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E-bay: Risk Management

Introduction

Businesses around the world are established in order to make substantial profits especially when they venture into international markets. Incidentally, engaging in trade in the various market environments comes with various risks as well as opportunities that the firm has to acknowledge. Carroll (2012) simply defines a risk as a threat that hinders a company in achieving its set objectives. Primarily, for businesses to make profits, they have to balance profitability and risk in increasing shareholder and firm value. This implies that businesses have to effectively manage the various risks involved in conducting the business. The various risks can be largely grouped into technological, financial, economic, environmental, industrial, socio-cultural as well as political and regulatory risk factors.

Business risk management involves incorporating various processes and methods in managing identified risks while seizing potential opportunities in accomplishing company objectives. The processes and methods identify particular trends and events that may negatively affect the business and their potential impacts while formulating a strategy geared towards addressing those risks. These processes are usually planned for before the establishment of the business where addressing and identifying the risks enable businesses to accomplish their objectives. This paper assesses the unique financial, political and regulatory risks among others faced by E-bay and its risk management practices as well as their effectiveness, interaction of risks with each other and proactive risk management measures that can be utilized by various firms.

benefits

E-bay is a global e-commerce platform that deals in three main segments that include marketplaces, payments and GSI which provide online services to individuals and merchants whether small, medium or large-scale. The marketplaces segment operates various e-commerce platforms including E-bay.com, Stubhub and Half.com among others. Payment segments offers payment and settlement services for merchants and consumers on and off E-bay websites and other merchant websites. The GSI segment provides an e-commerce suite for merchants operating in general merchandise such as sports goods, toys, apparel and marketing services among others. Risk management essentially begins by identification of the various risks before various measures can be put in place (Crouhy, Galai & Fark, 2006).

E-bay: Main Risk Factors

Technological Risks

Changes in technology are the main determinants that are used to assess a company’s future risks. Primarily, these changes are fuelled by other factors and changes inherent in the business environment including economic, socio-cultural and political among others (Girifalco, 1991). E-bay heavily relies on technology in attracting customers and considering dynamic changes in technology, it is facing fierce competition in the area of innovative technology. Availability of raw materials, as well as the fierce competition in the Silicon Valley, has led to innovation and creation of new and better technologies that competitors are embracing in a bid to enhance their business portfolios. This presents a great risk on E-bay as it relies on better software technology to attract customers from different market segments.

Socio-cultural Risks

Consumer purchase decisions are influenced by various social and cultural factors such as changing values as well as changes in fashions and preferences among others. In the case of E-bay, enhanced urbanization and generational changes precipitated by population growth have facilitated changes in values, preferences and fashions. Consequently, and with ties to technological changes, this has led to the utilization of the internet in online purchasing. The risks that E-bay faces include dynamic shifts in consumer purchases especially due to changes in fashions.

Additionally, population demographics have seen the youth access the internet which E-bay uses as the main platform for business transactions. The risk lies in continuous shifts and changes in values and other trends that will end up harming E-bay. Additionally, there is a risk of not adapting various products to consumer preferences in accordance to different cultural and social values as E-bay trades through the internet which is accessed by different people with different and changing cultural and social values and norms. Essentially, changes in the current social lifestyles and fashions, online shopping habits, the growth of the internet and international commerce are potential risks for E-bay.

Political-regulatory risks

Generally, political risk involves occurrences of any political events and processes that negatively affect conducting business. Political risks are divided into macro and micro political risks where macro involves all firms in the business environment while micro involves particular firms and industries. Political entities are primarily involved in making legislations that affect all aspects of society including business. In the case of E-bay, political risks that the business may face include regulations by various governments. New regulations such as the Stop Online Piracy Act (SOPA) are potential risks for E-bay as they can suffer liabilities since various users are involved in transactions on E-bay’s online websites.

E-bay faces the risk of regulations from web-based industrial regulatory bodies especially with many dynamic changes in new software technologies that are enhancing competition wars in web-based entities. E-bay’s strength and success in terms of international trade is fuelled by its ability to offer items locally and for reduced prices than those of local stores. However, this presents a business risk as various political and regulatory changes may lead to probable closure and blocking of the website. One of E-bay’s vulnerabilities includes a high risk for breaching of contracts especially when they outsource their key partners such as the GSI Company among others.

Economic risks

The various economic factors in a business environment represent risks for the company as they have the potential to influence profitability. For instance, when dealing in international trade a company faces risks involving foreign exchange where the value of a currency determines the firm’s profitability. For E-bay, fluctuations in foreign exchange rates present a potential risk where currencies stronger than the dollar and selling using the dollar currency means that the company may not record any profits.

The American market is recovering from the global economic crisis which negatively affected economies everywhere. For instance, banks could not lend money to businesses and those that did were charging high amounts of interest rates. In the case of E-bay, this crisis has led to a reduced number of people engaging in online shopping, what with the reduced monies and chances for employment. The various effects involved in an instance of global financial crisis such as inflation and lack of employment among others and the associated effects on economies and people serve as high potential risks for E-bay.

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Environmental risk

Environmental risks in relation to business activities generally arise from social concerns about the environment. Negative effects on public health and damage to ecosystems as a result of various man-made activities present a risk to various companies. Essentially, this becomes a risk in that if a company is perceived as causing adverse environmental effects that affect the public, it attracts criticisms from the public eventually leading to decreased consumer purchases. Additionally, it can lead to restrictive regulations being imposed on the company due to pressure from environmental lobbyists.

For E-bay, it faces an environmental business risk through its reliance on software technology providers who utilize varied technological hardware to produce the software. This is tied to disposal of materials used in creating the software and hardware that negatively affects the American public leading to regulations on those companies. This means that E-bay being a consumer of the technology is indirectly affected by those regulations leading to low technology products for E-bay which is bound to record low revenues. The risk is too indirect and cannot heavily impact on E-bay.

Industry risks

Industry risk assesses factors within the industry which affects a firm’s profitability and growth as well as the competitiveness of organizations in that industry. This incorporates almost all the other factors involving politics and regulation, the economy, socio-cultural and environmental factors, technological advancements and changes among others that are involved. In this case, the business is evaluated in an international or national context and looks at major trends affecting growth within the industry. Additionally, it looks at population growth and price inflation in assessing the opportunities and risks of businesses in the industry.

With many people utilizing the internet, E-bay faces a risk of new entrants in the industry further increasing the number of competitors and eventually leading to low profits. E-bay therefore will face lots of potential direct and indirect competitors in the industry such as Amazon among others that are predicted to rise in the industry. The power of buyers fuelled by lots of competitors also presents a risk for E-bay as they will have more bargaining power forcing businesses to lower costs and hence reduce revenue volumes.

Financial risk

Financial risks are assessed in relation to the firm’s ability in maintaining operational efficiency through adequate provisions of necessary finances which impacts the firm’s profitability in the short-term as well as in the long-term. Successful business operations require access to and control of funds which are sourced from different avenues such as banks in order to accomplish the company’s responsibility of increasing shareholder and firm value. As such, financial statements such as the statement of cash flows aid managers to access the financial health of an enterprise. Finances for business operations can be sourced internally or externally which come with their own risks as well as the associated impacts on the business.

With the potential entry of new competitors, E-bay faces various financial risks as it will probably require funds for differentiation strategies such as cost-effectively integrating and managing business ventures and acquisitions, which will require sourcing funds. E-bay’s ability in management of funding costs, credit risk and interest-rate risk associated with the Bill- Me-Later business and transaction loss rate in its Marketplaces, Payments and GSI e-commerce services businesses highlights the financial risks that it will be exposed to. Additionally, it faces the financial risk of choosing an inappropriate method to finance short-term finances needed to run the day to day operations.

The matrix below shows the probability and severity of harm expected as a result of the potential financial risks identified. The severity expected is highlighted by the bar marked consequences from insignificant to catastrophic while the probability is shown by the column on the likelihood from almost certain to rare. The likelihood and consequences thereof of the identified financial risks, that is, funding costs risks, credit risk and interest-rate risk are tabulated where the meeting between likelihood and consequences shows the highest potential for loss.

A firm’s financial health is measured by its standing on liquidity and solvency. As such liquidity ratios such as Current Ratio = Current Assets / Current Liabilities among others measure the short-term ability of a company to pay maturing obligations and service unexpected needs for cash. On the other hand, solvency ratios such as Debt to Total Asset Ratio = Total Liabilities / Total assets measure a company’s ability to survive over a long period of time by highlighting the company’s debt in relation to outsiders.

E-bay recorded 12,661,454 and 27,320,218 as total current assets and total assets respectively. Total current liabilities were 6,734,204 and total liabilities amounting to 9,390,339. Current Ratio amounts to 1.8/1 while Debt to Total Asset Ratio is 2.9/1. This indicates a better short-term debt paying ability and a relatively greater chance of financial risk in meeting long-term debt obligations. E-bay’s potential write-down asset is the land that they own which they want to develop but currently does not affect the business as it is being used although not optimally (E-bay inc., 2012).

Interactions in Risk Factors

As is evident above, the risk factors in the various categories affect and are affected by the other factors highlighting a distinct interaction between the factors. For instance, the potential decline of economic conditions in Europe and the United States which represent economic risks for E-bay will facilitate the formulation of various regulations geared towards enabling consumers to affordably access products leading to reduction of costs and hence revenues. The changes in consumer demographics where people between the ages of 15-40 years have embraced the internet have influenced many technological changes adopted by E-bay which reflects changes in society. The industry risk analysis on E-bay highlights the rise of numerous potential entrants in the industry a situation that is bound to be fueled by changes in technology as well as values, preferences and fashions and favorable economic conditions.

The financial risks of E-bay are also tied to the economic conditions as well as various regulations governing various aspects of the industry especially the Stop Online Piracy Act and involvement or association with criminal activities creating more potential for risks to be planned for and possibly incurred by E-bay. Potential political changes in other countries represent a risk for E-bay which influences and presents additional risks especially financially where the company has to institute changes in facilitating better and increased trade and revenues. These scenarios highlight the complexity of the potential risks that face E-bay as they interact with each other, one affecting and being affected by the other creating additional risks for the business.

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Effectiveness of E-Bay’s Risk Management Strategies

In minimizing potential risks, E-bay has requested Pay-Pal in various countries to place temporary holds on seller funds in various situations such as where sellers have a limited selling history. Additionally, it has implemented a new payment process where buyers can pay directly to newly registered sellers in various localized E-bay websites in various countries for purchased goods. This has not been quite effective as it has been met with dissatisfaction by various sellers. It has also shifted from its traditional auction-style and fixed-price listing format to the fixed-price format which will augment E-bay’s success on seller-discount programs encouraging more people to buy from E-bay. The firm also engaged in the amortization of intangible assets that they had acquired which enabled them in acquisition of Gmarket in addition to restructuring plans of various customer service facilities in order to improve the firm’s efficiency. Primarily, the business has made provisions for various future needs especially in areas of financing, investing and even in operations through various programs such as the commercial paper program among others.

As a result, potential risks that may arise as a result of these strategies includes the risk that there will be a dip in sales as the firm adjusts in restructuring various aspects of the business even though it is in the short-term. Sellers, being a major component of E-bay’s online platform may feel aggrieved by the changes being instituted as a result of E-bay’s efforts in minimizing business risks and are bound to find other online platforms to conduct business. E-bay faces a lot of potential legal risks especially with many legislations being instituted to curb fraud and online piracy, which creates more risks since E-bay is growing and therefore attracting more merchants who may not be aware of new restrictions.

Proactive and Holistic Risk Management Strategies

Chapman (2011) avers that risk management generally begins by establishing internal control by adhering to the risk management process that acts as a blueprint in managing business risks. This ensures that the firm is proactively and holistically engaged in minimizing potential risks that have the potential to harm the firm. Essentially, risk management is a structured approach where business risks are identified, evaluated and controlled and are usually formulated as company policy. Risk management is dependent upon formulation of a clear strategy that involves the following processes. First is the identification of the risks whereby it is analyzed and profiled in terms of likelihood and the consequences that would accompany those risks. This is followed by prioritizing the risks based on tolerance or acceptance of the risks in order to determine appropriate actions in reducing risks. The last step involves control of the risks where actions are built into various management plans while incorporating various monitoring procedures through quarterly and annual reports on the risk management measures (South Yorkshire Passenger Transport Executive, 2012).

Conclusion

Although, businesses cannot avoid all the risks, the identification, analysis of potential risks highlights a firm’s consideration of its strengths and weaknesses in balancing profitability and risks. As Franck (2012) asserts, when faced with risks a business can choose to avoid, assume, reduce or transfer the risks and the associated effects. However, a proactive and holistic approach is the best risk management practice as it anticipates potential risks and enables management to plan for the risks. E-bay has created programs and made provisions for various risks in its business model which satisfactorily will ensure that potential risks especially financial ones are mitigated before they can negatively affect the company. By formulating a risk management plan will enable E-bay to achieve its goals with all potential risks accounted for.