IMB 687 Alain University Management Information System Alibaba Groups Case Study Question #1: Why does Alibaba focus so much on small businesses? Is it onl

IMB 687 Alain University Management Information System Alibaba Groups Case Study Question #1: Why does Alibaba focus so much on small businesses? Is it only to fulfill corporate social responsibility? If not, how is it helping them in their business pursuits, financial viability , and sustainability?
Question #2. What is the role played by the other stakeholders in Alibaba Group’s ecosystem? How do you see the demand by sellers on Taobao for free listing in the initial years, and Jack Ma conceding to their demand? What were the consequences of these actions?
Question #3. Compare and contrast the concept of ‘‘Taobao Villages’ with ‘Rural Taobao’’. Do you think ‘‘Rural Taobao’’ is a sustainable strategy? If so, how? If not, why not?
Question #4. If an E-commerce firm in India would like to adopt a strategy similar to that of Alibaba’s, in terms of ecosystem building and focus on small businesses and rural markets, what are the challenges it would face? Is the adoption of a similar strategy advisable and if so, do you have any suggestions for the successful implementation of such a strategy? rP
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IMB 687
ALIBABA – BUILDING A SOCIAL SUSTAINABILITY
ECOSYSTEM FOR E-COMMERCE
Do
No
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HARITHA SARANGA AND HUANG YANGHUA
Haritha Saranga, Professor of Production & Operations Management and Huang Yanghua, Institute of Industrial Economics, Chinese
Academy of Social Sciences, Beijing, Peoples Republic of China, prepared this case for class discussion. This case is not intended to serve as an
endorsement, source of primary data, or to show effective or inefficient handling of decision or business processes.
Copyright © 2018 by the Indian Institute of Management Bangalore. No part of the publication may be reproduced or
transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise (including internet) –
without the permission of Indian Institute of Management Bangalore.
This document is authorized for educator review use only by Abdelkader Mazouz, Nova Southeastern University until Nov 2019. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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Alibaba – Building a Social Sustainability Ecosystem for E-commerce
I believe the spirit of equality and transparency at the heart of the Internet will make it
possible for Chinese society to leap-frog in its development of a stronger institutional and
social infrastructure. That’s why we built Alibaba as a “social business” from Day One.
— Jack Ma, founder of Alibaba Group
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Jack Ma’s primary objective of starting Alibaba.com in 1999 was to facilitate the access of world markets
to small businesses operating in China. After nearly 20 years of tireless efforts by Alibaba’s founding
members, more than 10 million out of the nearly 40 million micro, small and medium enterprises
(MSMEs) operating in China managed to gain access to Chinese and world markets through Alibaba’s
various digital marketing platforms. In the process, Jack Ma built an empire of e-commerce economy,
with Alibaba’s profits in the year 2015 overtaking the combined profits of Walmart, Amazon, and eBay.1
Sales in Alibaba’s various platforms generated the delivery of more than 55 million packages every day
and were expected to reach 100 million packages by 2020.2
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However, the ever-ambitious Alibaba Group had a new objective, that of bringing the entire rural
population of China into the online e-commerce, through Rural Taobao strategy. By the end of August
2016, within a mere two years after the initiative began, 1311 Taobao villages3 and more than 135 Taobao
towns4 across 18 provinces of China were on board. It was only a matter of time before the entire rural
hinterland became part of Taobao Villages’ network, making Jack Ma’s dream of creating a successful
digital marketplace that was not only profitable, but also inclusive and socially sustainable. Of course, the
role of local governments, especially the grass root county and township governments, is critical in
making this particular dream come true. It was the dual approach of ‘‘rural Taobao’’, wherein the local
governments helped to create a ecosystem that gave rural people access to internet and other related
services, and ‘‘Taobao villages’’, spearheaded by Alibaba group, which made it a success.
Do
No
However, the growth in Chinese e-commerce market was slowing down as the market began to mature,
and Alibaba needed to find new avenues for expanding its business beyond China. Alibaba had already
made entry into e-commerce markets of other emerging countries including the second most populous
country in the world, India, by acquiring stake in local players. While the Indian online market itself was
very small, at $17 billion, a mere 2%, compared to Alibaba’s revenues in 2016, the potential for growth
was enormous. India consisted of one of the youngest and the second largest population of mobile phone
users5 in the world, just ripe for explosion of e-commerce in the near future. Similar to China, India also
had large number of MSMEs and was full of cottage industries. India’s rural population was huge, with
more than 700 million people living in semi-urban and rural areas.6 The online market in India was
already a major battlefield, with homegrown e-commerce companies such as Flipkart and Snapdeal at
1

Alibaba’s annual web sales easily surpass U.S. e-retail sales

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Clark, Duncan. Alibaba – The house that Jack built. Harper Collins Publishers, 2016, pp.16.
3
Main criterions of Taobao villages by Ali-Research: (1) location of transaction: operation space is village based, and administrative village as
the basic unit; (2) scale of transaction: annual ecommerce turnover exceeds 10 million RMB; and (3) size of online business: over 100 active
online shoppers, or % of households dong online business exceeds 10% of total households.
4
Main criterions of Taobao township by Ali-Research: no less than 3 Taobao villages in a township or sub-district.
5
https://en.wikipedia.org/wiki/List_of_countries_by_number_of_mobile_phones_in_use
6
https://en.wikipedia.org/wiki/Demographics_of_India
2
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Alibaba – Building a Social Sustainability Ecosystem for E-commerce
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first and third places (in terms of GMV) tearing each other apart, and Amazon briskly gaining momentum
to grab the top slot, right at the heels of Flipkart. However, none of the existing players in India had either
made profits or mastered the art of penetrating into the rural markets, as Alibaba had done in China. The
losses were mounting year on year, with venture capital investments, although very aggressive in the
initial years, beginning to dry up as years passed. Alibaba was watching the e-commerce scene unfolding
in India from the sidelines, having invested in Snapdeal and PayTM, the third and fourth ranked players
in the Indian online retail market, but had not entered the fray directly yet. It appeared to be the right time
to make an entry, with internet access and mobile connections expected to reach 829 million7 and 90%,
respectively by 2021.8 However, what should be Alibaba’s strategy in India? Could it repeat what it did in
China? Could it build an e-commerce ecosystem that is both profitable and socially sustainable in India as
well?
E-COMMERCE IN CHINA – THE INCLUSIVE GROWTH MODEL
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China launched the Reform and Opening-up policy for accelerated development of the economy, towards
the late 1970s. Before the transition, China was an underdeveloped country with scarce capital, abundant
labor, and had outdated technologies in most industries. According to economic growth theory, capital
accumulation and technological progress are two necessary conditions for economic growth. China being
a transition economy, some basic pre-requisites for a market economy such as property rights protection,
the rule of law, and efficient price mechanism were absent. During the period of economic reforms, the
state played an active role in amending those flaws and facilitated faster economic growth. China
established a sophisticated policy system in attracting foreign capital, promoted exports and encouraged
technological upgrades, to facilitate industrial development. A prerequisite for these policies to work was
the transfer of abundant rural labor into the industrial sector. In 1978, China’s rural population was 82.1%
of its total population. However, this ratio decreased drastically to 43.9% by 2015. In 2016, there were
about 28.2 million migrant workers, and about one-third of these migrant workers served in
manufacturing.9 During its more than three decades of consistently high growth rate, China became the
‘‘world’s factory’’ and the world’s top exporter of hundreds of industrial products. The marvelous
industrial development created a favorable supply situation, wherein any Chinese individual who thought
of entering into an online business, had access to abundant supply of products for trade.
Do
Moreover, Chinese market was more integrated than other major developing countries (e.g., India and
South Africa), which served as a favorable ground when e-commerce was introduced in China. China has
a long history of having centralized authority, which reinforced commerce-augmenting institutions such
as universal language, metrology, taxation, and financial system. Chinese government has been making
successful efforts in improving transportation and information infrastructures, lowering regional
institutional barriers to entry, and facilitating the flows of factors of production towards efficiency.
Among others, China’s Ministry of Information Industry initiated the ‘‘Village Telecom Access Project’’
in 2004. After ten years of persistent implementation, the telephone access rates of all administrative
7
http://indianexpress.com/article/technology/tech-news-technology/internet-users-in-india-to-double-by-2021-says-cisco-4696154/
http://www.livemint.com/Consumer/zxupEDYD560LJrnoRxcn4L/Mobile-phone-penetration-in-India-set-to-rise-to-8590-by-2.html
9
source:
National
Bureau
of
Statistics,
Monitor
and
Survey
Report
on
Migrant
Workers
http://www.stats.gov.cn/tjsj/zxfb/201704/t20170428_1489334.html
8
2016,
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Alibaba – Building a Social Sustainability Ecosystem for E-commerce
villages and villages increased from 88% and 90% to 100% and 96%, respectively; broadband internet
access rates of townships and administrative villages increased from 90% and 70% to 100% and 91%,
respectively10. These efforts contributed significantly to domestic market integration that serves as an
essential pillar for ecommerce business. With the help of strong broadband and high speed internet
infrastructure as a foundation, in 2016, e-commerce in China generated $777 billion online retail sales
and accounted for 15.5% of all retail sales in China and 39.2% of global e-commerce retail sales.11 As of
December 2016, a total of 467 million Chinese consumers (out of a total of 731 million internet users)
have shopped online, with nearly 95% of these consumers (441 million out of the 695 million mobile
internet users) shopping through mobile phones.12
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China’s e-commerce business has been highly successful in urban regions, backed by strong consumption
ability, higher internet penetration rate, sound logistics, and greater access to finance. During 2014–2016,
however, rural e-commerce began to grow faster. In 2016, the internet users in rural China reached 201
million and the online retail sales in rural China accounted for approximately $137 billion,13 increased
from $27 billion in 2014 and $53 billion in 2015. There were 8 million rural online shoppers, about one
quarter of the total online shoppers. Alibaba group, whose platforms account for more than 75% of the
online sales in China, has played a major role in this inclusive growth story. According to Xiaozhun Yi,
the Deputy Director General of World Trade Organization (WTO):14
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China’s experience in the past decade has proven that e-commerce-driven growth can be
inclusive. First, e-commerce empowers micro, small and medium enterprises (MSMEs) to
compete with large enterprises on the same stage. MSMEs can leverage affordable
digital platform services, which used to be too expensive for them to establish, to build
brand awareness, acquire and manage customers, and spur innovation. Second, ecommerce knows no geographic boundaries. Remote rural residents can purchase the
same goods at the same price on the same platform as urban residents. Finally, ecommerce allows more flexible and inclusive employment.
No
ALIBABA STORY
Companies in the 21st century need to solve social problems, not just make money
— Jack Ma
Do
Jack Ma, the founder of Alibaba began his e-commerce journey in 1995, by creating an online business
directory called ‘‘China Yellow Pages’’ which facilitated Chinese companies15 to be discovered by
10
Data from Miao Wei, Narrowing the Urban-Rural ‘Digital Gap, Promoting Rural Economic and Social Development, People’s Tribune, vol.
33, 2014.
Online retail data is from E-Commerce in China 2016 (in Chinese), Ministry of Commerce, China, available via
http://images.mofcom.gov.cn/dzsws/201706/20170621110205702.pdf
12
Data
from
E-Commerce
in
China
2016
(in
Chinese),
Ministry
of
Commerce,
China,
available
via
http://images.mofcom.gov.cn/dzsws/201706/20170621110205702.pdf.
13
Estimates by Ministry of Commerce, China
14
Inclusive Growth and E-commerce: China’s Experience, AliResearch, April 2017.
15
https://en.wikipedia.org/wiki/Jack_Ma
11
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foreign enterprises searching for Chinese products. After China Yellow Pages was soon sold to a local
telecom carrier, in 1997, Jack Ma was invited by the Ministry of Foreign Trade and Economic
Cooperation (MOFTEC) of China to start and manage a ministry-affiliated online fair of Chinese
products. After two years, Jack Ma quit this enterprise and started Alibaba.com in 1999, with an objective
to facilitate trade by Chinese small businesses that were trying to export their products to the global
market.
Jack Ma had famously said that his objective of establishing Alibaba was “to make it easy to do business
anywhere.”
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This statement went on to become the mission statement of the Alibaba Group16. Of course, Jack Ma’s
fondness for MSMEs was no accident. He was a native of Zhejiang province, which was full of small
businesses led by grassroots entrepreneurs. In fact, during his early entrepreneurial career, he himself had
established a small business in translation services and had faced challenges that were typical for most
MSMEs in China. For example, all small businesses had to register under Bureau of Industry and
Commerce, and to gain access to foreign buyers, they had to participate in seldom-held fairs such as the
China Import and Export Fair (Canton Fair)17 for small businesses. This was not only expensive, but also
gave them limited exposure. On the other hand, there was sufficient demand outside the country for
Chinese products, but very limited online presence of Chinese companies, for foreign companies to trade
with. In fact, in Jack Ma’s own words, the inspiration to start yellow pages came to him, when he
searched online and found no Chinese company during his trip to the United States in 1994. This has been
Jack Ma’s secret for success throughout the evolution of Alibaba: finding gaps (institutional gaps,
information gaps, market gaps, logistics gaps and finance gaps) and converting them into business
opportunities.
Do
No
Alibaba’s growth story can be divided into four phases (see Exhibit 1 for a timeline of Alibaba’s
evolution). During the first phase (1999-2003), Alibaba.com, the business to business (B2B) trading
platform came into being, with an explicit objective to facilitate easier access for Chinese small
businesses to foreign trade. In 2001, China became member of World Trade Organization (WTO), which
opened many opportunities for exports of goods made in China. Alibaba.com therefore was timely and
became a huge hit among the small businesses weighed down by the customs and trade related regulatory
hurdles and language barriers. The Chinese government was also trying to facilitate exports of
manufacturing goods to increase economic growth in China and was happy to accept Alibaba’s
facilitation of cross-border trade. Chinese government showed an open attitude towards e-commerce. For
example, online sellers who could not meet the requirements of business registration were allowed to
register as an online business with their personal IDs.18
16
http://alibabagroup.com/assets2/pdf/Alibaba_Group_Corporate_Overview_Eng.pdf.
The fair was started in the spring of 1957 in Guangzhou, capital city of Guangdong Province. The fair opens twice annually in spring and
autumn of each year.
18
State Administration on Industry and Commerce, Interim Administrative Procedures on Online Transaction and Related Services (SAIC No.
49), 2010.
17
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In March 2002, eBay, the American auction based e-commerce company, entered China by acquiring
EachNet, which made a successful business out of the consumer to consumer (C2C) online bidding and
buying, and soon achieved a dominant position in this business. eBay’s market share was 85% in 2003.19
This gave Jack Ma sleepless nights with the fear that eBay’s power sellers might grow to compete with
Alibaba’s small vendors in the B2B space. He decided that it was time to get into the C2C business in
China, and consequently Taobao (literally meaning ‘‘Treasure Hunt’’ in Chinese) was born in May 2003.
This began the second phase of Alibaba’s growth story. Three important strategies by Jack Ma and his
team sealed the fate of Taobao in the Chinese e-commerce market and gave eBay a run for its money.
First was the ‘‘no fee’’ strategy, where the sellers could register under Taobao for free and sell their
products without incurring any commission for Taobao. Meanwhile, eBay adhered to its original formula
of making profits by charging commission on goods traded on its platform. Second was the establishment
of Alipay in October 2003, which as a third-party escrow service20 ensured that the payment by the buyers
was secure and reached the sellers only after the buyers were satisfied with the product they had received.
Although eBay introduced a direct payment system of Paypal, in this system, buyers were exposed to the
risk of asymmetric information of online trade. The third was the introduction of a chat service called
‘‘Ali Wang-Wang’’, which enabled the buyers and sellers to communicate with each other without any
cost, allowed possibility for negotiations and after-sales services. In contrast, eBay prohibited online
traders from sharing their contact information publicly and penalized off-platform transactions.21 These
three main strategies helped Taobao, an unknown entity outside China, to take on the mighty eBay, a
well-established ecommerce giant across the globe and beat it into a retreat.
tC
In a much-quoted analogy regarding his fight with eBay in Chinese market, Jack Ma had said:22
eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in
the ocean, we lose, but if we fight in the river, we win.
No
By 2005, within 2 years of Taobao’s launch, eBay’s share in Chinese C2C market decreased to 24%,
while Taobao enjoyed a market share of more than 70%.23 By 2008, eBay faded into obscurity in China,
whereas Taobao managed close to $15 billion worth of business on its platform. In addition to Jack Ma’s
innovative strategies, some of the fatal errors by eBay, such as charging high commission fee to the
sellers, standardizing the website design with its global site, prohibiting negotiation between buyers and
selle…
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