Ebay in China - Case Study

21/11/2011 E-Bay Strategy In China Alliance or Acquisition? Case Study Strategic Management Gabriela Salamonova Barbora Jandova Pierrick Boissel Julien Meunier Alexandre Godet SUMMARY I. The Input Stage ? ? ? ? ? CAGE VRIO Analysis CPM matrix EFE matrix IFE matrix II. The Matching Stage ? ? ? BCG matrix SPACE matrix GSM matrix III. The Decision Stage ? ? Matrix Analysis QSPM matrix IV. Questions ? ? ? ? Assessment of eBay? choice of market entry strategy for China, listing both the advantages and disadvantages of its acquisition strategy Assessment of the potential benefits and risks of eBay? s joint venture with Tom Online Assessment of both companies: eBay and Tom Online, decisions on their respective percentage of stake Strategic recommendation on International Commercial Strategy for eBay I- The input stage ? C.

A. G. E. nalysis Cultural with … Different attitudes in life Different sales practise To prefer local companies Different language, ethnicities, religions, social norms Best deal is the lowest price Administrative and political Differences in political system Corruption Market Access restrictions Time zone is different Differences in costs and quality of resources Currency problem Imbalanced economic development Differences with payment system Geographic Big distance between China and USA Economic Differences in consumer incomes Distance most affects industries or product …

Distance between two countries increases Auction-selling format is not usual for them, because there the prices went up and they used to deal the lowest price Customer confidence have only local and wellknown companies In China, people want to pay by cash a face to face In China are different government restrictions Different ways of functioning market It can leads to For which communication demand varies misunderstanding by income People in China don’t have Credit Cards, so prefer to pay by cash The company have to adjust to local currency This C.

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A. G. E. nalysis provides us information about differences that can create distance between two countries seeking to do business together. Expanding to China can cause some issues with the different culture and political system. In China are different government restrictions like USA and they can significantly affect the economics. In China can be complicated persuade people to trust international companies, and overcome government regulations and currency problem. For the eBay can be useful adjust more for the local environment, and provide good customer services to attract new customers.

But on the other side here can be problems with the system of auction, because Chinese people like face to face purchases and they are used to see the prices decreasing instead of increasing. ? VRIO model After analyzing the external analysis of eBay, the next step is to focus internally at eBay’s core competencies in order to determine whether those strengths provide them with competitive advantages. In order to define these core competencies as competitive advantages or disadvantages, a VRIO analysis must be used.

This technique measures each capability against whether it creates value for the company, it is rare in the industry, it is costly to imitate and if it is exploited by the organization. Which competenci es are likely to contribute to added value in terms of customer needs ? ? ? ? ? ? ? ? Resources / Capabilities Which competenci es are likely to contribute to cost reduction ? ? ? ? ? ? ? ? Valuabl e Rar e Costl y to Imitat e Exploited by organizatio ns Competitive implications Brand image Customer service Location Product diversificati on Information system Distribution Purchase protection Marketing ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Temporary advantage Parity Disadvanta ge Temporary advantage Parity Parity Temporary advantage Parity According to our VRIO analysis the disadvantage for eBay is its location in China because of imbalanced economic and technological development in different regions of China, differences in political system, government regulations and other factors like corruption and currency problems. Information system is analyzed as the parity. The reason is lack of a customer service hotline on eBay? s websites.

But on the other side they try to meet needs their customer, e. g. facilitate payment system. eBay? s executives do not adopt the management style to Chinese conditions. For the majority of population was the only option to pay by cash, because of non-users of credit cards. Also there are problems with the system of auction, because Chinese people like face to face purchases and they are used to deal the lowest price and in auction- selling format usually the prices went up. These issues caused the evaluation of marketing and customer service as the parity.

E-Bay had adopted various expansion strategies, both locally in the US and globally in new international markets. It builds a brand image in the US as an industry leader and tries to expand to other foreign countries. Additional temporary advantage related to the purchase protection because respondents extremely agreed that eBay did the best job in monitoring and protecting its users from purchasing counterfeit items from its site. ? Competitive Profile Matrix In CPM is important to identify eBay ? s major competitors, their strengths & weaknesses in relation to a sample company ? s strategic position.

Proposed CPM shows the clear insight to the eBay about its strong and weak points relative to its major competitor – TaoBao. The CPM score is measured on basis of critical success factors, each factor is measured in same scale mean the weight remain same for TaoBao only rating varies. TaoBao was established in May 2003, soon gained the hearts of Chinese consumers and beat eBay EachNet in China? s C2C online auction market. Its service offerings were later extended to include B2C e-commerce. By 2006, the company had become the leading C2C and B2C marketplace in China with a gross merchandise volume of US$2. billion, amounting to a 110% increase from 2005. Unlike eBay EachNet (in 2006) had seen its market share declining each year, until it had only a staggering 29%, compared to TaoBao? s 60%. On the other hand, TaoBao, albeit founded much later than eBay, was a subsidiary of Alibaba which had a more established presence in China. However, given a choice between a new foreign company and a domestic one, Chinese people would opt for the latter. Trust was particularly important in China, due to the lack of an adequate legal system or other formal means of dispute resolution.

Critical Success Factors ? ? Market Share – by year 2006 eBay? s market share declined to 29%, in comparison to TaoBao? s 60%, Price – eBay provides services fees – Insertion fee, Optional Features fee, Final Value fee, but to buyers were offered free, in comparison to TaoBao where it was free when they just listed an item, Competitiveness – TaoBao disposes with the people? s trust and history because of subsidiary of Alibaba. Also, Chinese people prefer domestic company more than foreign one. Customer Service – e. g. TaoBao made an important component of its AliPay system – an escrow.

It helped ease consumers? concern by introducing thirdparty monitoring throughout the transaction process, eBay introduced it later. Other example can be technical support hotline, Customer Loyalty – eBay had not made much effort in building trust both towards the company itself and between buyers and sellers further exacerbated the problem (linked with previous – AliPay). Company need to provide security every step of the way during a sales transaction to ensure that consumers feel comfortable making their purchases.

This point discouraged buyers and it resulted into switching to competitors, Management – eBay? s executives hold on US management style, there is a lack of effort in adaptation to Chinese market, also eBay entered China with the assumption that its brand image in the US as an industry leader would transfer to the Chinese market without any modification, Global Expansion – eBay is more extended because of its global presence, TaoBao focus on Chinese market what is in this case competitive advantage because of people? s trust to domestic companies, Website Design – eBay provides opic-specific guidelines and links, both of which are meant for self help, this is considered bad thing by consumers in China where do-it-yourself is not as popular as in Western countries. In comparison to TaoBao, its website design suits more because of loaded with ? ? ? ? ? ? information, links, graphics, banners and multimedia. Chinese people also appreciate a customer service and technical support hotline. In conclusion, we would like to emphasize the last one line in CPM – total weighted score. It is the sum of all weighted score in both cases. E-Bay? s total weighted score is equal to 2. 6. Since it is below the average (2,5) the company is consider as weak. On the other hand TaoBao? s total weighted score is equal to 3. 41. Since it is higher than 2. 5 the company is consider as strong in position, the winner among its competitor eBay. ? IFE matrix ? EFE matrix ? IE matrix To comment this matrix, we can say that Ebay is situated in the Grow and Build part of the matrix. So strategies which could be implemented are market penetration, market development, product development, backward integration, forward integration, horizontal integration.

II. The Matching Stage ? BCG matrix: High E-tailing: eBay should develop and invest on this SBU Market growth rate Low Online Auc ons: Leader on this SBU / Great future prospects (Asia /BRICS) eBay should con nue to exploit this SBU and stay the leader on it. 2 1,5 1 Rela ve market show 0,5 0,1 ? Space matrix: FS Conserva ve +6 +5 Aggressive 4. 4 +4 +3 +2 CA -6 -5 -4 -3 +1 -2 -1 -1 -2 -3 -4 +1 +2 +3 +4 +5 +6 IS 4. 6 -2,6 -3 Defensive -5 Compe -6 ve ES We can deduce from the matrix that: – Bay has an Aggressive strategy, defended by a strong financial capacity, which allows them to tackle competitors not only when they penetrate the market but also when they are established (by kicking them out). The firm evolves in a really competitive environment (with only a few barriers to entry), in which they will still have to improve their situation, particularly in emerging markets, such as e-tailing. ? GSM matrix Ebay is in Quadrant II because its competitive position is weak and there is a high market growth.

Consequently, different strategies are available for Ebay in China as the horizontal or vertical integration, the market penetration, the divestiture … III. The decision stage ? Matrix Analysis To conclude, we can say that Ebay can establish four main strategies in China: Market penetration, market development, product development and horizontal integration. ? QSPM matrix To conclude, we can see that it could be better for E-bay to organize an alliance with Tom Online because of the opportunities engendered. IV. Questions Introduction E-Bay Inc. a US company providing e-commerce, e-payments and internet communication services globally – in 35 global markets across North and Latin America, Europe, and Asia Pacific. By the end of 2006, e-Bay was boasting 14% market share in the e-commerce market. 1. Critically assess eBay? s choice of market entry strategy for China, listing both the advantages and disadvantages of its acquisition strategy E-Bay first entered the Chinese market in 2002 by acquiring a 33% stake in its local counterpart, EachNet, followed by a full acquisition a year later in 2003.

By its businesses in online sectors reduces its business risks tremendously because of absence of any tangible assets and gives the opportunity to provide infinite number of transactions. ? Entering the BRICs market In terms of long-term action in global market it was valuable to entry the other market of countries famous as BRICs, which are deemed to be at a similar stage of newly advanced economic development. Chinese market was for e-Bay the second Asian destination after Japan, currently third because of expansion to India. First impressions of acquisition The acquisition proved to be a success. By 2003, EachNet had already commanded 85% market share. Its value had grown almost two and a half times, from US$90 million in 2002 to US$225 million in 2003, and its revenues were recorded at US$1. 8 million equivalent to a ten-fold annual growth rate. ? Researches of e-commerce perspective Market entry strategy focused on bringing something new, specific terminology is ? be-first-or-nothing? strategy. Bay aimed to obtain markets with great potential for e-commerce proved by researches giving perspective results in China, undoubtedly the researches are most important when the company entering a new foreign market. ? Creation alliances & Trust We can positively evaluate the creation of alliances with the top three Chinese internet portals Sina, Sohu and NetEase for better visibility in the market. Despite this, eBay had to struggle with distrust coming from Chinese people because it had not made much effort in building trust. Chinese people at first did not trust to new foreign US provider of e-commerce services.

They used to be in direct interaction with sellers until they received the purchase, because they felt uncertain about paying. ? Localising websites and modification E-Bay entered China with the assumption that its brand image in the US as an industry leader would transfer to the Chinese market without any modification. eBay had done a good job in localising its websites. Creating market-specific websites in local languages and 4 currencies and providing location-specific information, among other things. It also attempted to protect its brand image worldwide. Design of websites E-Bay used a similarly simple interface, emphasised automation throughout the auction and transaction processes. Also has allocated the section for frequent answered questions and provided topic-specific guidelines, both of which were meant for self help. Unfortunately Chinese people did not appreciate it, because the ? do-ityourself? system was not so popular customers considered it as s bad service. The advantages and disadvantages of its acquisition strategy Advantages – China has immense market potential because all around the world are 1,23 billion Chinese language speakers.

In China growing prosperity, technological advances. There is more liberal attitude by the Chinese authorities, what means the internet is becoming an easier and more popular place to do business. – In China increase popularity of e-commerce. As more and more Chinese consumers had access to the internet and began to buy online. By February 2000, just six months after its start, EachNet had over 220,000 registered users simultaneously holding more than 20,000 auctions each day – Acquisition of EachNet.

It was China’s first online auction website with rich business knowledge, strong domestic and international experience, and well-thought business strategies. EachNet was able to win financial backing from several large venture capital companies in the US – In China retailers offer products seldom online and people could shop everything in the comfort of their own home. – EBay EachNet was also the largest online advertiser in China. Its performance was remarkable, and by the end of 2003, the number of registered users on EachNet had reached 4. 3 million, amounting to nearly a 95% increase from its 2000 level.

Disadvantages – In China could be problems with slow internet speeds, high internet access costs, imbalanced economic and technological development in different regions of China, the absence of a reliable credit system for online payment, government regulations and other factors like corruption, currency problems. – Auction-selling format might have discouraged some consumers from shopping on EachNet. In China, retailers and customer would haggle over almost anything in order to get the best deal, and the best usually meant the lowest price they could have.

Thus, an auction-selling format where prices only went up might have seemed bizarre to most Chinese consumers. – Emerging competitors TaoBao (Alibaba subsidiary). EBay EachNet faced the obstacle of increasing competition from local market rivals. By the end of 2006 eBay EachNet had its market share only a staggering 29%, compared to TaoBao’s 60%. – Big disadvantage was short history of eBay. The eBay was as a foreign company founded in 1995 with less than ten years of history when it first set foot in the Chinese market in 2002. So it was as fairly new to Chinese consumers.

TaoBao was founded much later than eBay, but n the other hand it was a subsidiary of Alibaba which had a more established presence in China. – The eBay used online payment system PayPal and it did not incorporate an escrow into this system. But on the other hand competitor TaoBao, made it an important component of its AliPay system. An escrow helped ease consumers concern by introducing third-party monitoring throughout the transaction process. And in this way eBay lost some customer. 2. Assess the potential benefits and risks of eBay? joint venture with Tom Online The joint venture formed by E-Bay EachNet and Tom Online presents some benefits as well as some risks. Benefits ? Knowledge of the Chinese market Tom Online has a strong knowledge of the Chinese market which is that E-Bay is looking for in order to gain market share and notoriety on the Chinese market. And as we said earlier, in order to tackle the Chinese market companies need a partner in order to have the political access, and Tom Online political connection could be very helpful for E-Bay success in China. Tom Online = a famous brand in China The first benefit we can find is that TOM Online is a Chinese domestic brand, which is much better for consumers of China. In fact Chinese consumers mostly like well know Chinese brands even in the Internet. Tom Online is a well know company in China, leader in sphere of mobile value-added services, and its internet portal, www. tom. com, is one of the biggest and most popular in China. This brand is recognized throughout China and the internet. ? Knowledge of telecommunication services One of the problems of E-bay EachNet was the communication and telecommunication services.

Tom Online has a good experience in cooperation with Skype and the result was pretty good. Tom Online succeed with Skype and it has the knowledge to present new product in the market and how to increase its market share. Moreover, this joint venture allowed E-bay to enter the mobile commerce market, their users could participate in online auctions using their mobile phone, PDA, etc, a sector in which Tom Online had been a market leader Risks ? Devaluation of E-bay image Risks on this joint venture exist for E-Bay.

In fact there is a risk of devaluation of the E-Bay Brand in the Chinese market because customers will be focus on the Tom Online and/or EachNet brand, product and services. ? Financial risk Also there is a financial risk. E-Bay can lose some money because Tom Online has 2% bigger ownership, but in amount of money, E-Bay invests two times more than Tom Online, and the success will depends more of Tom Online company than E-Bay work. ? Difference of targeted customers Also a last risk could be the target of E-Bay and Tom Online.

Tom Online is focused on mobile value-added services and their target audience is generally young consumers, but E-Bay target audience is a little older. ? Culture difference E-Bay is an American company, different than the Chinese in the way of thinking and doing things. This might causes E-bay a hard time adjusting to the Chinese market needs, and trust issue (even though they tried to resolve it by owning only 49% of the company). 3. eBay will have a 49% stake in the new joint venture while Tom Online will have 51% ownership.

Critically assess both companies, decisions on their respective percentage of take. In December 2006, eBay Inc. , announced its plan to form a joint venture with Chinabased online portal and wireless operator, TOM Online, that would give each company 49% and 51% ownership respectively. This was eBay’s third strategic move in China, following its acquisition of a 33% stake in domestic counterpart EachNet in 2002 that marked its entry into the market, and a full acquisition in 2003. Despite the initial good results, eBay had been losing market share to local rival and Alibaba’s fully-owned subsidiary—TaoBao.

By 2006, eBay had seen its market share drop from a high of 85% to a staggering 29%, while TaoBao’s continued to increase, reaching 60%. The joint venture was therefore an attempt by eBay to save its failing Chinese operations. The move also reflected the increasing difficulties foreign internet companies were facing in China because of fierce competition and a changing market environment. eBay believed that it would benefit from TOM Online’s local knowledge and political connections. The first thing we can say about E-Bay EachNet and Tom Online’s joint venture is that is a success.

Although E-Bay is a big company and success in US and around the world, China is a particular market where the better can lose. E-Bay had some difficulties to launch its business due to the cultural differences and moral values. Chinese people are more ? nationalist? and still trust their own companies more and respect them. The good thing for E-Bay is that Tom Online is a successful company with a good reputation on the Chinese market. Their activity area is also not far from E-Bay’s mainly internet and other IT services, and mobile entertainment.

Tom Online known also a business expansion and cooperation with Skype, and today they also know a decrease in revenues so joint venture also was an opportunity for them. But we can ask us about the percentage of the participation. Why the participation is 49% for E-Bay and 51% for Tom Online? And also why E-Bay invests more than Tom Online? And why does the E-Bay brand disappear on the Joint Venture (Tom EachNet)? We can try to explain this situation thanks to several factors. About the brand we know that Chinese trust more in a local brand. That why E-Bay not appears on the joint venture name.

E-Bay prefers having two well known local brands (Tom and EachNet). Also in this joint venture, Tom Online invest US $ 20 million and brings the knowledge of the local market, the technology and the brand value, which could be more important than money in order to tackle a market. Moreover TOM Online has very important persons among their shareholders. This joint venture would open a whole new market segment for both – E-Bay and also TOM Online, allowing them to fulfil and widen significantly together. Why not launching E-Bay in the mobile world?

As we said before, China is a difficult market to tackle and launch a sustainable company on this market is a hard work. But this market gives the opportunity of customers which could increase the revenues (approximately US $ 1. 5 billion). The stacks are so important for E-Bay and Tom Online that the Tom EachNet joint venture was a good answer for their difficulties in China. 4. Strategic recommendation on International Commercial Strategy for eBay One of the first recommendations for eBay’s growth would be to maintain global growth initiative (China and India).

The number of internet user is increasing in those countries. The difficulties for eBay are to success the integration of the Chinese market. Indeed, the eBay’s image brand in China is critical by Chinese people. They explain that eBay is not trustee website, the direct competitor TaoBao has free services. Moreover others problems are the difficulties to integrate the Chinese market due to the different laws, rules, or the control of internet by the Chinese government. The second recommendations would concern the electronic innovation.

For example, the interface of the website could adapt to the difference of culture of the market targeted, the website should be more secured to keep or have a trustee image… The third thing would be to set up new services or new application. For example, the e-tailing could be a good service. E-tailing is synonymous with business-to-consumer (B2C) transaction, and it is the selling of retail goods on the Internet. The last recommendation would be the reinforcing the marketing and the fact to keep a step ahead towards the competitors. The different recommendations on International Commercial Strategy for E-bay could be: ?

Maintain global growth initiative: ? Alliances ? New markets (develop India and China) ? New products ? Keep different cultures in mind ? Technological development: ? Rapid application development (software for new and existing market areas, e-tailing) ? Security: ? Back-up systems ? Online verifications of electronics goods ? Enhance trustee service ? Online banking protocols ? Enhance back-end ? Reinforcing marketing: ? Improve and maintain their image brand ? Global branding to make eBay generic brand with online auctions and etailing ? Step ahead: ? Identify and analyze global trends ? Innovative products and interface