“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 is 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
Innovator
Alibaba
Adopter #1
Supplier (SMEs)
Adopter #2
Buyer (SMEs)
Platform, services
Participates in the
system; Pays listing
fees
Participates in the
system
Provides
infrastructure to
online trading
Evaluates the
credibility of SMEs
Provides financing
to SME to facilitate
the trade
Co-innovator #1
Co-innovator #2
IT developer
(internal employees &
external companies)
Third-party credit
rating agency
Co-innovator #3
Commercial banks
Co-innovator #4
Third-party payment
platform
Facilitates payment
Relative
positions
Leader
Risks
High
Follower
Low
Follower
Medium
Sub-leader
Medium
Follower
Low
Sub-leader
Medium to
High
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 coinnovators 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-asa-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.
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Ten Years of Jack Ma (Chinese), Gang Zhang
A Consideration of a the Virtual Service Value Chain, Jon Haase
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