BUSINESS 478. Section D100 CASE SYNOPSYS FOR: ALIBABA GROUP

Transcription

1 BUSINESS 478 Section D100 CASE SYNOPSYS FOR: ALIBABA GROUP Group D: Winni Liu Eric Ransom Qian Wan Jason Yu Date: November 10, 2014

2 FIRM HISTORY Alibaba Group (Alibaba) was established with the belief that the Internet would enable small enterprises to leverage innovation and technology to grow and compete more effectively in domestic and global markets (Alibaba Group, n.d.-d). The company was founded in 1999 by 18 people led by Jack Ma, a former English teacher from Hangzhou, China (Alibaba Group, n.d.-d). Alibaba s mission is to make it easy to do business anywhere (Alibaba Group, n.d.-a, para. 1). Since then, Alibaba has been dedicated to help connect small Chinese exporters, manufacturers and entrepreneurs to get their products into the domestic and international marketplace faster and easier. Alibaba operates online and mobile marketplaces in retail and wholesale trade, cloud computing and other services, and primarily profits from Chinese retail marketplaces through online marketing services (Alibaba Group, n.d.-a). As of June 30, 2014, the company maintained 90 offices in Mainland China and 19 offices outside Mainland China, as wall as employing 26,845 people around the world (Alibaba Group, n.d.- c). With a goal of building the future infrastructure of commerce, Alibaba provides various technologies and services that enable consumers, merchants and other participants to conduct commerce more efficiently through Alibaba s system. Table 1 below (page 2) summarizes the company s milestones. Regarding financial performance, Alibaba has experienced a steady increase in its revenue over the years. For fiscal year-end March 31, 2014, Alibaba s total revenue reached 8.5 billion U.S. dollars, compared to $3.2 billion and $5.6 billion in 2012 and 2013, respectively (Alibaba Group, n.d.-b). In addition, revenue for the quarter ending September 30, 2014, was $2,742 million, an increase of 53.7% compared to $1.76 billion in the same quarter of The majority of the growth was driven by the rapid expansion of Chinese commerce retail businesses, which comprises 75.9% of the company s total revenue (Alibaba Group, 2014). ENVIRONMENTAL ANALYSIS General Environment All of the six segments in the general environment have the capability to impact Alibaba. The top three segments impacting Alibaba are economic, global and technology segments. 1

3 Table 1: Alibaba s Milestones Alibaba raises $25 million from Softbank, Goldman Sachs, Fidelity and other investors Online shopping website Taobao Marketplace is founded Alipay is launched as a third-party online payment platform Alibaba Group forms a strategic partnership with Yahoo! and later merges Yahoo! s China-based subsidiaries Alibaba Group launches Alimama, an online marketing technology platform. Alibaba launches Alisoft, which provide businesses with Internet-based enterprise management software Tmall.com, a dedicated platform for third-party brands and retailers, is introduced to complement the Taobao Marketplace Alibaba.com announces the acquisition of HiChina, China's leading Internet infrastructure service provider Taobao Marketplace introduces online group buying marketplace Juhuasuan. Alibaba.com officially launches AliExpress to enable exporters in China to reach and directly transact with consumers around the world. The Mobile Taobao app is launched Tmall.com and Juhuasuan are spun off from Taobao Marketplace as an independent platform Alibaba Group establishes the Alibaba Foundation with a sizeable funds dedicated to social causes Alibaba Group unveils the Alibaba Smart TV OS and officially launches its mobile social networking app, Laiwang. Taobao and Tmall top 5.75 billion U.S. dollars in sales in a 24-hour period on November 11 (China single-day) (Bloomberg, 2013) Alibaba has a U.S. IPO worth 25 billion U.S. dollars in September 2014, making it the largest IPO in the world (Lajoie & Shearman, 2014). Note: Source: Alibaba Group (n.d.-d). History and Milestones. Retrieved from Economic Segment: Small and medium-sized enterprises (SMEs) contribute significantly to a country s Gross Domestic Product, trading activities and employment. China s SME Finance Report from 2013 indicates that 60 percent of China s GDP, 70 percent of trade activity and 80 percent of employment are driven by SMEs (Liu, 2008). Alibaba provides SMEs with a great platform to reach out to a diverse customer base and conduct their businesses in a borderless and cost effective way. Global Segment: The term globalization has gained popularity since the 1980s. With the help of the Internet and increased Internet security, consumers and producers are seeking to gain global business 2

4 opportunities and connections. Research has shown that with the high demand of nutritional products from China, vendors from North America have begun utilizing Tmall.com to sell directly to Chinese consumers (Rogers, 2014). Technological Segment: Business models and systems are significantly influenced by recent technological developments. As mentioned, Internet browsers with enhanced website security have made online shopping possible and reliable. PayPal, the second most popular online payment system in the world, processes over eight million payments everyday, and has over 137 million active accounts in 193 markets and 26 currencies around the world (Costill, 2013). With the technological developments in smartphones, online shopping apps further enhance the overall shopping experience of the customers. Industry Environment Low Bargaining Power of Buyers: Alibaba Group does not have buyers or suppliers in a traditional sense as it only provides platforms for traders to conduct businesses. Since Alibaba generates most of its revenue from advertising, its primary buyers are SMEs and third party retailers who have online shops on Alibaba and pay advertising fees in order to promote and market their shops. Alibaba also generates revenue through selling more favourable search result positions on their websites. With more than seven million merchants using Alibaba, sellers pay promotional fees in order to stand out from competing firms located on Alibaba s sites (Osawa, 2013). These businesses have a low bargaining power as Alibaba already operates major online marketplaces, thus it is difficult for them to switch to a different platform provider. Low to Medium Bargaining Power of Suppliers: The platform users, SMEs and third party retailers, are also Alibaba s suppliers as they provide value to Alibaba s websites through their product listings. Since Alibaba dominates the Chinese E-commerce market, SMEs have few choices other than Alibaba if they want to create a visible and profitable online store. If Alibaba wants to expand its operation internationally, then vendors can have a choice between Alibaba and ebay, which will increase their bargaining power as suppliers. Low to Medium Rivalry among Competitors: In the short term, Alibaba will continue focusing on Chinese operations to leverage its strong market position (Backaler, 2014). Thus, among existing domestic firms 3

5 the threat of rivalry is low, as Alibaba has captured 80% of the market (Lajoie & Shearman, 2014). If Alibaba expands operations globally in the future, the threat of rivalry would increase to medium because there are other existing competitive companies in the industry, such as ebay and Amazon. Low Threat of New Entrants: There are several significant entry barriers such as extensive capital requirements, proprietary product technology and high switching costs of buyers. The barriers to entry also lie in network effects and critical mass, as they are able reach a large number of customers while having an immense number of SMEs promoted on their websites. This is what creates value for SMEs and customers and would take considerable resources and effort for an entrant to emulate. High exit costs exist for new entrants as they must invest significant capital in order to be competitive. Currently, as the market is dominated by ebay, Amazon and Alibaba it is difficult to steal the market share from these companies. Low to Medium Threat of Substitute Products: E-commerce involves all the buying and selling transactions online. Therefore there are few substitutes for online transaction as the other options include selling at physical stores or using company websites to sell products directly to customers. However, selling through physical stores is costly as SMEs must purchase shelf space and would have to compete with large firms. Directly selling to customers off of company websites is also problematic because SMEs may not possess the technology to provide a secure marketplace for consumers and also lack the convenience of comparing products off of one website. Competitive Environment: Alibaba will continue dominating the domestic E-commerce industry due to its strong market power and diversified businesses. As more than 600 million Chinese Internet users are moving to smartphones, Alibaba is putting increased emphasis on the smartphone market to remain competitive. The biggest competitor Alibaba will face moving into the mobile platforms is Tencent, China s largest and most used internet service portal provider (Tencent, n.d.). Although Tencent focus primarily on social media and entertainment its strong internet presence and changing interests have started to overlap with that of Alibaba s. Globally, the biggest competitors for Alibaba are ebay and Amazon. Both of the companies skyrocketed to success with very little competition, leading to a rapid growth in their business markets. 4

6 Both companies have a similar mission, which is to promote global trade and make trading easier. These companies have dominated the E-commerce industry and have seen extreme growth levels after only being in the industry for no more than 20 years. CURRENT SITUATION Today, Alibaba Group is operating businesses in a wide spectrum of industries and has grown into a global leader in online and mobile commerce. Its related businesses operate in leading online marketplaces as well as internet based advertising services, electronic payment, cloud computing and mobile solutions (Alibaba Group, n.d.). Alibaba Group has become the most valuable public company in China and one of the most popular technology companies in the world after its U.S. IPO in September, 2014 (Lajoie & Shearman, 2014). Market Expansion In recent years, Alibaba Group has experienced rapid growth in market expansion and diversification. In 2011, Tmall.com and Juhuasuan were spun off from Taobao Marketplace into two independent platforms and they have subsequently become the two most popular online marketplaces for retailers and online group buying (Alibaba Group, n.d.). In 2013, Alibaba introduced the Alibaba Smart TV OS, a smart TV operating system with enhanced features such as online shopping and bill payment options. During the same year, Alibaba officially launched its mobile social networking app, Laiwang, to attract mobile users and to sustain its competitive advantage in the mobile phone industry. Alibaba is also expanding into the North American market by investing heavily in mobile and e-commerce start-up firms. It has invested 215 million U.S. dollars in messaging app Tango and 170 million in Fanatics, an online sports memorabilia retailer (Forbes, 2014). Initial Public Offering On September 18, 2014, Alibaba Group Holding Limited (NYSE: BABA) announced its initial public offering of 320,106,100 American depositary shares. This IPO raised 25 billion U.S. dollars for Alibaba and is the largest global IPO to date (Lajoie & Shearman, 2014.). It made Alibaba the fourth biggest technology firm in the world after Apple, Google and Microsoft (Lajoie & Shearman, 2014). 5

7 Performance Alibaba Group has also maintained a stable and consistent growth in its financial performance. In the fiscal year of 2013, it has generated total revenue 5.3 billion US dollars; and for the year of 2014, it has generated 10.5 billion US dollars (Alibaba Group, n.d.). Additionally, its market share measured by active buyers has escalated from 172 million people in 2013 to 255 million people in 2014; this is an annual increase of 48 percent (Alibaba Group. (n.d.-b). Finally, its non-gaap net income has increased from 2.3 billion US dollars in 2013 to 5.0 billion US dollars in Current Strategies Business Level Strategy: Cost Leadership Alibaba Group gains substantial competitive advantage from building businesses to massive scale (Alibaba Group, n.d.-a). These economies of scale enable the company to expand market opportunities, giving Alibaba the ability to satisfy market needs from various sectors. It also provides SEMs, third party brands and retailers with a cost effective platforms to market and sell their products. Corporate Level Strategy: Moderate to High Level of Diversification - Related Linked Alibaba Group attracts buyers and sellers through its diverse marketplaces. Alibaba s three major marketplaces, Taobao Marketplace, Tmall.com, and Juahuasuan.com are established to targets consumers with different needs, as shown below in Table 2 (page 7). Additionally, it has set up AliExpress to attract and retain foreign buyers. The company also diversified its businesses into cloud computing, logistics information platforms, online payment solutions, mobile applications and smart TVs (Alibaba Group, n.d.). Alibaba s businesses are related through their technological platforms, defining their level of diversification related linked. International Level Strategy: Transnational Strategy In the short-term, Alibaba will continue to target the Chinese market. In the long-term, Alibaba seeks to develop cross-border commerce opportunities. Alibaba introduced AliExpress in 2010, an online marketplace designed to target global consumers. Along with its U.S. IPO in September 2014, Alibaba Group has begun managing operations in the U.S. by investing heavily in mobile and e-commerce start- 6

8 up firms. To sustain its competitive advantage in the global market, Alibaba will continue building its brand and capture market opportunities through establishing strategic alliances with global partners such as Apple (Solomon, 2014). Table 2: Major Businesses Operated by Alibaba Group Alibaba.com Taobao Marketplace Alipay TMALL.COM Alibaba Cloud Computing JUHUASUAN AliExpress Leading platform for global wholesale trade. China s largest online shopping platform featuring millions of product and service listings. Payment and escrow services for transactions on Alibaba Group s Marketplace. Largest third party online payment provider China s largest third-party platform for brands and retailers. Developing scalable platforms for cloud computing and data management. Most popular online group buying marketplace in China. Global consumer marketplace targeting consumers worldwide. Note: Source: Alibaba Group (n.d.-d). History and Milestones. Retrieved from MAIN STRATEGIC CHALLENGES Introducing Alibaba to new Regions Outside of China: On September 19, 2014, Alibaba had an IPO on the New York Stock Exchange. This is significant because it signals Alibaba s commitment to growing their brand and business in the United States. However, this comes with many challenges as the United States has many powerful competitors in the E-commerce segment. If Alibaba is to be successful in the U.S market, they must find a way to be price competitive with Amazon and ebay. Alibaba is far behind these players in being recognizable, as recent polls showed that 88% of United States consumers did not know who Alibaba was prior to their IPO (Saba, 2014). However, online consumerism is largely driven by price, so if Alibaba can offer products at a lower price than the incumbents, consumers will choose Alibaba. Another aspect that Alibaba must be aware of when moving into the United States, is that consumers have different tastes and preferences compared to Chinese consumers. ebay faced this same issue when they attempted to compete with Alibaba in the Chinese marketplace. Alibaba may have to change their business model or offerings to meet consumer s needs. 7

9 Moving into Mobile Platforms: Many E-commerce companies are beginning utilize mobile applications to sell their products. This presents many challenges as security issues have become a great concern to users recently. However, this market is a huge opportunity for businesses as recent surveys demonstrate that 86% of American consumers would prefer to use an e-wallet to cash or credit (Passport GMID, 2014). Another aspect of mobile competition Alibaba will face is intense competition for customers in order to reach critical mass. There are negotiations between Alibaba and Apple to collaborate with their Alipay and ApplePay services (Forbes, 2014). This would give Alibaba a huge advantage over competitors in the mobile marketplace. The sale of Counterfeit Items through Alibaba: A major concern of investors and potential customers is the purchase of counterfeit items through Alibaba channels. While Alibaba wants to provide smaller firms the opportunity to sell their goods to a larger marketplace, they must be aware that some of these companies may sell knock offs. To combat this Alibaba claims to be spending $16.1 million a year on identifying potential items that may be counterfeit (Wall Street Journal, 2014). This is especially troublesome if fakes are shipped to consumers and they leave bad reviews, as many online consumers spend as much as 30% of their time researching the legitimacy of products and vendors (Passport GMID, 2014). Alibaba must be aware of this in the United States, where the potential sale of counterfeit items could cost them immensely through lawsuits and loss of reputation. Should Alibaba Focus on One-Line of Business: Alibaba must be aware of the lines of business that they are operating in. If they become over diversified, they may over exert their resources and lose their competitive advantage in markets. While they are focusing on expansion, they do not want to expand too quickly and be spread too thin. A study found that many corporate ventures take eight years on average before they are profitable, and require considerable cash flow (Biggadike, 1979). They must also ensure that their business segments are able to adapt quickly to a dynamic marketplace. This may involve the use of decentralization, which could also result in the cannibalization of Alibaba s sales. Ultimately, these all must be considered moving forward as Alibaba expands into new markets. 8

10 REFERENCES Alibaba Group. (2014, November 4). Alibaba Group Announces September Quarter 2014 Results. Retrieved from Alibaba Group. (n.d.-a). Company Overview. Retrieved from Alibaba Group. (n.d.-b). Financials and Metrics. Retrieved from Alibaba Group. (n.d.-c). Frequently Asked Questions. Retrieved from Alibaba Group. (n.d.-d). History and Milestones. Retrieved from Alibaba Group. (n.d.-e). Our Businesses. Retrieved from Backaler, J. (2014). After Alibaba's IPO, Key Questions About Its International Expansion. Retrieved from Forbes: Biggadike, R. (1979, May ). The Risky Business of Diversification. Retrieved November 8, 2014, from Harvard Business Review: Bloomberg. (2013, November 12). Alibaba Breaks Sales Record Amid China Singles-Day Rebate. Retrieved from China Internet Watch. (2014, September 30). Infographic: Alibaba Investment Timeline Retrieved from Costill, A. (2013). The 10 Most Popular Online Payment Solutions. Retrieved from Search Engine Journal Forbes. (2014, October 28). Forbes Investing. Retrieved November 9, 2014, from Lajoie, M., & Shearman, N. (2014). What Is Alibaba? The Wall Street Journal. Retrieved from Liu, X. (2008), SME Development in China: A Policy Perspective on SME Industrial Clustering, in Lim, H. (ed.), SME in Asia and Globalization, ERIA Research Project Report , pp Retrieved from: %20SME%20Industrial%20Clustering.pdf 9

11 Osawa, J. (2013). How Does Alibaba Make Money? Retrieved from Wall Street Journals, Digits: Passport GMID. (2014, August 14). Alibaba Ready to Conquer Far West? Retrieved November 8, 2014, from Passport GMID. (2014, October 22). USA: Country Pulse. Retrieved November 8, 2014, from Rogers, K. (2014). As Alibaba soars in debut, Jack Ma acknowledges the little guy. Retrieved from CNBC: Saba, J. T. (2014, Septmeber 16). To U.S Consumers, China's Alibaba is a Non-entity. Retrieved November 8, 2014, from Solomon, B. (2014, August 24). Potential Apple Partnership Drives Alibaba To New $100 High. Retrieved from Forbes: Tencent (n.d.). Home. Retrieved from Tencent: Wall Street Journal. (2014, August 14). Suit on Alibaba Opens Window on Counterfeiting. Retrieved November 9, 2014, from