Case analysis #2 – “ebay structures its bid for change

Instructions: Please read the following case description of “eBay Structures Its Bid for Change”. After reading this case, you should prepare your analysis following the guidelines I have provided. The purpose of this assignment is for you to demonstrate that you can apply the concepts, principles, and theories presented in the course readings. Your analysis must employ only the facts presented in the case description below. You must resist the temptation to introduce facts not in evidence in the case description by searching the internet for updated information. The company’s present situation is not necessarily the ideal solution that could be derived from a careful analysis of the facts as presented here.

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eBay Structures Its Bid for Change

In 1995, 28-year-old computer programmer Pierre Omidyar started an online business to answer the kind of question that might interest both microeconomists and entrepreneurs: “He launched eBay,” we’re now told on eBay’s website, “to experiment with how equal access to information and opportunities would affect the efficiency of the marketplace.” Enthusiastic response to preliminary efforts had convinced Omidyar that somewhere there was a buyer for every item that a seller might put up for sale. The next step in Omidyar’s experiment consisted of a weekend spent writing software code that would support online auctions. He launched a website called AuctionWatch in 1995, and two years later changed the company’s named to eBay.

Originally, Omidyar structured his company using the functional design typical of small businesses. He set up the usual functional areas such as operations, finance, legal, human resources, etc., and eventually gave each unit a company president; however, he introduced a twist in the usual functional configuration by integrating a System4 design based on the behavioral model of organizational design that emphasizes the importance of group and other interpersonal processes. Omidyar’s personal values favored creating a company the structure of which sidestepped big business altogether and permitted individuals, wherever they might be, to function as buyers and sellers. Today, people commonly refer to eBay as “an online auction and shopping site,” but Omidyar envisioned his site as much more than an auction space. He intended eBay to create an online community—something like a small town in cyberspace—and, for that, he needed an organizational model that did away with bureaucracy and fostered democratic decision making, decentralization, open communication and interaction, and relationships of trust; after all, the entire business model depended upon two strangers trusting one another.

Omidyar stepped down as CEO in 1998, although he retained his position as chairman of the board. He was replaced by Meg Whitman, a former management consultant and a veteran of such venerable firms as Procter & Gamble and Disney. In that same year, eBay went public, raising $60 million and committing itself to much greater pressure to realize its profit-making potential. Over the next several years, eBay became wildly popular and grew rapidly. Under Whitman, revenues increased steadily, averaging 70% annual growth in the period 1998-2004, before year-over-year growth began to slow down to a sustainable level. Revenues for 1999 totaled $224.7 million, up a whopping 161% over 1998 and, by 2007, revenues had grown to $7.7 billion.

Like many companies, however, eBay did not have a good year in 2008 (the first full year of the so-called Great Recession). In the fourth quarter, revenues dropped 6.6% from 2007, the first quarterly shrinkage in revenue in the company’s history, and profits were down 31%. “Clearly,” said new CEO John Donahoe, “we’ve been operating in an almost unprecedented external environment,” but analysts have been quick to point out other, potentially long-term, factors in eBay’s sluggish performance. “Part of the problem,” agreed CNNMoney’s Michael V. Copeland, “is that no one is spending money . . . at the moment, but compounding the issue for eBay is that a lot of people aren’t hassling with auctions anymore.” A big reason for eBay’s problems, he adds, “is that virtually no one cares about eBay’s original business, the online auction.”

Copeland goes on to argue that eBay’s online business, its Marketplace unit, “is dragging down the rest of what are pretty solid businesses that eBay owns, chiefly online payments service PayPal and Internet calling company Skype.” For the fourth quarter of 2008, revenue for Skype was up by 5%, while PayPal’s revenue was up by 23%. Through 2007, the core Marketplace unit, through which all the goods trading at eBay takes place, contributed about 70% of the company’s revenues, but in March 2009, while announcing a three-year growth plan, eBay projected a much different distribution of its future income. Donahoe announced projected revenues of $10 billion to $12 billion by 2011, which is up from 2008’s $8.5 billion. If that increase doesn’t seem like much, remember that the company will probably have to make up more lost ground from 2009, for which analysts have projected another drop in revenue of 6%. The company expects its future revenues to be distributed as follows:
• PayPal will generate between $4 billion and $5 billion, up from $2.4 billion in 2008;
• Skype will contribute $1 billion, up from roughly $500 million in 2008; and,
• Marketplace will contribute from $5 to $7 billion, up slightly from $4.7 billion in 2008.

Not surprisingly, the meteoric rise in its financial fortunes that began in earnest with the 1998 IPO has already had a profound impact on both the organizational structure and the operations of eBay. One of its first major post-IPO moves was the acquisition in April 1999 of Butterfield & Butterfield, one of the world’s largest and most prestigious auction houses. Butterfield was folded into eBay’s auction operations and served to open up a new marketplace category for goods selling for $500 and up. A year later, eBay purchased Half.com, an online shopping site specializing in the sale of books and media products in a non-auction, or fixed-price, format. The purpose of the acquisition was to expand not only the parent company’s inventory but its format options as well. The original plan to roll Half.com into eBay.com stalled in 2002, when users objected to the pace of the changes at Half.com and, as of this writing, it is still an independent site. Both Butterfield’s auction operations and Half.com’s independent fixed-price operations are managed by a unit called eBay North America, whose president reports to a president of eBay Marketplace who, in turn, reports to the CEO.

Since the Half.com acquisition, eBay has purchased several other online-auction companies, most of them overseas start-ups that have been used to gain entry into foreign markets. Today, there’s a unit called Marketplace Operations, the president of which oversees operations at all of the company’s global sites in North America, Europe, and the Asia-Pacific region. This president is one of three presidents in charge of e-Bay’s three divisional units, all of whom report directly to CEO Donahoe. The other two divisional units, interestingly enough, are PayPal and Skype, both of which have been built around the acquisition of independent firms, and both of which focus on activities outside of eBay’s core Marketplace activities.

eBay purchased PayPal in 2002 for $1.5 billion. Essentially, PayPal is a system that allows payments and money transfers to be made through the Internet, and eBay has developed into the number-one payments system for e-commerce in general (only direct credit card transactions transfer more money). Skype was added to the eBay portfolio in 2005, at a cost of $2.6 billion. It was originally developed as a VoIP (Voice-over-Internet-Protocol) service, a transmission technology for sending voice communications over networks like the Internet, but eBay wanted to turn it into a communications hub over which its buyers and sellers can transact business by voice. As discussed above, both PayPal and Skype have emerged as important revenue generators, and figure prominently in eBay’s plans for the future.

Needless to say, eBay has undergone a good deal of organizational change in its relatively brief existence. Back in 2004, when she could still refer to eBay as a “unique blend of commerce and community,” former CEO Whitman (who stepped down in March 2008) admitted that perhaps the pace of change at the company was a little too brisk for some members of the community. “The community right now,” she said, “has seen a lot of change. We probably need to slow down that pace just a tad. It’s hard for folks to adapt to so much change.” Nevertheless, investor pressure to sustain profit levels, coupled with increased competition from such sources as Amazon, Google, and Yahoo!, continued to force change, much of it in the form of rules and regulations instituted in order to deal with ever-increasing numbers of buyers and sellers.

Recent changes, coupled with certain details of the announced three-year plan, suggest that the company also wants to alter its strategic focus. In January 2008, for example, a month after Amazon surpassed it in total U.S. traffic for the first time ever, eBay announced a change in its fee structure. Fees for listing items were slashed by up to 50%, but commissions for items that sold went up. Increases in commissions for low-end items, especially goods selling for less than $25, were particularly steep at 67%. Some eBay sellers were understandably unhappy about the change in fee structure. “It looks like what they are trying to do with the fees,” surmised one user, “is make it more difficult and expensive to sell low-end items.” Many observers agreed with this assessment, adding that eBay was shifting its emphasis to higher-priced items, especially used, off-season, end-of-life-cycle, and open-box products supplied by business sellers.

In a similar move, eBay stipulated that, beginning in March 2008, all sellers who had received less-than-100%-favorable feedback ratings would be required to use PayPal for all transactions. This requirement followed several stipulations regarding PayPal that had been put in place in 2007. As of January 2007, for instance, all transactions in certain categories, including “Computer/Software,” “Consumer Electronics/MP3 Players,” and “Mobile and Home Phones,” had to be paid through PayPal. Other categories were added in August of the same year, and included “Video Games” and “Health & Beauty.” Such changes were clearly intended to leverage the revenue potential of PayPal which, in March 2009, CEO Donahoe referred to as a “second core business” for eBay.

So far, the strategic effort to synergize its Marketplace and PayPal operations has been less than successful. Beginning in June 2008, for example, eBay required that all transactions involving Australian buyers and sellers use PayPal as the only payment option, except for cash on delivery. Within a month of that announcement, however, the company was forced to rescind the policy when the Australian government, acting upon a groundswell of complaints from users and petitions from bankers, informed eBay that its policy would have “an anti-competitive effect” on online commerce. eBay had promoted PayPal as a means for improving security in online transactions, but the Australian government was also unconvinced by this argument, finding “no evidence to suggest that the relative frequency of online fraud for PayPal online transactions is any less than that found in general online transactions.” The Australian Competition and Consumer Commission also noted that its PayPal-only plan would allow eBay to raise its fees by 45.7%. At this juncture, the result of the plan seems to be a few thousand annoyed users in Australia and a few thousand more in the U.S., where users are not convinced by the company’s assurances that it is not planning a similar policy for its largest marketplace.

Assignment: You are a management consultant who specializes in helping companies determine how best to design their organizational structure and, as such, you have been hired to evaluate eBay’s current structure and make a recommendation as to which structural design will be most appropriate now and in the future as changes in the external environment affect the online-auction market. Your recommendation should discuss the changes that e-Bay’s management has already made to the original functional structure, as well as your recommendation on how it should structure itself to accommodate international expansion, along with the effect international expansion is likely to have on the three existing functional units (finance, human resources, and legal) which currently exist alongside the three divisional units.

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