Innovation is not a single but a total process of interrelated sub processes. It is not just the conception of a new idea, nor the invention of a new device, nor the development of a new market. The process is all these things acting in an integrated fashion (Myers and Marquis, 1969). Innovation can also be explained with the help of the following equation:
Innovation = theoretical conception + technical invention + commercial exploitation.
EBay is the world's largest person-to-person online trading community and is one of the few Internet companies that is profitable. EBay effectively created a new business model never before possible - efficient one-to-one trading in an auction format. Individuals use eBay to buy and sell items in more than 4,300 categories, from collectibles and antiques to electronics and toys. Sellers pay a nominal fee for placing an item up for sale, and eBay receives a transaction fee that ranges from 1.25% to 5% of the final sale price on any item sold. The buyer and the seller work out the logistics of the transport (e.g. shipping, payment) between themselves, and eBay never takes possession of the item being sold, or the payment for the item - removing the need for inventory, transportation and other overhead costs.
Business Model
Business model defines how a firm will define and promote its brand, produce and distribute its product and build or attract its market. The success of business depends on selecting the appropriate business model can. Yet business models are often one of the most misunderstood aspects of doing business today. In the simplest sense, the business model is how the company plans to operate, compete and generate revenue. To extract value from an innovation, a start-up (or any firm for that matter) needs an appropriate business model. Business models convert new technology to economic value. For some start-ups, familiar business models cannot be applied, so a new model must be devised. Not only is the business model important, in some cases the innovation rests not in the product or service but in the business model itself.
Role of the Business Model
Technical
Inputs
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Business
Model
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Economic
Outputs
A business model draws on a multitude of business subjects, including economics, entrepreneurship, finance, marketing, operations, and strategy. The business model itself is an important determinant of the profits to be made from an innovation. A mediocre innovation with a great business model may be more profitable than a great innovation with a mediocre business model.
eBay's business model was based on creating and maintaining a person-to-person trading community, providing millions of auctions, and hundreds of thousands of new items every day from which bidders may choose. After implementing their model, eBay has been able to build strategic partnerships, continue to make innovative changes and improvements, and monitor its internal and external environments for possible future opportunities. This has given them the prestige of being the world's largest online auction company. The reason eBay is so successful is because the site gives buyers and sellers plenty of reasons to stay for longer periods of time and revisit on a regular basis. The longer they stay on eBay, the more likely they are to actually complete a transaction, and thus generate some revenue for eBay.
The other reason for eBay's success is their highest bidder wins style auction mechanism as a means of earning profit from charging a premium for mediating between buyers and sellers as a third party. In using this mechanism, a history of prices exists (price points), creating increased inter-play between competitors in the marketplace. There are a few specific elements of eBay's business model that they recognized as key to its success they are (as given in the case study):
Being the largest online trading forum with a critical mass of buyers, sellers, and items listed for sale
Its compelling and entertaining environment, which had strong values, established rules and procedures that facilitated communication between buyers and sellers
Establishing programs such as Safe harbor to aid in disputes and to punish users who violate eBay
Cost effective and convenient trading
Strong community affinity
An intuitive user interface that was easy to understand, arranged by topics, and fully automated
It goes back to the vision that eBay's founder had in the beginning: eBay would create the environment and give users ways to interact. By focussing on creating a community of users rather than simply on finding ways to make money, eBay ended up making lots of money. According to survey, the average eBay user spends an average of one hour, 26 minutes and eight seconds on eBay (http://www.marketingcharts.com/direct/ebay-aol-benefit-from-increased-us-web-usage-12765/). In contrast, visitors to catalogue stores and other commercial websites might spend only ten or twenty minutes there.
eBay is able to maintain its dominant position as they are continually improving to become better. Their expenses are minimal compared to Amazon.com who hold stock and then have to package and post the stock themselves whereas eBay doesn't hold any stock. And all postage and item related costs are paid for by their clients.
Creating New Markets Through Service Innovation
For decades, since the evolution of internet the importance of services has grown steadily to the global economy whereas the importance of goods has declined. It's only natural, then, that companies are constantly seeking to provide better services, regardless of whether they are in a "pure" service business or in a manufacturing industry that must increasingly rely on its service operations for continued profitability. However, most improvements to service activities are incremental. Stores stay open longer; product makers establish websites with e-commerce functions; airlines, casinos and supermarket chains enhance loyalty card programs. These improvements are useful and indeed necessary, but they are limited in the kind of returns they can produce. Only rarely does a company develop a service that creates an entirely new market or so reshapes a market that the company enjoys unforeseen profits for a longer period of time. Among the rare companies, eBay is one of them. It has created new markets through its unique model of innovation. As for example in the online auction concept, eBay was not the first but it slowly became the dominant player. In the early 1980's CompuServe (nee MicroNET) and The Source were sponsoring auctions. Specifically, Comp-U-Card Online/Comp-U-Store held weekly auctions for consumer goods like the brand-new Sony Walkman in 1983, and CompuServe's first eBay-style automated online auctions were held in 1982. Due to limit use of the internet technologies and lack of awareness about the auction through internet, these companies were not much success. Later the trend changed, new technologies developed, and growing nature of the online business, eBay introduced its business totally focussed on service which led them to create success new markets domestically and globally.
Ansoff's growth matrix identifying opportunities for growth for eBay
Current
Products/ services
New
Products/ services
Current
Markets
New
Markets
1. Market penetration strategy
Try to get existing users to spend more
3. Product development strategy
Wireless
Develop sectors such as introduce car sales, boat, sales etc.
Fixed-price shops
Paypal: payment system
Providing commission on sales
2. Market development strategy
Attract new vendors such as large corporations
Develop international sites in significant markets such as Germany, Japan
4. Diversification strategy
Skype: VOIP
Enabling communication among community
EBay is one of the most successful e-commerce website in the World Wide Web. The strategic direction of the company is market penetration. The main aim of a market penetration strategy is to increase the market share by using the current products within the existing markets. This involved the actions and programs to be done in order to enhance the current core competencies or build a new one. In the case of e-Bay, the company focuses on improving the quality of their service in order to improve the reputation of the company compare with its direct and indirect competitors. EBay is focusing on the improvement of its service by application of updated and high-tech Information System, which will help to improve the visit of the customers, at the same time improve the quality of service, more importantly the security and safety of its online users. Beside that EBay has continued to innovate and connect people. The most important points in their innovation are acquisitions of PayPal in 2002 - an online financial service, and Skype in 2005 - an internet communication company. With these acquisitions, EBay provides customers with the most convenience methods so that buyers can make low cost contact with sellers easier and make all transaction done faster. Although there are several disputes that EBay is doing a real value chain, its characterization proofs that EBay performs a virtual value chain. It provides platform for trading on the internet in virtually market where it operates and the value of goods sold in this site is determined by auctioning of buyers. It performs as a self-regulating global economy.
Lesson to a new internet business from eBay
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Figure from www.ebay.com
On the usual e-commerce site, someone does a little shopping, picks out one or more items, and heads to the checkout area as quickly as possible. The things that eBay members can do other than buy or sell are:
Post feedback: Both buyers and sellers are encouraged to post comments in the feedback forum describing their dealing with one another. The need to establish and maintain a good reputation gets people involved with the site.
"Talk" to others in message boards: Antique hunters, collectors, and bargain hunters of all sort love to talk about their common interests. Users often meet and greet each other in the same spots on eBay, either in a weekly, prearranged chat, or at the same each day, just to say "hello" and share opinions about the news of the day.
Post secondary information: eBay sellers and buyers can create About Me pages to tell people something about themselves. Sellers can open eBay Stores. This gets them personally involves with the sales; it's not just a business, it's part of their daily lives.
In other words, loyalty, the love if finding a bargain, and the love of making some extra money are what keep eBay users returning on a regular basis, which makes eBay a lovely and a successful venue. It's the human touch that means so much on the auction site.
By implementing their business model, eBay employed three main tactics. First, they looked to build strategic partnerships. Second, they looked for customer feedback to constantly make changes and improvements. Finally, they monitored its internal and external environments for possible opportunities. By doing all of these things, eBay was able to adapt to the changing ways and keep their customers satisfied. To be successful eBay continue to mold and change their business model to satisfy its customers and keep the level of quality they employ to the highest degree possible.
eBay has created a one-stop-shopping experience that is appealing to large corporations, independent entrepreneurs, and individual buyers and sellers. They have created value through many facets of their business that appeal to their customers and differentiate them from the competition. The main ways that eBay differentiates themselves is through:
Variety of products offered
When customers visit eBay they can search for virtually any product. eBay boasts a category variety not matched by any competitor with over 27,000.
The eBay Community
eBay wants their customers to feel like they are a part of a community. This community feel gives customers the sense that they are branch of something and cared about. By showing the customers that their feedback, opinions, and feelings are important eBay has gained tremendous ground with their customers.
The eBay Website
eBay has created an auction and retail website that is unique and interesting. This creative site sets them apart from their competitors. The site is set up with many facets that reach a broad span of visiting buyers and sellers. The site is also entertaining and easy to use making it very appealing for online shopping and trading.
The eBay Brand Name
eBay was the creator of the online auction industry. When customers think of online buying the immediately think of eBay. This has given them a competitive advantage that sets them apart from other online auctions.
eBay's Global Reach
The global reach of eBay is not achieved by any other online auction site. For large corporations international selling and buying is done everyday. Even for an individual buyer or seller, having the option of searching throughout 150 countries with a span of 94.9 million users is very appealing.
Conclusion
eBay's compelling value proposition, their ability to create a new market using Internet technology, and their first-mover advantage, have been key factors that have contributed to the success of the brand, however, their ability to cultivate a distinct 'sense of community' has been the defining characteristic which differentiates them from other online auctions. As a result, eBay attracts a broader selection of buyers, which in turn attracts more sellers - the ultimate network effect - contributing to its strong lead and competitive advantage. Their focus on heavy users and targeted promotions, have been instrumental in building a 'quality' customer base, which has established eBay above other online auction communities. eBay has also faced difficult challenges in scaling the organisation fast enough, as they could not opt for a 'go slow' strategy.
