Improvement and Innovation of EBay - Case Study Example

Ebay Introduction The concepts of process improvement and innovation have become increasingly important in the contemporary, ultra competitive and fast changing global marketplace. More than ever, businesses (especially IT related businesses) are faced with pressures in the form of changing customer requirements and rapidly changing technologies against the need to create and maintain shareholder value. Therefore, process improvement and organization have become increasingly critical to the survival, success and profitability of many businesses and organizations as key drivers of competitive advantage and value creation. Process improvement and innovation is basically concerned with the development and delivery of new or improved products with competitive functional performance (Lager and Horte 2001). Businesses are increasingly resorting to generating new ideas for new products and services and in improvements of their business processes such as achieving higher operational performance through more efficient production technologies or in delivery of information services and products as competitive strategies. Innovation has been a key element of the survival and success of businesses in IT especially in times of economic hardship such as recession and in the face of competition. Following the internet explosion of the mid to late 1990s characterized by billions of dollars raised in venture capital, a soaring stock market and increased advocacy for e-commerce, e-businesses such as Google, Yahoo!, Amazon.com, Cisco and eBay experienced remarkable growth and success through their innovative ways of creating value for customers and they would subsequently survive the dotcom crash of 2000 through creation of strategies based on superior value for customers (Ellison and Ellison 2005: Amir and Zott 2001). This essay focuses on eBay as a case study successful example of an IT related innovation in business. The essay will analyse on a case study of eBay by J. Gopalkrishnan and V.K Gupta, “eBay: The world’s largest online marketplace”. The essay will first define process improvement and innovation in business by focusing on various conceptualisations of innovation such as Schumpeter’s and from the perspective of value creation by Amit and Zott (2001). The essay will then focus on the various elements of innovation such as how innovation creates value and how innovation can be managed for competitive advantage as demonstrated in the case study of eBay. The essay will then speculate on the implications of the innovative strategies such as eBay’s for the future of business by arguing that the survival of web-based or IT related start-up businesses will be contingent on constant undertaking and management of process improvement and innovation to match competitors and industry leaders and an ability to generate value by identifying value gaps in the market and generating ideas to fill these gaps. Innovation What is innovation? A commonly held view or perception of innovation is that it is a term simply used to refer to anything new or different- a new (or a new idea for/of a) product, process, technology or service. This definition is consistent with the definition of innovators in business, as those firms (or individuals) which are first to commercialise a new product or process in the market (Teece 1986, p.287). However, this simplistic definition of innovation is not sufficient to qualify something as an innovation (Chen and Kai-Ling Ho 2002). A more comprehensive definition of innovation by the Centre for Business and Innovation (CBI) offers three criteria for innovation. Innovation is defined as the realization of value from a new solution to a problem, rewriting the rules of the game. The three criteria are a creative process (how something is done), distinctiveness (rewriting the rules of the game) and impact (the realization of value) (Chen and Kai-Ling Ho 2002). Innovation has also been understood from the perspective of economic development and technological change by Schumpeter (1934). For Schumpeter, innovation refers to novel combinations of resources and the services which they provide which provide the foundation for new products and production methods which in turn lead to the transformation of markets and industries. In this regard, innovation results in technological change and is the source of value creation which satisfies the criteria suggested by Chen and Kai-Ling Ho (2002). The sources of innovation for Schumpeter include introduction of new goods or new production methods, creation of new markets, discovery of new supply sources and the reorganization of industries (Schumpeter 1934). Figure 1: The three innovation criteria (Chen and Kai-Ling 2002) In business, innovations provide the innovator with strategic first-entry advantages and place them in a strategically favourable position vis-a-vis their competitors by providing entrepreneurial opportunities to capitalise or profit the most from their innovation. First-entry or first-to-new market advantages can be translated to competitive advantages for innovators which can either enhance existing earnings or create new earnings for businesses (Tecce 1986). Innovative entrepreneurs are therefore poised to exploit the value created by their innovations. However, as Tecce (1986) demonstrates, it is not often the case that innovators profit the most from their innovations. This is demonstrated by cases such as EMI’s (Electrical Musical Industries) CAT scanner which was introduced in 1973, six years after which EMI had lost market leadership and faded out of the CT scanner business or RC Cola which introduced canned cola and diet soda but could not withstand the onslaught of Coca Cola and Pepsi who benefitted greatly from the same innovations. The implication is that any innovation must be backed by sound corporate strategy and must be managed to sustain competitive advantage if a business is to benefit from the value created. EBay: Innovation and Value Creation in e-commerce Figure 1: The iconic EBay logo The internet explosion of the 1990s provided numerous opportunities to create wealth by taking advantage of the opportunities provided by e-business or business conducted over the internet. This period was characterized by many entrepreneurial start-ups and corporate ventures in a dynamic, rapidly growing and highly competitive market. In 1999 alone, $ 109 billion worth of goods were traded over the internet by U.S firms with figures forecasted to increase to over $ 251 million by 2002 (Amit and Zott 2001 p.493). It was against this backdrop that eBay inc. was launched in May 1995 and quickly became the world’s largest online auction site with over 147 million users globally by 2007 (Gopalkrishnan and Gupta 2007). Ebay is the world’s most popular internet auction site and a vivid demonstration of a successful innovation in IT which has been managed to create sustainable competitive advantage. EBay founder Pierre Omidyar wrote the code for the site from home after pondering the idea of an internet auction site. Initially, eBay started as an online trading post for Beanie Baby soft toys. While it was not the first internet auction site, eBay became the world’s largest online retailer by 1999 with over 80 percent of the auction online market by 1998 (Ellison and Ellison 2005), only one year after going public. The term eBay has even become the generic term for online auctions due to its immense popularity and brand equity (Anonymous 2004). EBay as an innovation meets the three criteria established for innovations- a creative process, distinctiveness and impact (Chen and Kai-Ling 2002). According to the case study, Omidyar intended to solve a problem or fill a vacuum in e-commerce by creating an efficient marketplace which would provide a level playing field where everyone had access to the same information. One of the problems solved by eBay through strategic innovation was the provision of customer to customer in addition to business to customer trading built on a platform of trust (Dini and Spagnolo2009). EBay’s distinctiveness draws from its innovative corporate strategy that has provided competitive advantage and enabled it to succeed where other competitors have failed. EBay’s business model is based on the idea that practically anything can be bought and sold over the internet and it has created trust among its customers that they can buy and sell free of the fear of being cheated. EBay has also had a severe impact on the market in terms of value creation. When it went public in September 1998, eBay stock was trading at only $ 18 per share which grew to $ 282 per share by March 1999 (Gopalkrishnan and Gupta 2007). EBay’s market capitalization had even surpassed that of Amazon.com (Ellison and Ellison 2005). Its net profit has grown tenfold from US $ 90, 448,000 in 2001 to US $ 1,082,043,000 by the end of 2005 (Chang 2010 p 66). Figure 2: M.E Porter’s value chain analysis Gopalkrishnan and Gupta (2007) have analysed value creation in the case of eBay using M.E Porter’s value chain analysis as shown in figure 1 above. The value chain is a systematic analysis of creation of competitive advantage that has identified the several activities undertaken by eBay that have culminated in the total value delivered by eBay. The value chain analysis examines how both primary activities and secondary activities in eBay’s corporate strategy have contributed to its growth and dominant position. For instance, inbound logistics include eBay’s bidding system which unlike other auction sites closed bidding at a fixed time thus accelerating activity as the bid draws to a close. Roumen (2005) argues that eBay is the king of auction sites because it: implements minimum increment rule has an auction deadline and requires sellers to submit an opening price and reserve price for every auction. In marketing and sales, eBay insured most purchases by an insurance policy offered by Lloyd’s of London that protected high value transactions. In support activities, eBay benefits from its procurement as it does not take possessions of any of the traded items and thus reduces inventory management costs. With regards to technological development, eBay uses the internet for marketing therefore reducing costs and sustaining competitive advantage (Gopalkrishnan and Gupta 2007). However, while Porter’s value chain analysis is useful, Amit and Zott (2001) have applied their sources of value creation framework in analysing e-business, which is closer and more relevant to eBay than Porter’s value chain analysis. Amit and Zott’s framework (shown below in figure 3) identifies four key value drivers and can also be applied to eBay’s corporate strategy to understand value creation at eBay as an innovation by examining the four drivers of value creation in e-business. 1) Efficiency: From the case study, eBay has reduced information asymmetry between buyers and sellers, therefore reducing search costs. Sellers provide detailed descriptions or images of their merchandise and indicate opening as well as reserve prices therefore all potential buyers are supplied with the relevant information they require (Roumen 2005). EBay’s payment system using PayPal is also cost efficient and user friendly. This is mentioned in Gopalkrishnan and Gupta’s (2007) fifth strategy where eBay has enhanced the simplicity of trading on the site as well as making payment’s easy and convenient. 2) Complementarity: Complementarity refers to a situation where customers value a firm’s product more when they have another related firm’s product than when they have it alone (Amit and Zott 2001). In the case study, the first of eBay’s strategies involved creating a customer base by establishing relationships with more than 60 websites such as AOL from where it obtained access to the largest user base on the internet (Gopalkrishnan and Gupta 2007). EBay has also complemented many businesses website’s which use eBay as selling or trading platform especially small businesses. By 2005, 430,000 small businesses in the U.S alone had opened eBay storefronts (Chang 2010). 3) Lock in: Value creation depends on the extent to which customers are motivated to engage in repeat transactions. Lock in, or loyalty, prevents migration to competing businesses (Amit and Zott 2001). EBay’s community values essentially imply that the company’s strategy relies on trust to build e-loyalty, for long-term profitable relationships, these set of core values encourages open and honest communication between its members (Dini and Spagnolo 2009). From the case study, eBay focused on community building, creating direct interactions between buyers and sellers with similar interest and creating a loyal community of users. Through innovative features such as buyer’s rating sellers after transactions, eBay has provided a safe and trusting environment for online trading and locked in a loyal consumer base. EBay’s large and loyal community has set it apart from competitors such as Amazon and Yahoo! despite the fact that they can offer better services. 4) Novelty: Key to value creation in e-business innovations is essentially the introduction of new products, services, methods of production, distribution or marketing. E-businesses can innovate by introducing new ways of doing business that create value by; connecting previously unconnected parties, eliminating inefficiencies in the buying and selling processes through adopting innovative transaction methods, capturing latent consumer needs and creating entirely new markets (Amit and Zott 2001, p 508). EBay was the first to introduce direct customer-to-customer auctions on a large scale. EBay’s community values and corporate strategy are built on the idea that idea that practically anything that can be bought and sold can be facilitated through eBay. EBay enabled low-value items and un-traditional items and even services to be sold over the internet, creating and expanding the online retail domain (Gopalkrishnan and Gupta 2007, Amit and Zott 2001). People can sell and buy anything from motor vehicles, books and art to food items and other extremely unusual items such as odd celebrity souvenirs (locks of hair, remnants of eaten food), listings for new species and rare collectibles (Amit and Zott 2001: Ellison and Ellison 2005). EBay has also been used as a platform to raise funds for charity. Figure 3: Amit and Zott’s drivers of value creation framework However, it must be noted that there are backward and forward linkages between each of the four value drivers. For instance, novelty and lock in are related considering that eBay was able to create a loyal customer base by creating new markets and through its community values. Novelty is also linked to efficiency as eBay’s innovative customer to customer model has resulted in reducing inventory costs. The Future of eBay From the case study, Gopalkrishnan and Gupta (2007) have cited a SWOT analysis of eBay which has identified some of the implications of eBay’s strategies in the future. EBay faces threats from competitors such as Yahoo! and Amazon who have crowded them out of major emerging markets most significantly the Japanese market. Its weaknesses have been catalogued as possible failure of technological systems since eBay is a web-based technology innovation susceptible to systems breakdowns. Another of eBay’s weaknesses was exposed in 2008 when it faced a seller’s boycott when it attempted to introduce several changes in its reputation system in 2008 which involved changing its fee structure. While it made small transactions cheaper, it lost a significant number of large sellers to rival competitors such as Google, Amazon, OnlineAuction.com, eCrater and iOffer as large transactions became expensive (Chu Lenora 2008). The rebellion was also sparked by a change in policy that no longer made it possible for sellers to negatively rate buyers and eBay lost about 13 million transactions (13%) in the 18-25th February week alone (Chu Lenora 2008). EBay has also unsuccessfully attempted to move outside the auction market with eBay express which was not well received. However, eBay’s strengths and opportunities were also numerous. This included its first mover advantage, its huge loyal customer base which competitors could not significantly eat into and the brand equity of eBay which had made its name synonymous with online auctioning. However, for eBay to sustain its competitive advantages in the future (10 to 15 years), such as first mover, it needs to make several changes to its corporate and business strategy. For instance, Charles (2008) notes that eBay needs to stop marketing itself as a start-up, embrace its status as one of the big brand players and go mainstream. Events such as the boycott effectively burst its “user-friendly” and anti-establishment bubble therefore it needs to move beyond strategies such as depending on viral marketing (and literally not spending a cent on marketing) as a brand and aggressively advertise itself to non-users (Charles 2008). The company should start building creative lifestyle themes around its marketing as established brands such as Coca Cola have. EBay as an innovation has already been successful, but the novelty has worn off as more and more competitors have entered the market offering similar features (Charles 2008). However, it needs to retain what has worked for it- user friendliness. EBay also needs to build on its innovation by offering attractive service features. In the increasingly digital age, eBay should venture aggressively into the mobile applications and social network domain and create new features for its users to set them apart from the competition. Therefore, speculating in the next 10-15 years, eBay and its iconic logo would become a mainstream company much like Coca Cola, Google, Yahoo! or Microsoft. It would capitalise on and enjoy first mover advantages and would have grown through strategic acquisitions such as Skype and other smaller online start-up companies and auction sites. Acquisition of smaller companies will enable eBay integrate their innovative features in establishing its competitive advantages as the mainstream dominant player. We are likely to see an eBay with an aggressive lifestyle-based marketing machine aiming to digitise retail globally. Conclusion Process improvement and innovation has increasingly become critical to the survival of bot large and small businesses as sources of competitive advantage and as drivers of value creation in business. Innovation in particular is crucial to the success and profitability of businesses in IT which is an ultra-competitive and volatile industry characterized by booms and busts. Innovation is essentially the introduction of new goods or new production methods, creation of new markets, discovery of new supply sources and the reorganization of industries the Innovations which succeed in IT create value for customers. The case study of eBay as a successful example of innovation focuses on how a small company with humble beginnings was able to rise to the top of its market segment eventually dominating the internet auction market. The word eBay has even become synonymous with online auctions. As an innovation, eBay has not only introduced new features and services such as customer to customer trading but also created new markets and transformed business both within the online trading market and in related businesses and markets. Key to eBay’s success has been creating a system of trust which has set it apart from competitors. EBay’s value creation can be understood through M.E Porter’s value chain analysis but more significantly through Amit and Zott’s drivers of value creation framework where eBay’s corporate and business strategy has enhanced the four drivers of value creation and competitive advantage; novelty, lock-in, efficiency and complementarity. For eBay to maintain its competitive edge and sustain the value created by its innovation, it has to transform itself and embrace its status as a dominant market player. The essay suggests that eBay should build on its iconic status and the trust it has built and change its corporate strategies such as aggressive lifestyle marketing and continuing with strategic acquisitions of businesses while retaining its signature user-friendliness. Bibliography Amit, R & Zott, C 2001, Value creation in e-business, Strategic Management Journal, Vol. 22, No.6-7, pp 493-520. Anonymous 2004, eBay and Google march on, Strategic Direction, pp 16- 19. Chang, J. 2010, EBay: Towards A Perfectly Competitive Market, The International Business & Economics Research Journal, Vol. 9, No. 3, pp 65- 70. Charles, G. 2008, eBay, Marketing (May 7, 2008), p22. Chen, E.L & Kai-Ling Ho, K 2002 Demystifying Innovation, Perspectives on Business Innovation, Vol.8, pp 46-52. Chu Lenora 2008, EBay rivals circle vulnerable auctions kingpin: Sellers fleeing eBay are flocking to a crop of upstarts, in CNN Money. 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