Business Model Report

Group Member:
Leader: Leow Zi Hui Grace (130318606)
Class Code: L43 – 2014
Submitted on: 07/10/2014

Introduction

Alibaba Group Holding Ltd. dominates China's e-commerce market, which by one measure is now the biggest in the world. Alibaba.com is a B2B website catering to the needs of suppliers and customers. The website acts as a middleman that helps to connect exporters in China and other countries with companies in over 190 countries around the world. For example, the system allows a business in the UK to find a manufacturer in China and have a range of goods produced and shipped.

It's not just businesses that use Alibaba's websites. It also owns taobao.com, China's largest shopping website, and tmall.com. Tmall is designed for bigger merchants who offer a wide selection of branded goods such as Nike and Gap to China's emerging middle class. While Taobao is like a gigantic Chinese bazaar with about 760 million product listings from 7 million sellers and is mostly for small merchants. Merchants don’t pay to sell products on Taobao whereby that fee-free model is a big part of its appeal but instead they pay Alibaba for advertising and other services to allow them to stand out from the crowd.

Alibaba Business Model

1) Business Value Proposition: Alibaba provides a platform for buyers and sellers, proposes news, analysis and timely price lists, and works on new technologies and functions to support their website which help to enhance their service and reduce operation cost and obtain large profit. It also offers personalized and customized services by providing members a utility called “Ali-assistant” (or My Alibaba) to manage their product listing and internal websites. There is a wide array of trading functions available for buyers and seller to choose from such as online auctions, online categories hosted in each member’s site and real time negotiation conducted through “Trade Manager”. This shows that Alibaba aims to make doing business easy through low cost and benefiting customers with the access to many suppliers/buyers and quick transaction time. It also plans to form an efficient, flexible and responsive structure to satisfy the huge demand of customers and information society opportunities.

2) Revenue Model: The company’s primary revenue is derived from charging customers for value added services and from subscription fees, listing fees, membership fees and secondarily through advertising avenues. The business buyers and supplier who want to find potential trading partners via e-commerce marketplaces have certain membership packages available for them to appeal to the most varied businesses. There are 3 types of membership available namely the free membership which customers are offered the basic services free of charge, the trust pass membership that is a paid service where the member has to pay US$299 and would be verified by a third party credit reporting agency and the gold supplier that is primarily for export oriented suppliers and the suppliers are classified into 27 industries which enable the buyers to locate the companies easily.

Fee paying members can also enjoy “priority placement of supplier storefront”, priority listings in the industry directory and advance search results at Alibaba.com marketplaces. The marketplaces provide many advantages to businesses as businesses can get access to the active global buyer community. For buyers, businesses can launch marketing activities to potential buyers in an economical way and buyers can get access to high quality and organizational information on products, potential sellers and additionally the convenience which is real time and 24 hours services for both the buyers and the sellers. However for the gold supplier membership, the pricing is fixed while the rest are cost saving as it is a certification that the site offers to specific supplier companies which gives them the opportunity to post an unlimited number of products online. Gold suppliers also have more of an advantage in global trade because of the certification Alibaba has provided showing that this organization is authenticated. This also means there will be much more access to customers than the others who do not have a paid membership. Thus, customers are jumping at the opportunity to sign up to be a gold supplier which gives Alibaba the upper hand and the opportunity to create revenue.

3) Market Opportunity: Alibaba targets small to medium businesses and focuses on buying and selling among small and midsized enterprises which majority are family based businesses and it has more than five million suppliers. Alibaba.com has successfully recognized that it could fill the gaping market need that China has. The country has no printed directories or electronic databases virtually that allow companies to describe their products and help buyers and sellers find one another. Alibaba’s major advantage is that it is located in a country that has emerged as the manufacturing base of the world and most of the companies in China are small businesses which gives Alibaba an opportunity to take advantage of the situation. Most exporting companies in China are not big companies so for these companies Alibaba provide a platform for them. Moreover, to provide for this market of small businesses, the access to Alibaba’s portals is mostly free of charge.

4) Competitive Environment: Alibaba’s major competitors are JD.com, Amazon.com, eBay.com and search websites such as Baidu.com and Google.com. Additionally, some potential customers may search results just through these free and simpler websites but not through the B2B e-platform resulting in a loss of profit for Alibaba.com. Competitive environment can also be determined using Porter’s five force model.

Threats of New Entrants
Alibaba has always welcomed the idea of competing companies entering the industry. With competitions, it would help to grow the entire e-commerce market in China. The consumer e-commerce penetration rate in China is 33% compared to over 90% in developed economies such as the US and Europe. Early competition from eBay is what Alibaba credits for growing the e-commerce industry in China from several hundred millions RMB to over 100 billion RMB in 2011. Evidently, high returns will draw in firms. This results in many new entrants which will effectively decrease profitability. With the development of B2B market and long time high profit of Alibaba.com, there are more and more new websites trying to copy the business mode of the company. The most common way to enter B2B e-market is trying to position its target market to a single industry. For example, companies like finechemical.com and textilehome.com also followed Alibaba.com into the e-market. Although these firms do not have the broad market as Alibaba.com but they share the special market as Alibaba.com since they are more professional and targeted.

Buyer Bargaining Power
The buyer bargaining power is the ability of customers to put the firm under pressure and it also affects the customer’s sensitivity to price changes. For Alibaba.com, the customers are generally medium and small size firms which do not have the ability or do not need to build up their own websites. To negotiate with the biggest B2B e-platform, these firms do not have too many advantages to fight for lower cost and nearly all standards are decided by the Alibaba.com. Though with the development of B2B websites, the customers may have the opportunity to choose the other platform and that will also be opportunity to negotiate with Alibaba.com for more rights.

Supplier Bargaining Power
Suppliers of raw materials, components, labour and services to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm or may charge excessively high prices for unique resources. But for Alibaba.com, there are seldom suppliers of raw materials, components and labour since it is not a manufacturing firm but an e-service company. However, Alibaba has many alliances with companies such as VeriSign Inc and American International Underwriters China (China’s AIU) that keeps the site running and on the cutting edge of technology in the external environment. These suppliers are the key to Alibaba’s credibility and quality management efforts. E-commerce organizations have safeguards available for its consumers and companies especially when large transactions are taking place. Each of these supplier companies help to make sure that the consumer is well protected. In the case where any of the suppliers do not want to be affiliated with Alibaba anymore, it is at the company’s own detriment because Alibaba is a growing company that has a reputation of having a large member based which means increasing profits for the suppliers and is more to the benefit for the company. Another cost for this firm is the cost for selling, so the most important suppliers are the firms supplying advertise for Alibaba.com such as famous magazines, newspapers and websites.

Rivalry In The Industry
For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc. The most competitive firms of Alibaba.com are the search websites such as Baidu.com and Google.com. Since potential customers may search through such websites first then consider searching through the B2B platform which may lead to lesser profits and customers for Alibaba.

Threats of Substitutes
The existence of close substitute product increases the propensity of customers to switch to alternatives in response to price increases. The most important substitute service is the self-websites of large companies. For the customers which prefer to make business with large companies, they will not turn to Alibaba.com but directly contact with the companies themselves.

5) Competitive Advantage: It has already been noted that Alibaba.com is presently the world leader in business to business e-commerce. It also has the reputation of success and effective growth strategies. Alibaba has strong alliances and partnerships with leaders in the industry and a strong whole in the global marketplace. Also with a global reach, Alibaba has profited from it along with their growth strategy since the larger the market, the larger the profit opportunity. Moreover, Alibaba also used a great strategy of developing great acquisitions with other leaders in the industry such as Yahoo China. Acquisitions put Alibaba in the position to grow quite rapidly and are generally a great mode of entry in a new untapped market. The e-commerce market in China is growing and Yahoo being a global company with influence gives Alibaba the opportunity to control a large percentage of the Chinese market. In addition, Alibaba has an international organizational structure that helps with the brand recognition of the company.

6) Market Strategy: The website is designed in a categorical way which made searching easy. A user can search for buyers, suppliers and products separately. Alibaba.com is playing a vital role in helping small and medium enterprises in China and around the world to participate in global trade and become more competitive in the global market. It is creating jobs and opportunities for millions of companies and their employees by giving them a cost effective platform to market their products, find quality suppliers and grow their business. Businesses in UK which have been established for quite a long time now, they have developed an expertise in almost all segments of industry developments ranging from machinery to human resource and real estate which is quite lucrative for Alibaba.com. As a result, Alibaba’s senior management is interested in establishing strategic partnerships with mature European firms that can share their pool of knowledge with entrepreneurs from other countries around the globe on small and medium businesses. Since it is a leading company, Alibaba has to research, develop and create new concepts answering to new needs focussing primarily on customers’ expectations. Through this way, Alibaba.com is able to capture the market opportunities and expand its strategy to the SMEs’ overall growth throughout the world. In addition, Alibaba’s advertising tagline “Get on Alibaba.com to make it happen”, helps to encourage struggling entrepreneurs and thus increasing a larger number of potential customers and expanding customers base.

7) Organizational Development: Many people decry Alibaba’s me-too tactics as being more copy-cat than innovative. While it is true that Alibaba did use Amazon and eBay as a benchmark for innovation, they didn’t simply copy wholesale. When eBay tried to enter the China market with their payment gateway, Paypal, Alibaba went a different route. Seeing that the China market had little faith in eBay and the internet at large to protect their credit card details, Alibaba came in with their own secured payment gateway that assuaged the nation’s fears. Thus, Alibaba took that one step further by applying local knowledge on globally accepted norms, thereby slicing a uniquely unassailable position for itself. Therefore, Alibaba has been successful because they did things in the most pragmatic way and may not be the ways that Western companies might propose but one cannot dismiss the ways Alibaba did through copying, incremental improvement and culturally expected.

8) Management Team: Alibaba’s founder Jack Ma, Chief Executive Jonathan Lu, Co-Founder and Vice President Simon Xie and 30 committee members in Alibaba Partnership group which is made up of managers at Alibaba Group and related companies are the behind-the-scenes people in the Alibaba Group Holding Ltd.