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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.

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

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 Chinas 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 Chinas 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 Alibabas 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 Alibabas 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).

Alibabas 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 Chinas Ministry of foreign Trade and Economic Cooperation (MOFTEC) which was mandated to help Chinese companies adopt

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

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Taobao offered its services for free to entice Chinese consumers to come online. By 2007, Taobao had taken 82% of the Chinese market, which eroded eBays 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 Chinas 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 companys ambition is that by the end of 2011 to reach an annual

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transaction volume of 1 trillion yuan and top pay pal to become the worlds largest payment firm.

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 Alibabas 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

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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. 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 Alisofts 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, Alimamas 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

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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. What make these upstarts global contenders is their advantage to some of the worlds 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

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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 dont participate in these markets, you will not only miss opportunities but also cut out all the innovation that comes from competing there, Then you wont 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

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population continues to display a hunger for the superhighway as internet users continue to grow 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 Groups 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 companys 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 Alibabas 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 companys 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 companys 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 directors 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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