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Case Study 5 Forces Framework

eBay Inc. is among the major players in the global e-commerce industry. The company’s success represents strategic effectiveness in solving challenges in the online business environment. Some of the major challenges are identified in this Five Forces Analysis of eBay’s online trading platform business. Michael E. Porter’s Five Forces analysis model is an external analysis tool that identifies competitive forces and their intensities linked to business performance in the industry environment. In this case, the Five Forces analysis of eBay Inc. encompasses the effects of competitive rivalry, the bargaining power of customers/buyers, the bargaining power of suppliers, the threat of substitutes/substitution, and the threat of new entry on the online marketplace, classifieds, and ticket exchange industry environment. For example, the low cost of new entry is an external factor that threatens the company’s market share of consumers and sellers. eBay’s management must implement strategies that consider the external factors identified in this Five Forces analysis of the online business.

A Porter’s Five Forces analysis of eBay Inc. informs managers and investors about pertinent external factors in the e-commerce industry environment. These external factors present issues that the company must strategically address. For example, high-intensity competition may warrant changes in eBay’s marketing mix or 4Ps to attract and retain consumers and vendors to the company’s trading websites. It is prudent that the company’s managers utilize the results of this external analysis to guide strategy formulation in the multinational business.

Summary & Recommendations: Five Forces Analysis of eBay Inc.

Summary. The results of this Porter’s Five Forces analysis of eBay reveal that competition or competitive rivalry, and the bargaining power of customers or buyers are the most significant external forces in the e-commerce industry environment. However, each of the other forces has a moderate impact on the global business. Thus, all of the five forces are major considerations in eBay’s strategic management decisions. The company has the capabilities to withstand these forces through competitive advantages (Read: SWOT Analysis of eBay Inc.). However, strong competition could erode the company’s market share. It is essential that eBay’s generic strategy for competitive advantage and intensive strategies for growth address the external factors responsible for these forces. In summary, this Five Forces analysis establishes the following intensities of the forces that influence eBay’s external business environment:

  1. Competitive rivalry or competition – Strong force
  2. Bargaining power of buyers or customers – Strong force
  3. Bargaining power of suppliers – Moderate force
  4. Threat of substitutes or substitution – Moderate force
  5. Threat of new entrants or new entry – Moderate force

Recommendations. Based on the results of this analysis of eBay Inc. through Porter’s Five Forces analysis model, a recommendation is to build competitive advantages through innovation. Innovation enables companies to compete in the e-commerce industry. Effective innovation for product improvement or development can increase market share and help fulfill eBay’s corporate mission and vision statements. For example, a higher innovation rate can increase the company’s online marketplace effectiveness. Another recommendation is to develop more strategic partnerships with third parties, such as courier companies. This recommendation addresses the strong bargaining power of customers by improving service reliability. Also, such strategic partnerships partly deal with the moderate bargaining power of suppliers identified in this external analysis. Furthermore, this Five Forces analysis of eBay Inc. requires that the company’s strategies address the threats of substitution and new entry. Continuing development of services is recommended to overcome these threats. For instance, a broader set of services can increase the attractiveness of eBay’s online marketplace, classifieds websites, and ticket exchange services.

Competition/Competitive Rivalry against eBay (Strong Force)

This aspect of Porter’s Five Forces analysis model assesses the degree of competition among firms in the industry. In this case of eBay Inc., the external analysis considers competitive rivalry with firms involved in e-commerce. These firms can hinder the company’s growth. The following external factors are the main contributors to the strong intensity of competition against eBay:

  • Large population of firms (strong force)
  • Low switching costs (strong force)
  • Low differentiation in quality (strong force)

This Five Forces analysis considers the large population of firms in the industry. This factor leads to tough competition among firms like eBay Inc. For example, the company needs to compete against major e-commerce firms like Amazon, Etsy, and Walmart (Walmart Marketplace), as well as many smaller firms that have online retail/auction operations. This external analysis also identifies low switching costs as an external factor that contributes to the strong intensity of competitive rivalry in eBay’s industry environment. Low switching costs are the low costs or barriers that customers (consumers and sellers) experience when they switch from one service provider to another, such as when they move from eBay to Amazon. This Porter’s Five Forces analysis considers such external factor as an intensifier of the force of competition in the online trading industry environment. In addition, low differentiation in quality reflects similarities among the quality levels of available online trading services. For instance, the quality of eBay’s classifieds services is similar to the quality of competitors’ services. This condition makes it easy for customers to transfer from one firm to another, thereby strengthening the force of competitive rivalry. Thus, this aspect of the Five Forces analysis of eBay Inc. stresses the importance of competition in shaping management and strategies for growing multinational e-commerce business operations.

Bargaining Power of eBay Inc.’s Customers/Buyers (Strong Force)

In this aspect of Porter’s Five Forces analysis model, the influence of customers on the e-commerce industry environment is examined. In eBay’s case, the customers are consumers and sellers who use the company’s online trading websites and related services. Customers’ rate of use of such services affects the strategic management success of the company and its subsidiaries like Kijiji and StubHub. eBay Inc.’s customers have strong bargaining power, which is based on the following external factors and their intensities in impacting the international business:

  • Low switching costs (strong force)
  • High price sensitivity (strong force)
  • High quality of information (strong force)

The aforementioned low switching costs in this Porter’s Five Forces analysis are also a representation of customers’ bargaining power. For example, because of this external factor, consumers and vendors can easily use Amazon instead of eBay. This condition intensifies the bargaining power of buyers or customers. In relation, this external analysis considers high price sensitivity, which is the degree of customers’ response to changes in prices. For instance, if eBay increases the prices of its online marketplace services, customers are likely to consider using the services of Amazon or other prominent online trading platforms instead. This external factor contributes to the strong intensity of the bargaining power of customers in the industry environment. Also, access to high quality of information regarding online retail/auction and related services is identified in this Five Forces analysis as a contributor to customers’ strong bargaining power. This external factor is partly based on the availability of information through the Internet, as well as other technological trends enumerated in the PESTEL/PESTLE analysis of eBay Inc. Such information empowers customers in shifting from the company to competitors. The combined effect of the external factors in this aspect of the Five Forces analysis creates the strong bargaining power of customers. eBay Inc.’s corporate social responsibility (CSR) strategy helps counteract this force by attracting customers through suitable management approaches for enhancing the image of the global business.

Bargaining Power of eBay’s Suppliers (Moderate Force)

This aspect of the Porter’s Five Forces analysis model considers suppliers’ impact on the industry environment. eBay Inc.’s strategic management, in this external analysis case, must account for how suppliers influence the multinational business through its supply chain. As an online trading service provider, the company’s supply chain involves information technologies used to maintain trading services. For example, online servers are among the technologies that eBay procures from its suppliers. Merchants/sellers who use the company’s websites provide goods, but they are customers and not suppliers because the company does not utilize such goods in providing online retail/auction, classifieds, and ticket exchange services. In this Five Forces analysis, the moderate intensity of the bargaining power of eBay’s suppliers is based on the following external factors:

  • Suppliers’ moderate population (moderate force)
  • Suppliers’ low forward integration (weak force)
  • Small population of delivery service providers (moderate force)

Suppliers’ moderate population corresponds to the moderate intensity of their bargaining power in eBay’s industry environment. This external factor limits the company’s choices in shifting from one supplier to another. Also, in the context of this Porter’s Five Forces analysis, suppliers have a low level of forward integration, which reflects their weak control on the distribution of their products in the e-commerce industry. This external factor reduces the intensity of the bargaining power of suppliers on firms like eBay. Moreover, this external analysis points to the moderate force that delivery service providers (courier companies) exert on the industry. For example, service providers can impose additional fees for package delivery involving eBay’s system. Delivery services complete the company’s offerings to the customers of its multinational marketplace business. Based on this aspect of the Five Forces analysis of eBay Inc., the bargaining power of suppliers is a considerable but limited issue in the company’s strategic management efforts.

Threat of Substitutes/Substitution (Moderate Force)

In this aspect of Porter’s Five Forces analysis model, the influence of substitutes on the e-commerce industry environment is assessed. Substitution can reduce eBay’s revenues by attracting vendors and consumers into using substitute services. For example, brick-and-mortar stores’ retail services are substitutes to eBay’s online marketplace services. With regard to this Five Forces analysis, eBay Inc.’s strategic management variables must include the following external factors that contribute to the moderate intensity of the threat of substitution:

  • Large population of brick-and-mortar marketplaces/stores (strong force)
  • Moderate cost of substitution (moderate force)
  • Moderate performance-to-price ratio of substitutes (moderate force)

The large population of brick-and-mortar marketplaces is considered in this Five Forces analysis as a strong contributor to the intensity of the threat of substitution in eBay’s industry environment. This external factor represents strong competition among brick-and-mortar marketplaces that influences online marketplace businesses. Also, this Five Forces analysis considers the moderate cost of substitution that exerts a moderate force on eBay’s international business. For example, customers are moderately likely to use substitutes because of such external factor. In addition, this external analysis considers the moderate performance-to-price ratio of substitutes. Because of this factor, consumers and sellers/vendors are moderately likely to use substitutes. The performance of online marketplaces like eBay’s tends to be higher in terms of efficiency. The company’s information technologies ensure the efficiency of its e-commerce services for online retail/auctions, classifieds, and ticket exchange transactions. The external factors in this aspect of the Five Forces analysis make the threat of substitution a moderate issue affecting eBay’s strategic management. The company needs to compete against trading websites, as well as brick-and-mortar stores.

Threat of New Entrants/New Entry (Moderate Force)

This aspect of Porter’s Five Forces analysis model examines the impact of new entry on the e-commerce industry environment. This external analysis case covers the effects of new online business operations that compete against eBay Inc.’s global marketplace, classifieds and ticket exchange business. New entrants can reduce the company’s market share and revenues. In this Five Forces analysis, the following external factors are relevant to the moderate intensity of the threat of new entry against eBay:

  • Low cost of entry (strong force)
  • Low switching costs (strong force)
  • Moderate cost of brand development (moderate force)
  • High economies of scale (weak force)
  • High economies of scope (weak force)

The low cost of entry exerts a strong force against eBay Inc. and its industry environment. This external factor represents the low capitalization needed to establish online operations, such as a retail/auction website. As a result, large and small companies can readily establish websites that compete against eBay’s multinational business. This Porter’s Five Forces analysis also points to low switching costs as an external factor that strengthens the intensity of the threat of new entry. For example, many customers experience minimal consequences in shifting from eBay to new entrants’ online marketplaces. The moderate cost of brand development is also included in this external analysis. Based on this external factor, new entrants need large funds to popularize their brands in the industry. In contrast, eBay Inc. already has a popular brand among consumers and merchants. Furthermore, high economies of scale give eBay Inc. an advantage in effectiveness and efficiency. The global scale of the company’s trading platform, classifieds, and other e-commerce operations creates effectiveness and efficiencies that many new entrants find difficult to match. Moreover, high economies of scope are a factor that this Five Forces analysis attributes to the weakening of the threat of new entrants. For example, the scope of eBay’s operations (marketplace, classifieds, and ticket exchange) increases business performance through expertise development and human resource sharing within the organization. This external factor is a barrier to entry because new firms likely lack the operational scope to achieve such competitive advantages. This aspect of the Porter’s Five Forces analysis of eBay Inc. reveals that new entry is a moderate strategic issue in managing the company.

References
  • eBay Inc. – Carrier Options.
  • eBay Inc. – Form 10-K.
  • Dobbs, M. (2012). Porter’s five forces in practice: Templates for firm and case analysis. In Competition Forum (Vol. 10, No. 1, p. 22). American Society for Competitiveness.
  • Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review24(1), 32-45.
  • Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change15(5), 213-229.
  • Miller, F.P., Vandome, A.F., & McBrewster, J. (2011). Porter Five Forces Analysis. VDM Publishing.
  • Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.
  • Walder, J. (2013). A critical evaluation of Michael Porter’s Five Forces Framework. GRIN Verlag.
  • U.S. Department of Commerce – International Trade Administration – Retail Services Spotlight – The Retail Services Industry in the United States.

Case Study & Case Analysis, Computer Technology, E-commerce, eBay Inc., Information and Communications Technology Industry, Information Technology, Porter's Five Forces Analysis, Retail, Retail Industry

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Page 5: Porter’s Five Forces model

One way in which staff within Rolls- Royce have focused their actions for responding to the changing role of the business, has been to use Porter’s ‘Five Forces’ model of industry competition. Five Forces analysis gives an improved understanding of the degree of competition within the business environment. It has helped them to develop a better understanding of the business environment so that business opportunities could be analysed. The model identifies one force within the industry – competitive rivalry - as well as four forces outside the industry:

  • potential entrants and the threat of entrants
  • power of buyers
  • power of suppliers
  • threat of substitutes

Competitive rivalry

As described above three dominant players operate in this oligopolistic global industry. The industry is capital intensive and there is a requirement for high investment in advanced technology and research and development. No single manufacturer dominates the industry, so balance fuels the rivalry.

Competition in the primary market for aero-engines is intensified by the link to the secondary market for engine part sales and services. Access to the secondary market is dependent on achieving the original sale of new engines. In recent years the intensity of competition has increased as each manufacturer has tried to improve its volumes and market share. Rivalry has also intensified because gas turbine engines are now essentially a mature product and the potential for technological differential advantage has been reduced.

Power of buyers

The numbers of potential buyers of new aircraft are low. Buyers of aircraft engines are therefore essentially price makers, with the market price for new engines being largely set by the buyer. The power of buyers has further increased in recent years as many airlines have become ‘global carriers’.

The decision to purchase a particular aircraft or engine combination is a long-term one. This means that failure to secure an order may prevent an engine manufacturer trading with a particular airline for more than a decade. The selection of one engine type can lead to a domino effect, with other competing buyers following the same selection. Airlines are increasingly seeking lifetime cost of ownership guarantees, and reduced repair costs.

Power of suppliers

The suppliers to the aero-engine manufacturer have limited power. There are many hundreds of different suppliers to the aero-engine industry. They supply all nature of components, from nuts and bolts to state-of-the-art electronic control systems costing hundreds of thousands of pounds. The power of many of the smaller companies, which represent most of the supplier base, has been reduced. This is due to engine manufacturers adopting dual sourcing strategies, using a range of alternative sources of supply. The most powerful suppliers are those involved in the supply of high specification electronic control equipment.

Threat of entry

Although not unknown, entry to the aero-engine industry is extremely difficult. The highly specialised advanced nature of aero-engine design combined with the costs of research and development as well as the confidence of customers represent significant barriers to entry. New engines also need extensive testing before gaining airworthiness approval from the authorities. The market is also sensitive to the reputation of the engine manufacturer, where names such as Rolls-Royce represent a range of proven high-technology products.

Threat of substitutes

There is no substitute for an aero engine and the threat of substitutes for air transport itself is minor. However, it is thought that the development of video conferencing capability will reduce some business travel and the growth of high speed train travel (e.g. Eurostar) will affect some travel decisions. However, both of these developments are taking place at a time when the demand for air travel is increasing.

This analysis shows that the commercial aero-engine business is highly competitive, with the buyer possessing and exerting a very powerful influence upon organisations. The high barriers to entry and the low threat of substitutes indicate that existing competitors will continue to share the business between them. However, a slow down in industry growth and the increasing maturity of products will intensify the degree of rivalry between the engine manufacturers.

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