CASE ANALYSIS Alibaba Taobao (A)
Presented by:
SAHIL BHAMBRI(097)
SAWAN GUPTA(104)
SAKSHAM SHARMA(098)
TANUJ ARORA(117)
SANDEEP SINGH BEDI(100)
ABHISHEK BANSAL(134)
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INTRODUCTION Alibaba.com (the company) is a business-to-business website (B2B) that offers sellers the opportunity to showcase and sell their goods. It has 61 million registered users in more than 240 countries and regions. Alibaba.com is the flagship company of Alibaba Group (parent company), a private enterprise based in China. Alibaba.com was set up in 1999 by Jack Ma along with 17 other founders. Alibaba Group has a 73% stake in Alibaba.com. The company is listed on the Hong Kong Stock Exchange (Symbol: 1688). The parent company is owned by Yahoo (39%), Softbank - a Japanese telecommunications company (31%) while the remaining shares are held by the Chairman, Jack Ma and other founders. The company has four marketplaces or trading platforms: * www.alibaba.com: International platform * www.1688.com: Chinese platform * www.alibaba.co.jp: Japanese platform * www.aliexpress.com: small order platform geared towards the purchase of small quantities The website itself does not sell any physical products. Buyers join for free and suppliers can join for free as well but value-added services are provided to suppliers who pay CNY 29,800 per annum to become Gold Suppliers. A China TrustPass membership is also available. According to the website, Gold Suppliers can: * list an unlimited number of products with top-tier priority, * get exclusive access to buyers contact details * gain buyers trust fast with the Gold Supplier seal * analyse performance in real time * Trade with global big buyers as sourcing events Taobao also embedded an IM service, Wangwang, in its website to facilitate communication between buyers and sellers and between users and the company. Wangwang allows buyers to
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directly haggle with sellers. This service reduced the communication problems of Taobao tremendously, compared to eBay. The use of the Internet to facilitate commerce among companies has provided vast benefits to the Company: dramatically reduced costs, greater access to buyers and sellers, improved marketplace liquidity, and a whole new array of efficient and flexible transaction methods. Suppliers use the company’s services to manage their storefronts on the website and their customer relationships. Not all such services are offered for a fee. Some value-added services (VAS) as listed on the website include Ali-Institute, an ecommerce and management training program through an offline learning centre and online learning platform; Traffic Analyzer which provides real time statistical reports on storefront traffic. The 2010 Annual report goes to describe how between 2009-2010, the business model changed to include balance between export-related and non-export related business; balance between membership sales and value-added services and the expansion of services.
Prior to 2009,
Alibaba.com was all about the exchange of information, but since then the company has introduced transaction based platforms (AliExpress and 1688.com) where actual buying and selling takes place. There is less focus on accelerating customer acquisitions and more focus on servicing existing clients. And due to the better understanding of Chinese culture and Chinese customers, Taobao’s website designs are preferred by Chinese eyes because it reflected how Chinese shoppers think.
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QUESTIONS 1. What are the major reasons that Taobao beat eBay in China’s C2C market?
The following factors lead to Taobao’s success in Chinese C2C market: a. Deep understanding of Chinese consumers and vendor business behaviour and consumption habit, the related market design such as nickname Taobao showcase and suit character of Chinese business context. b. Alipay and related mechanism design like vendors and buyers feedback are constructively instrumental for generating trust between sellers and buyers, which in turn engender sustainable transaction increment. c. The “free of charge” strategy nurtured and secured large loyal and incremental customer base 2. How will you evaluate Taobao’s “Zhao Cai Jin Bao”? Is this the right approach to monetizing Taobao?
The vendors overwhelming objection to ZCJB proved its failure, which can be contributed to the factors below: a. It neglects the dominant free service inertia and habit embedded deeply in the vendor’s heart; b. It skipped the vendors who are struggling for breaking even vested interests. They successfully exploited the web’s influence to force ZCJB out. c. It also triggered the buyer’ aversion. They were afraid that the increment cost would definitely distribute to them. ZCJB may be plausible, but it is not the right time to implement the strategy. Though, till now, Taobao is endeavoring to find the proper business model to generating revenue. However, ZCJB is not the right approach to monetizing Taobao now. The appropriate way will have to focus on triggering the incumbent vendors’ initiative incentives to promote their products and services via Taobao.
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Yet questions remain to be answered: Which market should the company participate in? Should they form a trading partnership with competitors? What software should we invest in? In the fast-paced world of the Internet Alibaba needs to act soon or they will be left behind.
This strategy paper will discuss focus on six major issues that Alibaba.com faces in the medium term.
The order of issues is: Chinese Ecommerce; Foreign Markets, Fraud, Technology,
Government Policy and Competition. Expanding in China is a two-pronged strategy; one focusing on suppliers in the export business and the other on suppliers servicing the domestic market. In comparison to other countries, Alibaba.com in China has spread at a lower speed. China, is, not only a big supplier, but also a country with a large consumer base. Alibaba.com should consider attracting more suppliers and customers. Internet usage in China still has great potential to grow. This presents Alibaba.com with a large growth opportunity for potential users. The Chinese Government’s 12th 5 Year Plan released on March 16, 2011 seeks to focus the country’s economic growth model on the quality and sustainability of growth. In particular, the Plan concentrates on higher domestic consumption and the reduction of the carbon intensity of the economy.
Higher domestic consumption involves income redistribution reform (with
implications for labour costs, and increased prices of raw materials) urbanisation and encouraging private investment. Furthermore, the Plan specific states that reducing the carbon footprint involves investment in the following emerging strategic industries: energy saving and environmental protection; next generation information technology, biotechnology; high-end manufacturing, new energy and clean energy vehicles So why should Alibaba.com look for clients who service the domestic market? While many agree domestic consumption cannot replace the role of exports, the following factors may prove interesting: * There is a high domestic savings rate, an average 41% over 2001-2005 according to an IMF working paper on consumption rates in East Asia. Section A
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* While the 5-year plan is just that - a plan, the Chinese Government has foreign currency reserves of US$2 trillion and does have the means to mobilise quickly on an issue; * Alibaba is currently building and nourishing an ecosystem of SMEs. In its 2010 Interim report, Alibaba.com recognized that the performance of SMEs was lacklustre due to limited access to finance and a “lack of advanced management tools and skills”. The company is addressing this lack through Ali-Loans (a creditworthiness assessment, loan and loan guarantee facility provided in partnership with several financial institutions) and Ali-Institutes (online, offline training facilities); * The volume of ecommerce transaction and the B2B segment in China is expected to increase. In a SWOT analysis of the company, www.datamonitor .com estimated the value of ecommerce in China will stand at US$220 billion by 2014. * Internet penetration by December 2010 was reported at 34 percent (457 million users) by www.internetworldstats.com.
Admittedly this number could be higher in urban areas.
www.datamonitor.com predicts penetration will increase to 812 million individual users by 2014; * Rising labour wages can result in two different consequences for Alibaba.com. On the one hand, higher wages can mean increased consumption and therefore more suppliers listing on the website to raise their profile and the other hand suppliers who are unable to cope with this change may stop their membership with Alibaba.com.
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Action Plan for Alibaba.com Following are steps that Alibaba could take to enhance profitability and market position in the next 5-7 years: Alibaba first needs to change its image. This is not a short term project, trust is easy to lose and very difficult to repair. Alibaba should be prepared to devote money and time on this issue in next 5 years. Improve:
logistics:
The popularity of Taobao is such that customer orders have outstripped the company’s ability to deliver goods on time. As a result, Alibaba Group announced firstly, a revamp of its existing logistics information system through a new platform and secondly an investment of up to CYN 30 billion to establish a nationwide warehouse network. This strategy also involves signing exclusive agreements with existing shipping companies working on the Alibaba platform. Given that Taobao is experiencing delivery issues now and that the market of e-commerce is expected to increase exponentially, Alibaba.com needs to plan for possible delivery bottlenecks. An improved delivery system is to Alibaba.com’s advantage. Coverage: Alibaba needs to consider whether the company should have China-wide coverage (which is an issue of image) or just coverage in regions where it makes economic sense? Does this mean it will compete with its own third –party shippers in one area and cooperate in another area? Building warehouses also means buying/leasing large amounts of land. Buying land means dealing with various levels of governments.
A better strategy is to improve its logistics
information system and continue contracting with third-party shippers. Space
on
the
website
dedicated
to
Clean
Energy
and
Green
Products:
Clean energy is a stated long-term strategy of the Chinese Government and an important issue worldwide. Energy and green products can currently be found on the website but Alibaba should take this further and have a dedicated section on clean energy and green products which is easy to locate from the homepage. Alibaba will not be the pioneer for a dedicated online energy resource but with China expected to be the world’s largest consumer of energy, the focus on Section A
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clean energy and green products and the fact that existing clients already supply such products the company would be well placed to offer such a service. Expand in the opposite direction: With the growing consumer base in China, there may be an opportunity for non-Chinese firms to establish Chinese language(s) storefronts to export products to China. Lobby for the increase of imports: For domestic consumption to grow, a gradual increase of imports should be allowed. This could take place either through lobbying the Government or through the Asian Leadership Business Group, a group that meets regularly with heads of State and of which Jack Ma is a member. Expanding into Foreign Markets In 2010, revenue from global suppliers stood at a paltry 1.6% of total revenues, virtually unchanged from the previous year.
In its 2010 interim report, Alibaba illustrated the
geographical location of its users/buyers (other than users from China): 15.7% from the United States, 10.7% from India and a combined 15.6% from the EU and UK. Given the large potential for revenue growth, Alibaba could invest in a two-prolonged strategy to attract both buyers and suppliers from these countries. Other Actions * Marketing (advertising in trade papers, on TV Business Channels) * Focus on quality: Alibaba needs to focus on quality among suppliers. The-grow-at-all-cost strategy has serious pitfalls, in that, fraudsters are attracted by the potential of huge returns or a low entry fee and there is no discernment in the quality of suppliers.
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