Electronic Commerce

Value Analysis, Quality Issues, and Internet Security Concerns

E-Bay: A Case Study

Art Madsen, M.Ed.

As the Internet, dubbed the "Information Highway", moves into its second decade of expansion, there has been a good deal of attention devoted to the booming electronic commerce sector in professional managerial journals. These journals have focused on the growing number of critical problem situations that are arising in the everyday conduct of business on the Internet.

Initially the Internet was used experimentally for purposes of exchanging data, correspondence and graphics; but, as its potential was tapped by major industry to promote products and services, new dilemmas arose and only tentative solutions were proposed. In the virtual absence of a recognized governing body, functioning like the Securities and Exchange Commission in the financial markets, the e-commerce industry, though partially governed by the National Institute of Standards and Technology (NIST), has sprouted in an essentially anarchic sense (Ghosh, 1998, 239). The ethics of Post-World War II business practices have given way to aggressive behavior, amounting literally to outright attacks and counter-attacks (Cartwright, March-April 2000, 32). This is clearly a situation deserving of elucidation.

Therefore, in this paper, an analysis of one highly successful e-commerce firm will shed light on the dynamic growth of e-commerce, the types of strategies emerging to protect and defend the interests of such firms, the value of web-based commercial operations, and measures used to ensure quality of products traded. Appendix I portrays many of these concerns graphically.

The firm selected for examination in this analytical paper, E-Bay (, provides insight into all of the foregoing aspects of commerce on the Internet and will serve to illuminate the current dilemmas faced by major traders in the hectic and ultra-competitive electronic arena. While this now ultra-successful e-commerce firm was created in an atmosphere of relative tranquility, the nature of transactions on the Internet eventually required sophisticated protection mechanisms and special measures to ensure the on-going viability of E-Bay’s reputation and profitability.

E-Bay began as an outgrowth of a romantic relationship between Mr. Omidyar and his fiancée whose collection of Pez candy dispensers, insignificant as it might have seemed at the time, gave birth to a concept that spiraled into multi-millions of dollars. However, as his e-commerce auction and trading enterprise developed, seemingly unsolvable problems accompanied this unprecedented expansionary cycle. E-Bay, technically referred to as ‘e-Bay’ with an unorthodox lower-case "e", generally solved these problems by out-sourcing its requirements to subcontracting firms. All credit card transactions, for example, have been out-sourced; and additional subsidiary services are being managed by subcontractors. E-Bay uses ORACLE software to process payments and has found this solution, as do most e-commerce firms, to be the most effective (Beale, 2000, 2). Yet, these are the mundane aspects of conducting business on the Internet. What really surges to the forefront, when studying the overall Internet business environment, are issues of quality, service, delivery and web-site design. All four of these parameters are impacted by innate Internet security problems.

Assuming that E-Bay’s objectives are those defined by Deming in his famous and widely accepted managerial paradigm, Total Quality Management (TQM), we can hypothesize that the below value-enhancing priorities of Mr. Omidyar’s business, excerpted from Hutton (February 2000), have led to continued success and competitiveness for his firm:

While these goals and priorities are praiseworthy, they must be injected not only into the 400 employee E-Bay operation based in San Jose, but also into the extremely hostile ambiance of Internet trading. Cartwright and Oliver, in their Journal of Business Strategy article (Jan-Feb 2000), concentrate their analytical efforts on how a firm such as E-Bay must cope with external forces attempting to foil their commercial efforts, and how network relationships can be resourcefully mustered to improve volume of traffic, turn-over of auctioned merchandise, and, hence, bottom-line profit.

During his years at Vanderbilt, Cartwright pondered the critical relationships between and among elements or components ever-present on the Internet. He identified six principal components, including E-Bay itself, and developed a conceptual theory of interaction among them. This relatively friendly theory, almost naively TQM in nature, must be complemented by another module incorporating the hostility and aggression he also perceived in most commercial Internet relationships. Critical quality indicators such as timely delivery, customer satisfaction, proper web-site design and security measures are all affected by the combination of both segments of the Cartwright paradigm, the amicable and the inimical.

The six components illustrated in Cartwright and Oliver’s referenced article are displayed on Table I, below, along with relevant descriptive data, slightly adapted for our analytical purposes. It is to be noted that there are both pleasantly agreeable and fundamentally hostile interactions among these components, depending on which portions of the various web-sites are activated by the potential customer and for what purposes.


The key firm complete with principal and subsidiary auction sites, credit facilities, policy statements, plus interactive applets for all functions.


Friendly Referral Entities such as Yahoo, AOL and Full Fledged Search Engines, but only when activated appropriately, i.e. in E-Bay’s direction, by potential customers.


Once solidly anchored into E-Bay’s site, all buyers and sellers constitute the customer-base.


Banks, shipping services and ancillary entities supporting E-Bay are included in this classification.


Computer Hardware and Software Firms, Sophisticated High-Capacity Servers, Network Providers and Technical Support Groups.


Unfriendly Auction sites, inclusive of Amazon and Yahoo, plus Traditional Non-Electronic Auctioneers advertising on the Net.

Source: Adapted from Cartwright and Oliver, 2000, 27.


These six entities are subject to various degrees and types of interaction, resulting in commercial traffic that is usually uninterrupted and unimpeded, once the customer is securely anchored into E-Bay’s Auction Site. However, as noted above, there is potential for ‘mis-routing’ customers away from E-Bay at the various points of entry, such as Yahoo, where competitive auction services are available. This is simply passive competition, as mentioned earlier, and does not substantively impact E-Bay’s traffic. Such competition is expected on the Internet in the auction field, as in other sectors of e-commerce.

E-Bay, according to their own Senior Director of Communication, Kevin Pursglove, quoted in Beale, is enjoying a level of approximately $8 million gross auction turn-over per day; whereas, Yahoo and Amazon, respectively, are grossing on their auction sites only $480,000 and $300,000 per day (April 2000, 3). In spite of the passive re-routing potential represented by Yahoo and Amazon, therefore, E-Bay’s reputation is funneling most auction-oriented customers toward its site. What then are E-Bay’s main concerns about security? In what ways can the integrity of their elaborate site be impacted negatively by consciously aggressive competitors? And to what extent are TQM sensitive criteria, such as quality, delivery and web-site design, affected by these actual or potential threats? For meaningful insight and plausible reactions to these crucial questions, it is necessary to turn once again to Cartwright, but, this time, with reference to his subsequent article published in the March-April 2000 issue of The Journal of Business Strategy (30-35). Here, in fact, he speaks directly of "supply chain interdiction and corporate warfare" on the Internet.

Cartwright implicitly acknowledges that the on-line auction market, though vast, is finite and is the object of severe competition among electronically based auctioneers. Conflict erupts among them and defensive and offensive strategies must be devised merely to survive. These are not corporate strategies in the traditional sense but rather, he claims, are "operational" in nature (Cartwright, March-April 2000, 31). Innovative thinking must be applied to defend and attack much like in a game of chess. Unfortunately, ethics are apparently flung by the wayside as cyber-competitors attempt to increase market share. Within this context, E-Bay, recognizing that "trust and confidence" are of prime importance to their clientele, are also devising ways of enhancing their own reliability, sometimes even by disrupting the ploys of their adversaries (Beale, April 2000, 2). E-Bay astutely designs its primary and subsidiary web-pages in order to discourage inter-linking to competing sites, and avoids any publicity detracting from its own activities. It projects an image of quality and personal service, complete with a customer assistance capability. In the negative sense, E-Bay projects subtle criticism of its closest competitors, such as in its E-Commerce interview with Matthew Beale (April 2000), when E-Bay disparages Yahoo and by quoting shockingly low figures.

Yet, Yahoo, for example, is equally ingenious in the promotion of its various offerings and frequently snares potential E-Bay customers, and others, by luring them during the initial surfing sequence. Ghosh, in his voluminous work entitled E-Commerce Security (1998, 109-110), describes how this "web spoofing" strategy works. By inserting links on a Yahoo entry page that lead deeper and deeper into Yahoo’s system, the ordinary surfer soon loses his or her original E-Bay thread, or intent, and is ensnared in an attractive realm of similar Yahoo offerings.

Casual inspection of the E-Bay site, however, indicates that they seem not to be engaging in similar "deceptive" practices, if Yahoo’s initiatives can be thus classified. Cartwright in both of his previously cited articles seems adamant that an e-commerce firm that intends to survive must employ active, rather than passive, strategies to compete viably in this volatile market place. E-Bay may benefit, therefore, from rethinking its overall strategy. It is important to note, however, that E-Bay’s figures reveal phenomenal growth and dynamism. Could Cartwright be wrong? Is there more to be gained from an external image of integrity and honesty on the Internet than Cartwright’s assertions would seem to imply? This dichotomous strategic stance (Ebay’s ethically pure success vs. Cartwright’s emphasis on attack-defend modes) forms the subject of much discussion among Internet specialists in this still blossoming field.

We have examined the tensions and counter-tensions inherent in e-commerce using E-Bay’s hands-on empirical experience as a basis for our analysis along with Cartwright’s well-respected position as a contrasting backdrop. Yet, both E-Bay and Cartwright, in addition to Ghosh (1998), seem to agree on the creation of "value" on the web and what factors determine value both from the individual customer’s perspective and from the financial markets’ standpoint.

A single site, operating independently, is a useful addition to the Internet, but does not embody tremendous value. If it is inter-linked in what Cartwright and Oliver refer to as a "web alliance", it becomes intrinsically more valuable as a tool to the targeted customer-base (January-February 2000, 22). By uniting the talents, technical and intellectual, of several supportive entities, improvements in underlying concepts and designs are forthcoming. Such modifications lead to increased profitability, exposure and, hence, value to customers. It is by forging such friendly links that creation of value occurs. E-Bay has capitalized on this value-enhancing effect internally more than externally; while the opposite may be said to be true of AOL or Yahoo.

The cyber world being what it is, there are also a number of more complex concepts that apply to the notion of value. By sequencing in a lateral sense several web-surfing activities or options, a ‘value chain’ is constructed. Whether this chain adds value, or complicates processes and detracts from overall market appeal or profit, is the subject of analysis in a newly identified field known as "value system analysis." (Cartwright, Oliver, 2000, 23). By analyzing components of the chain, a specialist can determine the innate underlying value of a cyber-business, its likely success or the degree of its appeal whether to the public-at-large, or to a highly specialized sub-section of the market. It is certainly one thing to order a new Pontiac over the Internet, and another to indulge in a refined search for elusive information. Information is as much a ‘product’ on the Internet, however, as the Pontiac. Giving the consumer a choice, based on an information data-base denoting the selection of products or services available, is an extremely important cyber-function, adding discernable value to the site. E-Bay has capitalized on this recognition.

Information. As can be readily appreciated, is a commodity difficult to predefine. Value Chain Analysis does not always apply to the blurred boundaries involved in identifying and delimiting information. For this reason, Cartwright and Oliver speak eloquently of another technique for looking closely at the inter-linkages and web-structures of information-based services (January-February 2000, 24). This tool examines the inter-relationships among value systems. Value cluster analysis (VCA) is a tool applied specifically to the elements defined previously on Table I, above, and focuses on all activities in the core of a given cyber-firm or firms. It has become more popular as the degree of complexity of site-interaction increases. VCA, according to Cartwright, is as versatile as it is revealing and can be used to unearth critical data concerning e-commerce sites, large and small.

In the case of E-Bay, which is a highly information-sensitive service, VCA calls for a four-step process, essential elements of which are portrayed below, as readapted from Cartwright and Oliver (January-February 2000, 24-27) whose insights into this emerging analytical process are probably foremost in the existing literature.

Collect Information on E-Bay’s Organizational and Business Model: SEC Records, public records, on-LINE data.

Identify E-Bay’s Internal Activities: Auction Data base, Billing and Collection, Etc.

Pinpoint E-Bay’s Customers, Suppliers and Support Complementors: I-Escrow, AOL.

Graphically Represent Key Links and Relationships Among Elements on Table I.

Table II

The information gathering process, the first analytical step, is of paramount importance since if errors are made in identifying basic data, the impact of such misconceptions will be felt in the following stages of analysis, decreasing accuracy and distorting the portrayal of the firm. Stage two, that of examining E-Bay’s internal activities, enables the analyst to zero in on some of the strengths and weaknesses inherent in the model, and to estimate future potential for earnings and stability, especially useful for finance analysts. The third step or stage of analysis assesses the nature and degree of interrelationships among all components of the equation, with emphasis on striving to determine the intrinsic market or commercial value of these linkages. The competition is assessed and evaluated here, as well. To illustrate what seems to be happening within and around E-Bay, a graphic representation is developed for purposes of "seeing" what seems to be occurring. Attempts by E-Bay itself, or by competing firms using VCA methodology, can then be made to replicate successful initiatives and to avoid those proving to be unprofitable or counter-productive.

It may be valid to inquire as to how inadequate security affects underlying value of a given web-based service or product within the context of VCA assessment. Indeed, faulty security can seriously impact reliability, acceptability and confidence factors, decreasing value measurably. Such a factor within E-Bay, for example, would most likely be part of VCA’s Stage Two internal procedural process. VCA theorists recognize that safe and secure transaction processing, known in the field as ‘TP’, is an indispensable condition for achieving ultimate success in e-commerce. All TP operations require, according to Kalakota and Whinston, two types of security services, namely authentication and authorization (1996, 226). This applies, of course, to E-Bay’s electronic transactions, as well. If both phases of the transaction are adequately ‘securitized’, no danger to client confidentiality or credit-card security is possible. This, at least, is the theory since unspecified specialists have told all of us, at one time or another, that everything on the Internet is subject to invasive maneuvers.

The quality of services provided by E-Bay is significantly affected by variations in the above parameters. Direct allusion is even made to the frequency of down-time and on-line outages by an E-Bay executive in a published interview (Beale, April 2000, 2-3). So, it can be inferred that massive swings in the timely delivery of auction information, buyer-seller communication and other critical phases of E-Bay’s business are occurring. Among such major quality issues, therefore, (1) down-time, (2) internet security, and (3) intermittently flawed support services figure prominently. Examination of their impact on customer confidence and profitability would seem suitable since actual and perceived value is dependent on these vital parameters.

In order to ensure that quality of service is achieved and then maintained, even during the phenomenal growth periods experienced by E-Bay, it is indispensable to employ specialists, whether managerial or technical, who know how to implement change. To guard against criticism resulting from boredom, stagnation, decay or dissatisfaction, upper echelon managers within E-Bay, and other firms, must realize that quality is not finite. In fact, it's a concept which should apply to all functions at all times in a perpetual cycle of monitoring and control. This is pointed out in Ho (April 1999, passim), when he states, "The only constant is change", and the quest for quality must be on-going and continuous, often encouraging fresh and spirited innovation.

With constant change, exploration of new possibilities and solutions, E-Bay’s site, complex as it currently is, can maintain its vigor and dynamism, attracting a broader customer base in spite of its recent insistence on a valid credit card prior to engaging in sales and purchases on its site.

If E-Bay, for instance, were to reduce its reliance on Java-scripted Applets, and move more heavily toward a purer form of e-commerce, they could improve quality, safety and reliability of service to the existing customer-base, consisting of millions of members. This concept is introduced briefly in CNET’s posted explanatory material on e-commerce (April 2000), and has been introduced successfully on other sites, resulting in quality and site-performance improvements. It is safe to assume, for our purposes, that web-design professionals employed by E-Bay understood, years ago, the fundamental security and quality issue at stake and have been consistently improving the site as new technology becomes available.

Quality of service from E-Bay is one thing; quality of merchandise peddled for sale on their site by unknown parties is, of course, quite another. By adhering to strict member guidelines and by enforcing them through a system of penalties, E-Bay can ensure to some degree that their customer-satisfaction quotient remains high. Their well-reputed I-Escrow feature (involving a prepaid member account containing unspent funds awaiting purchases to be made), and its refund policy, similar to the Thai Gem site (, make smooth and honest transactions possible for customers.

By referring to the information presented in this paper, and to the sources from which it was derived, it should become possible to arrive at valid conclusions concerning the e-commerce firm under review, of course, but also concerning the much broader spectrum of e-commerce activity on the internet. The topics alluded to above, namely net security, quality, web-design, e-commerce strategies, and various types of value analysis permit the newcomer, or the seasoned internet consumer, to assess the direction, objectives and potential of the e-commerce industry with respect to specific sites, such as E-Bay. Similarly, a vast array of similar sites offering merchandise across the proverbial board also fall within the purview of the surfer who, aware of the principles and factors set forth above, is in an informed position to determine the site’s relative virtues.

The bottom line, as Ghosh (1998) reminds us in the Preface to his book, is that we cannot rely on the innate honesty of the people with whom we may be dealing on the Internet, whether they are established firms or anonymous entities. All business activity on the internet, he points out, is subject to possible criminality:

"The mere fact that business is being performed online over an insecure medium is enough to entice criminal activity to the Internet." -- Ghosh, 1996, xi

However, by examining closely the security features of selected sites, as well as the policy statements of those sites, and by being theoretically and empirically prepared to cope with the uncertainties mentioned earlier, the initiated e-consumer can profit greatly while substantially minimizing risk.


Beale, M. "E-Commerce Success Story: E-Bay ", E-Commerce Times, April 2000.

Cartwright, S. "Supply Chain Interdiction and Corporate Warfare", Journal of Business Strategy, March-April 2000.

Cartwright, S. and Oliver, R, "Untangling the Value Web", Journal of Business Strategy, January-February 2000.

CNET Web ,"Ten Questions", April 2000.

E-Bay Web Site:

Ghosh, A. E-Commerce Security: Weak Links, Best Defenses, Wiley Computer Publishing, New York, N.Y, 1998.

Ho, S., "TQM and Organizational Change", International Journal of Organizational Analysis, April 1999.

Hutton, D. "Understanding and Implementing a TQM Approach", David Hutton and Associates, Ottawa, Canada, 1999.

Kalakota, R. and Whinston, A. Frontiers of Electronic Commerce, Addison-Wesley Pubishing, Reading, Mass., 1996.

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