ebay: a blue ocean industry eBay -- a Blue Ocean Industry

In 1995, the same year that Craigslist was born as a mailing list for announcing local events, Auction Web entered a market without competitors. A software engineer by trade, company Chairman Pierre Omidyar wanted to create a simple system for online trading of goods ("Meg," 2005). His wife, who had an interest in trading Pez candy dispensers, was one of the first customers. In three years time, trading was skyrocketing and Meg Whitman, from Hasbro, was hired as the CEO. Later in 1998, an initial public offering (IPO) made eBay a public company. Share value climbed steadily until the 2004 recession, as shown in Figure 1.

eBay Share Price

Source

The Economist

, June 9, 2005A company like eBay could not exist without the Internet, nor could it have grown so exponentially fast. In 1995, e-commerce was a twinkle in the eye of the denizens of California's Silicon Valley. Today, large and small businesses flourish on the Web. Barriers to entry are low and competitors seem to spring daily from the ether. Survivors of the dot com bust operate now in the company of a billion users across the globe ("anniversary," 2005). The reasons for the success of these businesses are the same reasons why eBay succeeded from it conceptualization, and survives today: Agility, flexibility, and an inherent willingness to listen to customers.

Online businesses change as quickly as the technology, and the behavior of customers change in concert with the technology. Doing business on the Internet means having to remake business over and over again. Internet businesses need to be agile and have a beginners' mind -- a Zen orientation that allows one to listen in ways not previously conceptualized and to learn deeply. For starters, eBay has not been just an auctioneer for some time now. But, in 1995, that is what they were -- an idea in an uncontested market that didn't really know what it wanted to be when it grew up. In fact, the company was focused on the immediate needs of special interest traders. Those needs dictated the start-up's mission and structure. As it turned out, the customers have always driven the evolution of eBay.

There are six conventional boundaries of competition, as outlined in the blue ocean strategy. Consideration of these boundaries helps a company to move from competing within to competing across (diverging and differentiating). The conventional boundaries of competition are: Industry, strategic group, buyer group, scope of product or service offering, functional-emotional orientation of an industry, and time. The blue ocean strategic analysis guides a company through each of these boundaries of competition in order to develop a value innovation.

Differentiation. How do you know a blue ocean company when you see one? The first clue is differentiation. Blue ocean strategy starts with the premise that a company should strive to differentiate itself from its competition -- not by focusing on doing the same things as its competitors, only better. But doing what competitors are not doing, and doing that better than anyone in coming into the market in the same way can do. In other words, being a better copycat is not the goal. A different framework is called for, though it can use existing framework as scaffolding. Blue ocean strategy is not about invention, but it may be about innovation, and it is definitely about reconceptualization and preparing to preempt future imitators. Figure 2 shows the four actions framework that is at the heart of blue ocean strategy formation.

At its conception, Auction Web was an innovative solution for hobby specialty traders. The forms that hobby trading took prior to Auction Web were cumbersome. Ads had to be placed in newspapers or trade publications. Hobby shows or trade shows had to be attended. Hobbyists had to trudge through flea markets or garage sales. Auction Web brought all these disparate players together, and in the process, created a community of like-minded hobbyists -- all online. It had never been done before, and it all started with a weekend spent writing code.

Value innovation. When a company can substantially differentiate itself from competitors and do so at a lower cost, it has created something known in the blue ocean vernacular as value innovation. The innovation has to generate market value that benefits both the company and the customer. It does this by eliminating or reducing services or products or features that are less valued in the market. Auction Web addressed many of the pain points of hobby traders in one fell swoop. Face-to-face trading was no longer necessary, and where it was still valued in the market, it could easily still take place. The kind of trust that is established through regular trading among hobbyists known to each other simply moved online. Any expenses associated with trading that were not directly related...

Suddenly trading could be done with a series of click of the mouse. Gone were the phone calls, the car or airplane rides.
Four Actions Framework and Eliminate -- Reduce -- Raise -- Create Grid.

The four actions framework is intended to help reconstruct customer value elements in order to formulate a new value curve. The four actions analysis helps to balance out the tension between differentiation planning and the constraints of maintaining low-cost as a competitive strategy. The four key questions are meant to challenge the logic of both the industry's strategy and business model. As there were no existing electronic auction and trade systems at the time of the Auction Web start-up, the four action questions produce answers that reflect the cumbersome platforms for transactions that were characterized by physical and temporal limitations which would not be strategic issues for an online system.

Figure 2. The Four Actions Framework

Eliminate

Raise

Which of the factors that the industry takes for granted should be eliminated?

Physical nature of transactions that require contacting newspapers, periodicals, and trade show organizers. Associated travel time and expenses.

Which factors should be reduced well below the industry's standard?

A sense of community by facilitating contact between like-minded hobbyists.

Reduce

Create

Which factors should be reduced well below the industry's standard?

Wait time associated with transactions. Difficulty of making comparisons when shopping for items.

Which factors should be raised well above the industry's standard?

The speed, ease, and security of transactions.

A platform that fosters review of a large number of items of interest to hobbyists or auctioneers.

The eliminate -- reduce -- raise -- create grid takes the four actions framework to the next level by identifying actual outcomes for which actions will be developed and refined. Figure 3 shows examples of these action outcomes for eBay.

Figure 3. The Eliminate -- Reduce -- Raise - Create Grid

Eliminate

Raise

Physical hassles to trading and auctions. No phone calls, no travel expenses. The time consuming placement of advertisement.

Sense of community and trust through ease of access and communication. Ways for buyers and sellers to rate transactions thereby increasing trust and a sense of community.

Reduce

Create

Buyer waiting time for responses from sellers. The anonymity of classified ads. The difficulty of comparing prices for like items across different markets, or outside of local markets. easy, with the capacity to comparison shop.

Immediate access to an extensive array of collectible items and auction lists of items.

A platform for transactions that is quick, easy, and secure.

The strategy canvas is a diagnostic tool and an action plan framework that is used to generate a blue ocean strategy. Figure 3 shows the strategy canvas for eBay against two of its competitors: Classified ads and trade shows. eBay ranks high on many of the attributes on which classified ads and trade shows simply cannot compete. Transactions are different with eBay than any other form that customers use. Speed of transactions, relative ease of transactions, and cost to transact are all positively represented by the eBay online method of auctioning and trading. Trade shows compete effectively with eBay on personalization attributes. Because trade shows require in-person and face-to-face transactions, they will seem more familiar and trustworthy, particularly to repeat shoppers and sellers who frequent specific trade shows. Though eBay will no supplant trade shows, it is highly likely that trade show hobbyists will rely on eBay for many transactions and may, in fact, bring items purchased on eBay to the trade shows for reasons of community, as well as trade.

Figure 3. Strategy Canvas

Good Strategy.

Every effective strategy must include methods for sustainability. eBay rose to the level of success that it has displayed for so many years because it allowed the customer to sit in the driver's seat. eBay continues to listen to customers and has benefitted in terms of brand affinity, brand loyalty, and brand equity. Customers have also helped drive eBay to diversity; the ultimate purchase of a portion of PayPal is a good example of this. Three fundamental characteristics of good strategy are considered when a company engages in a blue ocean strategic analysis: Focus, divergence, and a compelling tagline.

Focus. The value curve can help the company avoid attempting to work on all the key factors of competition…