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Five forces analysis applied to the online auction industry.

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Introduction

E-Bay The online auction industry offers marketplaces where buyer and seller meet to trade various products. Advantages of online auctions are: a wide community, broad product range, lower search and transaction costs and, compared to fixed price, a lower price. Therefore, a win-win situation is created, with benefits for buyers, like making a good deal and the auction feeling, and benefits for the sellers, like obtaining a good market price and being able to sell dispensable inventory. Some auction sites list a broad range of products on their site, and other specialize on niche products. Apart from that, the industry can be divided into three segments: Business-to-Business, Business-to-Consumer and Person-to-Person (Consumer-to-Consumer), with either businesses or consumers as market participants. Online auctions are one of the few profitable E-Business Models, and make up nearly 10% of all revenues created in E-Commerce. Five forces analysis applied to the online auction industry 1. Threat of entry In the industry, there are various barriers: - Capital requirements: Only some hardware (Server etc.) and a software packet are needed, as well as human capital to run an online-auction. In comparison to other industries, overall ramp-up costs are relatively low and no inventory is required. - Economies of scale exist: Within a certain range of users, there are fixed costs, but only very few variable costs. For example, two servers and a program adjusted for 1000 users, may also fit 10000 users, so there are declining costs per unit. Because the fixed costs are low, economies of scale are not a relevant barrier to enter the online-auction industry. - Product differentiation: Image is important to establish trust, confidence and customer loyalty; these elements are essential for online auctions. Special services, like warranties offered by uBid, and measures to foster community spirit, like special sites that attract a certain community, help to acquire new users and to keep actual users. - Switching costs: are high, because sellers who gain reputation at certain online-auction sites cannot transfer this to other sites. ...read more.

Middle

The size of the community and the variety of customers, which comes along with the size, results in different expectations towards the aim and participants in auctions. As a current problem one can name the growing presence of companies. It can be seen as a weakness that, C2C being the core competence of eBay, it is only in narrow ranges possible to exploit the potential of B2C trading. Turning towards businesses likely will result in loosing customers as well as a loss of potential revenues. Opportunities: With the growing worldwide diffusion of the Internet and the increase of e-commerce, countries like China offer a large market of potential customers. Other areas like South America or Eastern Europe, which are characterized by a high population, could also be attractive for eBay. So the geographical expansion represents a great opportunity to compensate for the saturating market in the US and to continue its growth. In this effort eBay`s brand image and its huge installed base could give it a competitive edge over its competitors. Secondly the alliances of eBay (e.g. with MercadoLibre.com, the market leader in online auction sites in Latin America) and the acquisitions of large or leading regional competitors could help to establish a favourable position in these countries. Another growth opportunity is the expansion of its current product line. One possibility is to increase the number of existing specialty sites. In the past eBay successfully introduced trading categories (e.g. eBay Motors), which were addressed to a particular product or group of products. As the variety of goods traded is almost infinite, there is enough space for more categories of this kind. Another possibility is the broadening of its pre- and post trade services (e.g. shipping service, escrow service etc.). By increasing the service around the auction eBay is enhancing the convenience in the auction and, which is even more important, it is increasing the customers` feeling of security and trust in its site. ...read more.

Conclusion

The company keeps this advantage, by strategically focusing on its core competence, personalized C2C online auctions. As an addition we add a list of eBay`s strengths, ordered by categories according to Strickland (in "Strategic Management", 13th Edition, 2003, Chapter 4) Company resources - Highly professional board of directors providing know-how for the strategic development of the company. - IT Knowledge, important for the design and hosting of the online-site. - Large financial resources, for example to finance marketing measures to increase brand recognition. - Personal experienced in (global) marketing, necessary for example to keep in touch with the community. - Alliances with other companies, for example credit card and logistics companies Competitive capabilities - Constructing community enhancing features: From the beginning on eBay offered chat-rooms to their members. As the community grew, services like local sites, specialty sites (eBay motors) and personal WebPages were added. - Establishing trust between buyers and sellers: through the Feedback Forum buyers and sellers were able to judge their trading partner, thus giving future buyers (or sellers) the possibility to asses the partner's trustworthiness. - Easy to use web sites: through a design that assured intuitive usability for new users, and effective handling for experienced users. - Techniques to optimize the auctions for customers: search engines help customers to find available goods, automatic bidding systems bid for their customers until a certain value is reached. - Technique to minimize system downtime: After one 22-hour crash in 1999, occurred eBay undertook various measures to make system more reliable. They hired an experienced software engineer, and finally outsourced their technology and websites operations. Distinctive competencies - Creating customer loyalty - Maintaining community spirit - Establishing trustworthiness Strategic assets and market achievements - First mover advantage - Big customer base enhanced by network externalities - Alliances and outsourcing partners (e.g. credit card companies, shipping, escrowing, IT- outsourcing) - Brand recognition - Market leadership Competitive advantages - Ability to attract buyers and maintain customer base - Volume of transactions and product variety - Brand recognition ...read more.

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