53
.55
25
Days Sales
22.6
21.9
20.8
19.6
P/E Ratio
-
-
-
12.80
Dividend Payout Ratio
0
0
0
0
Shareholder's Return
The ROE for 2008 is currently outperforming all time periods going back to 2005. This is an impressive feat given the current economic situation and displays eBay’s goal of working for its shareholders. This will be beneficial for the company, as the market will see it as an owner focused company and should stimulate more investor interest. The other area of success for the company financially is its liquidity ratios. By holding low amounts of debt and liabilities, these statistics look very good for the health of the company. These ratios have stayed consistent over time, proven the financial strength of eBay. Although there are strong financials to show for this company, there are also areas which show faults and need improvements. To start, operating profit margin has decreased on average since 2005. This shows a decrease in net profit relative to the amount spent on operating expenses. This will need to be improved in order for the company to be as successful as it should be financially. The other area of concern deals with the financial ratios for days sales. This number has decreased by 15% since 2005 and this is a result of less sales happening on a daily basis for the company. Slowed sales comes to equal less efficient performance for the company and also a need for a growth strategy to be implemented. Human Resources eBay currently holds a veteran management team under the control of the newly appointed CEO John Donahue. Donahue’s predecessor was the well known Meg Whitman who had many successes after her arrival at eBay in its infant stages. Whitman took the company public and through many successful years she was able to create an effective executive work force which was made to last. The employees at eBay are extremely well taken care of, and this is an area of pride for the company. Fortune has listed eBay as the 83rd best company to work for in its 2009 100 Best Companies to Work For edition, and in 2008 it was ranked 68th. Innovation Outside of the use of acquisitions in order to support growth for eBay, innovation is constantly being created. This is done through the hiring and use of software and computer engineers in order to develop new coding and software systems. Recently introduced is the “Best Match” searching tool, using algorithm in order to sort top searches and also the eBay to Go tool which allows the embedding of item listings into other internet websites. Having the capacity to innovate is also used in modifying the payment process to enhance speed, reliability and customer satisfaction.
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Because of its innovation system, eBay Inc. became the first internet company to be awarded the National Medal of Technology and Innovation. Reputation The eBay name has become a household reference when thinking of e-commerce catalogers. This is due to the reliability, reputation with suppliers, and forming of efficient, supportive and mutually beneficial interactions/relationships which have been focused on from the beginning of the company’s formation. eBay’s purpose is to create, maintain and expand the functionality, safety, ease-of-use and reliability of our online commerce platforms while supporting the growth and success of our community of users. In turn this leads to their goal of building new communities around the world with commerce, trust and opportunity. These all have been focused on in the eBay business model and are also felt and well-known by those with knowledge of the company. Capabilities The vast amount of resources held within the eBay company throughout each different area allows them to create capabilities for the company. This is done by packaging the necessary resources together and using them in a way to give value to those surrounding them. Through the systems which have been created and acquired, along with the technological advances, eBay has created a wide array of websites to bring millions of buyers and sellers into a number of marketplaces on a global level. This makes them the world's largest online marketplace with 84 million active users worldwide. The marketplaces are able to support more than a hundred million items on any given day through the addition of physical assets to technology and organizational systems. By developing an immense combination of facilities, eBay has the resources to handle large amounts of data and IT support. In addition to the strong marketplace division at eBay, payments and communications make up its success. PayPal and Skype as organizational resources gives eBay the capability to develop communication between users as well as making payments secure, easy and quick to send and receive payments online. These tools increase the amount of business eBay can do and the number of customers it attracts. Innovation and technology has been used in order to create marketplace platforms which seek to bring buyers and sellers together through fully automated and easy-to-use online websites that are available 24 hours a day, seven days a week, from any place in the world at any time. Working as an online company has allowed eBay to save costs which are normally held by brickand-mortar businesses. This has given them the capability of offering buyers and sellers lower fees than traditional intermediaries. A large component of the success eBay has received is through its reputational resources. By keeping a good name with its customers, they continue to return and recommend others. eBay has taken the route of combing technology, innovation and reputation to create a system to match users wants and needs. The SafeHarbor program was implemented in order to provide guidelines for trading and user dispute resolution. The staff investigates users’ complaints of possible misuse of marketplace platforms and takes appropriate action, up to suspending users from
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bidding on or listing items for sale. Another innovation which was created with reputation is the Verified Rights Owner Program. This Program lets intellectual property rights owners request the removal of listings that offer items or contain materials that infringe on their rights. This helps to protect community members from purchasing items that may be counterfeit or otherwise unauthorized. More generally, technology, innovation and reputation have built personalized, accurate and timely support services to the community of users. Buyers and sellers can contact eBay through a variety of means, including email, online text chat and also by telephone. Resources are focused on improving accessibility, increasing capacity, expanding categoryspecific support, extending online self-help features and improving systems and processes in order to provide efficient and effective support.
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Core Competencies
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Company Value Chain Primary Activities Raw Materials Being a technological e-commerce based company eBay originates from computer coding and software to develop its company’s requirements. In addition to these technologies, electricity is necessary to support all functions within the development stages of the product. Inbound Logistics eBay consists of technological system development to support their services. These technological systems began through the use of simple coding and have since required the development and enhancement of computer systems. The requirements have included the use of data management systems to handle the large amount of data which is used in the creation and support of eBay marketplaces. Servers are needed to store this data and also back-up servers to be used in the instance of system crashes. Also needed is obtaining database software through a third party vendor, Sun Microsystems. The collection of these logistics provides a backbone for the operations that will be completed in the final product. Operations Continuing on with the development of inbound logistics, eBay is able to offer their final product to customers. The products offered by suppliers in the eBay marketplace are brought together in an online type of catalog for buyers to view and purchase. This marketplace platform is developed and enhanced through the use of the following features of value it offers its customers: •
Turbo Lister, eBay Blackthorne, ProStores, Selling Manager and Selling Manager Pro, each of which helps to automate the selling process
•
Picture Services, which enables sellers to include pictures in their listings
•
Shipping Calculator, which makes it easier for buyers and sellers to calculate shipping costs
•
Shipping Labels, which allows sellers to print certain postage and UPS labels
•
Shipment Tracking, which enables sellers to track their shipped packages
•
eBay Toolbar, which helps eBay users stay connected with eBay wherever they are on the Internet
•
eBay Desktop, which helps eBay users stay connected with eBay from their desktop computer
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•
eBay Countdown, which helps eBay users bid and buy from anywhere on the Internet
•
eBay Sales Reports and eBay Sales Reports Plus, which provide sales and fee information to sellers
•
eBay Marketplace Research, which enables sellers to analyze sales in categories across the site
•
Reviews and Guides, which assists shoppers in making more informed choices
•
eBay Neighborhoods, which assists users in connecting around items in which they have a mutual interest
•
eBay To Go, which allows users to embed item listings in their own Internet websites
•
Best of eBay, where eBay users can vote for their favorite items
•
PayPal, which facilitates the online exchange of funds
•
Skype, which enables VoIP communications between buyers and sellers
•
Bill Me Later, which allows for transaction-based credit to be lent to buyers
•
Adjacent Marketplaces businesses, Half.com, Rent.com, and Shopping.com
eBay operates its marketplace platforms with two types of structures to offer its customers. These include auction-style listings and fixed-price listings. Auctions are the traditional offering of eBay and are administered through IT coding and software in a similar, but modified way a normal auction is held, but electronically. The other type of listing structure is through a fixed price format. This allows buyers and sellers to complete the transaction process in a timely manner rather than waiting for the auction period to expire. The Half.com subsidiary of eBay also provides a fixed-price, person-to-person online platform that allows customers to buy and sell new and previously owned books, movies, music and games at discounted prices. These listing are all brought together onto one platform within the eBay.com marketplace. Outbound Logistics The end of operations brings in the outbound logistics of the company. In eBay’s case this represents finalization of bringing together suppliers and buyers and the processing of payments. During the outbound logistics phase, suppliers and buyers enter into an order contract which commits each other into the purchase. eBay facilitates this action through administering the communication between each party. Handling payments from buyers involves the use of eBay owned PayPal, to transfer money directly from buyer to seller, while making payment for usage back to eBay. PayPal enables individuals and businesses to securely, easily and quickly send and receive payments online in
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approximately 190 markets worldwide. The other aspect of payments which eBay owns is the use of Bill Me Later, enabling online U.S. merchants to offer, and U.S. consumers to obtain, credit for the transaction at point of sale. These economic tools have given eBay a financial network to support global, real-time payments. Marketing and Sales Market and sales directly completed by eBay is on a broad level in order to obtain both new buyers and suppliers. They also offer their customers a way to market and sell their own products through the use of their marketplace. They directly market and sell their product through the use of product differentiation, such as online auctions, and the use of promotions. These occur through marketing campaigns in the U.S. and pricing promotions within the website to drive traffic and continue the growth in the amount of products listed and purchased. Providing products and services for the use of customers also promotes the eBay name, in an indirect manner. Marketing in this way adds into advertising which is ultimately received by the company, and aids in the sale of products within the marketplace. Customer Service and Retention In order to remain successful and hold market share in the catalog and mail order business, customer service and retention is a key function of eBay’s business. This is facilitated through the use of feedback forums and the use of several features added onto the platform to gain trust and loyalty of the customers. The feedback forum encourages users to provide feedback ratings and comments on other users with whom they trade. It requires feedback to be related to specific transactions and provides an easy tool for users to match specific transactions with the user names of their trading partners. This information is recorded in a profile that includes a feedback rating for the user, with feedback sorted according to whether the feedback has been provided over the past month, six months or twelve months. Users who develop positive reputations have color-coded star symbols displayed next to their user names to indicate the number of positive feedback ratings they have received. As a customer-focused company, eBay no longer allow sellers to leave negative feedback for buyers, but do give them the tools designed to avoid negative feedback. The other areas of value for customers are the creation of trust and safety features integrated to the platform. These include the Safe Harbor Program and Verified Rights Owner Program, Customer Support and Value-Added Tools and Services, as well as Loyalty Programs, such as PowerSeller, top buyer and coupons and buyer rewards. These features are designed to make users more comfortable dealing with unknown trading partners and completing commercial transactions on the internet which can be a stressful idea. Supporting Activities Procurement
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eBay’s activities within procurement involve creating systems for suppliers to be successful in their use of the marketplace platform. They complete activities in order to consume the inputs needed for the company’s products. In this case computer servers, database systems and IT software is combined to create a strong online marketplace. Technological Engineering is a strong focus at eBay in order to strengthen its innovation and technological development. In the e-commerce industry this focus in necessary in order to keep the advantage on new entrants attempting to enter the market and also those which already exist. Research and development totaled $736M for the 2008 year and this applies to new product design, product upgrades and services additions to the website. Human Resource Management eBay currently holds a veteran management team under the control of the newly appointed CEO John Donahue. Donahue’s predecessor was the well known Meg Whitman who had many successes after her arrival at eBay in its infant stages. Whitman took the company public and through many successful years she was able to create an effective executive work force which was made to last. The employees at eBay are extremely well taken care of, and this is an area of pride for the company. Fortune has listed eBay as the 83rd best company to work for in its 2009 100 Best Companies to Work For edition, and in 2008 it was ranked 68th. With out a large force of human capital eBay would not be able to function. The focus on employee satisfaction and attitudes is important to achieve the success of the company. This takes place throughout the company and even in the hardest times. Recently eBay was forced to layoff employees due to the economic circumstances and paid out handsome severance packages to those who were forced to leave. Firm Infrastructure eBay, being an online company has also advanced their infrastructure online as well. Financially, all reports are easily accessible through the company website along with media on quarterly statements and company updates, available for all to access. These display the structure which has been applied both financially and executively in order to support their company goals and vision. This business is also susceptible to government relations dealing with issues of the law and eBay has a strategy to deal with these government relationships. Finally, an important detail in today’s markets includes the development and promotion of environmentally sustainable actions. eBay sees this as a need to give back to their communities through various community wide and broad activities to support environmental friendliness.
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SWOT Analysis Strengths
Weaknesses
Brand Name Economies of Scale Internet Sales Open Seller Platform Low-Cost Provider Paypal Market Leading Low Debt Opportunities International Expansion NetBook Computers Department Store Failures
Non-Business Related Acquisitions Moving away from auctions being the primary business Mature Market
Threats Amazon.com E-commerce Tax Litigation Economy
Strengths Brand name - Strong brand name helps to increase margins by charging premium prices for goods, because customers perceive a higher standard of quality from companies with strong brands. The strong brand name eBay has obtained has increased the number of customers they draw into their business because of the common name they have throughout consumers. Economies of scale - eBay has economies due to its large supply of buyers and sellers. Having a large number of active users as they do, they are able to protect themselves from new entrants to the industry. This retains their market share and provides them with a strong foundation for successful business. Internet Sales – Internet sales are increasing at a fast pace. This has come to benefit eBay and the industry as a whole because of the recent advancement to using technological based systems to run the businesses. The continued growth of the internet and also its expected growth into the future greatly supports eBay’s business and success. Open Seller Platform - The ability to allow businesses to sell their products on a website enhances liquidity for such products, gives better options to users and allows the platform provider to increase the number of goods they have for sale, which increases their revenue and margins. When buyers can get new or used products from one place, the customer relationships between the buy and the preferred platform will increase.
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Low-Cost Product – Low cost provides significant barriers to entry if that company is the only low cost product among many other higher cost products. Also, companies that save businesses money will also benefit when businesses have to cut cost over time, either through greater efficiency or cheaper goods. eBay is able to have low costs in an industry which requires somewhat of a technological investment, which allows it to have high margins. Paypal/Non-Cash Society - The growing use of credit cards and debit cards are increasing the trend towards a cash-less society. Card companies and those that process card transactions should benefit from the shift away from using cash. The growing use of these forms of payment will allow Paypal to generate substantial growth to the eBay company. Market Leading - Market leading position brings many benefits to those companies. Generally, they possess good brand names, economies of scale, higher margins, revenues and other significant benefits, such as the ability to raise debt at lower cost. They generally have a more stable business than their competitors and are more likely to acquire other businesses as opportunities come about. Low Debt – Without long term liabilities facing the company, eBay is able to avoid constant interest payments which cut into cash flows each period. This lowers the risk of the company because without debt taken out, there is no default risk of the company. Free cash flows can then be used to finance growth of the company and on innovation, rather than making payments to bondholders. Weaknesses Non-Business Related Acquisitions - The acquisition of Skype did not add value for eBay's customers. Non-essential acquisition can distract a company and dilute the management expertise and financial results. It would be a significant weakness for eBay to continue making non-essential acquisitions. Moving away from auctions being the primary business – Through various business related moves, eBay has faced weaknesses in their company distracting their focus away from their core business of auctions. This has placed management in a situation to run the eBay company with a strategy different then what had been put in place in the past and also what has been successful for them. The last part of the weakness which effects the company is getting outside the range of management’s expertise. Mature Market - Mature markets result in slower growth of revenue and lower margins as companies begin to compete on price and service versus the past driver of value, growth. Competitors usually have to differentiate themselves in the customer's eye to maintain value. Some become lost cost suppliers, high quality suppliers of products, or niche suppliers of services. If companies are able to create a natural monopoly (economies of scale, buyer power, etc.) then mature markets can turn into cash cows, where the main company needs very little investment to produce very large amounts of free cash flow. eBay must handle their situation as a mature company by introducing new strategies to enhance their business. Opportunities
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International Expansion – Because of the increasing growth in buyers globally, there are many opportunities in globalization for growth. The type of business eBay is in has the potential to be successful in other markets if they can fix some of the problems with their services that other locations expect. NetBook Computers - Low cost notebook computers are gaining in popularity. They run on the Linux platform, which undermines Microsoft’s Windows operating software system. Department Store Failures - Slowdown in department store's popularity may cause long-term growth problems. This also affects all merchandisers who want to sell their clothing through department stores. Threats Amazon.com - Increased competition is a threat to Ebay's business, but Amazon.com provides an acute threat to eBay, through their advancement into used goods and auction style online commerce. E-commerce Tax - Potential tax on e-commerce transactions will decrease the demand for goods online. This will affect the prices of services which need to be charged in order to make up for the increase in costs for the company, suppliers and buyers. Litigation - Litigation risk might not be priced into the beta. The potential of litigation risk increases the uncertainty for companies, which lowers the value of a company. Until the risk is gone, a company tends to trade based on any news concerning the litigation potential. Economy - A global slowdown or recession will hurt all companies, but mostly those whose products sell in economies that experience the worst declines. Commodity prices will also decline, because economies slow down and the current resource supply is static; therefore, oversupply ensues. A global slowdown also affects advertising/service companies, which are typically very cyclical industries.
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Yahoo! – Strategic Profile Overview Yahoo! (Yahoo) is an internet and media communications company, offering internet services such as search and email. The company provides a range of services to individuals, including search, yellow pages, shopping, information, entertainment and communication. Its major websites include Yahoo! Mail, Yahoo! Jobs, Yahoo! Search, Yahoo! Answers, Yahoo! Videos and Flickr, among others. The company primarily operates in the US. It is headquartered in Sunnyvale, California and employs 14,300 people. The company recorded revenues of $6,969.3 million during the financial year ended December 2007 (FY2007), an increase of 8.5% over 2006. The increase in its revenue was due to growth in fee paying users and Page Views in 2007 over the previous year. The operating profit of the company was $695.4 million in FY2007, a decrease of 26.1% over 2006. Its net profit was $660 million in FY2007, a decrease of 12.2% over 2006. Key Facts Head Office
Phone
Yahoo! Inc. 701 First Avenue Sunnyvale California 94089 USA 1 408 349 3300
Fax
1 408 349 3301
Web Address
http://www.yahoo.com
Revenue / turnover (USD Mn) Financial Year End
6,969.3
Employees
14,300
NASDAQ National Market Ticker
YHOO
December
Company Background Yahoo! Inc. (Nasdaq: YHOO) is an American global Internet services company that operates the Yahoo! Internet portal. It provides a range of products and content, from email and search to media streaming and downloads. It is the most popular Internet site based on traffic, with visits
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from more than 500 million unique users every month. However, Yahoo!'s prominence is being challenged as competition heats up in the Internet services sector.
Resources Identification Tangible Tangibles for Yahoo! Inc. consist of financial, organizational, physical, and technological resources that are necessary for the overall success of the company. The financial resources for Yahoo are their borrowing capacity and their ability to generate funds. In 2008, Yahoo has $0 in debt and they generated total revenue of $ 7,208,500. Yahoo has never borrowed any money; however Microsoft is willing to spend $44 billion to acquire Yahoo! Inc. The organizational resources for Yahoo consist of the reporting structure and the formal planning, controlling, and coordinating systems. A couple of the things that are considered organizational resources are the computer systems that coordinate all the searching functions and storing data, and also all of the systems that go into preventing data failure and organizing search patterns. The physical resources for Yahoo are their servers across the countries, the power generators in case of blackout, and networking equipments which they operate out of. The technological resources for Yahoo are such things as patents, trademarks, copyrights, and trade secrets that they might hold. For example, Yahoo! is a trademarked name. In addition, their trade secrets would be their search engine. Intangible Intangibles for Yahoo! Inc. consist of human, innovation, and reputation resources. Human resources are the knowledge, trust, managerial capabilities, and organizational routines that are necessary for Yahoo! to be successful. HR management is vital towards ensuring that Yahoo has knowledgeable and trustworthy employees that deliver a consistent and pleasant experience for all of their users. Yahoo! prides itself on its superior customer service and this is a major part of their human resources. Innovation resources for Yahoo! are the many ideas, scientific capabilities and their ability to innovate. The Internet Information Providers industry is consistently changing and in order to remain competitive Yahoo! must consistently come up with ideas and innovations to adjust to the changing market. A few things that can be categorized as innovation resources are such things as having the idea to create browser based applications. Or the innovation that Yahoo has just initiated with social network applications which connects people with causes through their products and services. Reputation resources for Yahoo! are their reputations with their customers and their suppliers, their brand name, and the perceptions surrounding their service delivery, reliability, and efficiency. Yahoo has built a solid brand name over the years. And they have established a
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reputation for committing to empowering its users and employees through programs, products, and services that inspire people to make a positive impact on their communities. Capabilities identification Distribution Yahoo does not distribute any physical products and only offers services for the U.S. market. Their service includes Yahoo Shopping and Yahoo Auto; both of them provide search results of what products users want to buy. Yahoo provides search results and these results link to the manufacturer or retailer of the product. Technological Advances The company uses the search engine technology known as robots, spiders or crawlers. A robot is a piece of software that automatically follows hyperlinks from one document to the next around the Web. When a robot discovers a new site, it sends information back to its main site to be indexed. Because Web documents are one of the least static forms of publishing (i.e., they change a lot), robots also update previously catalogued sites. How quickly and comprehensively they carry out these tasks varies from one search engine to the next. EBay’s search engine is far less sophisticated than Yahoo, using a simple unranked keyword system that allows sellers to describe their products with any number of keywords that may not even be related to the product. Manufacturing Yahoo does not manufacturer any physical products, it’s a service based business. Organizational Culture Yahoo’s culture is to have fun at work and to be as creative as you can. As such, they make sure that the work environment caters to their every need. From video games throughout to catered lunch programs, Yahoo!’s internal culture is one of the company’s top priorities. On top of that, Yahoo! also lets full-time employees in the U.S. become part of an incentive-based stock option plan. Rewards are given out based on reaching targeted goals and obtaining advertising contracts. But, more importantly, it places part ownership in the hands of employees, something which founders of Yahoo have been essential to their success. Employees are also able to deduct 15 percent of their earnings to purchase company stock. That stock price is further discounted to 85 percent of the going market value. The company wants to encourage their employees to be as interactive as the product they work so hard to create. Financial Comparison of Competition, 20052008
2005
2006
2007
2008
Profitability ROA
18.95%
6.73%
5.56%
3.27%
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ROE
24.21%
8.48%
7.06%
4.08%
21.1%
14.6%
10.0%
.2%
36.07%
11.69%
9.47%
5.89%
Current Ratio
2.86
2.54
1.41
2.78
Quick Ratio
2.73
2.40
1.33
2.65
Debt/Assets
.21
.20
.22
.18
Debt/Equity
.09
.08
0
.01
-
-
-
-
Fixed Asset Turnover
8.6
7.1
5.7
5.0
Receivables Turnover
8.8
7.8
7.0
6.8
Total Asset Turnover
0.53
.58
.59
.56
Days Sales
41.7
46.9
52.0
53.6
P/E Ratio
-
-
-
54.1
Dividend Payout Ratio
0
0
0
0
Operating Profit Margin Net Profit Market Liquidity
Leverage
Interest Coverage Activity
Shareholder's Return
Company Value Chain Primary activities Inbound Logistics Yahoo! generates revenue by providing marketing services to businesses across the majority of its properties. Yahoo provides multiple websites for small businesses and users to submit advertisements. They can customize how they want these advertisements be displayed. For larger businesses, there would be meetings with the representatives of each company, in order to discuss the best method to get their advertisements out to potential customers. Operations Advertisers can display graphical advertisements on the pages that are viewed by their users across the Yahoo! Properties and on its affiliates’ websites. Yahoo! works with their advertisers
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to maximize the effectiveness of their campaigns by optimizing advertisement formats and placement on the network. Yahoo! also uses their targeting capabilities to help advertisers reach their desired audiences by placing contextually relevant advertisements on the pages. This is done by using an internet program that automatically ranks advertisements in order of importance so that the most relevant ones will be displayed on the webpage. Outbound Logistics In a developing market such as the Internet Information Providers industry outbound operations is an area that needs to improve constantly. The aspects pertaining towards outbound logistics would be the searching system and the way to display advertisements. Advertising is provided through a series of search offerings that enable advertisers to display text based links to their websites on the Yahoo! Properties, as well as on its affiliates’ websites. These advertisements are displayed in response to different user actions —when a keyword is used in a search query initiated by a user or when specific content is being viewed by a user on the Yahoo! Properties or on the websites of its affiliates. For example, if a user searches using the keyword “television” in the Yahoo! Search box or the search box on the website of one of Yahoo’s affiliates, two sets of results will appear based upon algorithmic and sponsored search technology. Links to websites for advertisers selling televisions will appear alongside the algorithmic search results. As another example, if the user is reading an article about interest rates, he or she may be presented with advertising links to websites for mortgage-related advertisers. For these advertising services, Yahoo! earns revenue when “click-throughs” occur. A “click-through” occurs when a user clicks on an advertiser’s listing. Yahoo! refers to such advertising services as “search marketing.” Marketing & Sales Yahoo! maintains three primary channels for selling their marketing services: direct, online, and telemarketing. Their direct advertising sales team focuses on selling its marketing services and solutions to leading advertising agencies and marketers in the United States. Their online channel is fulfilled by a self-service program that enables advertisers to place targeted text based links to their websites on the Yahoo! Properties as well as on its affiliates’ websites. Their telemarketing channel focuses on sales of marketing services to small- and medium-sized businesses. Yahoo! has combined their graphical and search marketing sales teams under the common leadership to better respond to advertisers who are increasingly using both forms of advertising on Yahoo! Properties to achieve desired marketing goals. No individual customer represented more than 10 percent of its revenues in 2004, 2005 or 2006. Yahoo! employs sales professionals in locations across the United States, including Atlanta, Boston, Chicago, Dallas, Detroit, Hillsboro, Los Angeles, Miami, New York, San Francisco, and Sunnyvale. Their sales organization consults regularly with agencies and advertisers on design and placement of online advertising, and provides customers with measurements and analyses of advertising effectiveness as well as effective consumer insights that can be turned into marketing campaigns. In addition to Yahoo’s geographic sales structure, they have industry focused sales teams for automotive, consumer packaged goods, entertainment, finance, retail, pharmaceuticals, sports, technology, telecommunications and travel. In international markets, Yahoo! has either its own internal sales professionals or they have established sales agency relationships in more than 20 countries.
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Yahoo! also believes that world-class marketing can be a competitive advantage. The Yahoo! brand is one of the most widely recognized in the world. Maintaining and growing that brand enables Yahoo! to attract, retain, and more deeply engage users and advertisers. Yahoo! believes a great brand begins with a great product. Yahoo! marketing engages in each step of product development, deployment and management to understand its offerings and how best to market them to its audience of potential and existing users. Their marketing communications efforts help accelerate product momentum, awareness, adoption, and engagement. Yahoo! uses online, television, print, radio and outdoor advertising, and they leverage their global online network and their distribution partnerships to market their products and services to the right people at the right time. With continued investment in global brand and product marketing, Yahoo! believes they can continue to attract and engage users and advertisers. Service Yahoo! is in the Internet Information Providers industry and commit to their users as a prime objective towards achieving success. Yahoo! has organized their services around audience segments and advertising customer, rather than around products. Their goal is to develop rich experiences for each audience segment and deliver solutions to meet the needs of all advertisers and publishers. Yahoo encourages every user on the network to participate in the consumption and publishing of information and knowledge and make connections through tagging, reviews, sharing images, audio and video, and other social media activities. Yahoo! prides itself on providing online products and services essential to users' lives, and offers a full range of tools and marketing solutions for businesses to connect with Internet users around the world. In addition to offering marketing services to businesses they also provide the following services: Yahoo! HotJobs is one of the leaders in the online recruitment industry, providing comprehensive solutions for employers, staffing firms and job seekers. Yahoo! HotJobs’ tools and advice put job seekers in control of their career search and make it easier and more costeffective for recruiters and employers to find qualified candidates compared to traditional methods. Yahoo! HotJobs enables job seekers to create an online resume and to search and apply for jobs, and provides access to newsletters, online forums and salary research, free of charge. Yahoo! generates revenue from employers and staffing firms that pay to access its database of job seekers and use Yahoo’s tools to post, track, and manage job openings. Yahoo! Small Business provides a comprehensive and integrated suite of fee-based online services including Yahoo! Domains, Yahoo! Web Hosting, Yahoo! Business Mail and its ecommerce platform called Yahoo! Merchant Solutions. By integrating one of the leading hosting solutions with business critical services and information, Yahoo! enables customers to easily get online, sell online, and market and promote online. Yahoo also offerings to users on its Yahoo! Properties currently fall into five categories: Search; Marketplace; Information and Entertainment; Communications, Communities and Front Doors; and Connected Life. Search Our Search offerings are often the starting point for users navigating the Internet and searching for information, whether from their computer or mobile device. In Search, Yahoo’s goal is to provide the world’s most valued and trusted search experience for users, advertisers, and developers, and to enrich people’s lives by enabling them to find, use, share, and expand all human knowledge. In the newly emerging areas of social search and media,
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Yahoo’s goal is to create the world’s most valued communities, large and small, to enable people to connect and exchange knowledge, insights and experiences with each other. Social search and media enable users to leverage their network of friends and other trusted information sources to improve everyday web browsing and searching experiences. Our Search product offerings include the following: • Search— Yahoo! Search; Yahoo! Toolbar; and Yahoo! Search on Mobile • Local —Yahoo! Local; Yahoo! Yellow Pages; and Yahoo! Maps Marketplace offerings are often the starting point for users seeking to purchase products and services on the Internet and seeking to access free services on the Internet. Yahoo’s specific Marketplace product offerings include the following: • Shopping — Yahoo! Shopping; Kelkoo; and Yahoo! Auctions • Real Estate —Yahoo! Real Estate • Travel— Yahoo! Travel; and Yahoo! FareChase • Autos—Yahoo! Autos • Personals—Yahoo! Personals and Yahoo! Personals Premier Yahoo’s Information and Entertainment offerings deliver content that is available without charge to our users, and also provide some of our content on a fee or subscription basis. Our Information and Entertainment offerings include the following: • Information —Yahoo! News; Yahoo! Finance; Yahoo! Food; Yahoo! Tech; and Yahoo! Health • Entertainment —Yahoo! Sports; Yahoo! Music; Yahoo! Movies and Yahoo! TV; Yahoo! Games; and Yahoo! Kids Our Communications, Communities, and Front Doors offerings provide a wide range of communication services to users and small businesses including those that extend a wide range of Yahoo! services beyond the browser and across a variety of devices and through our access alliances. We offer some services free of charge to our users and also provide some of our services on a fee or subscription basis. Our offerings include the following: • Communications — Yahoo! Mail and Yahoo! Messenger with Voice • Communities — Yahoo! Communities and Yahoo! Photos • Front Doors— Yahoo! Front Page and My Yahoo! Support activities Procurement
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Procurement for Yahoo! is the section of the company that oversees the purchasing of the materials that are necessary for the company to operate. The main materials that are vital towards the success of Yahoo! are their servers, electricity and networking related equipments. Currently, Yahoo! has 1500 servers and they are dependent on Dell, IBM, Sun Microsystems, etc, to make their servers. Servers not only help the internal company to function, but also help outside users to access Yahoo! services and products. These servers also require huge electricity to operate, so Yahoo! has to form a contract with local electricity providers. Backup generators are also necessary for the servers, in case there is a blackout, backup generators would kick in and provide powers to the main servers. In addition, Yahoo! contracts with network providers to connect all there servers together with a fiber optics networks. In order to remain successful and competitive within the industry, Yahoo! needs to obtain the most technological advanced materials at the highest quality. Human Resource Management The company seeks out people who are "passionate about the Internet" and don't take themselves too seriously. Yahoo! provides competitive pay and benefits in order to maintain and attract its workforce. In addition to high pay, Yahoo gives stock options to every single employee, outright stock awards to more than half the employees and health insurance with no premiums. Bonuses are weighted heavily toward high performers. According to Fortune Magazine, Yahoo! ranks number 87 on 100 best companies to work for. Firm Infrastructure The infrastructure for Yahoo! is composed of financial policies, accounting, compliance to regulations, corporate strategies, legal issues, and community affairs. A couple things that could be damaging to Yahoo’s infrastructure are first off changes in government regulations that can lead to an increase in operating costs and it can even result in service disruptions. An ineffective ad positioning or relevance could be harmful to the financial condition of Yahoo! and it could be damaging towards operations. Also, a failure to successfully implement their growth strategy and their technology innovation goals could leave a damaging effect on the firm’s infrastructure. Technology Development Technological developments that Yahoo! has developed over the recent years are: •
My Yahoo o My Yahoo is a personalized home page, allowing Yahoo users to customize it with RSS feeds, Yahoo services, and news.
•
Yahoo! BOSS o BOSS (Build your Own Search Service) is Yahoo!’s open search web services platform.
•
Pipes
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o Yahoo! Pipes is a web composition tool allowing developers to compile, mash up, and manipulate content from all over the web. •
Fire Eagle o Fire Eagle, a Yahoo Brickhouse project, is a location-sharing service. It launched privately on March 5, 2008 with very few user-facing features allowing users to manually update their location and a range of APIs allowing application developers to update or access that location programmatically. Notably, the launch offered a complete developers area for desktop, mobile, and web application creation. Fire Eagle allows for updates from mobile devices and multiple Social Networking Sites.
•
Yahoo! Pop o Yahoo Pop is a new Spanish-language site that ranks the ten most popular searches by day, month and category and shows pictures associated with each search. The site is available for U.S. Hispanics, Mexico, and Argentina.
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Core Capabilities
46
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SWOT Analysis Company Background Yahoo! Inc. (Nasdaq: YHOO) is an American global Internet services company that operates the Yahoo! Internet portal. It provides a range of products and content, from email and search to media streaming and downloads. It is the most popular Internet site based on traffic, with visits from more than 500 million unique users every month. However, Yahoo!'s prominence is being challenged as competition heats up in the Internet services sector. SWOT Analysis Yahoo! (Yahoo) is an internet and media communications company, offering internet services such as search and email services. The company provides a range of services including e-mail, search, yellow pages, shopping, information, and entertainment and communication. The company has a strong brand image, which provides it with a competitive advantage. However, Yahoo faces intense competition, which could restrict its growth and profitability. Strengths
Weaknesses
Strategic partnerships Product portfolio Strong brand image
Sluggish financial performance Weak presence in social networking segment
Opportunities
Threats
Strategic acquisitions Growing online advertising market
Intense competition Regulations
Strengths Strategic partnerships Yahoo has strategic partnership with several companies. Some of these companies are leading global brands such as eBay, AT&T, CNBC, Forbes, Telefonica, Nokia, Samsung, LG, and Comcast. In FY2007, Yahoo entered into a strategic global partnership with Samsung to distribute Yahoo’s popular services on new Samsung mobile phones in more than 60 countries. In February 2007, Yahoo announced a new strategic global partnership with LG to distribute the former’s industry leading services on LG mobile phones in more than 70 countries around the world. In April 2007, Yahoo entered into a multi-year strategic partnership with Comcast for online display and video advertising services on Comcast.net.Yahoo is also entering into strategic partnerships with daily US newspapers to offer search, display and classified advertising.
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In January 2008, T-Mobile and Yahoo entered into a strategic partnership for T-Mobile's Internet service, Web'n'walk, to carry graphical advertisements exclusively sold and served by Yahoo. Subsequently, AT&T and Yahoo expanded their strategic alliance to explore advertising-based revenue opportunities for both the companies for search and display capabilities from either a mobile handset or a PC. Such strategic partnerships enable the company to reach out to a broader audience and more importantly, embed its products and services in the offerings of other global corporations. Product portfolio Yahoo has a comprehensive product portfolio. The search services and email services are Yahoo’s main services of Yahoo.Yahoo search engine, despite lagging behind Google, is still one of the leading search engines in the world. The company also runs several sites such as Yahoo! Shopping that allow consumers to research, compare and buy products online. Other services cover a gamut of consumer needs such as information on health, travel, food, sports, and jobs. The company also provides ecommerce services to small businesses. It offers an extensive range of entertainment services, including games and internet radio. Its Yahoo! Messenger is an instant messaging tool, enabling e-mail, video and mobile messaging. It also offers a range of mobile applications including search, mail, messenger, Flickr, local and Yahoo! Go, among others. A comprehensive range of offerings could enable Yahoo to retain its existing customers as well as attract new ones. Strong brand image Yahoo! (Yahoo) is a global brand with high brand recognition in the internet user community worldwide. In the BusinessWeek-Interbrand ranking of top 100 global brands in 2007, Yahoo figured in the 55th position. The BusinessWeek-Interbrand combine have valued Yahoo brand at $6,056 million in 2007. Moreover, Yahoo is also a market leader in several segments of the internet market and is termed as one of the most trafficked internet destinations worldwide. It is ranked as the top email service provider with 262 million unique users and as top website for personal homepage of 50 million at the end of January 2008. In the online search market, the company stands second with a market share of 27%, behind Google. A strong brand image provides the company with a competitive edge and helps in attracting new users. The Yahoo! Directory is an original source of structured information. It has built over the last decade, and unlike mainstream search engines, its content is moderated (i.e. sites are vetted before their inclusion). Weaknesses Sluggish financial performance Yahoo’s financial performance in recent years has been sluggish, when compared to its major competitors, Google and Microsoft. While Yahoo’s revenues grew from $1,625 million in 2003 to $6,969 million in 2007, Google’s revenue grew from $1,466 million in 2003 to $16,594
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million in 2007. This represents a CAGR of 43.9% for Yahoo as compared to Google’s 83.4% during the same period. Moreover, the company’s operating and net profit margins were also lower than those of its competitors, Google and Microsoft. Its three-year average operating margins stood at 15.2%, compared to Google’s 32.8%, and Microsoft’s 36.7%.Yahoo’s three-year average net profit margins stood at 19.1%, compared to Google’s 26.1% and Microsoft’s 28.9%. In FY2007, Yahoo’s operating and net profit margins stood at 10.0% and 9.5%, respectively, when compared to Google (operating margin 30.6% and net margin 25.3%) and Microsoft (operating margin 36.2% and net margin 27.5%). Weak presence in social networking segment Yahoo has a weak presence in the fast growing social networking market. The company’s social networking media offerings include Yahoo! 360. The service is facing tough competition from other social networks like MySpace, Facebook, Orkut, Friendster, and Bebo. Moreover, Yahoo’s presence in this market segment is declining both in the US and in the international market for number of unique users and the amount of time spent on the website. By contrast, its competitors have been recording triple digit growth figures in recent years. For instance, the number of unique visitors to MySpace grew by 15% in 2007 to reach 110 million in January 2008; and Facebook has 100 million visitors which grew three times compared to previous year. During the same period, the company recorded 305 unique users with about 5% of users for Yahoo! 360. The major players are trying to tap this growing market with new, featureenriched offerings, as it is forecast to grow further. Opportunities Strategic Acquisitions Yahoo made various acquisitions in recent years. In recent years, the company has been targeting acquisitions to gain market share and enhance its offerings. In July 2007, Yahoo acquired Right Media, a creator of the Right Media Exchange. The acquisition of Right Media builds upon Yahoo's leadership in online advertising, and is a key step towards executing the company's long-term strategy to transform the way online advertisers connect to and engage with their customers. Later in the year, it acquired BlueLithium, one of the largest and fastest growing online global ad networks that offers an array of direct response products and capabilities for advertisers and publishers; and Zimbra (www.zimbra.com), a provider of next generation e-mail and collaboration software. The acquisition of BlueLithium extended Yahoo’s ability to offer data analytics, advanced targeting, and innovative media buying strategies to customers, while the acquisition of Zimbra expanded Yahoo’s mail offerings and presence in universities , small and medium-sized businesses, and service provider partners. Growing online advertising market The worldwide online advertising market is forecast to record significant growth in coming years. This market, which has recorded revenues of around $43 billion in 2007, is forecast to record a CAGR of 22% over the next three years. Of the different segments of the online
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advertising market, search and mobile segments are most attractive as they are forecast to record a CAGR of 24% and 160%, respectively, for the period 2007–2010. The search advertising market is forecast to reach a value of $34 billion by 2010 from current level of $18 billion and the mobile advertising market is forecast to reach a value of $2 billion by 2010. In line with the market demand, Yahoo has increased its concentration on this market in recent years. Yahoo launched its new search marketing system, Project Panama, in the fourth quarter of 2006. This system provides advertisers with additional tools for budgeting, testing, and optimizing their marketing campaigns. This new system added a new ranking model in February 2007, which ranks ads by relevance in addition to keyword bid price. It has also entered into partnerships with both mobile service providers and device manufacturers to embed its services with their respective offerings. In the beginning of FY2008, Yahoo announced a series of mobile related products expressing its mobile market strategy. It released Yahoo! Go 3.0, its flagship all-in-one mobile offering with features like personalized start page and customizable access to consumers' favorite Internet brands and services from mobile devices. It also announced the preview of its Mobile Developer Platform, a platform for developers to create mobile-optimized applications that are easy to build, quick to deploy, and run across a wide selection of devices. The company’s increasing focus on mobile delivery platforms will enable it to capitalize on mobile advertising opportunities. The company’s concentrated efforts in growing markets could drive its revenue growth in coming years. Threats Intense competition Yahoo faces significant competition from companies such as AOL, Google, and Microsoft. These companies have similar product offerings, and larger financial and technical resources. Google, in addition to an internet search service, offers many other services that directly compete with Yahoo’s services, including consumer e-mail service, desktop search, photos, maps and advertising solutions. Although, Yahoo entered into a search advertising agreement with Google, they continue to be major competitors. Microsoft has introduced its own internet search service and has announced plans to integrate internet searching capabilities with its Windows operating system. Yahoo also competes directly with providers of search marketing, including Google and Microsoft. Intense competition could adversely affect the company's market position. Regulations The importance of privacy and other issues are growing worldwide. The company is governed by Federal, state and international laws and regulations concerned with the collection, use, sharing and security of data on users and partners. Failure to comply with privacy policies or with any data-related consent orders, Federal Trade Commission requirements or other federal, state or international privacy-related laws and regulations, could result in penalties or actions. There are a large number of legislative proposals pending before the US Congress, various state legislative bodies and foreign governments relating to privacy and other issues. For instance, Yahoo, along with Google and Microsoft, agreed to pay $31.5 million in December 2007 to settle claims by the Justice Department that the three companies promoted illegal
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gambling by accepting advertisements from online betting operations. Additionally, Yahoo’s advertising alliance with Google, which was initiated in June 2008, was turned down by Google in November 2008 due to an indication from the Department of Justice to block the deal.
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Strategic Profile – Amazon Overview Amazon.com (Amazon) is an online retailer. The company’s retail websites include www.amazon.com, www.amazon.ca, www.amazon.de, www.amazon.fr, www.amazon.co.jp, www.amazon.co.uk, www.joyo.com, www.shopbop.com, and www.endless.com. The company primarily operates in the US. It is headquartered in Seattle, Washington and employs 17,000 people. The company recorded revenues of $14,835 million in the financial year (FY) ended December 2007, an increase of 38.5% over 2006.The operating profit of the company was $655 million in the FY2007, an increase of 68.4% over 2006. The net profit was $476 million in FY2007, an increase of 150.5% over 2006. Key Facts Head Office
Amazon.com, Inc. 1200 12th Avenue South Suite 1200 Seattle Washington 98144 2734 USA
Phone
1 206 266 1000
Fax
1 206 622 2405
Web Address
http://www.amazon.com
Revenue / turnover (USD Mn)
14,835.0
Financial Year End
December
Employees NASDAQ National Market Ticker
17,000 AMZN
Company summary Amazon.com is a leading online retailer company, offering for sale different items such as books, music, DVD’s videos, toys, electronics, software, video games and home improvement products serving over 45.5 millions customer in 150 different countries. The company was founded in July 1995 by Jeff Bezos in the state of Washington, USA. Amazon has become the
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dominant e-retailer in its field of online book selling. Amazon has grown fast from its initial beginnings as a small online bookseller to a giant superstore company. During its process of growth, it incurred significant losses and it became more exposed to greater competition and threats. Cutting costs and achieving profitability has become Amazon’s greatest key to success. Also, its strong brand name, outstanding customer value, massive sales volume and its implementation of economies of scale has contributed a lot to its success. Products Amazon started as an online bookstore but soon diversified to other product lines like VHS, DVD, music, CD’s and MP3’s, computer software, video games, electronics, apparel, furniture, food, toys, etc. Amazon has established separate websites in Canada, UK, Germany, France, China, and China. It also provides international shipping services for some its products. The company launched Amazon.com auctions, its own web auctions services, in March 1999. However, it failed to keep up with growth of industry pioneer eBay. Amazon’s auction was followed by the launch of its fixed price market place business called zShops in September 1999. However, Amazon no longer mentions either auctions or zshops on its main pages, but refers them as the marketplace. Although zShops failed to live up to its expectation, it laid the ground work for the hugely successful Amazon Marketplace services launched in 2001 that let customers sell used books, CD’s, DVD’s and other products alongside new items. Today, Amazon Marketplace’s main rival is eBay’s Half.com service.
Resources Identification Tangible Resources Amazon.com has a great ability to generate internal funds, because of its cash equivalent of $1022M in 2006 to $2539M in 2007, thanks to its cost cutting activities that includes downsizing and closure of ineffective warehouses. However, its borrowing capacity through public offering through has been seen with uncertainty in the past due to the technological crash in 2000. The company managed to survive the IT bubble crash, and thereafter was more able to raise more cash through the equity market (when the industry recovered). Its strong financial resources, patents and stock of technology not only has given the firm 20% share of web development (strengthening their internal fund capacity), but also a competitive advantage of the one click technology, which has strengthened its position in the catalog and mail order industry. Further analysis of their financial resources by examining their 2008 balance sheet on yahoo finance, shows that their current assets well exceeds their current liabilities. By this I can conclude that Amazon is well able to cope with its short term liabilities in the near future. The company headquarters is located in Seattle. The company also employs software developers in medium to large sized centers across the globe. Amazon also has number of warehouses
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around the world, it offers warehousing and order fulfillment for third party sellers including large companies such as Target. Intangible resources One of the best resources Amazon has is its founder and CEO Jeff Bezos, who after all these years managed to maintain the flame that has made amazon.com so great. The company has managed since its creation to create a reputation of a customer aware internet retailer that over the years has built a base of very loyal customers. This innovation culture was further enhanced by recruiting top executives who had through experience and knowledge in areas of supply chain management, logistics and international relations to support international expansion in Canada, Japan and Europe. One of Amazon’s superior innovations is its customer review systems, this allow the customer to choose a product that is most likely satisfying. When the CEO was asked why he published negative reviews on its books on the site he responded “We want to make every book available – the good, the bad, and the ugly...to let truth loose’", and this is exactly why Amazon has gained so much popularity among its customers, because your ordinary bookstore does not offer that. Amzon.com is the only bookseller in the world’s top 500 websites. Additionally, according to one analyst report, Amazon.com is estimated to have over 80 percent of the online bookstore market. Capabilities One of Amazon’s advantages over its competitors is that it can pen a new store, which has different products very easily because its core shopping technologies are easily re-usable. Its website is elegantly designed, easy to navigate and quick to load. It also has numerous proprietary inventions like the click shopping, personalized recommendations and user rating which has made shopping more fun online. Its four strategies such as outsourcing strategies, strategic partnership, compelling value, and the effective advertising that has been implemented by the company have contributed to its success in sales growth and cost efficiency. Amazons key factors are strong brand, providing customers with outstanding value and a superior shopping experience, massive sales volume and realizing economies of scale which has contributed to a lot of its success. These factors and the people around the company has helped Amazon to the face the threats posed by other online bookstores. Through the innovative use of internet technology, Amazon was dramatically able to lower the price and provide enhanced selection, high quality content, a high level of consumer service, and personalized customer care. By purchasing majority of its products from two major wholesalers, Ingram Inc, and B&T, has enabled Amazon to cut inventory costs and reduce internal overhead costs such as operating expenses.
Core Competences 55
Amazons constant ways of improvement and innovations such as low inventory costs superior brand recognition, and technology has made it a leader in among its competitors. Amazon has the upper hand vs. other traditional retailers in sense that it uses information technology to be cost efficient and offer better customer service. Other retailer and other eCommerce’s lack the partnerships Amazon has established over the years. Others retailer in the industry would find it to costly to imitate, because of Amazons brand recognition, innovation and several very important partnerships. If other traditional book stores would want diversify into areas like music and movies, like Amazon has managed to do, they would find the costs to be to high to imitate. Amazon.com has also several core values which has played an important part in the growth of the business. The first one is their excellent customer service based on their innovative technology. The company has a range of services such as book reviews from other customers, from staffs, as well from its editors. In addition, many featured books contained descriptions, highlights, a chance to see the content of the books and interviews posted by authors. Convenience and price is another core value the company has. It sells books through Internet and has its own distribution system. Similarly, Amazon does not have to spend too much money on properties and other operations because it is an Internet-based business. Thus, it can reduce its inventory expenses. The most valuable core competency the firm has is it strategic plot of expansion through customer innovation. It has the costly to imitate financial and technological resources, valuable firm infrastructure, rare strategic leader and management composition and non substitutable software technology. These resources and capability combinations has made the company to be able to sustain its competitive advantage, that is still present to the firm’s patented innovation. V.R.I.N. Analysis The V.R.I.N Analysis is used to analyze each aspect of its value chain compared to its competitors. They stand for Value, Rarity, cost to Imitate, and if it is Non substitutable. Passing each of the test means they have sustainable advantage in that particular chain. Amazons results are as follows: Marketing & Logistics Operations Sales
Technology Service Development
HR
V
Yes
Yes
Yes
Yes
Yes
Yes
R
Yes
Yes
Yes
Yes
Yes
Yes
I
Yes
Yes
Yes
Yes
Yes
Yes
N
Yes
Yes
Yes
Yes
Yes
Yes
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Its logistics in both inventory efficiency and technology gives it a superior edge among its competitors. It also enables it to cut costs better than its competitors. Because of its highly developed web systems Amazon has among the most satisfied customers in the industry. Its operations are very efficient thanks to the strategic locations of its warehouses and headquarters, which have enabled it to cut a lot of its costs. Their marketing and sales is superior thanks to their reputation and their brand building over the years. When people want to buy a book online the first place they usually visit is amazon.com, and that is why Amazon has a huge advantage in this field. Their book review features are highly popular among its customers, and it gives them a chance to study a book before they make their purchases. The millions of titles they have to offer is not something their competitors can easily copy. In HR department, their highly skilled and passionate CEO and founder Jeff Beznos has managed to build Amazon.com to what it is today. Its hiring of the key executive officers has further enhanced their efficiency, and you don’t find these kind people just around any corner.
Value Chain Analysis Logistics Amazon’s primary activities such as the inbound logistics are thoroughly supported by secondary activities such as selective procedures and technology development that filters the choice of products and services from retailers/manufacturers, which also has enabled it to be more price saving and customer satisfying. In addition, its firm infrastructures allows its operations and marketing to be integrated in one commission based scheme provided to its 900,000 and growing associate partners. Further, its infrastructure allows its Seattle headquarters to minimize its tax costs, not to mention the strategic outbound logistics of the Delaware center that has enabled the inventories closer to East country markets like Japan and other European countries. Thanks to this, the value chain combines the relatively low cost and support for its headquarter in Seattle, that support the technology development while creating efficient procurement for storing and delivering products through closing of inefficient warehouses and opening strategic and value adding ones. The company also in a marketing strategy aimed to increase customer traffic to their website, drive awareness of products and services they offer, promote repeat purchases, develop incremental product and service revenue opportunities and strengthen and broaden the Amazon brand name. The company relays much on word of mouth promotion and repeat customer visits. The company also employ’s a variety of advertising, which consist primarily of online advertising, associate programs, sponsored search, portal advertising, email campaigns and other initiatives. Their associate program directs customers to their websites by enabling independent websites to make millions of products available to their customers.
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Services A service that is very popular at Amazon is that they offer programs that enable seller customers to sell their products on their websites and fulfill order through them, allow consumer customers to shop for products owned by sellers using our features and technologies, and allows individual customers to complete transactions that include multiple sellers in a single checkout process. Allowing them to earn fixed fees on every seller item sold (competing with eBay). In addition their seller programs serve individuals, small businesses, and large branded businesses, enabling them to offer their new and used products for sale on their websites along side their products and products made available by other sellers. Marketing and Sales Amazon.com opened its doors to the web in July 1995 and they offer the “world’s biggest selection of book. They generate their revenue through co-branded credit card agreements and through marketing and promotional services, such as online advertising. Generally, Amazon.com recognizes gross revenue from items they sell from their inventory and recognizes a net share of revenue of items sold by other sellers. They direct customers to their website primarily through a number of targeted online marketing channels, such as their associate programs, sponsored search, portal advertising, email campaigns, and other initiatives. Human Resource Management The company employed approximately 20000 full time and part time employees as 2008. The company constantly competes with other firms to employ “the only best”, and it owes much of its success to the well qualified people it employees. It constantly trains its employees and employees only the best. The Company depends on their senior management and other key personnel, particularly Jeffrey P. Bezos, President, CEO, and Chairman. The loss of any of their executive officers or other key employees could potentially harm their business. Technology Amazon has a team of software engineers, computer scientists, merchandisers, and management team that continuously focuses to enhance their technological innovation. They do this by offering easy to use functionality, fast and reliable fulfillment, timely customer service, featured rich and authorative content, and a trusted transaction environment. Key features of their website includes editorial and customer reviews, products information, personalized web pages, secure payment system. They seek to efficiently invest in several areas of technology and content including seller platforms, web services, digital initiatives, and expansion of new and existing product categories, as well as technology infrastructure so that they can enhance their customers experience, improve their process efficiency and support infrastructure web services.
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SWOT Analysis Strengths The strength of Amazon is in its continuous and fast growth over the years. This gives the company a distinct identity separate from its competitors. The continuous and fast growth of the company shows how well they are operating and how efficient they really are. Another strength of the company is the extended promotional relationships with established internet player. Also, Amazon works closely with internet players so that they can make use of each others to achieve their goals. Through this cooperation with these key players it enables it to increase and improve the services they give to their customers. Moreover, the strength of the company is its powerful search facility wherein there is personal notification service to email its clients, a recommendation section, an awards section containing award winning books, and an associate program with other sites. This enables Amazon to give its customers convenience and ease in finding the books they want. It also helps in giving its customers some ideas on what to buy. Another strength of the company is its ability to give a vast and wide collections of books to its customers. Lastly, it was one of the original dotcommers, and over the decade it has built a customer base of millions of people thanks to its popular services. Amazon also has strong customer established customer loyalty, Its well developed software helps improve customer experience. Over the years it has also built a sophisticated logistics system that has enabled it to reduce its costs. Weakness The weakness of Amazon is not having an attractable website. Having an attractable and user friendly website makes its products more attractive to purchase. It increases customer satisfaction and leads to more people suggesting it to the people they know. Also, It has not diversified into other business endeavor other than website. By doing so it can increase it chances to increase revenue and increase its market power. Amazon might find new opportunities in other sectors related to its core business. It also doesn’t have the ability to reach sectors of society that does not have internet access. The company can further increase its profitability and revenue if it can reach sectors not having access to the internet or its website. Opportunities Amazon’s opportunity is its website. The website of the company can still be improved and given a new look and be made more attractive and informative. The website of the company can be made more up to date and convenient to use for its customers. Also, the company is now increasingly cashing in on its credentials as an online retail pioneer by selling its expertise to major store groups. For example, British retailer Marks and Spencer announced a joint venture with Amazon to sell its products and services online. Amazon has also agreed on similar cooperation with Target, Toy-R-Us and NBA. Amazon’s new Luxembourg based division aims to provide tailored services to retailers as a technology service provider in Europe. There are also opportunities for Amazon to build partnership with the public sector.
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For example it struck a deal with the British Library, London, in 2004, to offer its services to launch the library’s catalogue of published books (containing around 2.5 books). In 2004 Amazon emerged into the Chinese market, by buying china’s largest online retailer, Joyo.com. This will allow for Amazon to grab new knowledge in that market, as well as help it further expand in China. Also, through the constant improvement of information technology Amazon can further improve and expand its operations. Threats A major threat to Amazon is its competitors. If Amazon stops being innovative and efficient in its operations, it competitors will find ways to equal or exceed the performance of the company in the future. Another threat to the company includes the law in that country they are operating in. Laws can be a major hinder for expansion in new markets and Amazon needs to consider all its options before it makes it moves. There could laws that cause some delay in selling the products. These laws can hamper business transactions to be completed. Future joint venture, strategic alliance and mergers could threaten Amazon’s role as the lead online retailer. Also, traditional retailers are establishing online presences. Manufacturers have also recently begun selling online directly to consumers. Also, Amazon needs to look out for competitors who try to imitate their business model at zero cost. Financial Health of Amazon Amazon’s initial business plan was unusual: the company did not expect to make profit in the next four to five years; the strategy was effective. Amazon grew steadily in the late while other internet companies grew blindly fast. Amazon received complaints from its stockholders that it wasn’t profitable enough, but when the dot-com bubble bursted, and when many other ecompanies went out of business, Amazon.com preserved. Finally, it turned to its first profit in the fourth quarter of 2001: $5million, just 1c per share, on revenues of more than $1 billion. Amazon remained profitable all through 2001 to 2008 thanks to its diversification and international presence. Amazon is financially the strongest competitor out of eBay and Yahoo. Its revenue of $26.2 billion for 2008 is well above eBay’s and yahoo’s ($8.54 billion respectively $5.40 billion). It has shown an average revenue growth rate of 29.5% and an EPS growth rate of 79.5%. This proves to me that Amazon is growing and any investors who had money put in this company during the last years would have seen a hefty return on their money. Its 5 year average of 51.7% Return of Equity is well above its competitors. It has seen an average of 8.6% Return on Assets in the last 5 years. Also, Amazon gross profit of an average of 23.7% proves that is well able to profit from what it sales. Its current ratio of 1.4 indicates that they are able to pay their short term liabilities if they came to due. However, its debt/equity ratio indicates that it has been financing its expansion through debt, but I don’t see a problem with this because of its high growth rates in the past. As long as the company keeps growing and profiting this ratio will not be an issue for concern. Its debt/asset ratio of 0.69 which indicates that majority of assets are financed through equity and not debt. Financial Forecast
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Its EPS growth is predicted to grow with 9.4% vs. 1.3% for the industry, which indicates that Amazon is growing at a much faster pace than its competitors. Its EPS growth for next year is estimated to be 25.2% vs. 13.6% for the industry. Its revenue is estimated to grow 16.5% this year to $22.32 billion and 18.2% for next year. It estimated that it will grow with 21.2% per annum the next 5 years vs. 11.93% for the industry. This tells me that Amazon is growing well above its competitors and will remain the strongest out of its competitors. Comparison of Competition, 2005-2008
2005
2006
2007
2008 or 5 yr average
ROA 10.34%
4.72%
8.78%
ROE
56.13%
58.48%
25.4%
3.6%
4.4%
4.19%
0.0%
0.3%
3.41%
Current Ratio 1.52
1.33
1.39
1.30
Quick Ratio 1.18
0.95
1.03
Debt/Assets -
-
-
-
Debt/Equity (5 year average) Long term D/E (5 year average) -
-
-
1.46
Inventory Turnover 12.3
11.4
11.1
11.2
Fixed Asset Turnover 29.4
28.6
29.7
27.4
Total Asset Turnover 2.5
2.7
2.7
2.6
87.7
82.6
52.49
Profitability
Operating Profit Margin 5.1% Net Profit Market -0.1%
8.2%
Liquidity 1.0
Inventory Capital Leverage
1.48
Activity
Average Collection Period Shareholder's Return P/E Ratio 60.6 Dividend Payout Ratio
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Strategic Recommendation and Implementation – Strategy 1 Strategic Recommendation for EBay – Preserving Their Core Business Weakness: Focusing on secondary market of business Recommendation: Following their original success in the Auction industry Problems To compete in the fixed-price marketplace, eBay passed a series of policies and site changes that favored power sellers at the expense of smaller sellers. As casual sellers abandoned the site, buyers have migrated elsewhere in search of the hard-to-find products upon which eBay built its business. eBay’s traffic was down 5.2% last month over the previous year, while Amazon’s traffic rose 18.7%.
The more eBay has tried to be a retailer, the more its customers have gravitated to sites offering better overall shopping experiences with lower total prices, better customer service, and predictable deliveries; not to mention the avoidance of the risk of fraud. The percentage of eBay’s visitors who shopped at Amazon jumped from 41% in February 2008 to 53% last month. Over the same period, Amazon visitors’ cross-shopping of eBay has remained unchanged at 58%, suggesting eBay’s fixed-price strategy has failed to attract significant numbers of new shoppers to the site. By focusing so much on fixed-priced items sold by large sellers, eBay has blurred the distinction between it and the litany of shopping comparison sites and tools on the web (such as
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shopping.com which eBay also owns). In so doing, eBay has traded away much of the brand equity that once set it apart from the rest of the online retailing universe.
With its greater emphasis on fixed-priced goods, it’s not surprising that eBay has seen a steady increase in the number of shoppers making “Buy-It-Now” purchases over the past year. In February, 11% of eBay’s visitors, or 7.8 million customers, made a Buy-it-Now purchase (up 20% from the previous year). However gains in fixed-priced activity have been eclipsed by declines in eBay’s traditional auction business. The percentage of eBay’s traffic that made a bid on an auction-style listing dropped from 13.5% in February 2008 to 12.2% last month. In total, 1.5 million fewer shoppers placed a bid on eBay last month than did last February. Solutions eBay’s challenges are multi-faceted, and it remains to be seen whether by simply returning to its roots as an auction site it can win back buyers and sellers who have long since given up on using the site. Online retailing has evolved significantly since eBay was founded over a decade ago. Savvy consumers have learned how and where to find deals online, but value intangibles beyond price when making their purchase decisions. Consumers expect a level of service that in some respects is beyond eBay’s ability to control in its role as middleman. Given that, eBay would be better served looking beyond product strategy and focusing instead on improving the shopping experience for buyers and sellers as its constant tinkering seems to be doing more harm than good.
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Strategic Recommendation and Implementation – Strategy 2 Strategic Recommendation for EBay – Skype Weakness: Acquiring unrelated businesses which become a distraction to the core business Recommendation: Decide a strategy which will best benefit eBay’s financials, while also removing Skype from the company’s profile Problems eBay has recently taken on the purchase of VoIP provider Skype to add to their company portfolio. The cost of this acquisition to eBay was $2.6 Billion. This purchase has been heavily criticized since its decision, but is still very much supported by the management at eBay. It has seen growth in revenues and also customers since its acquisition, along with becoming one of the largest long distance phone companies. The issue which arises from this business is the concern of its success into the future and also its relevance to eBay’s core business. Solutions The economy will play a large role in the timing and success in handling a move with this business. The two potential strategies to follow would be most successful in a time of expansion, when more money is available to be invested. A spin-off of Skype through an IPO is the first strategy to consider given its recent success. This would allow eBay to receive some return on its original investment while allowing Skype to be ran under its own ownership. Although, the issue with this strategy is two-fold. First, the markets are currently not successful in IPOs because of the riskiness and also the lack of additional funds by investors. This has placed nearly all IPOs on hold for the near future. The expectation is that this will be the case until at least 2010, with the possibility that it may take longer, when markets become more successful and investors will be looking for investments to take with this sort of risk. The issue of this for eBay comes with the need of extra cash flow to handle new strategies and growth. Also, it will be important for them to A more successful approach for eBay to take would be the strategy of making Skype look very attractive for a straight buyout. This is a situation which could happen quickly as there are some companies, especially in the technology sector, which have stable business with enough cash to handle a purchase of this size. Another reason for a company to choose a take over this business would be to set themselves up for high growth, in faster pace then the economy. This will happen due to having additional free cash flow from the sale which would be used in other areas of its business. This will become available more rapidly then other strategies which could take time waiting to implement. Skype is currently a profit making business and would need to market its financial highlights to suit a buyer. This business is nearing $600 Million in revenue and is still showing signs of growth in the industry. With the right buyer, Skype has potential to reach new
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heights by partnering with another successful product. There are companies which have shown interest in the purchase of Skype and this includes the original founders. With many suitors interested in the company, eBay can build a sort of bidding war in order to receive a return on their investment. The current valuation of the Skype company has come to equal about $2 billion, while the purchase price in 2005 was $2.6 billion. It has also been mentioned that it could receive between $5-6 billion from a larger company interested in increasing the technology in one of their previously existing products (Blodget, 2008). The recent success of the company leads us to suggest purchase of this company by Apple, Google or Verizon Wireless. These companies are the big three which should be considered and contacted for the sale of this company. They all have free cash flow and other strong financials which could support this type of purchase and most importantly, pre-existing products which could adapt the new technology they obtain to be more successful in their industry.
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Strategic Recommendation and Implementation – Strategy 3 Strategic Recommendation for EBay – Chinese Expansion Weakness: Weak expansion results in China. Recommendation: Boost efforts to become a key player in the Chinese market. Why expansion would be good? In Japan, Ebay lost a very important market (the second largest online market in the world) when eBay was aced out by a joint venture between Yahoo and Softbank. Yahoo only entered that market five months head of Ebay, and they took control of that market and never gave it up. Thanks to that move, Yahoo now sees more than $5 billion in transactions a year in Japan. EBay eventually gave up that market entirely in 2002. So an expansion into the Chinese market would be crucial for any furthers success stories for eBay, and eBay doesn’t want to make the same mistake they made in Japan, by losing this huge lucrative market to its competitors. Besides, it is estimated that China will overtake America with the largest number of Web surfers as early as 2010. So, overlooking and not taking this market seriously would be a huge mistake for eBay. Problems One of the challenges eBay face in China is that’s country’s difficulty to adapt readily to the PayPal system eBay’s uses. In much parts of China, for example, such electronic payment systems remain a mystery, and many eBay deals are sealed only with face to face cash payments. For instance, China Unionpay holds credit card monopoly in China, which makes it hard for Paypal to expand its services in China. Other concerns facing eBay in China is that people feel insecure with making payments online. However, in 2005 it was announced that eBay had agreed with a partnership with China Pay, the online payment arm of the country’s official band card information switch centre, China UnionPay. In 2005 Yahoo agreed to buy a 40% stake in eBay main competitor in that country, Alibaba.com, for $1 billion. The expertise of the two giants can easily cause more trouble for eBay, and unless eBay acts quickly to counter this, eBay can once gain be out competed like it did in a similar way in Japan. Solutions Further strengthen the partnership with China Pay: The fact that many people in China do not have Visa, MasterCard or other western payment systems is a huge hinder for any future success in China. By further strengthening its partnerships with China Pay, eBay can make payment from its customers easier, which in the long run leads to a broader market share. Hire a country manager: Today, Korea is eBay’s third largest international market. But when Jay Lee was installed as country manager there in May 2002, he inherited a catastrophe. The
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business was bleeding cash. A Korean himself, Lee understood that in Asia there’s a stigma against buying used goods. He moved the business from unrelated areas like real estate listings and insurance to auction off newer items like digital electronics, computers and fashion. Today, eBay Korea is on track to produce $1 billion in annual online sales. Because of his success in Korea, eBay’s head management put him in charge of its expansion in China as well, which we believe is a wrong move. We think this is country-by country-race, and putting someone charge who had success in Korea doesn’t necessarily mean he is going to be successful in China likewise. By hiring a local manager that has the experience and reputation would be the best move for any future success in that region. Lee understood the Korean market, because he’s Korean. EBay needs to find someone who his similar to Lee, but has the expertise in the Chinese market instead. That way eBay can gain on all the advantages the Chinese market has to offer. Conduct research: eBay needs to put more effort into researching that market. It needs to conduct more market researches and find out what the needs of those customers are. This can be done through surveys, interviews and tests. This will give EBay valuable information on what is lacking and what it needs to do. Once its results of that information is clear it needs to implement those strategy in areas they are weak. Change agent programs that are working should be kept and those which are not should be abounded. Increase advertisement: After all the plans above have been implemented, eBay should increase its efforts to advertise its services to its customers. Letting people know the benefits of shopping on eBay and eliminating its customer’s doubts and insecurity of shopping online. Good and beneficial services along with strong marketing are well know ingredients in any corporate success.
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Strategic Recommendation and Implementation – Synergy The strategies highlighted in this section are dependent on each other for overall success. The first strategy leads the company for the impending changes by focusing back on auction business rather than secondary-market. eBay had taken off as an early leader in e-commerce in the late 1990s with an auction model that guaranteed consumers could find the best price on many used and leftover items. Second, eBay will be able to cover up the transformative costs by selling Skype. Skype is not directly related to the auction business. To ensure future long term growth of eBay, the company would have to enter the Chinese auction market. China will overtake America with the largest number of Web surfers as early as 2010. After two or three years of change, eBay will be positioned in Global markets. Moreover, eBay will continue to grow, and providing a consistent stream of profit that will reinforce eBay’s long term position as market leader.
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Strategic Recommendation and Implementation – Timeline The following graph exhibits how the timing will occur in implementing the above mentioned strategies. The proper timing will need to occur between these three recommendations in order for the best success to be seen in the company’s performance. As can be seen, the first step in the process will need to be reorganizing the goals of the company and sharing this image with the employees of the company. In completing this step, the company will be prepared to move on a structured path in order to complete the remaining tasks. The next step to be completed in the reorganization of the eBay company is placing their subsidiary Skype on the market to be sold. This continues on the plan of return to eBay’s core business, rather than spreading their management in areas which they have no expertise such as the telephone service providing industry. To complete the sale of this company, bids will need to collected from potential buyers and must be considered to best benefit eBay’s business. Following the completed sale of Skype, eBay will continue promoting their core business. This will require efforts to promote the use of auction services to their customers and also potential customers looking for this unique type of business. The final group of steps will come from the plan to expand the eBay company into successful globalization. A country manager will need to be hired to begin the process and this will also include the manager’s choices for creating an effective team for this market. The compiled team will conduct research on the Chinese market in order to avoid errors which have occurred from this step being skipped in past internal expansion strategies. Following the in-depth research, advertisements can begin in order to build hype for this newly formed expansion and finally it will be time to begin services in the Chinese market. It will be necessary to conduct an evaluation of these implemented strategies over time in order to gauge the successfulness of each and to also be sure the company’s correct core business is remaining the main focus. This evaluation must be completed every year following the initial evaluation process to keep the company on track. In the following section you will find a graphical version of how these strategies will play out over time and when it will be necessary to implement each to receive the greatest benefit.
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Economic Value Added Economic Forecast for 2010 The year 2010 is expected to bring a turnaround in both the economy as a whole and also in this industry. This period will be the end of an economic recession, as the current market will come to a trough. This leads us to believe in the economy and eBay will need to weather more of a downturn before becoming successful in the near future during expansion. Economic Forecast to 2014 By the year 2014, the United States will be in the midst of economic expansion and this will be the opportunity for eBay to see large successes in financial performance. eBay is expected to grow at a rate of 31.59% in revenues over the next five years. Following this high growth period, analysis on eBay’s financial forecast was completed using a conservative 6.7% for their stable period of revenue growth. Recession Resistant Retailer This firm saw its quarterly revenue in 2008 growth bounce by 19.7% (year-over-year), while quarterly earnings growth jumped 22.5%. Its users sold $927 million in goods during the second quarter, which dumped $35.7 million into the company’s funds in transaction fees. These are positive results, given the weak state of the current economy and inflation forcing consumers to cut back on purchases. eBay is able to see successes during this time period because of the type of products they offer and being an e-commerce based company has aided in their success in our heavily internet focused society. Payment Services Business to Diversify The other area which has allowed eBay to stay stable during times of turmoil is having Paypal in its company portfolio. Having these two companies working together, diversity is created between the two and this limits the risk of the eBay company being the only member of the portfolio. The reason Paypal has been successful for this company is its relevance to the business which is occurring and also its flexibility to expand into other companies. Present Value of Economic Value Added Using the FCFFEVA model coded by Damodaran, we can first determine the present value of the economic value added by the company of eBay. In order to complete this model we have used the financial results from the year end 2008 financial statements and also calculated forecast, for both the growth period and stable growth period for the company. The main assumptions taken for this model were that of eBay choosing to take on some debt during the stable period in order to lower their cost of capital in the company. The other decisions made were that of remaining conservative in the near future regarding financials and also for the future, as these items are difficult to predict with certainty. This returns results of
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$39,184,331,993. This amount of money is the value eBay has added to the economy through its growing earnings forecasts. Present Value of the Firm Value of firm has been calculated using the free cash flow method and this equates that the eBay company is worth $47.05B. In the market eBay is currently reporting company value of $23.17B. As can be clearly seen, the valued company worth is much more than the company has been valued in the market. Lastly, we have calculated the valuation of the share price. The free cash flow method has returned a value share price of $35.98, while the current share price is $17.23. Using these numbers we can determine that eBay is currently much undervalued and this represents that investors have other beliefs about the current situation of the company. It seems as though there could be worries about eBay’s current situation as a company which has not obtained investor trust in the company. This, along with the current economy placing many stocks in a value position, has placed this stock price in an undervalued position. FIRM VALUATION Value of Firm
$
47,052,148,638
- Value of Debt
$
1,000,000,000
Value of Equity
$
46,052,148,638
Value of Equity per Share
$
35.98
PV of EVA
$
39,184,331,993
+ Capital Invested
$
10,587,300,000
+ PV of Chg Capital in Yr 10
$
(2,719,483,355)
= Firm Value
2009
2010
$ 47,052,148,638 Value of Firm by year 2011 2012
$ 47,052,148,638 2014
$ 53,044,205,188 2015
$ 59,454,140,700 2016
$ 66,168,727,693 2017
$ 72,998,197,277 2018
$79,645,280,83 5
$86,112,845,792
$92,321,162,784
$98,367,906,906
$104,589,358,409
2013
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Financial Forecasts Annual Income Statement
In Millions of U.S. Dollars 2011 2010 2009 Period Lengt Period Lengt Period Lengt h h h 12 Months
12 Months
2008 Period Lengt h
% of Rev 12 Months 668393 $9,053.78 % $8,541.30 -668393 $9,053.78 % $8,541.30 $2,054.19 23% $2,228.10 $6,999.59 77% $6,313.20
12 Months
Revenue Other Revenue, Total
$10,172.82
$9,597.00 $4,000.00
Total Revenue Cost of Revenue, Total Gross Profit Selling/General/Admin. Expenses, Total Research & Development Depreciation/Amortization Unusual Expense (Income) Total Operating Expense Operating Income Interest Expense, Net NonOperating Interest Income(Exp), Net NonOperating Net Income Before Taxes Provision for Income Taxes Net Income After Taxes Net Income Before Extra. Items Net Income Income Available to Com Excl ExtraOrd Basic Weighted Average Shares Basic EPS Excluding Extraordinary Items Diluted Weighted Average Shares Diluted EPS Excluding ExtraOrd Items Diluted EPS Including ExtraOrd Items Total Special Items Normalized Income Before Taxes Effect of Special Items on
$10,172.82 $2,308.09 $7,864.74
$13,597.00 $2,177.44 $11,419.56
$4,087.67 $824.99 $291.08 $547.91 $8,059.74 $2,113.12
$3,856.29 $778.29 $274.60 $516.90 $7,603.53 $1,993.51
$3,638.01 $734.24 $259.06 $487.64 $7,173.14 $1,880.67
40% 8% 3% 5% 79% 21%
$3,227.90 $725.60 $234.90 $49.10 $6,465.60 $2,075.70
-$12.94
-$12.20
-$11.51
0%
-$8.00
$194.55 $2,294.73 $645.09 $1,649.64 $1,649.64 $1,649.64
$183.54 $2,164.84 $608.58 $1,556.26 $1,556.26 $1,556.26
$173.15 $2,042.30 $574.13 $1,468.17 $1,468.17 $1,468.17
2% 23% 6% 16% 16% 16%
$115.90 $2,183.60 $404.10 $1,779.50 $1,779.50 $1,779.50
$1,649.64 $2,063.51
$1,556.26 $1,946.71
$1,468.17 $1,836.52
16% 20%
$1,779.50 $1,303.45
$1.23
$1.16
$1.09
0%
$1.37
$2,095.82
$1,977.19
$1,865.27
21%
$1,312.61
$1.21
$1.14
$1.08
0%
$1.36
$1.21 $551.34 $2,846.07 $287.24
$1.14 $520.13 $2,684.97 $270.98
$1.08 $490.69 $2,532.99 $255.64
0% 5% 28% 3%
$1.36 $58.10 $2,241.70 $9.10
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Income Taxes Inc Tax Ex Impact of Sp Items Normalized Income After Taxes Normalized Inc. Avail to Com. Basic Normalized EPS Diluted Normalized EPS
$932.33 $1,913.70 $1,913.70 $1.42 $1.40
$879.56 $1,805.38 $1,805.38 $1.34 $1.32
$829.77 $1,703.19 $1,703.19 $1.26 $1.25
9% 19% 19% 0% 0%
74
$413.20 $1,828.50 $1,828.50 $1.40 $1.39
Annual Balance Sheet In Millions of U.S. Dollars Cash Cash & Equivalents Short Term Investments Cash and Short Term Investments Accounts Receivable - Trade, Net Total Receivables, Net Prepaid Expenses Other Current Assets, Total Total Current Assets Property/Plant/Equipment, Total Gross Accumulated Depreciation, Total Property/Plant/Equipment, Total Net Goodwill, Net Intangibles, Net Long Term Investments Other Long Term Assets, Total Total Assets Accounts Payable Payable/Accrued Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current liabilities, Total Total Current Liabilities Total Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities Common Stock, Total Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Treasury Stock - Common Other Equity, Total
2011 $3,390.38 $279.77 $3,110.61 $2,945.62 $2,945.62 $190.44 $273.58 $7,487.44
2010 $4,000.00 $3,198.47 $263.93 $2,934.53 $2,778.89 $2,778.89 $179.66 $258.09 $7,063.62
2009 $3,017.42 $248.99 $2,768.43 $2,621.59 $2,621.59 $169.49 $243.48 $6,663.80
$3,349.14 -$1,921.47
$3,159.56 -$1,812.70
$1,427.67 $8,367.36 $876.71 $126.49 $285.13 $18,570.8 0 $1,951.24 $641.48 $1,191.02
2008 % of Cash $2,846.63 $0.08
$0.06 $0.08 $2.21
$3,188.90 $234.90 $3,423.80 $2,473.20 $2,473.20 $159.90 $229.70 $6,286.60
$2,980.72 -$1,710.10
$0.99 -$0.57
$2,812.00 -$1,613.30
$1,346.86 $7,893.74 $827.08 $119.33 $268.99 $17,519.6 2 $1,840.79
$1,270.62 $7,446.92 $780.27 $112.57 $253.76 $16,527.9 4 $1,736.60
$0.42 $2.47 $0.26 $0.04 $0.08
$605.17 $1,123.60
$570.92 $1,060.00
$0.19 $0.35
$1,198.70 $7,025.40 $736.10 $106.20 $239.40 $15,592.4 0 $1,638.30 -$538.60 $1,000.00
$0.87
$5.48 $0.58
-$629.09 $4,412.83 $1,191.02 $898.03
$593.49 $4,163.05 $1,123.60 $847.19
$559.89 $3,927.41 $1,060.00 $799.24
$0.19 $1.30 $0.35 $0.26
$528.20 $3,705.10 $1,000.00 $754.00 -$0.02 $49.50 $1.58 $4,508.60 $1.50
$58.96 $5,369.81 1.50 $11,416.8 4
$55.62 $5,065.86 1.50 $10,770.6 0
$52.47 $4,779.12 1.50 $10,160.9 5
$3.37
$9,585.80
$7,110.37 -$6,404.09 $1,076.08
$6,707.89 -$6,041.60 $1,015.17
$6,328.20 -$5,699.62 $957.71
$2.10 -$1.89 $0.32
$5,970.00 -$5,377.00 $903.50
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Total Equity Total Liabilities & Shareholders' Equity Shares Outs - Common Stock Primary Issue
$13,201.1 0 $18,570.8 0
$12,453.8 7 $17,519.6 2
$11,748.9 3 $16,527.9 4
1,526.92
1,440.49
1,358.95
$5.48
$11,083.9 0 $15,592.4 0
$0.45
1,282.03
$3.89
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