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Birth of an Internet Empire

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Birth of an Internet Empire

Source:Chieh-Ying Chiu

Alibaba Group chairman and CEO Jack Ma has eclipsed global players in building the world's biggest B2C online empire. What are the winning strategies behind his rags-to-riches story?

Birth of an Internet Empire

By Benjamin Chiang
From CommonWealth Magazine (vol. 442 )

In early summer 1999, smarting from another failed business venture, former university English teacher Jack Ma retreated to his old apartment off West Lake in Hangzhou, where he and 17 partners cobbled together 500,000 yuan (renminbi) to launch Alibaba.com.

Ten years later, the company with a strange-sounding name would become the world's largest business-to-business (B2B) e-commerce company, serving as the B2B lifeline for 45 million small- to medium-sized enterprises (SMEs) in 240 countries and territories around the world.

At the same time, Alibaba subsidiary Taobao.com has become China's biggest consumer-to-consumer (C2C) and business-to-consumer (B2C) online auction website in just three years, building an 80 percent market share and a customer base of more than 170 million users. The value of transactions handled on the site surpassed 200 billion yuan last year and will likely shatter the 400 billion yuan barrier in 2010. The company's revenues are expected to grow five hundred-fold within the next eight years.

On an average day, Taobao sells 600,000 pieces of apparel. The amount of merchandise it delivers door-to-door accounts for 30 percent of the total in China's logistics market, and that share is expected to reach an estimated 60 percent by 2012.

Alibaba's Alipay.com, founded in 2004, has also risen to become China's biggest third-party online payment platform, controlling roughly half of China's online payment market through its 270 million users. On Dec. 8, Alipay celebrated processing more than 1.2 billion yuan in one day for the first time, and with Chinese consumers set to make an estimated NT$2 trillion in payments online through its platform in 2010, Alipay is being recognized as a giant financial institution.

Spreading Disruptive Innovation Globall

Though Alibaba is a relatively small company, it has ambitions of emerging as a globally influential B2B online player.

Within a decade, Ma has led the Alibaba Group in vanquishing eBay's China unit eachnet.com and acquiring Yahoo! China on its way to becoming the world's biggest e-commerce group.

Many Taiwanese Internet operators harshly disparage Alibaba's success, denouncing it as being partly the product of Chinese government protectionism. The government requires, for example, that domestic investors control at least 51 percent of Chinese Internet companies, severely restricting foreign online players' room for development. 

But few people really understand how Ma took local troops with little overseas experience and eventually defeated powerful world-class Internet operators after a fierce struggle.

"Alibaba unleashed disruptive innovation, in which an e-commerce company became not simply a distribution channel, but a partner that helps SMEs build their businesses by providing marketing, financial and information solutions," observes Yi-Chia Chiu, a professor in National Chung Hsing University's Department of Business Administration who specializes in technology management. Ma has redefined the rules of the game in e-commerce, Chiu says.

Alibaba developed three major initiatives – building an integrated "bricks and clicks" sales model, establishing market order, and helping companies with value innovation. These stand as high thresholds difficult for competitors in China to scale.

These are also the three management capabilities Taiwanese companies most lack in gaining a presence in China's markets. Alibaba's development model can be seen as the business management benchmark for SMEs that want to cultivate China's market and internationalize their operations. 

Strategy No. 1: Getting in Early

Alibaba was able to defeat foreign giants and grow steadily in a difficult market because it thoroughly researched local market culture and identified the market's unsatisfied needs before launching an e-commerce platform tailored to China's special characteristics.

Internet companies generally have the image of being high-tech operations with employees sitting in air-conditioned offices charting the course of the Internet world, but Alibaba is anything but the stereotypical online enterprise.

Of its more than 9,000 employees, 3,500 have been organized into an "iron bull" sales brigade. For every three Alibaba employees, one is an "iron bull."

This huge brigade handles the company's critically important frontline tasks of scouring office buildings for customers and checking company details. The troops are everywhere selling e-commerce services and helping the companies they sign up engage in international trade.

Alibaba's Internet platform is its "air force," but to really penetrate urban and rural areas, it still relies on its highly disciplined "iron bull" army to engage in hand-to-hand combat street by street.

"Alibaba uses a high-tech Internet platform to support its conventional retail sales approach," Chiu says.

Twenty-five year-old Wu Yang, a Jilin woman with a pretty smile and a member of the "iron bull" brigade, is responsible for sales in the Greater Nanjing area. Every day at 7 a.m., she takes a two-hour bus ride to the Nanjing suburbs to canvas office buildings, visiting at least nine per day.

"Every day I get thrown out by security guards, but after I wipe away the tears, I come back the next day to try again. Sooner or later, there'll be a day when I tap into that building's customers," she says.    

Although many companies post signs on the door reading, "No insurance agents, salesmen or Alibaba people allowed," they cannot deter the persistent members of the "iron bull" brigade such as Wu, who have helped Alibaba unearth small corporate customers hidden in the bowels of office buildings.

These agents, however, are not only responsible for sales, but also join with the company's more than 1,000 customer service people in keeping Alibaba informed of customers' comments and complaints related to its Internet platform. The company responds quickly, with the expressed goal of making the necessary changes the same day.

Strategy No. 2: Creating Market Order, Forcing Rivals to Follow

Alibaba specializes in tailoring its operating strategies to local conditions, identifying market needs and applying disruptive innovation. Thus, the new products they develop quickly become the industry standard.

For example, Ebay's Chinese unit eachnet.com prohibited private communication during an online transaction, which created an opening for Taobao.

"You can't physically touch items on the Internet, so of course you want to provide buyers and sellers more channels through which to communicate. That makes it possible for potential buyers to ask questions about a product until they feel comfortable about making the purchase. That's just the way people are," says Taobao's chief financial officer Daniel Zhang.

The real-time information software promoted by Taobao at its inception and its free incentives have helped it overtake eachnet.com, which had a 90-percent market share, in just three years to become the industry leader.

After cementing its hold on the market, the online retailer realized that many consumers still had a sense of mistrust in online vendors or felt cheated after receiving a product that did not live up to the online photo advertising it.

"This sense of mistrust has a severe impact on the development of online shopping," Zhang stresses, and it compelled Taobao to establish order in China's online shopping market on its own.

Taobao designed a three-pronged rating system that enables buyers to separately grade a vendor's service attitude, products, and even logistics service.

"The standard of China's logistics companies is uneven. A perfect product can be destroyed by the shipping company during the delivery process," Zhang says.

Last March, Taobao joined with more than 10 shipping companies to create a global first: an "online product logistics recommendation index." The system allowed consumers to rate logistics providers, which helped enhance the integrity of the online shopping environment.

Alibaba, Taobao, and Alipay have also created a sense of order in China's B2B, B2C, and C2C e-commerce sectors.

"In the future, everybody who wants to get into e-commerce or online shopping must follow Alibaba's rules of the game," observes Jimmy Yiu, the CEO of Taiwan-based e-commerce service provider eDynamics, which runs one of Alibaba's Taiwanese websites, tao1shop.tw.

Strategy No. 3: Helping Customers with Value Innovation

Alibaba CEO Ma clearly realizes that the core competence of e-commerce businesses is not technical prowess as some may believe, but service.

In targeting SME e-commerce, Alibaba developed a "Trust Pass" service out of consideration for both buyers and sellers to overcome the sense of mistrust some have toward online transactions.

Jackel Sheng, director of technical and product development at large format digital signage provider Collevo Inc., says Alibaba's safety and security system protecting buyers and sellers is unique. Alibaba's website is the first hurdle. Suppliers must constantly update information on new products for them to remain featured on Alibaba. In contrast, conventional Internet service providers often host obsolete websites as long as the fees are paid, leading to foreign buyers placing orders for samples displayed on the site only to find that the company no longer exists.

Also, after Alibaba signs a contract with an SME, it immediately sends somebody to photograph the company's production line and products and directly posts the photos on its website for buyers around the world to see, a program designed to prevent scams by shell companies. Alibaba's customer service department also calls its contracted members weekly for suggestions on the operating system and adjusts the transaction platform accordingly.

By helping customers solve problems, Alibaba has created commercial opportunities for itself. Ma clearly realized that financing and training were the main weaknesses of most SMEs, so in 2007 Alibaba joined with a number of banks in China to form the Ali-loan program to ease the financing bottleneck faced by small companies. As of June 30, 2009, the program had processed in excess of 2.6 billion in loans to around 1,400 SMEs in Zhejiang Province, according to the company.

Cultivating Talent, Collecting Intelligence

To help SMEs overcome their lack of e-commerce talent, Alibaba set up the Ali-Institute in Hangzhou in conjunction with 300 schools. The institute, which trains the e-commerce staff of Alibaba members for free, has already instructed more than 50,000 people. "And in the next five years, we expect to expand to 1 million students," Alibaba.com CEO David Wei proudly asserts.

Accurate market intelligence and analysis is the secret weapon to Alibaba's lightning attacks that continuously frustrate rivals.

Alibaba currently has 45 million SMEs using its system, but Ma still insisted on founding the Alibaba Group R&D Institute to study the latest global and Chinese market trends. The research reports generated by the 100-person staff are fed to company managers to help them make decisions.

"The R&D Institute is Alibaba's brain, researching industries at any time. The institute was integrated with the company's software unit Alisoft to develop e-commerce software, making Alibaba smarter," says Tzong-Ru Lee, a professor in Chung Hsing University's Department of Marketing.

In contrast, many big Taiwanese electronics vendors with annual sales exceeding NT$100 billion are unwilling to spend even NT$1 million a year on industry research reports, leaving them far behind Alibaba in their grasp of market intelligence.

Alibaba's Next Step

Someone once asked Jack Ma who Alibaba's biggest rival was. Without hesitation, he replied, "Wal-Mart."

Today, the Alibaba Group has become the Internet world's Wal-Mart, because the business-savvy Ma sniffed out the huge opportunity in moving from China's manufacturing to its service sector before anybody else.

"C2B is the trend of the future and will subvert the production and sales model in vogue since the industrial revolution. Whatever clothing you want to buy, you can go online and have it tailor-made," says Ma, noting that Alibaba has already prepared for the C2B world.

Ma's tone is full of ambition, but then, in the Internet world, nothing is impossible.

Translated from the Chinese by Luke Sabatier

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