“Open Sesame”
The Legend of Alibaba.com

Nov. 11, 2012

Jia Chen
Kang He
Yiyi Wang
Jingyan Wu
Liang Xue
Qiaolan Zhuo

Executive Summary
“To make it easy to do business anywhere” is the core value proposition of Alibaba.com, a leading B2B online market place in China with 53.8% market share.
Founded in Dec. 1999, Alibaba provides both suppliers and buyers an easy to use online interface where they can match their needs.
The report team considered this as an innovation because other than those typical challenges faced by innovative companies; Alibaba also faced specific challenges such as the lack of credit system in China when it was first founded, the severe pressure from capital investors due to the burst of dotcom bubble shortly after its inception, as well as the strong incumbent, eBay, entering China in 2003.
By focusing on its core business of B2B online market place, continuously building its IT capability and integrating third-parties to establish a local credit rating system, Alibaba was able to stand out amongst the many players in the early dotcom age in China.
At the same time, Alibaba successfully defended its B2B business by proactively entering into the C2C space and compete head to head with eBay.
This report explores in specific details of actions undertaken by Alibaba, particularly by its founder Jack Ma, analyzes the impact of those actions, and finally presents an outlook for Alibaba’s business with our recommendations.
Background Overview
The Business Model of Alibaba

Most of Alibaba’s customers nowadays still use a traditional supply chain; the business model of Alibaba is unique because it’s virtual in nature. The three components of Alibaba’s virtual supply chain are the suppliers looking for a matching company for their supply chain needs, the management of information, and the buyers looking for business relationships. The management of information is accomplished through Alibaba’s internal IT capability, including gathering, organizing, sorting, analyzing, and distributing of those information.
The workflow of Alibaba’s virtual supply chain is illustrated in the above diagram, and explained as follows: 1. Suppliers and buyers post their listings, matching the inputs from the company’s strategic perspective. * This particular step takes advantage of the IT capability developed internally in Alibaba, creating an easy to use user experience. 2. Listings are searched, contacts are made, and information is exchanged between the suppliers and buyers. This will often include product specifications and capabilities. * This step also involves the credit rating agencies, providing the buyers an additional layer of information when selecting business partners. 3. Suppliers and buyers then negotiate with each other, finalize negotiation, place orders, arrange delivery, and make payments. * Payment guarantee and Settlement methods through traditional banking system are critical to this step. 4. Suppliers and buyers use Alibaba’s tools to manage customer relationships and trade information. * By allowing both buyers and suppliers manage their entire business online, Alibaba was able to monitor the market place, and turn those data to their own advantage.
Due to the virtual nature of Alibaba’s supply chain, technology is fundamental for Alibaba’s business model. Alibaba has been expanding its global supply chain for small & medium enterprises (SME) through both internal development as well as acquiring e-Commerce technology developers. In 2010, Alibaba acquired Auctiva, a leading third-party developer of tools for eBay sellers. The acquisition of Auctiva, as well as Alibaba’s purchase of Vendio in June 2010, will bring more than 250,000 new customers to Alibaba, and expands its US operations.

Ecosystem Analysis
Key Stakeholders
The Alibaba B2B initially targets at the SMEs in China and now it’s expanding to SMEs all around the world. In this innovation ecosystem, we analyzed the roles of each player as follows: Roles | Who | Responsibilities | Relative positions | Risks | Innovator | Alibaba | Platform, services | Leader | High | Adopter #1 | Supplier (SMEs) | Participates in the system; Pays listing fees | Follower | Low | Adopter #2 | Buyer (SMEs) | Participates in the system | Follower | Medium | Co-innovator #1 | IT developer
(internal employees & external companies) | Provides infrastructure to online trading | Sub-leader | Medium | Co-innovator #2 | Third-party credit rating agency | Evaluates the credibility of SMEs | Follower | Low | Co-innovator #3 | Commercial banks | Provides financing to SME to facilitate the trade | Sub-leader | Medium to High | Co-innovator #4 | Third-party payment platform | Facilitates payment | Sub-leader | Low |
As we see it, this is a very risky battleground to play in, and the majority of the risk lies within Alibaba. Part of this risk is reflected in the internal employees as the co-innovators, whether or not they can come up with IT solutions that would satisfy the need of buyers and suppliers.
At the same time, the lack of credit system in China has made the buyers and commercial banks very nervous about the potential risks. By including a low-risk third-party credit rating agency, Alibaba was able to bring those two players on board with their business model, which was much needed in generating a critical mass necessary for the success of Alibaba.
Value Creation and Capture
In 1999 when Jack Ma founded Alibaba B2B business, similar platforms had already existed in China. Alibaba B2B business was able to come to the fore and left other competitors in the dust. The reason for its success is simple. Alibaba is able to provide an on-line trading platform supported by disruptive IT technology, and deliver following value propositions to SMEs. * Easy to do business
The technologies for e-Commerce comprise of all components required for transacting businesses in electronic (digital) domain. The various components or subsystems making up the e-Commerce super system include Digital Payment Systems, Payment server, Payment Gateway, eWallet, and security systems like Firewall and Intrusion Detection.
Before Alibaba came along, sales channels are very limited for local SMEs in China. Trade shows are very costly and risky, and physical sale teams can only reach a limited region of customers. While the enthusiasm for entrepreneurship is rising since the reassurance of the Reform and Open policy in 1992, these challenges in some sense limited the growth of private sector industries.
Therefore, we believe SMEs in China have been enjoying huge benefits brought by the disruptive e-Commerce technologies provided through Alibaba. Firstly the market for ecommerce is not bound by any geographical constraints. This means lesser growth inhibitors due to various restrictions existing in different geographical regions. Secondly the transaction costs go down tremendously in a well set up ecommerce environment. SMEs could save a lot on the costs of sales team needed to interact with the customers. Thirdly the ecommerce business can be integrated into the regular business cycle and give customers more useful and relevant information than ever before. Overall, e-Commerce technologies make it much more convenient and efficient to conduct business anywhere in the world.
While the online e-Commerce part of the value was delivered free of charge to both suppliers and buyers, Alibaba also introduced a pay-per-click ad campaign in order to capture the consumer surpluses from suppliers with the highest willingness-to-pay.
In addition, Alibaba pooled those interested suppliers and represented them in various Trade Shows with a largely reduced cost. At the same time, Alibaba gathered and analyzed market data to help suppliers better forecast their own business demand. These services allowed Alibaba to charge a fee, which we view it as pooling the need for marketing and sales from millions of supplier together and offering them with a lower-than-average quality service at a discounted price. This successfully allowed Alibaba to capture the values they created for the suppliers, who are very price sensitive, but less demanding on the quality of service compared to their larger sized counterparts. * Credit Worthiness
“There are hundreds if not thousands of suppliers in China who would jump out and claim to be capable of fulfilling your order, but no one knows for sure” One manufacturing representative pointed out the reason his company was so successful in 2006. Seven years ago when Alibaba was first founded, the situation was only worse, for both foreign and domestic buyers.
Indeed, unlike most developed countries, China is a country without solid credit system. China is still a strong "cash society", with cash on delivery being a popular payment method in China. Since Chinese people have historically had a low level of confidence in online transactions, cash payment gives them the ability to confirm the arrival of goods before payment. It gives them reassurance and confidence in conducting an online purchase. The lack of credit system is a big hurdle that e-Commerce companies must overcome. To establish a trusted credit platform between various players in a transaction, Alibaba has taken three actions. 1. Alibaba collaborates with third party credit rating agencies to provide “Trust Pass”, “Gold Supplier” and “Chinese Manufacturers” licenses to validated suppliers. This helped to establish a basis of credit for listed suppliers. 2. Since 2005, Alibaba also collaborated with many domestic banks to encourage suppliers and buyers to maintain good reputation. Banks will take into account the track records of suppliers and buyers from Alibaba when deciding their credit worthiness for a loan. 3. Alibaba develops “Escrow” for international SMEs and “Alipay” for domestic SMEs. This provides a simple, safe and efficient online payment solution for SMEs. After buyer places an order, his/her payment would be secured in Escrow or Alipay. Only after the buyers have received goods and confirm quality delivery, supplier would then receive payment from Escrow or Alipay.
In particular, “Trust Pass” service targets at Chinese SMEs involved only in domestic trades while “Gold Supplier” and “Chinese Manufacturers” service is tailored for Chinese SMEs in foreign trade. By working with local third-party credit rating agencies (CRA), Alibaba was able to pre-screen some of its suppliers, endorse those credit-worthy business partners so that more buyers will be attracted to the network, which will ultimately drive home more quality suppliers listing their products on the platform, creating a virtuous cycle. At the same time, Alibaba charged a fee for those services, citing the need for a physical verification process. This move enabled Alibaba to capture the value they created for the buyers, but through fees from suppliers, what a brilliant move! * Access to Capital
Alibaba further launched a “Credit Guarantee” service together with some Chinese commercial banks. . Under that agreement, China Construction Bank will issue non-collateral loans to SMEs that are quality members of Alibaba. This is a milestone in SME financing history in China. Chinese banks used to only issue loans to big state-owned enterprises. It’s very difficult for SMEs to get financing from commercial banks because, on one hand, the SMEs have no credit history and on the other hand, banks in China are not sophisticated enough to do due diligence. However, Alibaba created a trust-worthy (by partnering with third party CRAs) credit record for each of their customer, which incentivized commercial banks to enter into the private sector loan industry.
Although this service was offered free of charge to quality suppliers of Alibaba, its ability to attract suppliers accelerated Alibaba towards a critical mass needed for success.

Some Other Key Challenges and Approaches
Competitive position and substitutes
According to iResearch’s data, Alibaba accounts for a resounding 53.8% market share with absolute predominance in China B2B e-Commerce. Alibaba’s major advantage is that it is located in a country that has emerged as the manufacturing base of the world. Most companies in China are small business and Alibaba has put itself in the right position to take advantage of this. Most companies exporting in China are not big companies, so for these companies Alibaba provides a platform.
Despite the rapid growth of China e-Commerce market, this industry will get more competitive. The biggest competitor of Alibaba is eBay. Both Alibaba and eBay operate in the Chinese e-Commerce industry. Alibaba acquired Yahoo China as well as other subsidiaries to help grow its company. eBay is a global giant in e-Commerce and it has the advantage of owning a recognizable brand that had global attention and had a loyal customer base in many developed economies. Compared to eBay, Alibaba is less well known in the U.S., so there is both a disadvantage and an opportunity for growth.
In terms of substitutes, any substitute to come along would have to be an easier, more effective way of conducting business on global arena, because Alibaba is focused on creating one of the easiest ways to conduct business. While we don’t see any new technological break-through for B2B e-Commerce that would replace Alibaba in the B2B, any other existing online e-Commerce platform would be considered as a direct substitute. In particular, Alibaba was worried about eBay entering the B2B space with its expertise in the C2C model.
In response to this potential threat, Alibaba launched its own C2C platform called Taobao.com (which could be analyzed as an innovation itself) in May 2003, shortly after eBay acquired Eachnet, China’s online auction leader at the time.
This move was successful because of two reasons. First, it stalled its major competitor, eBay in this case, within the C2C space. Second, it created a barrier of entry to the B2B space, because Taobao.com now compliments Alibaba in a way that many Taobao sellers would source their supplies from Alibaba.
In addition to Alibaba’s proactive move on entering the C2C market, the financial regulation in China also helped Alibaba significantly. Paypal was extremely difficult to use, and created an opportunity for Alibaba to secure a critical mass of individual consumers for its Taobao business, which not only reinforces its C2C business, but also in turn fortifies its core B2B business.
Market definition and Segmentation
Alibaba rapidly expanded during its earlier years in 2000 after locking in $25M investment from various investors. However, the three “B2C” strategies established by Jack Ma in 2001 clarified the market definition for Alibaba, and painted a clear roadmap for the company to approach its customers.
The elements of the three “B2C” strategies are: “Back to China”, “Back to Coast” and “Back to Center”.
In alignment with the minimum foot-print principle, “Back to China” allowed Alibaba to focus its limited resources on developing a reliable network of Chinese suppliers. As we discussed earlier, the core value created for buyers is the availability and credibility of suppliers. This first “B2C” strategy helped attract more and more buyers by delivering the value they most treasured, and in return, drew in more suppliers who wanted to share a piece of this growing cake, essentially creating a virtuous cycle.
“Back to Coast” is another focus point for Alibaba. Because the entire business model was based on online information exchange, this initial tagline to focus on coastal region makes total sense in terms of customer readiness. For example, when Jack Ma visited their Kunming (in Southern China) branch in 2001, he found out that the most frequent thing his sales representatives say to those potential suppliers is that “you really should go buy a computer, it will help your business so much.” This resembled the reality for the majority of inland China in back in 2000, and “Back to Coast” is not only a good strategy for Alibaba at the time, but also a necessity.
Compared to the other two “B2C” strategies, “Back to Center” is more of an effort to align the internal culture to support the other two strategies. In practice, it meant switching the headquarter from Hong Kong back to Hangzhou, where Alibaba was founded, and focusing on its employees by providing them more training etc. We will discuss the importance and effect of this strategy in later section.
Level of Resources Commitments
The reason so many dotcom empires have fallen is simply because their inability to balance their ambition to grow and their capability to manage the business. As our analysis progressed, we believe the success of Alibaba amidst the dotcom bubble can be largely attributed to their understanding of the minimum foot-print principle. The limited amount of resource commitment early on allowed the company to minimize the risk exposure.
To start off, Alibaba was founded with very limited starting capital. 18 founders put forward $60,386 seed money when Jack Ma said “Now, save some money to feed yourselves, and put the rest of your money on the table. The seed money must be pocket money, no borrowing from friends or family, because the possibility of failure is extremely high. We must prepare for the worst”
What’s interesting is that, even under such extreme circumstance, Jack Ma had declined 38 potential investors before he accepted his first venture capital of $5M from a group of investors led by Goldman Sachs. Jack Ma argued those 38 investors was too short-sighted, and some even intended to directly intervene the daily operations of Alibaba. This allowed Alibaba to remain manageable in size, and kept the business model to its core.
Another clear example of Jack Ma’s personal decision to start small was in 2001. The burst of dotcom bubble has made investors anxious, pushing Alibaba for expansion in order to retrieve their investments. Despite the pressure, Jack Ma held a conference in Hangzhou in Oct. 2000, firmly stating that Alibaba will not be managed for the sake of IPO, and asked the investors to take their money and leave if they don’t want to wait. Three month after that, Alibaba started its internal restructuring by either reducing or even closing down many of its branches.
Although this tactic alone was not enough, along with some other financial and operational maneuvers, it helped Alibaba survive the coldest winter of 2001 until its first profitable month in December, 2001.
Internally, the level of resource commitment also echoed with building their value capture capability. “Customers first, employees second, shareholders third”. This credo re-emphasized the importance of creating value for its customers, buyers and suppliers alike, and Alibaba made sure that its resource allocation was fully aligned.
In its early days, the “Back to China” and “Back to Coast” strategies, as discussed earlier, refrained Alibaba from over-expanding its operations. This limited its resources to a narrow set of potential suppliers that are most likely to become the cornerstone of Alibaba’s global supplier network.
Similarly, the “Back to Center” focused on its employees, who are essentially the co-innovators of Alibaba. Not only the training enabled its employees to better serve its customers, by creating a corporate value statement that guides its co-innovators towards a common goal, Alibaba also successfully established a guideline of action throughout its operation. One vivid example of the impact of this “Back to Center” strategy happened during SARS in 2003. At that time, Alibaba’s employees were all forced to work from home due to quarantine reasons, and naturally transferred all incoming calls to their office line to their home line. Almost all of them instructed whoever was living with them, parents, partners, to say “Hello, this is Alibaba” with no exception whenever the phone rings.
With this series of strategies to guide their resource allocation, Alibaba was able to secure its leadership position in the Chinese B2B market place during the most turbulent environment from 1999 to 2003.
As Alibaba further grows in size, its resource allocation and commitment followed closely with the minimum foot-print principle. For instance, Taobao.com, one of the most successful C2C platforms in China, was started with only $200 seed money from Alibaba, and was not publicly acknowledged as the subsidiary of Alibaba until several months after its establishment.

The Future of Alibaba
Expected market growth
Alibaba has already been experiencing robust growth in customers and revenue for years and is the dominant player in China’s e-Commerce market. The growth is contributed by the overall China’s e-Commerce market growth. In terms of users and spending power, the Chinese e-Commerce market is posed to overtake the US e-Commerce market within the next 3 – 5 years.
According to 2011 China B2B e-Commerce market data released by iResearch, market scale of China B2B market is 3.48 billion RMB in 2011, up 40.3% over 2010. Much more value-added service is used by SMEs and core operators take affirmative steps to improve service quality. The higher year-on-year growth rate is mostly attributed to the major advantages of B2B e-Commerce and the stable commercial environment in foreign and domestic market. iResearch believes that as the macro economy and foreign trade keeps a steady and rapid growing trend, market scale of China B2B e-Commerce market is quite promising.
E-Commerce is one of few bright spots in China's economy now and isn't seeing the slowdown many other sectors in China are experiencing. Thus, the market growth of Alibaba is expected to continue despite a slowdown in the overall economic growth.

Future Trends and Our Recommendations * Trend 1: Go Mobile.
13 years ago Jack Ma captured the opportunities brought by the online trend and established Alibaba, one of the first e-retailers in China. As everything is moving to mobile, Alibaba has launched a new version of Alipay for smart phones. However to further strengthen its presence in e-retail and capture the full potential of mobile trend, Alibaba has to have a footprint in mobile payment, either by developing its own new solutions or by strategic acquisitions. A challenge is the uncertainty of future mobile payment technologies. Just in our class we have heard discussions about several payment technologies already. The advantage of Alibaba as an incumbent player is the ability to leverage its existing market to generate enough buzz and popularity for whichever technology they choose to endorse. Nevertheless, we would strongly urge managers at Alibaba not to forget their core value of facilitating convenience in doing business while making that decision. * Trend 2: Cloud for SMEs
Cloud is one of the key technology trends. Many companies, including Alibaba’s competitor: Amazon, have developed cloud platforms to serve SMEs, who are Alibaba’s major customers. With the cloud, SMEs could conveniently establish their own private networks; store information; compute; and make full use of the cloud applications. Ultimately, this would allow them to focus more on their core businesses and “conduct business more easily”. While Alibaba has already established their Cloud presence for C2C customers, we believe Alibaba will inevitably need to integrate cloud-based services for its B2B customers in order to stay competitive against Amazon and achieve sustainable growth
While we don’t have a complete solution, we believe the most critical decision for Alibaba is to figure out the right entry point. Currently there are already many strong players in all three layers of cloud: infrastructure-as-a-service, platform-as-a-service and software-as-a-service. A comprehensive competition landscape analysis and a thorough investigation of Alibaba’s capability as well as strategic alignment with its existing businesses would be necessary to make that decision.

References:
Comparison of eBay and Alibaba, Thomas Liquori, Danauda Benjamin, and Anca Barbu

Ten Years of Jack Ma (Chinese), Gang Zhang

A Consideration of a the Virtual Service Value Chain, Jon Haase
China's E-Commerce Market could Top U.S.' by 2015 http://latimesblogs.latimes.com/technology/2011/11/china-ecommerce-united-states.html How to Compete in China’s E-Commerce Market http://sloanreview.mit.edu/the-magazine/2012-fall/54109/how-to-compete-in-chinas-e-Commerce-market/ Online Payment System in China http://www.chinapaymentservices.com/online-payments-china E-Commerce Ecosystem and Its Mechanism http://www.kesum.com/Article/ltcyyj/lsyyj/lsyt/wssdydzsw/201003/111123.html Reconfiguration of Ecosystem http://tech.163.com/12/1011/18/8DIAAFAL000915BF.html A Win-win Eco-chain: The Development Path of Alibaba Business Ecosystem http://www.doc88.com/p-719752443432.html Study on Alibaba E-Commerce Business 2008 http://wenku.baidu.com/view/1f8e443f0912a216147929ee.html Study on Alibaba B2B Business http://wenku.baidu.com/view/16648bee4afe04a1b071de2e.htm Wikipedia Alibaba Group http://en.wikipedia.org/wiki/Alibaba_Group Alibaba Corporate Value
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