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The Evolution of a Chinese e-Business Model - A Case Study of Alibaba

- Teaching Notes

Khet Khet Oo Tha, Oh Poh Piew, Wang Zhiyu, Yu Xiaohui, Zhang Rong

The Case in a Nutshell

Alibaba is a fictional character in the Book of One Thousand and One nights where the magic
word used to open a cave of treasures is “Open Sesame”. In choosing the name Alibaba, its
founder Jack Ma, hopes that it can similarly open doors to Small and Medium Sized
companies (SMEs).

Alibaba is currently the world’s largest business-to-business e-commerce portal for china and
international trade. It connects buyers and suppliers from around the world in a huge virtual
market place, currently made up of 18 million members worldwide. Since its inception in
1999 to its IPO in 2007, it has managed to grow its business to its current stable of five sub-
companies and offices in US and Europe. It had managed to do this and at the same time
managed to fend off bigger competition like e-commerce giant eBay.

Through the years Alibaba has leveraged on a combination of identifying the needs and
opportunities of the market, produced solutions that helped local Chinese SMEs, and at the
same time make money. It has progressed from an information co-broker by providing
product such as China Supplier and Trust Pass for Chinese SMEs; a transaction platform by
providing online payment system Alipay; to a capability–enabling community by educating
e-merchants in Alicollege, helping SMEs to get Aliloans from banks, supporting the company
in managing their business processes using Alisoft, and helping SMEs advertise their
products.

There are some challenges ahead of Alibaba including: First, ALibaba group did not touch on
logistics. it is impossible for both buyers and sellers to track their goods in real time with the
help of Alisoft. However, due to the complexities of logistics, it is not easy for Alibaba to
embark on this area. Second, is it possible that these SMEs who are able to grow their
business eventually do not see the need of Alibaba, after achieving the financial strength to
create their own online presence? Third, Alibaba does not have focus or in deep professional

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knowledge or understanding of specific product or industry. It is involved in too many

different sectors and this horizontal quality may be its undoing. Besides, the competitors are
trying to attracting the members of Alibaba, while Alibaba are also confronted with the
problems that unsatisfying service due to the rapid increase of customers.

Teaching Objectives
The case of Alibaba could be used in a variety of ways in courses on E-Commerce Business
Models, Entrepreneurship, and Case Studies in Enterprise Systems. Depending on the
particular course, one or more of the following teaching objectives should be emphasized:

 To understand the evolution of business model in response to the pull factors and push
factors
 To explore the needs and wants of the market, identify the gaps in the market and take
advantage of such opportunities that arises (pull factors)
 To identify the external factors such as economic changes and competition which can be
considered not only risks that push a business but also opportunities that a business can
take advantage of (push factors)

Assignment Information
The following questions could be addressed by the students in preparation for the case
discussion:

1. Could a western company apply the lessons learned from Alibaba case study and succeed
in China?
2. How did the business models of Alibaba successfully evolve in response to the external
factors and the internal factors?
3. How Alibaba managed to emerge as a leading B2B E-commerce portal?
4. What is the secret of Alibaba in fending off competition from Internet Giant eBay?
5. Why Alibaba wanted to build a capability-enabling community for SMEs?
6. What are the business models of Alibaba in the phase of a capability-enabling community
for SMEs?
7. What are the challenges ahead for Alibaba? What is your opinion about the future of
Alibaba?

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Suggested Background Readings:

Liu, S. Y. and Peng, Z.M., “Jack Ma’s thinking on entrepreneurship”, Economic Daily
Publish House, 2008

Sun, Y, J, “The Myth of Alibaba- The Beautiful New World of Jack Ma”, Jiangsu Literature
and Art Publishing House, 2008

Zheng, Z. S., “Alibaba: There are No Difficult Businesses in the World”, Zhengjiang
People’s Publishing House, 2008

Zhu, F, “Jack Ma’s say-so”, China Economic Publishing House, 2008

Teaching Plan

Case Introduction
The class might be introduced by observing that in today’s E-commerce area, business model
is important for E-commerce business to gain the competitive edge. There are different
business models in E-commerce, such as B2B, B2C and C2C. B2B is the business model
describing commerce transactions between businesses; B2C is a terminology used to define
activities of businesses serving end consumers with products and/or services; C2C refers to
electronically-facilitated transactions between consumers through some third party. Alibaba,
as the leading E-commerce company in China kept changing the business models in order to
grab the opportunities and fill the gaps of the market.

Class Discussion
During the class discussion, the instructor can discuss the assignment questions with the
students and guide them towards discussing.

1. Could a western company apply the lessons learned from Alibaba case study and
succeed in China?
In order to answer this question, students should be encouraged to compare western’s e-
businss model, like Amazon, e-Bay and other successful stories from western company with
the current case. One important point students should touch on is the Chinese culture and
history. Alibaba is the one who understands the Chinese e- business environment best among
all the competitors, not only just the foreigners, but also the fellow Chinese competitors.
Alibaba grows its e-business model from this Chinese culture and has been trying to meet the

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requirements of Chinese SMEs, while other Chinese e-business companies have been trying
to apply the western e-business models to Chinese culture. Besides the "Culture" factor, a
successful business needs other factors like right time, right place and right people. So even
the westerners’ clone Taobao together with Chinese partners, the chance of being successful
won't be high.

Students may also be reminded to think about the Chinese people’s strong patriotism
characteristics. Will it affect the entrance of a western company? The answer is no. Since
Alibaba is a bridge that links the Chinese SMEs and the global market. Strong patriotism
could not help Alibaba but inhibit the development of Alibaba.

Besides, China is the world's factory and Alibaba is a Chinese company. Western companies
who come to China and set up similar dot-com do not have advantage as Alibaba in the way
of communicating with Chinese SMEs.

In sum, it is very difficult for a western company to learn from Alibaba and success in China.

2. How did the business models of Alibaba successfully evolve in response to the
external factors and the internal factors?
The students should be encouraged to think about the strengths of the Alibaba such as its
ability to identify the needs and fill the gaps (e.g. by adopting a localized business model that
fits with the China market, by making their services free to differentiate themselves from the
competition), and to pioneer E-commerce communities. The instructor should ask the
students to give their opinions and get them involved in the discussion. In the course of the
discussion, the following points should be noted:

Alibaba has through the years, leveraged on a combination of identifying the needs and
opportunities of the market, produced solutions that helped local Chinese SMEs, and at the
same time make money. It has progressed from an information co-broker by providing
product such as China Supplier and Trust Pass for Chinese SMEs; a transaction platform by
providing online payment system Alipay; to a capability–enabling community by helping
SMEs to get e-loans from banks, educating e-merchants in Alicollege, supporting the
company in managing their business processes using Alisoft, etc.

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3. How Alibaba managed to emerge as a leading B2B E-commerce portal?

To answer this question, students are advised to use their previous knowledge about B2B
business model and identify what activities occur in the process of Alibaba building a
successful B2B portal. They are encouraged to think about this question based on the
following points:

1) Able to understand the business environment and adapt to the change of the environment
2) Stay close to its customers, in terms of relationship and location. And Alibaba grows
together with its customers.
3) Business-centric rather than technology-centric. Be innovative to introduce the services to
address e-business issues.
4) Respond to the market needs. Alibaba grows from the Chinese business environment and
knows the requirements of Chinese SMEs very well, unlike other e-business models which
just apply the western e-business model to Chinese context.
5) Partner with the investors strategically. Besides the capital, the investors bring in new
market and technologies.

4. What is the secret of Taobao in fending off competition from Internet Giant eBay?
To answer this question, students may be advised to think about this issue involving the
difference between Taobao and eBay in business strategies, services provided and the
Chinese culture. The following important points should be addressed.
1) Free Service:
Confronted with such strong competitors, one of the main strategies Taobao took is Free
Service and decided to keep transactions free of charge until 2008. Online auction website
usually took place in three ways: transaction service fee, login fee and exhibition fee. Those
merchandises put on top of the website need to pay advertisement fee. While in Taobao, all
these services are free.
2) Focus on customers’ needs
The requirements of customers are always the most important thing. Taobao spent a lot of
time collecting users’ requirements, even Jack Ma himself communicated frequently with
users. In order to solve a problem, he stayed late night in the forum of Taobao discussing
with members of Taobao. The aim of Taobao is to provide better service free of charge than
the charged services provided by other platform.

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3) Alipay- enhances the confidence of consumers and e-merchant:

To conduct a transaction using AliPay, a buyer first sends his payment to an AliPay account
provided by Taobao. Once the buyer indicates that the product has been received, the money
is transferred from AliPay to the seller. With Alibaba’s full guarantee for each AliPay
transaction, buyers and sellers may transact online with confidence.

5. Why Alibaba wanted to build a capability-enabling community for SMEs?

The aim of this question is to help student form a big picture of business strategy of Alibaba.
Instructors can ask students to share their opinions about the changing of Alibaba’s business
model. Students should be encouraged to look for signs throughout all phases of ALibaba
development.

Meet at Alibaba and Trade at Alibaba are just transient phases, which also can be provided by
many other websites, the ultimate goal of Alibaba group is to establish a capability-enabling
community for SMEs in which they can survive and develop. Make profits in the transaction
process is the basic requirements of SMEs, a lot of other services they need in order to
survive in the competition, such as bank loan, advertisement, management. This is what
Alibaba aimed to do for SMEs.

E-commerce is not only a tool by Jack Ma, it should play its role in the business process of an
enterprise such as information flow, cash flow, management, etc. Alibaba is believed to make
a revolution change in the industry chain of the whole economic society by embarking on the
third phase- as a capability-enabling community. In the process to achieve this goal, Alibaba
initiated more services to serve the SMEs. For example, Alicollege was established to train e-
merchants the knowledge of e-commerce; Alisoft was developed to help China’s SMEs to
manage their company; E-Loan helped these small companies to get loan from banks; and
Alimama was developed to help SMEs to advertise their products.

6. What are the business models of Alibaba in the phase of a capability-enabling

community for SMEs?
Students should be guided to think about what a capability-enabling community can provide
for SMEs based on the characteristics of Chinese SMEs. Instructors can guide students to
discuss based on the following points:

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1) Alicollege – Help to train E-business experts for SMEs

Alicollege is the training centre of Alibaba that provides both online and offline training
courses related to e-business
2) Aliloan – Help SMEs to get loan from banks based on their online credibility
Cash flow is crucial for the survival and development of SMEs. Because the credibility
infrastructure in China was not established and SMEs could not provide the credibility
evidences to the third parties who are willing to guarantee for them, it is very difficult for
SMEs to get loan from banks. To solve this problem, Alibaba and China Construction Bank
initiated the project E-Loan .
3) Alisoft was published – Help to manage company inside
Alisoft initially targeted China’s more than 40 million small and medium companies,
providing easy solutions for customers to integrate e-commerce with their back-end systems.
4) Alimama – Advertising agent for SMEs
Alibaba’s strength is its ability to pioneer e-commerce communities among these people.
Alibaba leveraged its knowledge of auctions/B2B/C2C sales to create an ad marketplace
where ad spaces are bought and sold, in order to meet the needs of China's fragmented market
for online advertising. Foreseeing the huge potential of this “long tail of ad space”, Alibaba
launched an online advertising exchange, Alimama for online advertisers and web publishers
to trade online inventory in Nov 2007. Alimama website connects advertisers (SMEs) with
the China’s countless websites and bloggers. Publishers can offer their websites’ place to
show advertisements. Advertisers may pick appointed place or website to show their ads.

7. What are the challenges ahead for Alibaba? What is your opinion about the future of
Alibaba?
This is an open-ended question for discussion based on students’ opinions of the Alibaba e-
business model. Students are encouraged to think about the sustainable business model for
Alibaba based on the following points:

Alibaba has been successful because of its ability to identify the needs and fill the gaps. It
coincides very well with the present China market of a fast developing market. ALibaba now
is trying to establish a community for Chinese SMEs, even for SMEs around the world. The
future of Alibaba imagined by Jack Ma is that all the SMEs worldwide operate based on the
platform of Allibaba. There are four challenges ahead for Alibaba:

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First, ALibaba group did not touch on logistics. A buyer and seller are brought together in
cyberspace and complete the transaction between them through Alipay. However, it is the
sellers who take responsibility to deliver the goods by themselves or by the third party
logistics. Delivering the goods is the sort of value added services that big corporate buyers
and sellers come to expect. For example, if Alibaba can provide the logistics service, it is
possible for both buyers and sellers to track their goods in real time with the help of Alisoft.
However, due to the complexities of logistics, it is not easy for Alibaba to embark on this
area.

Second, typically there are three possible revenues sources from such model. Primary sources
are from direct charging of customers for value added services. Secondary sources are from
subscription and listing fees. And finally tertiary sources are from advertising and fees for
redirecting to other sites. Of the three, the tertiary source is the most easily lost and is the
actual bane of dotcom companies that went belly up during the bubble burst. Alibaba
probably must look beyond these subscription revenues to transaction based revenue. Is it
possible that these SMEs who are able to grow their business eventually do not see the need
of Alibaba, after achieving the financial strength to create their own online presence?

Third, [Link] has been a single portal comprising of all kinds products across all
industries. This may appear to be a comprehensive “all-in” range of products, but on closer
analysis, it also means Alibaba does not have focus or in deep professional knowledge or
understanding of specific product or industry. It is involved in too many different sectors and
this horizontal quality may be its undoing.

Besides, the rapid expansion of company causes the management of the company very
difficult. Now there are about more than 10,000 employees which are increasing everyday,
which is quite different from the small company who only has eighteen persons. The
competitors are trying to attracting the members of Alibaba, while Alibaba are also
confronted with the problems that unsatisfying service due to the rapid increase of customers.

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