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  2. 2. Katelynn Coghlan 8/18/2010 Online Auction Industry The online auction industry began its phenomenal market boom in the late nineties. EBay has been the company that has paved the way for this ever growing industry. When Pierre Omidyar began the company in his living room he had no idea the potential that the industry held for him and many other hopeful online auctioneers. Key Economic Features The industry’s key economic features make it both unique and attractive for firms looking to enter (Appendix A). The market size and growth rate have been increasing since the origination of online auctions. Furthermore, the fact that it is a large market makes it favorable for new firms to enter. Also, since the industry is still in the growth process of the product life cycle, there is still the possibility of new competitors. There is also high profitability for firms in the online auction industry. Competitive Forces The competitive forces of an industry will be a deciding factor of whether the industry is attractive to enter. By examining Porter’s Five Forces of competition the attractiveness of the industry can be determined (Appendix B). Rivalry is usually the most important of the five forces. In the online auction industry rivalry is moderate but not too rigorous. Some aspects of the industry such as low switching costs make rivalry stronger but the fact that the industry is growing especially in global markets weaken rivalry. Two of the strongest forces are the threat of substitutes and the potential of new entrants. The online auction industry has the potential for high profits making it attractive to new firms to enter. Also, substitutes are readily available and attractively 2
  3. 3. Katelynn Coghlan 8/18/2010 Online Auction Industry priced from numerous distribution channels including, other auction sites, online stores such as Target.com, and brick-and-mortar organizations such as WalMart. Driving Forces Three driving forces were determined in the online auction industry (Appendix C). They are, growing use of the internet, increased globalization, and market innovation. These driving forces are the aspects of the online auction industry that have changed the industry and it’s competitive environment through the years and will continue to effect change in the future. Strategic Group Maps Strategic group maps can show where a company lies within an industry (Appendix D). Although many companies in the online auction industry are very much alike, two differentiating characteristics were determined. First of all, the degree of service offered differentiates the companies in this industry. EBay focuses on creating a sense of community within its company. They pride themselves in leading their customers through the buying and selling process from beginning to end and beyond. Other companies are not as in depth with their services and keep to a no frill state of mind such as BidVille. Another defining characteristic is geographic coverage. EBay has saturated the global market while companies such as Yahoo have not been as successful. Even smaller companies such as ePier have tried to take action to make their company more global. Analysis of Competition There are only two large competitors in the online auction industry (Appendix E). EBay is the dominant firm in the online industry followed by Amazon.com. 3
  4. 4. Katelynn Coghlan 8/18/2010 Online Auction Industry Amazon.com has the best strategy to take them into the future. Other firms in the industry hold a much smaller market share compared to eBay and Amazon. UBid.com has tried to capture a specific niche in the market but with the changing ownership of the firm and a distorted market strategy they seem destined to lose more ground in the future. Yahoo has also had many problems gaining ground in the industry. They were not successful in most of their global ventures and also changing fees for customers cut their membership in half. Key Success Factors After analysis of the online auction industry key success factors have been determined (Appendix F). First of all, a company must establish a brand and make sure their brand is respected. This is crucial to any firm in order to obtain and keep customers. Next, personalized customer service is important. EBay has focused through the years on creating a sense of community within their company. Customers must feel appreciated in order to remain loyal to a company. Global distribution is also a key to success in the online auction industry. As the internet becomes more prominent in countries such as Europe, Asia, and Latin America, new customers are created. This gives firms in the industry a chance to obtain these new customers. Lastly, overall low costs are important. Each firm must come up with a strategy to keep costs low. If a firm can keep their costs low they can also keep their fees to customers low. Overall Attractiveness The online auction industry has been determined as an attractive industry (Appendix G). With large profits and growth still on the rise new entrants have the 4
  5. 5. Katelynn Coghlan 8/18/2010 Online Auction Industry potential to gain market share in the industry. Although the future of the online auction industry is somewhat unknown the growing use of the internet makes potential for continuing growth very likely. If a firm can develop a business plan which makes them diverse, customer oriented, and unique, the potential of success is possible. 5
  6. 6. Katelynn Coghlan 8/18/2010 Online Auction Industry APPENDIX A: DOMINANT ECONOMIC CHARACTERISTICS ECONOMIC STRATEGIC IMPORTANCE FEATURE Market Size The market is relatively large in size. It has the potential for new entrants looking to acquire market share from large firms. Market Growth Rate The industry is in the rapid growth and takeoff stage of the product life cycle which makes it appealing for new firms to enter. This is because it is still not overly saturated with competitors. Capacity The industry is not crowded with too many large competitors. Industry Profitability Since the online auction industry is profitable it will attract new entrants. Entry/exit barriers The internet is an open market making it easy for new firms to enter into the online auction industry Product is big-ticket Depending on the type of buyer and the product to be purchased, item for buyers finding the lowest price may be a concern for some buyers. Standard products The online auction industry is a relatively standard service. Therefore, buyers have power in the online auction industry. If they cannot find a desired product at the right price from eBay, they can easily look at Amazon.com, BidVille, or uBid to search for the product. Rapid Technological Increasing technology creates more customers for the online Change music industry. Low risk. The firms in the market do not produce anything that would become obsolete because of technological change. Vertical Integration Some competitors in the industry are partially integrated. For example uBid has warehouses that store their merchandise. If this feature of uBid is specifically cost effective is not specified. Vertical integration is not a threat to online auction firms. Economies of Scale Economies of scale do not exist because large production does not lower cost for any of the firms in the industry. Online auctions are services. Rapid product Product innovation is important to the online auction industry. innovation Each firm can make their product superior to the others by adding new features or continually making online buying and selling easier for customer. 6
  7. 7. Katelynn Coghlan 8/18/2010 Online Auction Industry APPENDIX B: ANALYSIS OF COMPETITION IN THE ONLINE MUSIC INDUSTRY SUBSTITUTE PRODUCTS-HIGH • (+)Substitutes are attractively priced • (+)Substitutes have comparable performance • (+)Low cost switching costs • (+)Readily Available Rivalry-Moderate (-)Buyer demand is growing rapidly Buyer Power- especially in foreign markets Moderate Supplier Power- (-)The market is growing rapidly (-)The industry product Low (+) Buyer cost to switch brands is is not standard (-)Seller switching costs low. (+)Low switching costs are low (+) eBay and Amazon both have (+)Several sellers are (-)Good substitutes exist powerful strategies while the other available to buy from (-)Substitutes exist firms are trying to catch up. (-)Many buyers purchase (+)Rivals are located in other in small quantities countries. Potential New Entrants-High (+)Entry barriers are low (+)Entering into foreign markets is common (+)Profit earnings for new firms are attractive (+)Buyer demand is high. (+) No economies of scale 7
  8. 8. Katelynn Coghlan 8/18/2010 Online Auction Industry APPENDIX C: DRIVING FORCES OF THE ONLINE AUCTION INDUSTRY 1. Growing use of the Internet. Everyday more people are becoming users of the Internet. Especially in Asia and Europe, the Internet is more accessible then ever before. This is a driving force for the online auction industry because it creates new customers and suppliers. People in foreign markets will continue to be exposed to the internet and will begin to use it more often. This increase will be a driving force of change in the online auction industry. 2. Increasing Globalization. The Online Auction Industry is booming in the United States. The success of this industry has made some of the largest contenders branch out into the global community. EBay has created, acquired, and began joint ventures in order to dominate in the foreign markets. First, EBay has created sites specifically for foreign customers. Starting in Canada, eBay began to make sites that tailored specifically to a region. EBay also acquired foreign auction sites to broaden their customer base such as, Alando.de AG, Germany’s largest online person-to-person trading site. Lastly, in order to acquire one of their largest foreign presences, eBay began a join venture with NEC to launch eBay Japan. EBay’s foreign markets will be crucial to their continuing success. Amazon.com one of eBay’s main competitors has also began to branch out into the global market. Amazon invested $300 million to make Canadian, European, and Japanese tailored sites. Each firm must develop a strategy for global penetration. Yahoo.com did not develop a strong successful strategy for the global expansion and in turn failed in most of their global markets. 3. Market innovation. Market innovation is used to spark interest in buyers to buy your product or use your service. Firms in the online auction industry are constantly looking for ways to market their service and make it the easiest to use. EBay is constantly adding new aspects to build customer loyalty and build a sense of community around their business. EBay has also added many sister sites such as eBay Motors and LiveAuctions. These sites are designed for auctions of specific products. They were created with buyers and sellers in mind to make finding the right product easy and simple. Market innovation will be a driving force in the future of the online auction industry. Firms need to find ways to spark interest with potential customers so they can begin to build a relationship and build loyalty. 8
  9. 9. Katelynn Coghlan 8/18/2010 Online Auction Industry Assessing the Impact of Driving Forces 1. Are the driving forces causing demand for the industry’s product to increase or decrease? The driving forces for the online auction industry are causing demand for the product to increase. All three of the driving forces listed are used to increase demand for the product. First of all, increasing use of the Internet drives demand upward because more people are accessing the online auction sites. Next globalization opens up new markets for the industry and also increases demand. Lastly, marketing a product more rigorously will make your product known. Marketing is used with increased demand as a goal. 2. Are the driving forces acting to make competition more or less intense? They are acting to make competition less intense. 3. Will the driving forces lead to lower or higher industry profitability? The driving forces will lead to higher profitability. Globalization, although costly, can also be very profitable, especially because of the increasing use of the Internet. This also is true to marketing of your product. A high volume of marketing, although costly, will increase awareness of your product or service. This awareness will attract customers to your product or service 9
  10. 10. Katelynn Coghlan 8/18/2010 Online Auction Industry APPENDIX D: STRATEGIC GROUP MAPS Full eBay DEGREE OF SERVICE OFFERED Limited Amazon.com uBid.com Yahoo.com ePier BidVille No-frills Low High GEOGRAPHIC COVERAGE 10
  11. 11. Katelynn Coghlan 8/18/2010 Online Auction Industry APPENDIX E: ANALYSIS OF COMPETITION Below are S.W.O.T analyses for the main competitors of eBay. Compiled from the information given in the eBay case, each competitor is analyzed. AMAZON.COM Strengths Weaknesses • 35 million users, 150 Countries • Free shipping policy • Well known name • 1.1% web traffic to auction sites • Extensive reviews of each item • Expanding globally pushed them listed on site out of number one spot • A9 search tool • Alliances with other companies OPPORTUNITIES THREATS • Continuing strategic alliances • EBay’s success in the global market • Continuing globalization • New entrants to the online auction • Acquiring smaller auction sites to industry broaden and diversify their product  In the online auction industry, excluding eBay, Amazon.com has the best strategy for continued growth and improvement in the future. They have many features that make them very customer friendly. Also, they have begun to expand into global markets. Global expansion will be crucial to the future of online auction sites. UBID.COM Strengths Weaknesses • Selling brand-name merchandise at • Does not offer consumer-to- low prices consumer auctions • Niche market • Changing of ownership • Certified Merchant Program • Changing product mix • In house merchandise OPPORTUNITIES THREATS • Addition of new categories • EBay’s growing power in the • Addition of new suppliers industry • Broadening the niche market to • Diversification of the online auction capture a specific target market industry  Ubid.com has the weakest strategy of the major competitors of eBay. They have completely shut down consumer-to-consumer auctions and are now focused on providing brand name products at close out prices. With all of the competitors trying to compete on this aspect, both brick-and-click and brick-and-mortar, uBid 11
  12. 12. Katelynn Coghlan 8/18/2010 Online Auction Industry does not have a solid distinctive feature that will make them stand out. UBid also states that they are trying to reach a niche market. The niche market however is not well-defined. YAHOO AUCTIONS Strengths Weaknesses • Numerous alliances to generate • Failure in many foreign markets traffic • Decreased use after change in list • Investment in technology to fee requirements improve sites overall aesthetic feel • Little advertising and marketing • Well known name • Offering of extra services to users such as the Premium Sellers Program • Joint venture with Sina OPPORTUNITIES THREATS • Joint ventures • Globalization of online auction • Diversification of products offered industry • EBay’s commitment to building a sense of community to keep customers  Yahoo Auctions is a weak contender in the online auction industry. Although the company is well known for their e-mail, search, and financial sites, their shopping site is practically unknown. Yahoo must create a distinctive feature which makes them stand out from the larger competitors if it wants to survive in this industry 12
  13. 13. Katelynn Coghlan 8/18/2010 Online Auction Industry APPENDIX F: KEY SUCCESS FACTORS IN THE ONLINE AUCTION INDUSTRY The four key success factors (ordered from most important) of the online auction industry are: 1. A well-known and well-respected brand name 2. Personalized customer service 3. Global distribution capabilities 4. Overall low costs A well-known and well-respected brand name Any firm in the online auction industry must have a well-known name in order to gain customers that visit their site. EBay and Amazon.com both have well-known names. They have used many media avenues in order to get people to visit their site. Both eBay and Amazon have created alliances with other large companies to create awareness of their company. EBay has partnered with companies such as AOL, IBM, and Compaq in equal opportunity alliances to help spark awareness. Amazon has also created alliances with companies such as Border’s Books with the same idea in mind. A company must also be well respected. It is easier to keep a customer then to obtain a new one. Therefore, online auction sites must remain well respected by all customers and potential customers. EBay has sustained their respect by never forgetting who made them into who they are today. They pride themselves on their sense of community and continually create value-added services for their customers. Personalized Customer Service EBay has created a customer community. “My Ebay” and “About Me” are two personalized customer service components of the eBay community. Also, “The Feedback Forum” lets customers tell everyone how they feel about certain sellers. By providing personalized customer service any online auction site can give their customers a feeling that they are appreciated and cared about. Global Distribution Globalization is becoming a huge factor for virtually every industry. The online auction industry is no different. Firms must takes this into account and make sure that they are either branching out to the global community or planning to in the future. Overall Low Costs Costs are better when they are low. If the firms in the online auction industry can keep costs low they can continue to offer low listing prices and fees for their sellers and buyers. This will ensure that customers will not leave their firm because of high costs. 13
  14. 14. Katelynn Coghlan 8/18/2010 Online Auction Industry APPENDIX G: OVERALL ATTRACTIVENESS OF THE ONLINE AUCTION INDUSTRY Many factors of the external environment have been examined in order to determine the overall attractiveness of the industry. Although eBay holds the majority of the market, there is still potential for new firms to enter. Some of the major determining factors in this decision were: • Market Size: large • Market growth: fast • Stage in product life cycle: Growth Stage, market is still not fully saturated • Market profitability?: yes • Future of the industry: unknown but most likely continually growth • Competitors: Not too many large competitors • No economies of scale • Potential for new entrants to take over smaller/weaker firms?: yes 14