Analysis of PayPal's Business Model using Blue Ocean Strategy

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Marketing and communication
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Table of Contents
Introduction......................................................................................................................................3
Company overview..........................................................................................................................4
Red ocean.........................................................................................................................................5
Blue Ocean.......................................................................................................................................7
Business Model Canvas...................................................................................................................9
Four Action Framework................................................................................................................16
Conclusion.....................................................................................................................................21
Reference List................................................................................................................................22

Introduction
Business organisations adopt different types of strategy in order to function smoothly and attain
their business objectives during the stipulated time period. Business strategy helps companies in
determining the course of actions and the measures that should be adopted in order to achieve the
goals of the company in the most efficient manner. Strategies allow companies to determine the
resources and methods that should be used in conducting business operations beforehand so that
the successful implementation of the strategy allows the company to achieve their aim in a
smooth and efficient manner.
In this assignment, the chosen organisation is PayPal. The study analyses the business model of
PayPal by using a canvas to understand the key aspects of the business. The assignment
discusses the concept of the red ocean and blue ocean strategy in order to understand the strategy
adopted by PayPal. Four Action Framework has also been used to develop an understanding of
the measures that should be adopted by the company in order to align their business and services
with the industry standards. The framework helps in developing a new value curve for business
organizations. It will enhance the understanding of the measures that PayPal adopts and the
manner in which it can improve their productivity for the development of the business.

Company overview
PayPal is an American company that operates on a global scale by offering an online payment
service for the transfer of money through an online platform. The company has provided an
alternative to traditional ways of transferring money such as money orders and cheques. The
company processes the payment of commercial users, auction sites, online vendors etc, for which
the company charges a nominal fee. The company also offers benefits to their customers such as
password memory, one-click transactions, which has made the company popular among the
customers and attain a leading position in the industry.
The company was originally founded as Confinity in 1998 and X.com in 1999. The company
started their first public offering in 2002 and eBay became the parent company of PayPal. The
company has their headquarters in California, U.S. Peter Thiel, Elon Musk, Max Levchin, Luke
Nosek and Ken Howery founded the Company. The current chairman of the company is John
Donahoe while the CEO of the company is Dan Schulman. The division of the company consists
of PayPal Payments Pte Limited, PayPal Payments Pte. Holdings, PayPal Pte Ltd, PayPal Inc.
The company also owns subsidiary companies such as Tradera, iZettle, Xoom Corporation,
PayPal Credit, Venmo, Paydiant, Braintree (investor.paypal-corp.com, 2018).
PayPal allows people to pay others through account balances, PayPal Smart Connect, credit
cards etc without sharing any kind of financial information. The company has attained the
position of global leader in the industry of online payment solutions. The company has around
203 million accounts all across the world while the company operates in 202 countries
(paypal.com, 2019). The company has facilitated global e-commerce by overcoming barriers of
language, currencies, and distance. The company has been awarded more than 20 times from the
business community and internet industry for the excellent services they offer to consumers. The
company locates their customers at the heart of their business, which has allowed the company to
attain success and stand as a global leader.

Red ocean
Many companies while competing with rival companies in the industry adopt red ocean strategy.
However, before we decide on the strategy adopted by PayPal, it is essential to understand the
concept and different aspects of red ocean strategy. Red ocean strategy is completely different
from blue ocean strategy. The terminology blue ocean and the red ocean was coined by Renee
Mauborgne and Chan Kim in their global bestseller Blue Ocean Strategy in 2005. Red oceans
are referred to the various industries that operate and function in the known market area (Aithal
et al., 2015). This strategy is called the red ocean as their cutthroat completion in the active
industry, which makes the industry bloody red.
The strategy focuses mainly on competition in the industry among the different companies. With
an increase of companies in the market space, the competition among the rival companies
becomes fiercer in order to acquire a large share of the current limited demand. The quantity of
consumer demand does not change regularly but the numbers of the company are increasing in
the market. This has resulted in limited demand of the customers which changes sometimes but
there is no extreme change in the demand (Kim and Mauborgne, 2017). This makes the
companies compete in the market to get the largest portion of the consumer demands so that they
can sustain competition and ensure the development of their business by gaining a competitive
advantage over rival companies. The red ocean strategy divides the current finance of the
industry among the competing companies, which makes it a zero-sum game. Increase in the
number of companies in the industry not only increases competition but also decreases
opportunities for growth and high profitability. This strategy converts the products into mere
commodities and companies try to outperform their rival companies.
Companies use the red ocean strategy in order to focus on the current customers and cater to
them in order to satisfy their demands. They exploit the current demand for products or services
by concentrating on the tradeoff between cost and value. The companies have to choose between
providing value products at high cost to their customers or low pricing of their products and
services with a reasonable value in order to sustain in the industry. Companies align their
business operations with low cost or differentiation but the companies should seek every
opportunity in order to decrease their cost and adopt both low cost and differentiation to gain a

competitive advantage in the market. This strategy makes companies focus on the execution
process in order to increase their share in customer demand.
An example of the organisation that has adopted red ocean strategy is Ryanair, a European
airline operator. The company operates with a significant contribution to competition by
functioning in a saturated red ocean of airline business offering short haul flight services. The
company adopts red ocean strategy by reducing the cost of their services in order to provide no-
frills service to the customers. The company has adopted measures such as check-ins, online
booking, payment by customers for extra service, using secondary airports instead of main
airports, etc in order to reduce the cost of the services offered to the customers. The company
does not offer quality service or their services are not different from rival companies but offers
low cost. This makes it evident that the company chose low cost over differentiation for the
implementation of red ocean strategy.

Blue Ocean
Blue Ocean strategy is a theory of marketing that came into light in 2004 from a book that was
taken down by W. Chan Kim and Renée Mauborgne. W. Chan Kim and Renée Mauborgne were
professors at INSEAD. Blue ocean strategy is the process of adopting an innovation, that is,
innovating new features such that the product is differentiated and offering it for sale to the
clients at low cost. This marketing strategy shuns the competition that exists in the market. In
other words, it can be stated that the struggle to survive in the red ocean where cutthroat
competition among the organizations exists is conquered by the intrusion of blue ocean strategy.
According to Kim, it is required to adopt blue ocean strategy in cases when the supply of
products surpasses the demand of the products in the market. The strategy is applicable in many
industries and its application will increase with passing time.
The strategy developed by Kim and Mauborgne does not support Porter’s Five Forces. The blue
ocean strategy does not emphasize on winning the competition like Porter’s Five Forces but it
emphasizes on making the competition inappropriate, that is, adopting such strategies that so that
there does not exist any kind of business in the market that can compete with that particular
organization. According to Kim and Mauborgne, Porter’s Five Forces suggests ways of winning
the competition but does not suggest any means by which an organization can step out of the
competition but it leaves the organization to keep its struggle in the read ocean. The Blue Ocean
Strategy comprises of Four Actions Framework that is used to reconstruct the value elements of
the buyer. It believes in the construction of a new value curve and questions the management of
the organization on four topics namely, raising, reduction, elimination, and creation.
According to the marketing theory of Blue Ocean, imitation or copying would not help an
organization to win the competition or make another position in the market. Only innovations
can help an organization to create a mark or to create a new ocean for itself, competing ahead or
imitation does not serve the purpose. In order to make the competition irrelevant, it is necessary
to make the shift, that is, to shift the focus of the organization on a product that is superior of all
and the organization is able to generate new demand in the market (Kim and Mauborgne, 2017).
However, this strategy is not always successful but the theory is helpful for the organizations that
are struggling or are new in the market since it helps the organization to leave its footprint.

According to Mauborgne, it is advisable for the business owners to look at their business in the
way it is seen in the market. It will enable the organization to make such innovations according
to the demand in the market, thereby, aiding the organization to step out of the competition that
exists in the market. It is helpful for the organization to increase its profit margin.

Business Model Canvas
A business model canvas is a global standard tool that is used by companies of different size and
scopes to pivot, challenge, design and describes the business model of an organisation. It can be
used alone by companies or along with other processes and tools such as strategic execution and
management tools or value proposition canvas. Alexander Osterwalder developed the business
model canvas on the basis of his book Business Model Ontology. The model is a graphic
representation of the different variables to portray the values of the company (Joyce and Paquin,
2016). The canvas depicts nine sections that constitute the building blocks for an effective
business model of a company. It is used as a strategic tool to ensure the development of a
company by analyzing the business situation of companies. It helps business organisations in
improving their performance as it makes the chief aspects of business operations clear with the
visual aspect of the canvas. Companies can make decisions on the course of action and improve
their strategy and value propositions by considering the development in each category. It also
helps new companies in making clear and effective decisions beforehand (Meertens et al., 2012).
Business model canvas is effective and useful for both existing and new companies in the
market. The key components of the business model canvas in relation to PayPal have been
discussed in detail below:
Key Resources: Every company requires some resources in order to perform the different
business activities in a successful manner. These resources can be human, financial, intellectual
and physical. The human resource comprises of the employees of the organisation while the
financial resources refer to the flow of funds and income sources. Intellectual resources are the
patents, brands and other knowledge (Muhtaroglu et al., 2013). On the other hand, physical
resources comprise of assets like business equipment. PayPal has different resources such as the
platform of the company, big data, worldwide licenses, partnerships, dominant position in the
market, research and development team. The company operates in more than 202 countries all
across the world and caters to more than 203 million customers internationally. The company
uses their resources in an effective manner that helps the company is developing their business
and becoming global leaders.

Key Activities: The value proposition of a company can be understood in an effective manner by
developing an improved understanding of the core activities of the organization. The core
activities of an organization comprise not only of the production process but also of networking,
quality checking of the services of products, problem-solving attitude, etc. The organization
needs to understand the aspects that may increase the added value of the products or services for
the customers. The companies can exploit these aspects to build a better relationship with their
customers and overcome competition (Dudin et al., 2015). PayPal offers online payment service
to their customers with a 24/7 support to provide maximum customer satisfaction. The company
also conducts research and development activities to improve their services. Apart from these,
the core activities of the company include legal activities, marketing activities, contractual
agreements, IT system operations etc. The company manages their core activities efficiently so
that their business operations are conducted smoothly.
Key Partners: Partners are important for business organizations, whether it is an existing
company or a new company. Maintaining a cordial relation with the partners will allow the
company to use the combine specialization and knowledge of their partners in order to fight
competition effectively (Hong and Fauvel, 2013). Alliance with partners will also help in
determining the probability of maintaining a valuable relationship with the partners. The owner
of PayPal is eBay, who acquired the shares of the company in their first public offering in 2002
in 1.5 million dollars. The company also have shareholders as partners of the company. The
company has a partner program and enter partnership deals with payment providers, payment
hubs, banks, financial institutions, and third-party merchants. The company also have subsidiary
companies as their partners like Xoom Corporation, PayPal Credit, Venmo, Paydiant, and
Braintree. The company maintains a cordial relationship with their partners, which has helped
the company in becoming a global leader.
Value Propositions: The basic core of the company through which it exists in the industry in
order to meet the demands of the customers is referred to as value propositions. Every company
adopts strategies or measures that will ensure that their products or services are different from
the products or services offered by other company. This helps them in overcoming competition
in the industry (Zolnowski et al., 2014). Different factors such as quality, price, speed, service,
delivery conditions, brand image, design, customer satisfaction and experience influence the

value proposition of companies. In the case of PayPal, it offers a global online payment system
that allows people to transfer money online. It provides an electronic alternative to the traditional
method of transferring money such as money orders and checks. It has become a global leader of
internet payment organisations. The value proposition of the company has made it popular
among the customers and helped the company in gaining loyal customers.
Channels: Companies need to take care of different channels such as sales, distribution and
communication channels as it is through these mediums the company can ensure that the
customers are getting the products and services. Communication channels allow companies to
transmit their values and messages to customers. The sales channel can be online or offline or a
combination of both in order to reach the customers. The channels comprise of five stages such
as awareness about the product, purchase of the product, delivery, evaluation of the product and
the satisfaction after sales of the product (Dudin et al., 2015). Companies should ensure that each
stage is performed appropriately to make the channel effective. The channels of PayPal consist
of eBay, mobile application, company platform, partner programs, social media, website and
online advertising. These channels ensure that the company is able to reach their target
customers in various manners. The company ensures that the various channels are used
appropriately to conduct business effectively.
Customer Relationship: Customers are the heart of every business organization and it is
essential to maintain a cordial relationship with them. Customers have the potential to influence
the brand image and sales volume of the company so companies should adopt appropriate
measures to maintain a relationship with their customers (Maurya, 2012). Companies should
classify their customer base into different target groups as per their needs and accordingly serve
them to ensure that their needs are fulfilled to improve their customer experience. Business
organisations should anticipate the customer needs appropriately in order to serve them in an
efficient manner. This will ensure a stable and good relationship with the customers in the
present as well as in the future (Sinfield et al., 2012). PayPal maintains a good relationship with
their customers by making their services simple, affordable, automated and protecting their
privacy. The customers trust the company due to quick response and reimbursement for
unauthorized transactions.

Revenue Streams: Revenue streams along with the cost structure help business organisations in
developing a clear insight into the finance of the company. It helps the company in determining
the number of customers it will need to earn profits, the amount of revenue it requires to reach
the breakeven point etc. Organisation drive cost of their company through revenue streams.
Revenue stream comprises of advertising, sponsoring, licensing, lease income, subscription fees,
sales of products or services etc (Trimi and Berbegal-Mirabent, 2012). The revenue streams of
PayPal have helped the company in increasing their revenue to 3.68 billion Dollars in the third
quarter of 2018. The company gets a commission of 2.9% for every transaction that helps the
company in earning their revenue. The GAAP EPS of the company increased by 17% to 0.36
dollar while the non-GAAP EPS increased by 26% to 0.58 Dollar (investor.paypal-corp.com,
2019).
Customer Segments: Business organisations divide their customer base into different groups
and these segments allow companies to cater them in an effective manner to enhance customer
satisfaction. The company should identify the requirements and needs of the customers and
accordingly segregate their customer base. The company can provide better products by
improving the value attached to the product or services by the customer (Wallin et al., 2013). It
will allow the company to enhance customer satisfaction and it will consequently improve the
value proposition of the company. The different customer segment comprises of sellers such as
auction seller, business organisations and merchants. The company also deal with B2B, B2C,
and C2C, which allows the company to cater to all types of customers.
Cost Structure: Companies should maintain a clear estimation of the cost structure as it would
allow them to calculate the minimum turnover of the organisation in order to earn profits from
their business operations (Osterwalder et al., 2013). The cost structure considers different factors
such as profit advantages, variable cost, constant cost, economies of scale etc. Organisations
have to adjust their cost when they when the investments amount more than the revenue earned
by the company. For this purpose, companies often reduce their key resources (Clark et al.,
2012). PayPal needs to consider different cost structure such as legal aspects, customer
acquisition cost, staff payment, platform maintenance, and development to ensure that they
conduct business operations uninterruptedly.