Alibaba Case Study Pestel Analysis- Alibaba’s Motivation to invest in Southeast Asia Political: Enabling Factors - ASEAN- promotes economic, political and security cooperation among 10/11 countries in Southeast Asia. ATIGA- adopted to achieve free flow of goods and services in the region by lowering trade barriers and deepening economic links. Inhibiting Factors - Most southeast Asian countries are still experiencing political instability Economic Enabling Factors: - Relatively good economic performance- combined GDP of $2.5 trillion, stable growth of 5.3% per annum- Growing middle class. Inhibiting Factors: - 11 different countries with different currencies- fluctuations in local currencies may increase the cost of trade. Sociocultural Inhibiting Factors: - No common language- different levels of literacy- do not practice the same cultures and come from different ethnic backgrounds. May not be able to successfully apply the same business model from their global operations- need to localise business in order to ensure they fit with each country. Technological Enabling Factors: - Significant growth in internet users and the digital population- opportunity for internet based companies to operate in the region. Inhibiting Factors: - Challenges including less-developed electronic payment systems, low number of credit card holders, low use of online transactions and underdeveloped logistic infrastructures. Acquisition Rationale - - Rising Competition and slowing economic growth in China- promising contest of the Southeast Asian market. Huge potential- next growth engine of the internet economy- rapid rate of internet penetration and rising middle class- Capitalise to become leader in the region while achieving revenue expectations. Enlarges Alibaba’s customer base Introduces Chinese merchants and international brands to Southeast Asian consumers- merchants can expand themselves geographically. Strategic Context Financials - A only derived 7% of total revenue from international retail and wholesale markets Aimed to generate 50% of revenue outside of China in the next 20 years- serving 2bn customers globally and empowering 20mn businesses and creating 100mn jobs. Access to New Markets - Access huge and growing consumer base outside of China Allows merchants access to customers in Southeast Asia Retailers in Southeast Asia – access to consumers in China through Alibaba. Access to Strategic Assets - Building an e-commerce market in emerging markets- complex and expensive Gains access to Lazada’s logistic infrastructure- “would have cost Alibaba years and billions of dollars to build such strategic assets if it had chosen a greenfield investment”- time compression diseconomies. o 10 fulfilment centres and 80 distribution hubs; 2,000 vehicles and an ecosystem of 100 third party logistic providers. Beating the Odds in Market Entry- Horn, Lovallo and Vigueire 2005 Predictor of Success Size of entry relative to minimum efficient scale Description Companies that are closer to an industry’s minimum efficient scale upon entry are more likely to succeed Relatedness of market entry The more related the market is to a company’s Application to Lazada Lazada is the number 1 shopping marketplace in the Philippines (34%), Indonesia (29%), Malaysia (28%) Thailand (17%) and Vietnam (9%) Market relatedness is high in terms of products and current portfolio of products and services, the greater the chance of success Complementary assets Complementary assets, including marketing and distribution, are even more important than core assets (technology) when entering new markets Order of Entry Early greenfield entrants are often “optimistic martyrs” losing out to experienced players that diversify into the market later Industry Life Cycle Stage Companies entering early in the industry’s life cycle have greater odds for success than those entering near the shake-out When a high level of inside industry knowledge is needed to innovate, incumbents have an advantage over new entrants Degree of technological innovation services • However, there are significant cultural variations • Not one market entry – but six, heterogenous markets. Lazada has a deep understanding of the Southeast Asian context • Lazada has built an extensive logistics network and a payment gateway to make its core business operation more effective Network effects are essential to scaling an ecommerce platform • Lazada’s investment in complementary services such as logistics and payment can help reduce multi-homing. Lazada entered the market at the initial growth stage. Alibaba can share its analytics capabilities to strengthen Lazada’s value proposition. Build-Borrow-Buy Framework- Mitchell and Capron 2010 Question Description Evaluation Decision How relevant are the internal resources? Can you leverage existing company resources to satisfy new needs? • Are the internal resources similar to those you need to develop and superior to those in the target market? Core technological assets, including data and analytic capabilities are similar to what is needed to compete successfully in the Southeast Asian market. • But core assets in the form of market knowledge is dissimilar and inferior. • Complementary Internal development is not an option. • Greenfield investment would be prohibitively expensive (time compression diseconomies). Are the targeted resources tradeable? How close do you need to be with your resource partner? Can you integrate the target firm? assets are also dissimilar and inferior as Alibaba has little experience in building infrastructure in emerging markets • JD.com has been able to build its own infrastructure in Indonesia Contracting is often Resources (market the simplest way of insight, physical gaining needed infrastructure) are not resources tradeable M&A is the most If Alibaba merely complex resource wants access to the path and it should be Southeast Asian reserved for those market then an equity instances where it alliance would be pays to have a deep sufficient to access collaboration with the market insights and resource provider infrastructure • However, if Alibaba wishes to apply its capabilities to strengthen the competitive positioning of Lazada, then a higher level of closeness is needed. • One additional consideration is the extent to which knowledge is explicit or tacit – market knowledge is likely tacit so therefore a high degree of closeness is needed • An alliance may not give Alibaba the exclusivity or the strategic control it needs over Lazada. If you value strategic Integration may not control over the target be necessary in every resources, you must aspect of the business assess whether you – Alibaba has granted can integrate the Lazada operational target firm’s and brand autonomy. resources? • The main area of Contracting is not an option An alliance or joint venture may not provide the level of closeness needed to combine Alibaba and Lazada’s resources. Because of the risk of pre-emption, a partnership would not have been able to stave off competition. It is debatable as to whether some of these advantages could have been achieved with a joint venture. integration has been the merger of their payment systems. • It also appears that Alibaba has transferred some of its capabilities through training in best practices • But intensifying competition and need for strategic control trumped modest integration requirements Approaches to Integration- Alibaba and Lazada - Partnered instead of integrated following the acquisition. - Lazada provided complimentary resources- help Alibaba extend its presence in the - - region and create value for Chinese merchants through a larger customer base. A was looking for growth in revenue over cost reduction- also wanted to learn about the Southeast Asian market through the acquisition and to share best practices based on the two companies experience in each market. Integrated payment systems to set the standard in the industry and accelerate online payment adoption in the industry.
