Assignment 1
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Evaluate eBay¶s international internati onal business strategies strategie s to date. What changes, if any,
would you suggest?
Since eBay burst to life in Pierre Omidyar¶s living room in 1995, the company has grown domestically and internationally internationally at a relentless pace, with revenues topping $2.17 billion in only 7 years after creation. Its ra pid success inspired the firm to define its mission as ³ providing a global trading platform where anyone, anywhere can trade practically pr actically anything anytime´ 1.To transform this vision into reality, eBay¶s growth strategy focuses on expansion abroad and continuing innovation to enhance the variety and appeal of products on its sites. EBay¶s international business strategy is certainly aggressive, expanding in overseas markets using simultaneous entry in several international markets. The company now has local on-line auction sites in 17 countries around Europe, Asia and in Australia and New Zealand, with 40% of its earnings being generated overseas 2. EBay appears to have been affected by a lack of local market knowledge, especially when it entered Japan. Internationalization Internationalization theory argues lacking local local market knowledge leads firms to gradually increase commitment in four sequential steps: starting with no regular export activities, activities, exports exports through independent representatives, representatives, through to more commitment intensive establishment of sales subsidiaries and joint ventures (See Graph 1 below). below). Therefore T herefore firms limit their risk in unknown markets through limiting resource commitments. EBay does have a large advantage over typical physical good providers when it comes to resource commitment, however the entry methods chosen by eBay do not correspond with theoretical predictions, directly setting up local sites in 16 foreign countries and high commitment investments in Latin America and China. Graph 1: Johanson and Vahlne (1977) Uppsala Model
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Daniels et al., 2007, p403 EBay Case Study
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Source: www.provenmodels.com
Johanson and Vahlne (1990) expanded the stage model and argue that firms control risk by first entering foreign markets that are similar in culture, language, rules and norms, and business networks before they expand to foreign markets that are culturally different 3. EBay¶s choice of which countries to enter appears to be influence by national culture, which can be defined as ³the sum total of the b eliefs, rules, techniques, institutions, and artefacts that characterise human populations´ 4. Hofstede (1980; 1991) conducted one of the best-known cultural studies in management through research on IBM¶s operations in 70 countries around the world. He believes that culture can be best explained across five dimensions, 1) Individualism, 2) Power Distance, 3) Uncertainty Avoidance, 4) Masculinity/Femininity, and 5) Time Orientation. Kogut and Singh (1981) hypothesise that the more culturally distant the country of potential entry is, the more likely it is that firms will choose to set up a joint venture 5. The fact that eBay rapidly entered countries with greater psychic distance such as Hong Kong and G ermany, implies the company¶s strategy is not driven by factors suggested by those suggested in stage models of internationalisation. EBay¶s quick and aggressive expansion is more in keeping with the phenomenon labelled as ³Born Global Firms´, first discussed by Hedlund and Kverneland (1985). R esearch on such ventures observes accelerated internationalisation and a more frequent use of joint ventures, which are considered
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Kogut, B & Singh, H ³The effect of national culture on the choice of entry mode´ J ournal of International Business Studies, Fall: 411 - 432 4 Ball, D. McCulloch, W. (1999). ³International Business: The Challenge of Global Competition, 7 th edition´ Boston: Irwin McGraw-Hill 5 Kogut, B & Singh, H. (1981) ³The Effect of National Culture on the Choice of Entry Mode´.
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high-control strategies, during expansion 6. Theoretical explanations put forward for this is the increasing emphasis on network relations, manager mind set and importantly for eBay, technological change. Increasing use of the internet has lowered transaction costs, shortened the supply chain and improved access to the global market (Knight/Cavusgil 1997). Customers benefit from a wide range of products on offer and at lower prices. EBay benefits from lower capital requirements and lower r esource commitment compared to the traditional manufacturing exporting firms used by Johanson and Vahlne in the 1970s used when developing the Uppsala model. Therefore it is possible to conclude that the competitive forces of this dynamic and fast-paced market override psychic distance as the main explanatory factor explaining eBay¶s rapid internationalisation7. Graph 2: The ³Born Global´ Firm
Source: European Business Review, Vol.16, Issue 6.
Despite its quick progress I believe that EBay¶s biggest problem so far is that it has failed to expand into new markets quickly enough. Perhaps it has waited until a market has reached a certain degree of internet penetration or GDP before entry, however it took roughly six years for eBay to become a trusted and popular name in the UK; should other markets require a similar evolution the company needs to move quicker as there appears to be an intangible value to having a history in a market. The opportunity cost of ignoring markets could result in a repeat of eBay¶s failure in Japan, where the company experienced the results of losing first-mover advantage and lost out to Yahoo! However instead of accelerating its international expansion, it is moving at a measured pace. While 17 local Web sites may seem plentiful, Google offers more than 100 local Web interfaces8.
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Mahnke, V & Venzin, M. (2002) ³How do digital information good characteristics influence pace and modalities of international market entry?´ DRUID Working Paper No 02-13 7 Rasmussen, S, E. (2002) ³The Born Global concept´ Paper for EIBA conference 8 Byte Level Research ± ³A Global Analysis of eBay´ Available at: www.bytelevel.com/companies/global_profile_ebay.pdf
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In your assessment, has eBay really created a new type of market? Justify your answer with reference to the case and to relevant theory.
At our core, we help make inefficient markets efficient¶ 9
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Meg Whitman, CEO of eBay EBay¶s creation came about because Pierre Omidyar¶s future wife complained that it was hard to find people in her local area to trade with. One of the earliest items sold on the site was a broken laser pointer for $14.83, Omidyar emailed the winning bidder to check he knew it was broken and the bidder replied: ³I¶m a collector of broken laser pointers.10´ Essentially, but slightly more crudely, ³eBay has created the first never-closed garage sale´ 11.A market is simply defined as a place where buyers and sellers interact. The notion of auctions and second hand selling has been around for many years, therefore, it would be logical to say that eBay has not created a new market but in fact made current markets a great deal more efficient through providing an online platform where millions of potential buyers and sellers can interact in ways not possible in the physical world. Leaving inventory carrying costs, distribution risks, vendor management issues to those who participate in auctions, it has created a web based business model that shows that the web can create efficient markets where none existed before. Even if the notion of auctions is an old and well-known market, eBay has certainly indirectly created a new type of market for firms that specialise in selling items on eBay for individuals who accept forgo a fee in order to have the whole transaction process such as taking photos and postage done for them. Create new online marketplace using internet. Governments using to dispose of surplus items, cars, charity, eBay motors, 3.
Is continued growth desirable and possible for eBay and where do you consider that growth would be feasible? High market penetration in the U.S. signals that the firm has reached saturation point
domestically. However, I believe there are still potential avenues for growth available through innovation
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EBay Case Study Cholski, S. Kim, J. Lee, C. Nguymen, D. ³EBay Inc.´ 11 Berry et al (2006) ³Creating New Markets through Service Innovation´ MIT Sloan Management Review, Vol.47. No.2. 10
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and expansion abroad into emerging markets. Whether this growth is desirable or not depends on what strategies the company uses, specifically if the firm remains committed to its core competencies and does not diversify too much. Whilst diversification provides potential for firms to achieve greater returns on their innovations, theory suggests that low returns are related to greater levels of diversification and that its positive effects are limited. After learning how to operate efficiently in these markets, firms generally earn positive returns on international diversification up until a certain point, then returns turn negative (See Graph 3). Trade barriers, cultural diversity, greater geographic dispersion greatly increases the obstacles to international diversification. There are a number of examples where firms that are more broadly diversified compared to their competitors may have overall lower p erformance. The Japanese firm Sanyo Electric needed to restructure because it had too many businesses to manage, ranging from recruiting services to running a golf course. It needed a $2.6 billion restructuring loan from Goldman Sachs in 2004 to get itself out of trouble. Graph 3: The curvilinear relationship between diversification and performance
Source: www.openlearningworld.com/olw
Nevertheless I believe eBay does have potential avenues of expansion: firstly, the firm must continue to be successful and innovative when it comes to technology. The supporting network for the µ
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site is one of the most advanced applications ever created, 12¶ It is imperative that eBay retains technology as it core strength and minimizes potential software issues as it continues to expand globally. In 1999, the website crashed for 22 hours and the firm lost $4 million in fees and $5 billion in market valuation. Another technology problem is that some customers are unwilling to take photos and upload them to the site; therefore if a quicker and more efficient way of doing this is found it is bound to increase the customer base. Technology will also be important when dealing with differences in government regulations across countries. EBay has tried to avoid policing its site for illegal activities and instead issued disclaimers and consequently rely entirely on sellers to abide by local rules. Stolen goods and products that are banned in certain countries but not others are increasingly used in auctions (Koerner 2003). Whilst eBay tries to remove these items manually, the volume of online listings each day makes it practically impossible to eradicate. The firm has occasionally simply ignored illegal sales of legal products, such as reselling of tickets to concerts a nd sports events (Moses 2007a). The selling of fake items can also be costly; in 2008 Louis Vuitton sued eBay for $63m over fake goods sold on the site. Recent moves like the acquisition of PayPal and expansion of its auction categories have introduced new layers of complexity into its operations. Localizing PayPal is perhaps more challenging than eBay due to the complex regulatory and banking hurdles in each market. In a more globalized on-line community, it will become increasingly difficult and time-consuming for sellers to understand and follow the wide variety of government regulations. To continue expansion, eBay will likely have to also develop tools and invest significant resources to help sellers navigate these issues. Beyond improving the technology of the site I believe there to be two further avenues for expansion. The first is through acquisition. Yahoo.com is established in Japan and has a highly reputable brand name with potentially lucrative alliances in Asia; therefore this is definitely a potential acquisition for eBay. The company already has links with Yahoo in other areas so this could potentially be a mutually beneficial acquisition. The second is through improving links with the government. Judging by the success of state governments in the US to dispose of surplus items, it would be in the government¶s interest to use the software as traditional auctions are often poorly attended, and those states that have used eBay have tended to find the prices they received has doubled or tripled.
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Overall eBay faces a significant amount of competition and regulatory problems as it continues to expand overseas where local competitors have first mover advantages and strong local brands. In many countries, eBay will have to compete with companies who understand the local market better. Global strategy is not as responsive to local markets and it is difficult to manage because of the need to coordinate strategies and operating decisions across country borders. EBay experienced this when it moved into Asian markets. Therefore, after a period of fast international expansion, it is questionable whether continued expansion can be profitable.
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