A Comprehensive review of The Alibaba Group

A Paper Presented in Partial Fulfillment

Of the Requirements of

The Robert Kennedy College, E-Business course June 2011

Abstract

This case study documents the example of how a small Chinese company which originated from

humble beginnings can eventually make it and compete successfully on the global electronic and

economic market. The case study looks at The Alibaba Group strategies for success in the

complex world of online trading through its visionary leader Jack Ma.

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Introduction

The Alibaba Group of companies was founded in 1999 by its visionary leader Jack Ma and a

small group of his friends. Alibaba.com limited is the global leader in business-to-business

(B2B) e-commerce and is the flagship of the Alibaba Group. Base in Hangzhou, Alibaba Group

is a many to many e-market place that brings together millions of buyers and seller from around

the world who want to do business with China. The Group provides online marketplaces through

Alibaba.com which is English language website, hosting an international global trade

marketplace. This website serves small and medium-sized enterprises (SMEs) in the international

community.

A broad range of products and services are offered at Alibaba.com to both suppliers and buyers.

Basic features, such as standard supplier store fronts, product listings and communication tool

such as e-mail alerts, discussion forums, news and alerts are available for free. Paid membership

packages are also available for verified suppliers. The business model adopted by Alibaba.com is

geared towards helping vital, but disadvantaged, segments of China economy with simple and

efficient internet solutions.

Alibaba.com.cn is the Chinese-language version and this business-to-business marketplace

promotes trade among the domestic china. Alibaba.com.cn boasts more than 31.6 million

registered users. Alibaba China brings together a trusted community of members who meet

regularly to chat, search for products and do business online. Like its international counterpart,

customers pay annual subscription fees for membership, which entitles them to post trade offers

and products online.

In addition the Alibaba Group owns and maintains the following marketplaces:

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Yahoo.china.com, this is a leading Chinese-language portal website that offers search tools, an

interactive community, and one of the most popular e-mail services in China. It also acquired

China’s leading classified listing website, Koubei.com.

Taobao.com, this is China largest internet retail site with 100 million registered users and more

than 1.5 million sellers have open store on this site. The site provides a platform for both retailers

and individuals to see virtually anything to Chinese consumers.

Alipay.com is China’s leading third party online payment platform. It allows individuals and

business to transact payments online in a safe and secure manner. This online payment facility

assisted merchants worldwide to sell directly to consumers in China

Alisoft.com, this company offers an internet base business management solution. It develops

markets and delivers internet base business management software such as e-mail, customer

support, information management and basic financial management tools to SMEs in China.

The Analysis and Companies Portfolio

In 2008 and 2009 China experienced rapid growth in the e-commerce markets. During this time

The Alibaba Group was had established a leadership position with its business-to-business

platforms. This group of autonomous companies was able to grow revenues by 24% to $636M

and their assets by 7% to 5.3b in just six months from December 2008 to June 2009. However,

its founder was faced with a very difficult challenge on how to bring Alibaba’s businesses to

their fullest potential.

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The fist challenged was if to maintained the competition among the subsidiaries or bring them

together. Secondly, leave them as separate entities but foster collaboration among them.

In 2009 The Alibaba Group had nearly 17,000 employees. Approximately 70% worked in

Alibaba’s B2B arm covering sales in small business in over 50 cities in China. The other

business in the Alibaba Group did not depend largely on sales teams but rather more head counts

in engineering and customer service in the Case of Taobao and Alipay. In this case I believe that

Jack Ma would have recognized the importance of good customer service and customer loyalty.

The Alibaba group of companies had experience rapid membership growth to the tune of 2.5

million and 14 million registered users in its international and Chinese domestic marketplaces

respectively. Therefore his companies needed deploy significant resources to attract new

customer as well as retaining existing ones. Customer acquisition and retention is a critical

success factor in any e-commerce business. (Electronic Commerce, Efraim Turban, 2010, p154).

Alibaba’s B2B Marketplace

Jack Ma was an English teacher who glimpsed the power of the internet during a trip to the U.S

as an interpreter for a Chinese economic delegation. After typing the word “China” into a portal

search engine and receiving no result he was inspired to leave the delegation and setup an online

directory call “China pages. However he faced constraints in moving China Pages forward as

China infrastructure was not quite ready for inline commerce.

In 1998 Ma joined a company established under China’s Ministry of foreign Trade and

Economic Cooperation (MOFTEC) which was mandated to help Chinese companies adopt

“Electronic Commerce. However Ma did not agree with the strategy of “electronic data

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interchange (EDI) favored by his superiors. As a result Jack Ma left the government job in 1999

to form Alibaba. This company filled the void for over 40 million small Chinese businesses who

operated in fragmented markets, with limited access to communication channels and information

sources and had no evaluation tool to access the trustworthiness of their trading partners.

Alibaba.com started as a simple trading platform designed to help connect small Chinese

manufactures with buyers, such and retailers, trading companies and downstream manufactures.

This intermediary company started as a pure information portal but then move to become the

leading trading exchange in China. While it offered free basic services to registered members it

migrated about 1% of its users to the value added of the international gold supplier program and

China trust-pass membership program which provided subscribers with enhanced online

storefronts, prioritized listings for increase exposure to buyers, company profile authentication to

increase buyers confidence and real time performance analysis and escrow payment services.

By improving on its product offerings and service delivery Aibaba operating profit grew by 48%

to RMB 1.9 billion and added 10.5 million registered users and 1.7 million storefronts in 2008.

Alibaba also gained revenue form it reverse auction in keyword bidding and advertising. Jack

Ma also believed that Alibaba would derive revenue in the form of commission from stable

transaction volume via bulk discounts through the approach of Citibank and UPS.

Taobao

In 2003 Taobao was launched as a business-to-consumer (B2C) and a consumer-2-consumer

(C2C) platform for retailers and individuals to sell good to Chinese consumers. To survive this

company was to compete directly with eBay who already had 85% of the Chinese online market.

Taobao offered its services for free to entice Chinese consumers to come online. By 2007,

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Taobao had taken 82% of the Chinese market, which eroded eBay’s market share down to 7%. In

2008 Taobao introduce search engine advertising service called Zhi Tong Che. This popular

service let sellers bid for keywords in exchange for preferential ad rankings. This was done

through the use of a pay-for-performance contract, therefore sellers only paid for their bids if a

customer actually clicked on the advertised product. With 2 million individual sellers and

merchants on Taobao this would be a natural base to make great revenue and in the second half

of 2008, Taobao broke even on the strength of revenues for Zhi Tong Che.

Alipay

Alipay was launched in 2004 by Taobao. This company facilitated payment settlements on

behalf of consumers until purchased good are delivered. Consumer trust is fundamental to

successful online trading; it is considered the currency of the internet (Electronic Commerce,

Efraim Turban 2010, p157). Thus Alipay would have been conceptualized to build consumers

trust when dealing with business in through Taobao. In 2005 Jack Ma separated it from Taobao

and made it an independent business unit. In August 2008 Alipay reached a peak of $66 million

per day and its users account had exceeded 100 million. By the end of that year Alipay had

gained 50% of all online payments in China and executed 4 million transactions per day. Alipay

is now China’s leading online payment platform. It provides a simple, secure and speedy way for

millions of individuals and businesses to make and receive payments on the Internet. As of

December 2010, Alipay had more than 550 million registered users and facilitated around 8.5

million transactions daily. The company’s ambition is that by the end of 2011 to reach an annual

transaction volume of 1 trillion yuan and top pay pal to become the world’s largest payment

firm.

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Selected other Business

In 2005, China Yahoo was purchased from Yahoo! Inc. China Yahoo! was one of the leading

Chinese-language portals offering search, email and an enhanced focus on entertainment content.

China Yahoo showed poor growth in its market of the keyword search market. Therefore in 2009

China Yahoo eventually shut down its 3721 operations.

In early 2006, Alibaba began incubating a new company called Alisoft. This company was

created to supply small business with affordable Enterprise Resource Planning technology to

include systems like customer relationship management, inventory management and financial

management. The systems should bring major benefits to the 40 million small businesses who

were Alibaba’s clients. The ERP benefits should include the following:

Buyers can reach more vendors, producing from more competitive bids and lowering the cost of

products and services purchased. Sellers and vendors can widen participation in government

contracts. It increases the potential for substantial yearly savings to buyers. It allows for faster

product/service look-up and ordering. ERP systems also provides fast access to detailed accounts

histories, providing more abundant information and improved planning and analysis (for buyer

and sellers). Linking budget systems to payroll, accounting, control and legal personnel and other

departments, allowing nearly instant data exchange and ensuring such information is constant

and uniform across the board. It can provide easy access to trend data; financial information from

previous years can be quickly combined into an up-to-date long-term view. ERP system can

empower small business to closely measure their performance in order to achieve desired results.

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In January 2007 Alisoft had demonstrated it market viability and had reached critical mass and

Jack Ma transferred it out is incubation and had the company reporting directly to him. By 2009,

Alisoft had 40% of the Chinese EPR software market and employed 500 professionals. However,

Jack Ma recognized that the business model faced several challenges. For example, how to find

ways to encourage cross business opportunities and reduce conflict among Alisoft’s and Alibaba

B2B sales teams?

As a result of these issues in 2007, Alibaba launched Alimama this was an online advertising

exchange which connected websites and advertisers. This platform allowed publishers to market

their advertising inventory to advertisers. Overtime, Alimama’s model evolved from just an

online exchange to an affiliate network of small web publishers. By 2008, Alimama had

employed 400 professionals serving a network of over 3 billon advertisements on a daily basis

and connected with over 80 million consumers.

1. How can well-established Western companies best respond to the challenges brought

about by Chinese start-ups?

Like many other countries from Asia the current global recession has cause business to look

outside their home markets for customers and companies from China are no different.

Companies like the Alibaba Group are hungry for customers and they are changing the global

game. Chinese companies are not only increasing their share of the Chinese domestic market but

they are aggressively penetrating western markets with great success. One of the key reasons for

this development is that Asian companies know how to compete in markets with low profit

margins usually unheard of in the western world. Many companies like The Alibaba Group are

leveraging their base as a spring board to build global empires.

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What make these upstarts global contenders is their advantage to some of the world’s most

dynamic growth market and immense pools of low-cost resources. However, these aspiring

giants are much more than low cost. The best of them are proving innovative and run by some of

the best minds the world has to offer. Their businesses are astutely run and they are monitoring

global consumer trends and technologies and getting products to market faster than their rivals.

Techtronic of Hong Kong was the first to the first to heavy-duty cordless tools powered by

lightweight lithium ion batteries.

Western corporations have weathered rivals before and emerged stronger for it. However, this

new group of game-changing companies is different on many levels. For starters they are

arriving from a country that there population while growing fast remains relatively poor. China

per capita income is still just $1,300 a year. Despite this China internet penetration continues to

grow at a rapid rate.

So how can well establish western companies respond to this on slot? This first step is to begin

respecting the new competition and recognize that they will be here to stay and start planning

and improving your systems. Western companies need reexamine their cost structure and look

for innovative way to drive cost down and past some of those savings on to the consumer.

Another strategy is to refuse to concede grown either at home or abroad. For example Wirlpool

Corporation agreed to pay a surprisingly high $2.8 billion to buy Maytab just to keep it out of the

Chinese. Thirdly is you cannot beat them, join them for example Nortel Networks Ltd. And

3Com have formed telecom equipment and design ventures with Hauwei. No matter how big

Western companies respond, gone are the day when they could afford to wait for an emerging

market to ripen and then use their ability to dominate the local players. According to C.K

Prahalad, a University of Michigan management strategist “If you don’t participate in these

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markets, you will not only miss opportunities but also cut out all the innovation that comes from

competing there,” Then you won’t be able to withstand the pressure when these companies come

and hit you there. Whether one chooses to confront or collaborate, the new China startups are set

to change the rules in the industry.

2. Considering the success of Alibaba.com's IPO, what is a good time for entrepreneurial

start-ups going public?

An initial public offer (IPO) is usually the largest equity issue a corporation ever makes. The IPO

is also an important channel through which an entrepreneur or venture capitalist get rewarded for

his initial effort. A review by Luigi Zengales for the University of Chicago suggests that the

decision to go public should be the result of a value maximizing decision may be the initial

owner who wants to eventually sell his company or increase the value of it. By 2006 The Alibaba

Group would have experienced 7 years of successful trading and had a proven track record for

innovation, a large customer base, had reached a level of maturity and profitability. This would

be a prime time to make an IPO providing that you are looking for capital in order to finance

growth and expansion. They have a business plan with targets for business expansion and you

have capable competent people in the right positions.

3. How should Alibaba.com optimize its use of the proceeds from the IPO?

The Alibaba Group of companies has a proven track record in providing internet solution for

millions of small business in China and connecting them to the global market. The Chinese

population continues to display a hunger for the superhighway as internet users continue to grow

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at a phenomenal rate. Users climbed from 59 million in 2002 to 390 million in 2009 with 270

million users connecting using broadband.

Therefore I would suggest that The Alibaba Group use the proceeds from the IPO to do the

following:

Fuel the expansion in building additional application to assist in the development of small

business and further enhance the technology platforms.

Expand their marketing drive to attack more buyers and seller to use the Alibaba

exchange and other related services.

Use some of the funds to expand the existing business to expand both in China and the

global market.

Develop a mobile platform that users can use to connect to the exchange in order to

search and purchase products.

Develop an application that would allow The Alibaba Group to tap into the lucrative

market of small business loan. This application should be integrated in the existing

platforms to assist with ease use and repayments.

Some of the proceeds should also be used to develop the brand value of the Alibaba

Group both in the Chinese and international market.

Finally The Alibaba Group should also consider the acquisition of businesses that offer

complementary products and services to the Group’s portfolio of products and services.

4. Having gone through the IPO, what should the next steps be for a company like

Alibaba.com? What constraints might the company face?

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The next step for the Alibaba Group after such a successful IPO is to relentlessly and

aggressively pursue new markets and deploying strategies for growth. These can be in the form

of:

Enhancing the power of the company’s B2B exchange, this can be achieved by attracting and

registering more buyer and sellers on the Alibaba platform.

Building a powerful brand. This can be achieved by executing a marketing strategy that will

make Alibaba.com a household name, not only in China but around the world similar to that of

Amazon.com in the U.S.

Continue to focus on the Group competency. This is developing electronic solutions for small

business in China. By focusing on small business that would be otherwise be left alone, the

Alibaba Group has created a solid institution that fully understands the situation and need of

SMEs.

Continue to build on the strong sales and customer service teams and expand these principals

into the global markets.

Continue technology innovation and providing application that can expand the business products

offered to members.

Continue to develop their management teams and the commitment to the strong corporate

culture. Continue to encourage their employees to embrace the entrepreneurship sprit and

enhance their skills in e-commerce and internet technology.

Continue to diversify the relationship with the parent company and its subsidiaries. However, the

Group must work together to match the needs of different customer segments.

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Deploy the use of collaboration software such as Lotus notes or Novell GroupWise. This would

assist the group to better communicate the objective of sharing common task, working together

and sharing information.

Facing the Constraints

Life after an initial public offer can prove to be very different for a newly listed company,

especially for a leading fast-growth company like Alibaba. An IPO is a transformative step for

any business and it can change the lives of executives involved. There are personal rewards in

going public but it also comes with risk. Therefore it is imperative that executives position

themselves to deal with new challenges created by the IPO. Three of the major constraints

affecting the new public company are examine below.

1. Working with Investors

2. Delivering on your promises

3. Maintaining the pace of growth

4. Risk Management

Working with investors

When Alibaba was in private hands it was just accountable to Jack Ma and his other 17 friends.

But for a public company the situation changes radically. You will now have hundreds possibly

thousands of shareholders calling and you will need to cultivate effective relationships with

them. It will take some strategic planning and proactive efforts to nurture an effective

relationship with them. During the IPO process Alibaba would have crafted a compelling story

about where the company was going and its fast track strategies to market leadership. Therefore

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you will need to maintain that effort once the company in now subject to public scrutiny. Being a

public company Jack Ma would now need to prioritize his efforts to cultivate a relationship with

key analysts. He would have to guide them into understanding his business model and foster

constructive conversations about the company growth path.

Delivering on your promise

The public market is an unforgiving place. Therefore, to flourish Alibaba will need to

demonstrate to investors that you are competent at executing the business plan, while ensuring

that you are in full compliance with regulatory requirements. New levels of discipline will have

to be deployed throughout the organization with tight focus on efficiency, improve cash flows

and greater liquidity. Key metrics that will drive the business forward will need to be defined and

their indicators monitored closely. The result of the indicators should be used to fame public

analysis of the company making sure that the discussion takes place on Alibaba’s terms. The

company will also need to keep on top of emerging threats and deal with any risk that can derail

your business plans.

Maintaining the pace of growth

After a successful IPO it might be tempting to relax and rest on your laurels. However, you will

now need to keep the pressure on to continue moving forward and deliver of the grow path

projected to shareholders. The IPO may be the most significant transaction in the company’s life

to date, but it is only one more milestone along the road to continuous growth and market

leadership. Jack Ma will need to continually re-evaluate, renew and recreate the business plan

and his management team in order to sustain the growth plan and satisfy shareholders demand.

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The Alibaba Group will now have to focus on the company’s long term success. This will

require rigorous planning matched by a commitment of operational excellence.

Risk Management

The Alibaba Group will have to overhaul their approach to managing risk. Whatever approach

they take it should form and integral part of their daily business processes with constant

monitoring and revision. The stock market does not like surprises so it would be important to set

and communicate realistic goals and ensure that the business is financially transparent. Corporate

governance issue will need to be resolved including full disclosures of director’s compensation,

their working relationships and conflicts of interest. The working environment after an initial

public offer can be distracting for staff but that have to remain focus while understanding their

new responsibilities. The Alibaba Group will also have to comply with a host of new rules and

deadlines as failure to do so will alarm investors and the company may be subject to

investigation and fines.

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References

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Appendix/Appendices (if used)

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