Written Case Business Analysis
Alibaba and Global E-commerce
China has a population of more than 1.3 billion people and an annual GDP growth rate of between 9 and 10 percent over the last 30 years (The World Bank, n.d). The country has also become the world’s second-largest economy following the United States and is playing a significant and influential role in the world economy. The favorable economic situation created several great opportunities for business growth that have been effectively seized by Alibaba, which dominates the Chinese e-commerce segment. Ideally, Alibaba is an online marketplace founded in 1999 by Jack Ma. The company has its headquarters in Hangzhou, with a global presence through their online portal. Initially, the company was designed to connect Chinese Manufacturers with buyers from the country and other countries. Today, the multi-billion company has more than 500 million registered users and sales surpassing those of Amazon.Inc and eBay together (Pride & Ferrell, 2018). The company was also first listed on the U.S stock exchange with an initial offering of $25 billion, which was the largest IPO to date. In an emphasize of its global presence, the company has opened officers in France, Germany, and Italy. Along with that, the company has also undertaken to sell international brands such as Apple, L-Oreal, and Macy’s.
Unfortunately, despite their achievement, the company has various shortcomings. For instance, although Alibaba is listed with the U.S. stock exchange, it becomes hard to invest in the company due to regulations and legal barriers put in place by the Chinese government. Alibaba owns all of its company shares, and Jack Ma holds the most powerful position in the company. Another issue facing Alibaba is the influx of counterfeit products. China is popular with counterfeit products, and there has been an increase of such goods being sold on the site, a trend that is worrying and might compromise the competitive advantage of the company.
Consistently, we make a comprehensive overview to analyze and evaluate Alibaba’s industry, market, buyer behavior, and organization structure. More specifically, we focus on the assessment and interpretation of facts through a SWOT analysis framework. Along with that, we come up with various recommendations representing the course of action necessary to help Alibaba overcome the current threats, improve on their weaknesses, and take advantage of their strengths and opportunities.
Analysis and Evaluation
Alibaba is the world’s largest business-business marketplace for world trade. The company presents several business opportunities for buyers and sellers all over the world. The main purpose of this analysis and evaluation is to help present a detailed strategic analysis of the company. The strengths and weaknesses are based on the strengths and weaknesses of the company. The opportunities are based on the opportunities available that the company can exploit. The threats involve the issues that might affect the competitiveness of the company and hinder its growth.
Strengths in SWOT Analysis
Scale of Operations
One of the greatest strengths of Alibaba is the large scale of their operations and the market it operates. Virtually, China is one of the highly populated nations in the world and among the leading economies. As mentioned earlier, the country has a population of 1.3 billion and plays a significant and influential role in the global economy (The World Bank, n.d). Consequently, according to a report by the World Bank, since initiating market reforms in 1978, China has shifted to a market-based from a centrally planned economy, a move that has seen unprecedented economic and social development. Alibaba has seized the opportunities provided by the country. Currently, the company accounts for at least 80 percent of all online sales in China.
Alibaba is the leading online commerce company in China, offering a spectrum of e-commerce services ranging from Business to Business (B2B), Business to Consumer (B2C), and Consumer to Consumer (C2C) alongside mobile payments. According to a report by Statista, the company also has shares in cloud infrastructure and China’s biggest online video. In the fiscal year ending 2016, the company recorded revenue of approximately 101 billion Yuan or $15.69 billion. The company recorded a net income of 24.32 billion Yuan, which translates to $3.73 billion. Consequently, it is important to note that most of the revenue was generated through the various e-commerce ventures with local e-commerce accounting for the biggest share of 83 percent. During the second quarter of the year 2016, the company generated 837 billion Yuan through online shopping such as Taobao, Marketplace, Tmall, and Juhuasuan. Consequently, further reports indicate that although Amazon – the e-commerce giant had a good year in 2017, Alibaba had an even better year. Bosa (2017) noted that, while Amazon’s stock was up to 30 percent in 2017, Alibaba’s stock had almost doubled intensifying the race to $500 billion in value. The two companies both dominate the e-commerce market in their respective market zones, and both are expanding new business ventures. However, the Chinese market is growing at a higher pace as compared to the United States, which explains the rapid growth of the Alibaba Group.
Although qualitative, the presence of Jack Ma at the helm of the company is another strength for Alibaba. According to an article published on the Fortune by Lashinsky (2017) on the profile of Jack Ma, the executive chairman of the Alibaba Group is one of the most singular business executives of our times. The company is one of the second-largest markets and tagged innovative too. As compared to Amazon, Alibaba’s platform is more of an asset-light strategy that has yielded the company far better profits. Jack Ma is a visionary leader, who has on several occasions served as a bridge between the Western world and China. Although he has failed in some areas such as fighting the issue of counterfeit goods, Jack Ma has been managed to raise the company to such heights single-handedly because reports indicate that he has the most power in the company to make decisions.
The good relationship with Partners
Alibaba provides a very conducive environment for its partners. Partners, merchants, and consumers working with Alibaba are offered a wide range of services including could storage, scalable platforms, and financial scheme information. The company explicitly states that every party transaction, material amendment, or modification of any related party transaction shall be adequately disclosed, reviewed, and approved or ratified by the audit committee (United States Securities and Exchange Commission: Form 20-F, n.d). Further along, it is stated that any employment relationship or similar transaction of any of the company’s director shall be probed and approved by disinterest members of the compensation committee. With these statements, Alibaba is committed to providing information to its partners, which has strengthened the trust of the partners in the company.
Weaknesses in the SWOT Analysis of Alibaba
Although Alibaba has several strengths, they also have various weaknesses.
Too many sellers
Virtually, Alibaba has been unable to cap the number of sellers who can register and partner with the company. The result has been a huge number of sellers flooding the website and driving the competition to newer heights. For instance, by 2015, it was reported that Alibaba had more than 10 million active sellers on its marketplace as compared to more than 2 million sellers on Amazon marketplaces worldwide (Wieczner, 2015). In reality, while this is good for the consumers and buyers, it might not favor the sellers. Reputable websites might also be tempted to pull their brands from Alibaba and affiliate companies.
Alibaba does not allow sellers to sell at fair and profitable prices, which is another weakness of the company. The huge discounts suppress the seller’s freedom or opportunity to sell at profitable rates. For Alibaba, they make most of their revenue through advertising spaces sold to the sellers. As Osawa (2014) notes, Alibaba does not only dominate China’s e-commerce, they also run one of the biggest online advertising agency in the country. Additionally, advertising provides the company with more than half the revenue. For Alibaba, offering huge discounts to the consumers may win them a traffic and customer loyalty, but they may end up losing reputable brands because they are unable of making profits.
Ideally, for suppliers to sell in Alibaba, they are expected to register with an account. Alibaba offers four levels of supplier membership. According to Alibaba (n.d), the free member option is free for suppliers who are still contemplating about using Alibaba. The other packages in the Gold Supplier Membership range from basic package, standard, ad premium package. According to the reviews on their membership page, suppliers who join the Gold Supplier helps assure buyers that they are credible and divert more inquiries. Moreover, it makes it easy to interact with buyers directly and showcase their products more frequently on the website. Notably, the membership fee is paid annually and even with the option of paying the fee in installment does not activate the gold membership, meaning one has to make the whole price off. Unfortunately, the presence of a membership fee for sellers may limit sellers unless they can pay in full the required amount.
Experience in China
Alibaba has a long-standing experience in the way e-commerce business works and a solid understanding of the Chinese market. For the company, this means they have the capability and meet the necessary business requirements to connect with other markets and expand their customer base.
Possible Expansion Abroad
Another possible opportunity for the company is expanding their operation beyond the Chinese boarders. However, the company is likely to face obstacles such as being unknown worldwide and strong competition from e-commerce giants such as Amazon. Inc, and eBay. Ideally, according to a poll carried out in 2014, the vast majority of American citizens had not heard of Alibaba. In fact, before Alibaba went raised their initial public offerings, 88 percent of Americans were not aware of Alibaba Group Holding (Toonkel and Saba, 2014). Instead, Americans recognize giants such as Amazon, eBay, and Walmart among others, which are the major competitors of the Chinese Company. In reality, this presents a huge opportunity for the Chinese Company. Nonetheless, as a company that is relatively unknown in the United States, it could struggle to win a customer base. Consumers are willing to do online business and pay via their cards, but often reluctant to do business with a company they have never heard of, especially with the high-profile hacking problems that have infiltrated online transactions. Notably, we cannot also ignore that majority of U.S. consumers are driven by a good bargain, and Alibaba offers just the right price. The wise thing for Alibaba is to start small, investigate markets, consumers, and competition and try building an attractive business models to offer to the Americans. Combined with aggressive and smart marketing strategies, Alibaba stands a chance of exploiting the opportunities offered by the United States.
Increased Demand for e-commerce Portals
In the current era, consumers are shifting from inline business model to online business model due to the convenience and other advantages that come along with the model. Alibaba has been in existence since 1999 and has garnered consumer trust. For the company, this is a strong competitive advantage that can curb them against tough competition from local e-commerce businesses. Additionally, the company has the backing of the manufacturers who have over the years transacted with Alibaba.
Threats in SWOT Analysis of Alibaba
Domestic and International Competitor
Amazon is one the greatest competitor for Alibaba. However, other e-commerce sellers such as eBay and Walmart pose a potential to the company’s future business prospects. Similarly, if Alibaba is looking to expand their business in other countries such as the United States, then they will have to face solidified establishments of Amazon and the e-commerce sellers.
The stability of the economy of China plays a critically significant role in the success of Alibaba Group. Currently, the Chinese government restricts foreign investment in certain areas, making it hard for investors outside China to invest and own shares in Alibaba Company. If the situation does not change, this could lead to the company facing difficulties expanding their business outside the Chinese boarders and attracting investors.
An influx of Counterfeit Products
In China, counterfeit goods are widely accepted as part of the economy. Unfortunately, there has been an influx of counterfeit products on Alibaba, which can be a threat to the company’s prospects. Ideally, when Jack Ma met up with President Donald Trump in January 2017, he promised to give the United States one million U.S. small businesses entrée (Doggett, 2017). Unfortunately, given Alibaba’s reputation as a hub for counterfeit products, American companies may find it hard trusting the Chinese company to guide them in the Chinese market. For the company, this is a direct and serious threat that could compromise their expansion and existing business success.
Recommendations for Alibaba
Over the years, Alibaba has successfully generated millions of dollars in revenue. Their mission is to make it easy for consumers and sellers to do business anywhere through online portals. The company is committed to building the necessary infrastructure to enable the continuity of e-commerce. Currently, Alibaba is among the largest e-commerce businesses and has emerged on top having surpassed Amazon – the e-commerce giant in sales. However, despite their success, Alibaba is facing various issues and problems that would threaten the current business status and compromise the future success of the company. For instance, Alibaba has too many sellers who drive the competition to new heights. This can be corrected by restricting the number of sellers who register in Alibaba. Instead of focusing on getting more sellers onboard, they should focus on ensuring that the sellers offer the consumers the right goods and meet the customer expectations. Alibaba also offers huge discounts, making it hard for sellers to make any substantial profits. The most appropriate way to handle this problem is to minimize their control over sellers, set a maximum limit and give sellers the freedom to set prices that would give them considerable amounts of profits. Alibaba also imposes registration fees for sellers who want to do business on their site. While this is hard to do away with, they should implement a plan like Amazon’s – charge monthly subscriptions depending on the marketplace and the number of sales per month. The opportunities for the company are also immense, most of them backed up the strengths of the company. The company’s deep understanding of e-commerce provides them with an excellent opportunity to tap other markets. The United States remains a huge potential for the company. With the consumer need for cheap goods, the company should consider coming up with aggressive and the right marketing strategies to penetrate the U.S. market and create a customer base. Additionally, the company is facing some serious threats that may affect the future success of the business. The presence of major competitors such as Amazon poses a real threat to the company’s existing customer base and prospects. The company should keep on innovating to ensure that they maintain their competitive advantage. The problem of counterfeit products is another issue that is a direct threat to the company. Unfortunately, for Alibaba, China is known for tolerance of counterfeit products, and issue that is affecting the consumer trust on the products offered on their site. While it may be hard to control the number of counterfeit products that find their way to the consumers through the website, the company should come up with appropriate strategies to control the large volumes of counterfeit products being sold there. Lastly, the economic status of China and the various regulations and barriers imposed on foreign traders by the government are also a bigger problem in the success of the company. Jack Ma is a visionary leader, who has in the past interacted with the government. Thus, as the CEO of the company, he should come up with ways to convince the government to design policies that will allow foreign trade without the restrictive regulations and barriers.
Alibaba could be the precursor of a new era in the business world. The aggressive strategies used by Alibaba and their dominance of the e-commerce market will certainly change the current business models. If the company can handle their internal weaknesses and address the threats facing the company, they might soon be the world leading e-commerce portal. In fact, the company has already surpassed Amazon, the e-commerce giant despite their limited presence in majority of European countries. Overall, the company has been operating for several years and has the strengths and capabilities to expand its market and increase their consumer base in countries such as the United States and other parts of Europe.
Alibaba. (n.d). Membership fees. Retrieved from: http://seller.alibaba.com/memberships/index.html?tracelog=seller_channel_membership_home
Doggett, J. (2017). Why American companies can’t trust Alibaba. Fortune. Retrieved from: http://fortune.com/2017/05/06/alibaba-jack-ma-donald-trump-owner-group-china/
Lashinsky, D. (2017). What Makes Alibaba’s Jack Ma Such a Singular Entrepreneur. Fortune. Retrieved from: http://fortune.com/2017/03/24/data-sheet-alibaba-jack-ma/
Osawa, J. (2014). How Alibaba makes money from ads. The Wall Street Journal. Retrieved from: https://blogs.wsj.com/digits/2014/09/23/how-alibaba-makes-money-from-ads/
Pride, W. M., & Ferrell, O. C. (2018). Marketing 19th Edition. United States: South-Western College Pub.
Statista. (n.d). Alibaba Group – statistics & facts. Retrieved from: https://www.statista.com/topics/2187/alibaba-group/
The World Bank. (n.d). The World Bank in China. Retrieved from: http://www.worldbank.org/en/country/china/overview
Tonkel, J., & Saba, J. (2014). To U.S. consumers, China’s Alibaba is a non-entity – poll. Reuters. Retrieved from: https://uk.reuters.com/article/uk-alibaba-group-ipo-poll/to-u-s-consumers-chinas-alibaba-is-a-non-entity-poll-idUKKBN0HB0BL20140916
United States Securities and Exchange Commission: Form 20-F. (n.d). Alibaba Group Holding Limited. Retrieved from: http://www.alibabagroup.com/en/ir/pdf/agm160524_ar.pdf
Wieczner, J. (2015). Alibaba: Here’s why our mind-blowing numbers are real
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