® 2006, Tony Gauvin, UMFK 1 EBay A Case Study In Strategic Management Tony Gauvin, UMFK April 2006.

® 2006, Tony Gauvin, UMFK 1

EBay A Case Study In Strategic

ManagementTony Gauvin, UMFK

April 2006


Some Acknowledgements

• Graphics and some Data for presentation taken from investor.ebay.com

• The analysis is based in part on the case study prepared by the following students in Spring of 2005– Corey Daigle, Megan Foreman, and Seth Fraser

• Other material was provided by the authors of the Case – Marcelo De Mattos and Forest David


OverviewSome Cool Facts

Who we are, What we sell, Where we are

Mission and VisionInternal Assessment

- Financial Condition- IFE Matrix ??

External Assessment- EFE Matrix- CPM Matrix

Strategy Formulation- SWOT Matrix- Space Matrix- IE Matrix- Grand Strategy Matrix- QSPM Matrix- Matrix Analysis

Strategic Planning for the Future

EPS/EBITDecisions/Implementation/

Evaluation2004&05 FinancialseBay press releases


eBay is evolution• 1996 – 1998: US only, collectibles only

– Started by Pierre Omidyar to assist his girl friend in collecting Pez Dispensers

• 1999 – Moving beyond collectibles• 1999 – Going global• 2000 – Introducing Fixed Price and eBay Stores• 2002 – PayPal: removing friction and building a huge new business• 2004 – 2005: Creating other marketplaces → Marktplaats, Mobile,

Rent.com, Shopping.com, Kijiji, ProStores

Common theme – expanding our vision, our market and our opportunity

Aspirational goal of growing faster than e-commerce


High performance company

Years since started


Registered users


Gross merchandise volume


Total PayPal Accounts


PayPal Payment Growth


Who we Are

Founded in September 1995, eBay is The World's Online Marketplace® for the sale of goods and services by a diverse community of individuals and small businesses. Today, the eBay community includes more than a hundred million registered members from around the world. People spend more time on eBay than any other online site, making it the most popular shopping destination on the Internet.


What we Sell

On an average day, there are millions of items listed on eBay. People come to eBay to buy and sell items in thousands of categories from collectibles like trading cards, antiques, dolls, and house wares to practical items like used cars, clothing, books and CDs, and electronics. Buyers have the option to purchase items in an auction-style format or items can be purchased at a fixed price through a feature called Buy It Now.


Where we Are

People from all over the world buy and sell on eBay. Currently, eBay has local sites that serve Australia, Austria, Belgium, Canada, China, France, Germany, Hong Kong, India, Ireland, Italy, Malaysia, the Netherlands, New Zealand, the Philippines, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan, the United Kingdom, and the United States. In addition, eBay has a presence in Latin America through its investment MercadoLibre.com.


eBay’s Community Values

eBay is a community that encourages open and honest communication among all its members. Our community is guided by five fundamental values:

– We believe people are basically good.– We believe everyone has something to contribute.– We believe that an honest, open environment can bring out

the best in people.– We recognize and respect everyone as a unique individual.– We encourage you to treat others the way you want to be

treated.


eBay's mission is to provide a global trading platform where practically anyone can trade practically anything.

1

eBay’s Mission Statement


Proposed Mission Statement

eBay’s mission is to be the world’s most utilized and profitable “trading post.” Having bright and talented employees that are dedicated to serving both customers and communities, eBay provides the most technologically advanced, reliable, and secure trading platform available to anyone, anywhere, while always doing business in a highly ethical manner.

1


Our vision at eBay is provide an online business to enable anyone to auction practically anything.

1

Proposed Vision Statement


External Audit


2

Opportunities

1. Current Internet usage estimated to be 420 million worldwide including 180 million in the US.

2. Generation X and Y entering the workforce.3. Foreign markets especially in Asia are improving.4. US and Mexico exceeded $3 trillion in online sales in 2003.5. E-commerce in Latin America expected to grow to $82 billion in 2004.6. Under 25 percent of online North American households made an auction

purchase in 2003.7. Online auction sales are estimated to reach $54 billion in 2007.8. The price of personal computers continues to fall.9. Internet sales remain tax free.10. Some customers prefer to finance large purchases "in house"


Threats

1. Online businesses could possibly be subject to future taxation.

2. Medium fixed cost structure - barrier to entry not significantly high.3. Ongoining fraud issues, with merchants not sending payment or products.4. Many people feel the Internet is an unsafe medium to conduct financial

business.5. Many households still do not own a PC.6. Despite improvements, many foreign economies are still unstable.7. High unemployment rates in the US.8. Transportation systems in foreign countries could be poor for delivering

products.9. Fluctuations in currency and exchange rates, could limit international business.

10. Possible website security problems such as hacking.


Opportunities Weight Rating Weighted Score1. Current Internet usage estimated to be 420 million worldwide

including 180 million in the US.0.07 4 0.28

2. Generation X and Y entering the workforce. 0.02 3 0.063. Foreign markets especially in Asia are improving. 0.03 2 0.064. US and Mexico exceeded $3 trillion in online sales in 2003. 0.04 3 0.125. E-commerce in Latin America expected to grow to $82 billion in

2004.0.03 2 0.06

6. Under 25 percent of online North American households made an auction purchase in 2003.

0.07 2 0.14

7. Online auction sales are estimated to reach $54 billion in 2007. 0.08 4 0.328. The price of personal computers continues to fall. 0.04 3 0.129. Internet sales remain tax free. 0.04 3 0.1210. Some customers prefer to finance large purchases "in house" 0.03 1 0.03

External Factor Evaluation Matrix (EFE)

3

EFE Matrix


EFE Matrix

Threats Weight Rating Weighted Score1. Online businesses could possibly be subject to future taxation. 0.04 3 0.122. Medium fixed cost structure - barrier to entry not significantly high. 0.10 3 0.303. Ongoining fraud issues, with merchants not sending payment or

products.0.08 3 0.24

4. Many people feel the Internet is an unsafe medium to conduct financial business.

0.07 2 0.14

5. Many households still do not own a PC. 0.07 1 0.07

6. Despite improvements, many foreign economies are still unstable. 0.03 2 0.067. High unemployment rates in the US. 0.05 1 0.058. Transportation systems in foreign countries could be poor for

delivering products.0.02 1 0.02

9. Fluctuations in currency and exchange rates, could limit international business.

0.02 2 0.04

10. Possible website security problems such as hacking. 0.07 3 0.21

1.00 2.56TOTALS


Weight Rating Score Rating Score Rating Score0.05 2 0.10 4 0.20 1 0.05

Market Penetration 0.06 4 0.24 4 0.24 2 0.12Customer Service 0.08 3 0.24 4 0.32 2 0.16Brand Awareness 0.10 4 0.40 4 0.40 2 0.20User friendly website 0.05 3 0.15 4 0.20 2 0.10Revenue Growth 0.15 3 0.45 4 0.60 2 0.30Financial Condition 0.15 3 0.45 2 0.30 2 0.30Customer Loyalty 0.05 4 0.20 3 0.15 3 0.15Market Share 0.10 4 0.40 4 0.40 1 0.10Product Quality 0.08 4 0.32 4 0.32 4 0.32Information about user 0.05 4 0.20 4 0.20 3 0.15Price Competitiveness 0.08 3 0.24 3 0.24 3 0.24

1.00 3.39 3.57 2.19Totals

Critical Success Factors

eBay

Competitive Profile Matrix (CPM)

Amazon Yahoo! Auction

Advertising

CPM

4


Internal Audit


Organizational Team

• Beth Axelrod, Senior Vice President, Human Resources• Matt Bannick, President, eBay International• William C. Cobb, President, eBay North America• John Donahoe, President, eBay Marketplace• Michael Jacobson, Senior Vice President and General

Counsel• Jeff Jordan, President, PayPal• Pierre Omidyar, Founder and Chairman of the Board• Bob Swan, Senior Vice President, Finance and Chief

Financial Officer• Maynard Webb, Chief Operating Officer• Meg Whitman, President and CEO


Key Financials

• End of year 2003– Net Income grew to $442 million, up 77%– Resulted in record operating cash flows of $874

million, up 82%– Year end Balance Sheet

• $5.8 billion in total assets• $2.7 billion in cash and investments


Key Financial Ratios Company Industry Sector S&P 500

Valuation RatiosP/E Ratio (TTM) 97.12 41.01 28.90 24.01Beta 1.77 1.30 0.96 1.00

Growth Rates %Sales - 5 Yr Growth Rate 90.58 35.47 17.25 9.30EPS (MRQ) vs Qtr 1 Yr Ago 55.07 27.30 15.43 28.69EPS (TTM) vs TTM 1 Yr Ago 60.76 27.58 16.37 21.92EPS - 5 Yr Growth Rate 111.74 43.79 15.23 12.15

Financial Strength Quick Ratio (MRQ) 3.13 1.22 0.93 1.26Total Debt to Equity (MRQ) 0.03 0.73 0.82 0.85

5


Key Financial Ratios Company Industry Sector S&P 500

Profitability Ratios %Gross Margin (TTM) 80.78 42.23 42.84 47.32Gross Margin - 5 Yr Avg 79.48 41.08 42.06 47.01Operating Margin (TTM) 29.01 11.97 12.90 20.33Operating Margin - 5 Yr Avg 16.21 6.75 11.21 18.35Net Profit Margin (TTM) 21.00 7.76 7.54 13.12Net Profit Margin - 5 Yr Avg 13.53 3.74 7.62 11.59

Management Effectiveness %Return on Assets (TTM) 9.10 8.29 5.91 6.40Return on Investment (TTM) 10.18 11.53 7.98 9.97Return on Equity (TTM) 10.50 14.04 13.51 18.71

www.investor.stockpoint.com


eBay Stock Information


eBay as an Investment


Strengths

1. eBay is the most well known online auction company in the world.

2. Strong auction community of loyal customers.

3. Excellent financial situation.

4. Have a fair payment system that encourages merchants to list products.

5. Strong presence in strategic global markets.

6. Experienced management team.

7. eBay has very little inventory since they do not actually take position of items sold on their site.

8. Strong customer service.

9. Percent of revenue in international markets increasing significantly.


Weaknesses1. Weak promotional and marketing activities

2. eBay does not pay dividends on their stock.

3. Some customers feel the website is cluttered

4. eBay’s position in the business to business (B2B) market is weak.

5. eBay has very little debt, therefore the company is not taking advantage of low interest rates to expand.

6. eBay has a higher tax rate since they do not take advantage of depreciation as well as other companies.

7. The company relies too much on word of mouth advertising, assuming everyone already knows about eBay.

8. The company does not do enough to convince leery potential customers that Internet business is financially safe.

9. Longer transaction times, since many merchants will not receive payment until a buyers check clears.

10. eBay is mainly a cash business.


IFE Matrix

Key Internal Factors Weights RatingWeighted

Score0.0 to 1.0 1 to 4

Internal StrengthseBay is the most well known online auction company in the world 0.1 4 0.4Strong auction community of loyal customers. 0.04 3 0.12Excellent financial situation 0.1 3 0.3Have a fair payment system that encourages merchants to list products. 0.03 3 0.09Strong presence in strategic global markets 0.05 3 0.15Experienced management team 0.1 4 0.4eBay has very little inventory since they do not actually take position of items sold on their site. 0.05 3 0.15Strong customer service. 0.03 4 0.12Percent of revenue in international markets increasing significantly. 0.02 3 0.06

0Internal WeaknessesWeak promotional and marketing activities 0.1 1 0.1eBay does not pay dividends on their stock 0.01 2 0.02Some customers feel the website is cluttered 0.02 1 0.02eBay’s position in the business to business (B2B) market is weak. 0.03 1 0.03eBay has very little debt, therefore the company is not taking advantage of low interest rates to expand. 0.05 2 0.1eBay has a higher tax rate since they do not take advantage of depreciation as well as other companies. 0.1 1 0.1The company relies too much on word of mouth advertising, assuming everyone already knows about eBay. 0.1 1 0.1The company does not do enough to convince leery potential customers that Internet business is financially safe. 0.03 1 0.03Longer transaction times, since many merchants will not receive payment until a buyers check clears. 0.03 1 0.03eBay is mainly a cash business 0.01 2 0.02

0Totals 1 2.34


The Analysis


SWOT Matrix

7

SO Strategies WO StrategiesExpand operations into Asia

(S 1,2 &5; 0 1,3 & 8)

Start B2B operations in Asia (W 4,5,&10, O 4,7 & 9)

Increase advertising (1 1,6,7 & 10; 0 1,3,4,6 & 8)

ST Strategies WT Strategies

Lobby to keep Internet sales tax free (S 1&3; T 1)

Increase Fraud Awareness (S 1,4 & 8; T 3)

Use extra Cash to educate all customers that Internet Transactions are safe (W 8; T 4&10)


SPACE Matrix

6 -12 -46 -35 -56 -6

5 -4

Financial Strength (FS)Return on I nvestment (ROI )LeverageLiquidity

Environmental Stability (ES)Rate of I nflationTechnological ChangesPrice Elasticity of Demand

Working Capital Cash Flow

Competitive PressureBarriers to Entry into Market

Environmental Stability (ES) Average Financial Strength (FS) Average

-1 5-2 4-2 4-3 4-5 6

-2.6 5

Competitive Advantage (CA) Industry Strength (IS)

Competitive Advantage (CA) Average Industry Strength (IS) Average

Customer Loyalty Rivalry Among CompetitorsTechnological know-how Resource UtilizationControl over Suppliers and Distributors Profit Potential

Market Share Growth PotentialProduct Quality Financial Stability


SPACE Matrix

6

5

4

3

2

1

-6 -5 -4 -3 -2 -1 1 2 3 4 5 6-1

-2

-3

-4

-5

-6

IS

ES

CA

FSConservative Aggressive

Defensive Competitive


IE Matrix

4.0 I II III

High

3.0 IV V VI

TheEFETotal Medium eBayWeightedScores

Domestic International

2.0 VII VIII IX

Low

1.0

Strong Average Weak4.0 to 3.0 2.99 to 2.0 1.99 to 1.0

The Total IFE Weighted Scores

24%

76%

24%

76%

11


Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Strong Competitive

Position

Slow Market Growth

Weak Competitive

Position

Quadrant III Quadrant IV

10


QSPM


QSPM


QSPM


QSPM


Suggestion/Recommendations• New Strategies

– Expand to all countries of the world» Cost: $500,000.00-1,000,000.00(advertising)

– Advance in security of personal information» 1,000,000.00+

– Increase in Industry» N/A

– Increase revenues by capturing more customers» N/A

– Look into new pay system or create own (PayPal only in 38 countries)

» Millions


We believe that our continued profitability at historical levels will depend in large part on our ability to do the following: • attract new users and keep existing users active on our websites; • manage the costs of our business, including the costs associated with maintaining and developing our websites, customer support, transaction and chargeback rates, and international and product expansion; • maintain sufficient transaction volume to attract buyers and sellers; • increase the awareness of our brands; and • provide our customers with superior community, customer support, and trading experiences.

eBay’s Thoughts

From 2003 annual report


EPS/EBIT Analysis

• $Amount Needed: $1,500

• Stock Price $45

• Tax Rate 80/162=40%

• Interest Rate 5%

• # Shares Outstanding 609

14


Recession Normal Boom Recession Normal BoomEBIT $100,000,000 $400,000,000 $1,000,000,000 $100,000,000 $400,000,000 $1,000,000,000Interest 0 0 0 75,000,000 75,000,000 75,000,000EBT 100,000,000 400,000,000 1,000,000,000 25,000,000 325,000,000 925,000,000Taxes 40,000,000 160,000,000 400,000,000 10,000,000 130,000,000 370,000,000EAT 60,000,000 240,000,000 600,000,000 15,000,000 195,000,000 555,000,000# Shares 642,333,333 642,333,333 642,333,333 609,000,000 609,000,000 609,000,000EPS 0.09 0.37 0.93 0.02 0.32 0.91

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal BoomEBIT $100,000,000 $400,000,000 $1,000,000,000 $100,000,000 $400,000,000 $1,000,000,000Interest 22,500,000 22,500,000 22,500,000 52,500,000 52,500,000 52,500,000EBT 77,500,000 377,500,000 977,500,000 47,500,000 347,500,000 947,500,000Taxes 31,000,000 151,000,000 391,000,000 19,000,000 139,000,000 379,000,000EAT 46,500,000 226,500,000 586,500,000 28,500,000 208,500,000 568,500,000# Shares 632,333,333 632,333,333 632,333,333 619,000,000 619,000,000 619,000,000EPS 0.07 0.36 0.93 0.05 0.34 0.92

70 Percent Debt - 30 Percent Stock70 Percent Stock - 30 Percent Debt

EPS/EBIT Analysis


Decisions

Primary:

Expand aggressively into China

Secondary:

Increase business to business operations

Increase marketing campaigns in Asia


Implementation

Objectives:

Create a fully translated Chinese eBay site

Increase sales by 35%

Increase number of registered users


Evaluation

Quarterly & Yearly Financial Statements

Annual strategic meetings of division

management and corporate management


2004 Financial Information

More than 104.8 million registered users

327.7 million items

More than $8 billion in gross merchandise sales

* All from first quarter of 2004


2005 Highlights


We have an incredible set of assets

http://www.skype.com/ http://www.paypal.com

http://www.ebay.com


Increased marketing


eBay International;


CHINA


eBay in the News

March 30, 2006eBay Statement on Supreme Court Oral Argument and MercExchange Patent Reexamination

March 6, 2006eBay Announces Matt Bannick To Head Efforts in Corporate Philanthropy and the Developing World

February 27, 2006eBay Community To Gather in Las Vegas for 5th Annual eBay Live! Conference

February 24, 2006Celebrities Turn to eBay for Academy Awards Looks

December 21, 2005Matt Carey Named Chief Technology Officer for eBay Marketplaces

November 3, 2005Star Wars LEGO Sets and Thomas the Tank Engine Top eBay's 2005 Hot New Toys List

October 14, 2005eBay Completes Acquisition of Skype


Questions

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