Alibaba’s international strategy

Chapter 14 discusses global strategy. It is critical for a global public company at Alibaba’s scale to wisely attack international markets.  Also who has not heard the buzz word of “cloud”?  Alibaba is adopting this in its global expansion strategy.

http://www.businessinsider.com/r-alibaba-opens-first-us-cloud-center-enters-hotly-contested-market-2015-3  Alibaba just made a ‘very strategic move’ in the US

March 3, 2015

HANGZHOU, China (Reuters) – Alibaba Group Holding Ltd is launching a cloud computing hub in Silicon Valley on Wednesday, the e-commerce giant’s first outside of China, underscoring its global ambitions in the face of stiff and entrenched competition.

The new California data center marks the Chinese company’s latest measured expansion onto American soil, and into a hotly contested U.S. market now dominated by Amazon.com Inc , Microsoft Corp and Google Inc.

Alibaba’s Aliyun cloud division intends the new data center to cater initially to Chinese companies with operations in the United States, including retail, Internet and gaming firms. It will later target U.S. businesses seeking a presence in both countries, Ethan Yu, a vice president at Alibaba who runs the international cloud business, told Reuters.

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Alibaba’s strategic alliance to provide US businesses with financing

Chapter 13 discusses strategic alliance and its various types. Enterprises are facing a constantly increasing set of challenges as the global marketplace becomes ever-more competitive. At the same time, today’s explosion of communications devices and channels is transforming the ways businesses communicate with customers, presenting new opportunities to transform the customer experience and improve business outcomes.1  Alibaba is no exception on this.  With its expansion into finance industry. it has also teamed with strategic partners to attack these new markets.

1. http://www3.alcatel-lucent.com/partners/hp/industrials.html

2. http://www.marketwatch.com/story/lending-club-and-alibabacom-form-strategic-alliance-to-provide-us-businesses-with-innovative-financing-solution-2015-02-03

Lending Club and Alibaba.com Form Strategic Alliance to Provide U.S. Businesses with Innovative Financing Solution

SAN FRANCISCO, Feb. 3, 2015 /PRNewswire/— Lending Club LC, -0.95% the world’s largest online marketplace connecting borrowers and investors, and Alibaba.com, the leading platform for global wholesale trade owned by Alibaba GroupBABA, +0.28% today launched a strategic, multi-year partnership making Lending Club the exclusive solution for point of sale business financing for up to $300,000 for Alibaba.com’s millions of U.S. business buyers.

Under the newly formed partnership and a new product called “Alibaba.com e-Credit Line powered by Lending Club,” U.S.-based business buyers can apply for the critical working capital they need when purchasing goods from China-based suppliers on Alibaba.com.

How many of us foresaw this move coming?

Alibaba’s novel compensation structure

Chapter 12 discusses organizational structure and compensation policies.  Alibaba is very unique in its own right.  It was formed by a group of friends under Jack Ma.  Over the course of its growth, Alibaba’s compensation policy reflects its uniqueness.  The following articles discusses Alibaba’s unique corporate structure which extends to compensation.

http://blogs.wsj.com/moneybeat/2014/05/28/dealpolitik-alibabas-novel-governance-structure-extends-to-compensation/

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In many ways, the management partnership bears a striking resemblance to how many law firms are run.

There are currently 28 partners, according to the prospectus. The Wall Street Journal reportedWednesday that Alibaba plans to disclose their identities in an update to the IPO filing. The partnership is self-perpetuating and anticipates electing new partners each year. The new partners are elected by the existing partners (there is no indication in the prospectus that the Alibaba board has a role in this process). According to the prospectus, to be eligible for election, a candidate, among other things, have served Alibaba or related companies for at least five years, have a track record of contribution to the business and be what the prospectus calls a “culture carrier” who shows a consistent commitment to Alibaba’s mission, vision and values. Many law firms would likely endorse these principles in their partnership selection process….

But as to the allocation among partners of their part of the cash bonus pool, that is generally left to a committee of partners elected by the partnership. (Amounts allocable to partners who are executive officers–there are seven listed in the prospectus–are subject to approval of the board compensation committee, according to the prospectus.)

The partnership committee will also determine how much of the bonuses payable to partners will be deferred. Deferred bonus payments operate as a kind of golden handcuff, tying the partner to the company. The payment would be lost if the partner leaves before it’s made, the prospectus says…

With the ability to determine the allocation of bonuses to the members of the partnership below the executive officer level, who will be also be important members of management, one wonders whether the Alibaba partnership committee won’t be at least as important to setting the direction of the company as the board of directors. Alibaba could be an interesting experiment in management of a huge public company.

Alibaba’s diversification strategy

Chapter 11 discusses diversification strategy. Diversification means branching out into new business opportunities, not just expanding your existing business. For Alibaba, such strategy is also critical.  In recent years, Alibaba has attempted different moves, with the most move into professional soccer and movie making business.

However the following articles analyzes some moves that can be rash and undermine Alibaba.

http://usa.chinadaily.com.cn/epaper/2014-09/15/content_18600772.htm

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Alibaba, founded and led mostly by the Zhejiang-born Jack Ma, continues to stretch its corporate brand with investments far outside the e-commerce, Internet and high-technology sectors. The company’s investment in finance, entertainment and healthcare this year alone has exceeded $6 billion with no clear, cogent strategy underpinning many of these moves.

A prime example of Alibaba’s rather rash diversification occurred only a few months ago with the purchase of a 50 percent stake in China’s most successful football club, Guangzhou Evergrande, for $192 million.

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Competition between JD.com and Alibaba

In Chapter 9, it discusses a concept of tacit collusion.  When a few large firms dominate a market there is always the potential for businesses to seek to reduce uncertainty and engage in some form of collusive behavior to maximize profits for participating parties.  In China’s e-commerce market, there has been consolidation and only few dominant ones are left.  Among Alibaba’s competitors, JD.com (Jing Dong) is one of them.  It is difficult to tell if there is coordinated collusion between the two companies.  However, it’s clear that sellers are not embracing for the lowest prices to undercut competitors.  Market seems to have reached an equilibrium on pricing.  Often times, these competitors are looking for a less battled market to differentiate.  The following article discusses one of such moves by JD.com

http://thenextweb.com/asia/2014/07/17/chinese-e-commerce-firm-jd-com-relaunches-ebay-like-paipai-to-take-on-alibaba/

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Chinese online retailer JD.com took over internet giant Tencent’s e-commerce operations back in March, and now it has relaunched the latter’s Paipai eBay-like consumer-to-consumer marketplace, taking its battle with Alibaba up a notch.

The newly-refurbished platform has more emphasis on search relevance rather than advertising, boasts reduced marketing costs for sellers and lets users complete orders through JD’s nationwide fulfillment network — which means access to same-day and next-day delivery.

The search function is particularly important as it helps to keep users on the platform. JD is using a new algorithm on Paipai that prioritizes sellers based on factors such as buyer feedback, the variety of relevant products sold, amid other factors. Sellers will also be able to access JD’s last-mile logistics network and finance tools.

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Expansion Options for Alibaba (maintain flexibility under uncertainty)

In Chapter 8, it talks a concept of flexibility which is a firm’s ability to change directions quickly and at low cost, given unanticipated changes in the competitive situation.  Alibaba is no different from other companies. Since its IPO, its growth and diversification strategies are more clear to the market.  Alibaba is using its resources to explore various expansion options including mobile shopping, investments, and even entertainment.  Alibaba is implementing and exploring these options with flexibility, e.g. no huge sunken cost, low-risk markets, complementary markets, etc.

Alibaba is enticing customers to download its mobile applications by adding links on its website and handing out shopping credits when they click on particular links in the apps. The increase in traffic and shopping transactions makes advertisers more willing to spend money for marketing on the apps, Tsai (Vice Chairman of Alibaba) said.

As the company expands its core business of e-commerce, it’s also adding other investments such as finance and entertainment content. The company offers high-definition movies and TV shows through its set-top boxes and has a minority stake in online video site Youku Tudou Inc.

Mr. Ma visited Hollywood in October to learn about movie studios as he said China’s film industry needed great cultural products. Alibaba showed interest in partnering with Sony Corp. on movie franchises including “Ghostbusters” and considered investing in “Pixels,” a 3-D computer-animated comedy starring Adam Sandler, e-mails revealed by Sony hackers showed.

http://adage.com/article/digital/alibaba-earnings-suffer-push-mobile-shopping/296881/

http://www.bloomberg.com/news/articles/2014-11-05/jack-ma-s-pep-talk-on-struggling-mobile-drives-alibaba

Product differentiation: business model differentiation

Chapter 7 discusses how a firm can differentiates itself from competitors in the market place.  In order to differentiate their products, firms can focus directly on the attributes of its products or services, or relationships between itself and its customers, or linkages within or between firms.

Alibaba’s Business Model

A mix of Amazon, eBay and PayPal, Alibaba Group and its companies dominate the Chinese e-commerce market. The platform takes some elements from different e-commerce platforms with its own Chinese flavor. Alibaba primarily acts like a middleman, both connecting buyers and sellers with each other and helping facilitate their transactions.

Alibaba’s business model is unique (strong differentiation) in that it does not take any ownership of inventory or stock it anywhere. It only provides a virtual marketplace that connects buyers and sellers. In absolute terms, it has substantially less revenue than Amazon, but with almost no overhead costs, it is extremely profitable while Amazon barely is.

Since Chinese retailers are less widespread, Alibaba has the opportunity to collaborate with these retailers to offer more customers more choices in buying their products. Costco recently teamed up in Alibaba to start serving Chinese market.

Sellers on Alibaba pay for advertising their items and for special services instead of a per sale cost. This is a very attractive proposition for sellers as they can sell items at a lower cost. Additionally, Alibaba has closed its search function and items can only be searched for within the website. This protects customers from being poached and also eliminates the need to spend on appearing on top of search engine results.

This strong differentiation on service model makes Alibaba’s business sustainable and hard for competition to copy.

http://www.entrepreneurial-insights.com/alibaba-strategies-selling-ecommerce-giant/

Network economies of scale

Chapter 6 discusses a concept of economies of scale.  It indicates that when there are significant economies of scale in business (manufacturing, distribution, marketing, etc.), larger firms have a cost advantages over small firms.  Alibaba has shown this advantages due to its rapid growth since its inception. Furthermore, Alibaba shows a Network of Economies of Scale.

A network effect acts like an externality. It is the effect that one user of a good or service has on the value of that product to other people. When a network effect is present, the value of a product or service is dependent on the number of others using it.

Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop. Alibaba refers to its “eco system”. 

On page 132 of their SEC filing, they go into more detail on this ecosystem and network effects:

• –The participants in our ecosystem are invested in its success and growth. These participants, including buyers, sellers, brands, producers, marketing affiliates, logistics providers, retail operating partners, developers and other service providers
• –The interactions among these participants create value for one another as our ecosystem expands and generates strong network effects. More merchants on our marketplaces increase the choices available to consumers, and more consumers on our marketplaces increase the potential sales for merchants through a self-reinforcing, mutually beneficial network effect. In addition, services offered by other participants in our ecosystem enhance the user experience on our platform. These network effects increase the loyalty and frequency of use of our marketplaces by buyers and make it difficult to replicate our ecosystem.

In the case of Alibaba, what protects its monopoly is more than this – it is crucially network economies of scale. Firms like Google, Facebook, Nestle all command financial economies of scale, but where they will find it tough to compete with Alibaba is the network economies of scale. (Although Amazon has its own ‘ecosystem’ too, as does Google).

http://beta.tutor2u.net/economics/blog/network-effects-alibaba

Alibaba’s network of economies of scale (“eco system”):

Imitability Paradox

In Chapter 5, it talks a concept of Imitability Paradox. It suggest that not all firms can (easily) gain sustained competitive advantages.  Only these firms with managers who have developed valuable, rare and costly-to-imitate resources of capabilities over long period of time may be able to help their firms gain sustained competitive advantages.  It is very difficult for firms that don’t have these skills to develop competitive advantages.

In recent announcement (January 2015), China-based Wanda E-commerce, which hopes to position itself as a rival against Alibaba, hasraised one billion RMB (about $161 million) in funding from investment funds Shengke Limited and Hong Kong Xu De Ren Dao E-commerce Investment Co.  WanDa Group is a real estate development company with the recent expansions into the movie theater business.  Wanda E-commerce was founded in August as a five billion RMB ($814 million) joint venture by mega-conglomerate Wanda and two of China’s biggest Internet firms, Tencent and Baidu. Wanda’s holdings in China include real estate, hotels, movie theaters, and shopping malls, but in the West the company is probably best known for acquiring AMC Theatres and Sunseeker International, a British yacht maker.

It is interesting to point out hat WanDa is not hoping to “copy” Alibaba model realizing cost to imitate.  In stead, Wanda E-commerce hopes to differentiate from Alibaba and other rivals like JD.com by focusing on an online-to-offline business model. Wanda claims that its various holdings give the “world’s largest offline consumer network,” with 1.5 million customers in 2014, a number that it expects to reach six billion by 2020. The company’s advantage is that it already has a significant number of brick-and-mortar retail businesses that it can leverage to gain customers and data for its online services.

http://techcrunch.com/2015/01/04/wanda-ecommerce-funding/

First-movers Advantages

In Chapter 4, it talks about First-movers advantages.  E-commerce is a relatively new business in Chinese market. Alibaba was a pioneer in many sub-markets. However, another company, Tencent developed a unique product (WeChat hongbao) for people to give others money (red packet) during holidays.  Tencent gained firs-movers advantages by securing customer loyalty and also bundle this with another popular App for chatting (WeChat).  In this Red Packet market (billions of RMB changed hands during holidays), although switching cost is low for customers, still it seems there is a long way for Alibaba to catch up in this area.

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It’s been called “the most expensive competition in online history” between China’s Alibaba and Tencent.

Both companies were founded about 15 years ago.  Tencent in 1998 and Alibaba in 1999.

Alibaba: In 2003 Alibaba launched Taobao, essentially China’s eBay. This was followed a year later by Alipay, a Paypal clone.  Alibaba is the largest e-commerce company in China, essentially Amazon, eBay and Paypal in one.

Vs.

QQ – the company’s instant messenger platform – quickly became the world’s largest, with more than a billion accounts. The company then launched a variety of social platforms before going public in 2004, and quickly becoming the fifth largest internet company in the world – currently valued at over $140bn (£84.1bn).

New market reality: More than 85% of Chinese are now interested in buying goods and services through their mobile phone – three or four years ago, it was 30%

In 2014, Tencent launched a mobile payment service during Chinese New Year to allow users to send and receive traditional “red packets” (“hong bao” of money, more than 200 million users signed up for the service in 15 days!  In an effort to stave off competition, Alibaba has attempted to launch new products, including WeChat competitor Laiwang in 2013, and acquire firms, including an 18% stake in Sina’s Weibo – essentially China’s Twitter.

Tencent’s strategies: The firm recently bought a large stake in JD.com, the second-biggest e-commerce site in China behind Alibaba, for $215m.  The two giants are competing with each other, making acquisitions in very similar areas – travel, online lifestyle websites, shopping – it’s head-to-head competition.

January 2015 status:

Because of Chinese New Year, Tencent’s Red Packets are super popular among all mobile phone users who often also use WeChat (similar to WeChat and Snapchat but with more functions).

Alibaba on the other hand is facing scrutiny from Chinese government on allowing sellers to sell counterfeit products.  Although Alibaba’s PR seems to have worked and the damage is limited as of the end of January 2015.

http://www.bbc.com/news/business-26540666