Instructions: Please read the following case description of "eBay Structures Its Bid for Change". After reading this case, you should prepare your analysis following the guidelines I have provided. The purpose of this assignment is for you to demonstrate that you can apply the concepts, principles, and theories presented in the course readings. Your analysis must employ only the facts presented in the case description below. You must resist the temptation to introduce facts not in evidence in the case description by searching the internet for updated information. The company’s present situation is not necessarily the ideal solution that could be derived from a careful analysis of the facts as presented here. This assignment is worth 80 points.  Please post your completed case analysis under the "Assignments" tab. eBay Structures Its Bid for Change In 1995, 28-year-old computer programmer Pierre Omidyar started an online business to answer the kind of question that might interest both microeconomists and entrepreneurs: “He launched eBay,” we’re now told on eBay’s website, “to experiment with how equal access to information and opportunities would affect the efficiency of the marketplace.” Enthusiastic response to preliminary efforts had convinced Omidyar that somewhere there was a buyer for every item that a seller might put up for sale. The next step in Omidyar’s experiment consisted of a weekend spent writing software code that would support online auctions. He launched a website called AuctionWatch in 1995, and two years later changed the company’s named to eBay. Originally, Omidyar structured his company using the functional design typical of small businesses. He set up the usual functional areas such as operations, finance, legal, human resources, etc., and eventually gave each unit a company president; however, he introduced a twist in the usual functional configuration by integrating a System4 design based on the behavioral model of organizational design that emphasizes the importance of group and other interpersonal processes. Omidyar’s personal values favored creating a company the structure of which sidestepped big business altogether and permitted individuals, wherever they might be, to function as buyers and sellers. Today, people commonly refer to eBay as “an online auction and shopping site,” but Omidyar envisioned his site as much more than an auction space. He intended eBay to create an online community—something like a small town in cyberspace—and, for that, he needed an organizational model that did away with bureaucracy and fostered democratic decision making, decentralization, open communication and interaction, and relationships of trust; after all, the entire business model depended upon two strangers trusting one another. Omidyar stepped down as CEO in 1998, although he retained his position as chairman of the board. He was replaced by Meg Whitman, a former management consultant and a veteran of such venerable firms as P.

1. Instructions: Please read the following case description of
"eBay Structures Its Bid for Change". After reading this case,
you should prepare your analysis following the guidelines I
have provided. The purpose of this assignment is for you to
demonstrate that you can apply the concepts, principles, and
theories presented in the course readings. Your analysis must
employ only the facts presented in the case description below.
You must resist the temptation to introduce facts not in
evidence in the case description by searching the internet for
updated information. The company’s present situation is not
necessarily the ideal solution that could be derived from a
careful analysis of the facts as presented here.
This assignment is worth 80 points. Please post your completed
case analysis under the "Assignments" tab.
eBay Structures Its Bid for Change
In 1995, 28-year-old computer programmer Pierre Omidyar
started an online business to answer the kind of question that
might interest both microeconomists and entrepreneurs: “He
launched eBay,” we’re now told on eBay’s website, “to
experiment with how equal access to information and
opportunities would affect the efficiency of the marketplace.”
Enthusiastic response to preliminary efforts had convinced
Omidyar that somewhere there was a buyer for every item that a
seller might put up for sale. The next step in Omidyar’s
experiment consisted of a weekend spent writing software code
that would support online auctions. He launched a website
called AuctionWatch in 1995, and two years later changed the
company’s named to eBay.
Originally, Omidyar structured his company using the
functional design typical of small businesses. He set up the
usual functional areas such as operations, finance, legal, human
resources, etc., and eventually gave each unit a company
president; however, he introduced a twist in the usual functional
configuration by integrating a System4 design based on the
behavioral model of organizational design that emphasizes the

2. importance of group and other interpersonal processes.
Omidyar’s personal values favored creating a company the
structure of which sidestepped big business altogether and
permitted individuals, wherever they might be, to function as
buyers and sellers. Today, people commonly refer to eBay as
“an online auction and shopping site,” but Omidyar envisioned
his site as much more than an auction space. He intended eBay
to create an online community—something like a small town in
cyberspace—and, for that, he needed an organizational model
that did away with bureaucracy and fostered democratic
decision making, decentralization, open communication and
interaction, and relationships of trust; after all, the entire
business model depended upon two strangers trusting one
another.
Omidyar stepped down as CEO in 1998, although he retained
his position as chairman of the board. He was replaced by Meg
Whitman, a former management consultant and a veteran of
such venerable firms as Procter & Gamble and Disney. In that
same year, eBay went public, raising $60 million and
committing itself to much greater pressure to realize its profit-
making potential. Over the next several years, eBay became
wildly popular and grew rapidly. Under Whitman, revenues
increased steadily, averaging 70% annual growth in the period
1998-2004, before year-over-year growth began to slow down to
a sustainable level. Revenues for 1999 totaled $224.7 million,
up a whopping 161% over 1998 and, by 2007, revenues had
grown to $7.7 billion.
Like many companies, however, eBay did not have a good year
in 2008 (the first full year of the so-called Great Recession). In
the fourth quarter, revenues dropped 6.6% from 2007, the first
quarterly shrinkage in revenue in the company’s history, and
profits were down 31%. “Clearly,” said new CEO John
Donahoe, “we’ve been operating in an almost unprecedented
external environment,” but analysts have been quick to point
out other, potentially long-term, factors in eBay’s sluggish
performance. “Part of the problem,” agreed CNNMoney’s

3. Michael V. Copeland, “is that no one is spending money . . . at
the moment, but compounding the issue for eBay is that a lot of
people aren’t hassling with auctions anymore.” A big reason for
eBay’s problems, he adds, “is that virtually no one cares about
eBay’s original business, the online auction.”
Copeland goes on to argue that eBay’s online business, its
Marketplace unit, “is dragging down the rest of what are pretty
solid businesses that eBay owns, chiefly online payments
service PayPal and Internet calling company Skype.” For the
fourth quarter of 2008, revenue for Skype was up by 5%, while
PayPal’s revenue was up by 23%. Through 2007, the core
Marketplace unit, through which all the goods trading at eBay
takes place, contributed about 70% of the company’s revenues,
but in March 2009, while announcing a three-year growth plan,
eBay projected a much different distribution of its future
income. Donahoe announced projected revenues of $10 billion
to $12 billion by 2011, which is up from 2008’s $8.5 billion. If
that increase doesn’t seem like much, remember that the
company will probably have to make up more lost ground from
2009, for which analysts have projected another drop in revenue
of 6%. The company expects its future revenues to be
distributed as follows:
• PayPal will generate between $4 billion and $5 billion, up
from $2.4 billion in 2008;
• Skype will contribute $1 billion, up from roughly $500 million
in 2008; and,
• Marketplace will contribute from $5 to $7 billion, up slightly
from $4.7 billion in 2008.
Not surprisingly, the meteoric rise in its financial fortunes that
began in earnest with the 1998 IPO has already had a profound
impact on both the organizational structure and the operations
of eBay. One of its first major post-IPO moves was the
acquisition in April 1999 of Butterfield & Butterfield, one of
the world’s largest and most prestigious auction houses.
Butterfield was folded into eBay’s auction operations and
served to open up a new marketplace category for goods selling

4. for $500 and up. A year later, eBay purchased Half.com, an
online shopping site specializing in the sale of books and media
products in a non-auction, or fixed-price, format. The purpose
of the acquisition was to expand not only the parent company’s
inventory but its format options as well. The original plan to
roll Half.com into eBay.com stalled in 2002, when users
objected to the pace of the changes at Half.com and, as of this
writing, it is still an independent site. Both Butterfield’s auction
operations and Half.com’s independent fixed-price operations
are managed by a unit called eBay North America, whose
president reports to a president of eBay Marketplace who, in
turn, reports to the CEO.
Since the Half.com acquisition, eBay has purchased several
other online-auction companies, most of them overseas start-ups
that have been used to gain entry into foreign markets. Today,
there’s a unit called Marketplace Operations, the president of
which oversees operations at all of the company’s global sites
in North America, Europe, and the Asia-Pacific region. This
president is one of three presidents in charge of e-Bay’s three
divisional units, all of whom report directly to CEO Donahoe.
The other two divisional units, interestingly enough, are PayPal
and Skype, both of which have been built around the acquisition
of independent firms, and both of which focus on activities
outside of eBay’s core Marketplace activities.
eBay purchased PayPal in 2002 for $1.5 billion. Essentially,
PayPal is a system that allows payments and money transfers to
be made through the Internet, and eBay has developed into the
number-one payments system for e-commerce in general (only
direct credit card transactions transfer more money). Skype was
added to the eBay portfolio in 2005, at a cost of $2.6 billion. It
was originally developed as a VoIP (Voice-over-Internet-
Protocol) service, a transmission technology for sending voice
communications over networks like the Internet, but eBay
wanted to turn it into a communications hub over which its
buyers and sellers can transact business by voice. As discussed
above, both PayPal and Skype have emerged as important

5. revenue generators, and figure prominently in eBay’s plans for
the future.
Needless to say, eBay has undergone a good deal of
organizational change in its relatively brief existence. Back in
2004, when she could still refer to eBay as a “unique blend of
commerce and community,” former CEO Whitman (who stepped
down in March 2008) admitted that perhaps the pace of change
at the company was a little too brisk for some members of the
community. “The community right now,” she said, “has seen a
lot of change. We probably need to slow down that pace just a
tad. It’s hard for folks to adapt to so much change.”
Nevertheless, investor pressure to sustain profit levels, coupled
with increased competition from such sources as Amazon,
Google, and Yahoo!, continued to force change, much of it in
the form of rules and regulations instituted in order to deal with
ever-increasing numbers of buyers and sellers.
Recent changes, coupled with certain details of the announced
three-year plan, suggest that the company also wants to alter its
strategic focus. In January 2008, for example, a month after
Amazon surpassed it in total U.S. traffic for the first time ever,
eBay announced a change in its fee structure. Fees for listing
items were slashed by up to 50%, but commissions for items
that sold went up. Increases in commissions for low-end items,
especially goods selling for less than $25, were particularly
steep at 67%. Some eBay sellers were understandably unhappy
about the change in fee structure. “It looks like what they are
trying to do with the fees,” surmised one user, “is make it more
difficult and expensive to sell low-end items.” Many observers
agreed with this assessment, adding that eBay was shifting its
emphasis to higher-priced items, especially used, off-season,
end-of-life-cycle, and open-box products supplied by business
sellers.
In a similar move, eBay stipulated that, beginning in March
2008, all sellers who had received less-than-100%-favorable
feedback ratings would be required to use PayPal for all
transactions. This requirement followed several stipulations

6. regarding PayPal that had been put in place in 2007. As of
January 2007, for instance, all transactions in certain
categories, including “Computer/Software,” “Consumer
Electronics/MP3 Players,” and “Mobile and Home Phones,” had
to be paid through PayPal. Other categories were added in
August of the same year, and included “Video Games” and
“Health & Beauty.” Such changes were clearly intended to
leverage the revenue potential of PayPal which, in March 2009,
CEO Donahoe referred to as a “second core business” for eBay.
So far, the strategic effort to synergize its Marketplace and
PayPal operations has been less than successful. Beginning in
June 2008, for example, eBay required that all transactions
involving Australian buyers and sellers use PayPal as the only
payment option, except for cash on delivery. Within a month of
that announcement, however, the company was forced to rescind
the policy when the Australian government, acting upon a
groundswell of complaints from users and petitions from
bankers, informed eBay that its policy would have “an anti-
competitive effect” on online commerce. eBay had promoted
PayPal as a means for improving security in online transactions,
but the Australian government was also unconvinced by this
argument, finding “no evidence to suggest that the relative
frequency of online fraud for PayPal online transactions is any
less than that found in general online transactions.” The
Australian Competition and Consumer Commission also noted
that its PayPal-only plan would allow eBay to raise its fees by
45.7%. At this juncture, the result of the plan seems to be a few
thousand annoyed users in Australia and a few thousand more in
the U.S., where users are not convinced by the company’s
assurances that it is not planning a similar policy for its largest
marketplace.
Assignment: You are a management consultant who specializes
in helping companies determine how best to design their
organizational structure and, as such, you have been hired to
evaluate eBay’s current structure and make a recommendation
as to which structural design will be most appropriate now and

7. in the future as changes in the external environment affect the
online-auction market. Your recommendation should discuss the
changes that e-Bay’s management has already made to the
original functional structure, as well as your recommendation
on how it should structure itself to accommodate international
expansion, along with the effect international expansion is
likely to have on the three existing functional units (finance,
human resources, and legal) which currently exist alongside the
three divisional units.