Strategic Management Analysis of Chinas Alibaba Company - Case Study Example

Strategic Management Analysis of China’s Alibaba Company Student’s Name Institutional Affiliation Contents Company Background 2 Internal Environment Influences 2 Corporate Structure 2 Competitive Advantages 4 Core Competencies 4 Price Strategy 6 Information Technology 7 Resources 8 Tangible assets 8 Intangible assets 8 Revenue 9 Research and Development 9 External Environment Influences 10 Corporate Relationships 10 Henry Mintzberg's 5Ps Strategy 10 Waterman et al.'s 7-S Model 12 Profitability of the Industry 15 Porter's Five Forces Analysis 15 Growth Strategies 17 Porter Diamond’s Model 17 China’s Alibaba Company Company Background Alibaba Group Holding Limited is an e-commerce business corporation located in China. The company provides web-based services that range from one business to another, consumer-to-business and consumer related sales. Additionally, the company offers supplementary services that range from data-centric cloud computing, engine search shopping, and online payment. The group was initiated in 1999 as a business-to-business gateway by Jack Ma with the aim of connecting overseas buyers with Chinese manufacturers. Alibaba ventured into SME mainly to champion small businesses by use of readily available resources such as the internet. Evidently, the company has been able to realize this mission as it has linked millions of buyers and sellers together with business merchants. Internal Environment Influences Corporate Structure Currently, Alibaba is affiliated to different entities. The main ones include Alibaba.com, AutoNavi, Taobao, Alipay, Alibaba Cloud, AliExpress, and Yahoo China, among others. Alibaba has no recognized organizational structure. It is managed by a group of directors who work under the Chief Executive Officer. Below is a diagrammatic representation of Alibaba’s organizational structure; Alibaba’s Current Structure: Source: Alibaba.com 2016 For the proper conduct of the Group's business, the managing board, has its responsibilities. The board meets on a quarterly basis to discuss on matters of governance and operation. A formal schedule is specifically reserved for its decisions such as operation monitoring, financial performance, overall strategic direction, major capital projects and annual operating plans (Yazdanifard, 2014). To ensure that the board discharges its duties effectively, it established Formal Board Committees that comprises of the Nomination Committee and the Audit Committee (Alibaba. Com 2016). To meet the specification for the review of adequacy and integrity, the Board takes responsibility in matters of risk management and operation control. This is also a strategy to safeguard Alibaba's shareholder investment and assets. According to Goetsch & Davis (2014), the distribution of leadership in an organization should adequately support the flow of knowledge from the middle to the top and bottom levels. The company is provided with risk management processes to help the Board in managing and evaluating risks (Alibaba.Com 2016). Competitive Advantages The following are the key factors that have propelled Alibaba Group's growth in China. Core Competencies Alibaba has achieved its profitability and competitiveness from internal activities that are well organized. As a strategic management principle, core competencies should seek to leverage and capitalize on a company’s resource strengths (Johanson & Mattsson, 2015). First, the company is located in an advantageous country that has enhanced its growth through intensive e-commerce systems. By far, China has over 560 million internet users. With this kind of environment, great growth opportunities are created thus high profit margins. Additionally, this market location has facilitated Alibaba’s internet marketing, a credible core competence that has enabled Alibaba to make it in the global economy. An incidence to explain how Alibaba prioritizes in this kind of market is the November 11, 2014, 11-11 marketing strategy that enabled them to collect $14.3 billion in just 24 hours (Busch & Moreno, 2014). In the same period, its digital marketing solutions targeted a group of Chinese consumers and raised a revenue of over $9.83 billion. In China, Alibaba has become an online payment processing leader due to its dominant position in e-commerce, thus conducting over 80 million transactions per day (Michael) Zhang & Zhang, 2015). The second core competence is the economies of scope. Alibaba sales its products in different varieties using different channels. A quote by Alibaba’s founder, Jack Ma, “The economies of scope is not Alibaba’s core competence, rather, it is the company’s culture” (Alibaba.com 2016), displays the existence to which the company values economies of scope in its operations. The company uses identical sales channels in a single cooperation thus taking advantage of the cost savings that these channels offer. For instance, Alibaba has two retail sites; Tmall which caters for brand name products and Taobao that caters for several non-brand name products traded by unknown-smaller merchants. Scale is the third core competence of Alibaba. This includes the cost savings that are realized from larger volume sales. With this core competence, Alibaba is set aside by size, thus creating a point of differentiation. For instance, the company’s Tmall and Taobao have been operating the highest parcel of deliveries in China. More than half of the parcel deliveries made in 2016 were transacted by Tmall and Taobao. In 2012, Tmall and Taobao transacted a combined volume of $163 billion, surpassing the total for both eBay and Amazon (Alibaba.com 2016). Additionally, Alibaba has established a strong e-commerce platform due to its expertise in building networks. Possibly, networking has been a core competence due to the expanding number of users of the company’s products. The benefits that have risen from this guiding principle are much more than it could have been without. Products have become more valuable to each user due to Alibaba’s large network. The company has become a form of “collective entrepreneurship” that links thousands of merchants in a circular chain. The company provides the merchants with a platform in which they promote their products. By so doing, a large volume of customer traffic is created. Price Strategy One of the most obvious challenges in operating an e-commerce business is the limited number of customers. It becomes even difficult when competing forces are high. Alibaba faces stiff competition from Amazon, eBay and JD.com. Amazon has indulged in owning warehouses and distribution centres. The company has been able to attract over 2 million third party sellers who participate in the selection of their new and used products at fixed prices (To & Lai, 2015). Amazon manufactures self-branded products and has excellent logistic potential. In 2016, Amazon earned $30.4 billion in revenue while Alibaba earned $34.29 billion Alibaba Group 2016). On the other hand eBay, is a distinct brand that specializes in online retailing, commerce and digital marketing. The company enjoys a more autonomous brand recognition over that enjoyed by Alibaba. The two companies have not been able to surpass each other in their homeland records. In 2016, eBay generated a revenue of $20.9 billion. This figure changes on an as reported basis and is likely to reach $ 30 billion (Alibaba Group 2016). As Chang et al. (2014) recommend, tactical pricing is an important strategy to attract clients in an e-trade market. However, this method should target customers who are regular internet users (Park et al. 2014). Hollensen (2015) argues that the point of differentiation in any competitive business environment is quality and price. These two aspects should match since one effect on the other reflects the same on the other. Danziger et al. (2014) also assert that revenue is directly proportional to the strategic principle governing price and quality in a company. Alibaba has not created any significant differences with its primary competitors such as JD. Com in its pricing strategy. Comparatively, JD. Com generated a net revenue of $29 billion in 2015 from domestic operations while in the same year, Alibaba generated a net revenue of $ 30 billion, a difference of 5% (Tse, 2015). In their bid to offer customers a wider choice of variety, Alibaba considers the suppliers' cost to provide its customers with products of different prices but of the same range. Information Technology Communication platform is the primary factors in e-trade business (Xiaoquan (Michael) Zhang & Zhang, 2015). This is a delicate market and complexities can arise in the absence of an effective and efficient communication platform. According to (Simonson & Rosen, 2014), information technology is part and parcel of the daily business organization and operation. It is through such systems that various organizations establish contact with their clients thus enabling them to effectively moderate, control and manage the daily business activities (Ryan, 2016). In its e-trading marketplace, Alibaba has established a communication platform through Alibaba's TradeManager tool that facilitates trading partner communication in real time (Xiaoquan (Michael) Zhang & Zhang, 2015). To ensure that Alibaba catches up with the changing trends, a team of dedicated technological experts has been put in place (Alibaba Group 2016). The team is highly motivated, and their importance is reflected in their search for innovative and better technology platforms that can facilitate e-trading. Ample security actions have been set in the bid to develop a highly complex system that can enhance consumers' online transactions. For instance, customers have been provided with a security and strong trust of online transactions by Trustpass (Alibaba.Com 2016). Besides, the company is in possession of the latest anti-spam and anti-fraud technology that can filter unwanted messages and detect any fraudulent activities (Alibaba Group 2016). Constant efforts are being made by the IT team to improve the protection and accuracy of customer transactions since customers are the entire source of business success (Alibaba Group 2016). Resources Tangible assets Alibaba has achieved high organizational performance by using resources such as financial capital, human resource and equipment in exploiting external and internal opportunities. Since the company does not operate a physical store, the utilization of these resources to the maximum is necessary. Alibaba generates its financial capital from both invested money and invested purchasing power. Financial capital is regarded as a productive capacity based on the transactions that are successfully completed each day. Since the time of its establishment, Alibaba has been obtaining capital by producing and selling more than the demand. This strategy has enabled the company to save the surplus thus optimizing its operations. Alibaba has also strategized in the use of technological equipment. These comprise of computers, technical staff and communication devices. The company uses computer links to generate transaction codes and reference numbers to ensure that customers are well protected. The technical staff manages machineries and provides immediate technical solutions in case of breakdowns. Additionally, with the integration of IoT, these equipment helps the company to perform data analytics to meet customer preferences. The use of the Trustpass tool serves to promote customer protection and transaction accuracy (Alibaba Group 2016). Intangible assets Brand reputation is the main source of Alibaba’s sustainable competitive advantage. This resource has made it possible for the company to surpass Amazon, eBay and JD. Com to some extent. Alibaba’s brand reputation comprise of over 40% of its market capitalization (To & Lai, 2015). The company has used this asset to improve the quality and accuracy of its perceptions, expectations, intellectual property and business relationships. Evidently, it is because of the company’s brand reputation that it has been able to retain its employees since its establishment. Recent research shows that 80% of employees are likely to leave companies with weak brand reputation (Gosling et al. 2016). Revenue In generating high profits, the company considers the establishment of a strong client base as its first move. The use of strategies and models such as Virtual Reality and the increase of merchandise volume have been the main sources of revenue to Alibaba. Alibaba uses the Virtual Reality offline show to target millennials in an effort enhance shopping experiences. To even attract more shoppers, the company is setting out to expand this program in Taiwan and Hong Kong. An excellent model that has been adopted by the company is the Online to Offline (O2O) acquisition strategy that combines both mobile payments and discovery tools to benefit both buyers and sellers (Alibaba Group 2016). Revenue generated from Alibaba's seven companies, including Tmall, Taobao, Alibaba Small Business Operations, Alibaba Cloud Computing, and Alibaba International has been boosting its overall performance to a greater extent. With this, the Group can integrate corporate functions, the retail, mobile e-commerce and wholesale market. 82.6% of revenue accounted for the company's operations. 8.5% of the revenue was generated from international e-commerce operations while its Cloud Computing business generated the remaining 8.5% (Alibaba Group 2016). Research and Development To achieve business sustainability, research and development (R&D) is a primary factor to consider. According to Warusawitharana (2015), R&D is an immediate source for innovation and creativity in any particular company. The R&D function has led to innovative breakthroughs through painstaking efforts. As at 2016, Alibaba Group spent $6.39 billion in R&D, an increase of 5% of what was used in the 2014/2015 period. By so doing, the company has acquired a competitive edge over its competitors such as Amazon.Com and eBay. The company uses this function to develop foresight on future customer demands and preferences. From the Alibaba.Com's financial data, it is evident that expenses on R&D are considered as an investment rather than expenditure. Johnson, (2014) asserts that long-term business sustainability can be achieved as a result of the sustained R&D effort since e-trade is a market that moves on only through discoveries and scientific inventions. Alibaba uses the R&D function as a resource for shortening time to the market and an as an approach to stay ahead of the learning curve. As Hair & Lukas (2014) assert, firms should use R&D as a strategic orientation tool in meeting short-term and long-term operational goals. External Environment Influences Corporate Relationships The data from the company's website reveals that its operations are affected by different forces among them government regulations and influences. The most recent case supporting this assumption is the alleged selling of counterfeit products by Alibaba sellers. This led to a war of words between Chinese officials and the company management which led to the significance decrease in stock prices (Er-liang, 2015). At least for now, the company is in terms with the government following a PR work conduct towards overcoming this threat. Henry Mintzberg's 5Ps Strategy This Model advocates for the use of effective strategies in meeting market changes and other business forces that are difficult to control. Its proponent, Henry Mintzberg, asserts that great strategies beget operational success. According to Mintzberg (1978), strategies should be dynamic as market and business are also dynamic. Regarding this assertion, he pinpoints five golden approaches to formulating an effective strategy; Plan, Ploy, Pattern, Position and Perspective. Figure: Mintzberg’s 5 P’s Model The following is an analysis of Henry Mintzberg's Model of Alibaba; Plan Being a highly established company, Alibaba has plenty plans. These plans are often encrypted in briefings, presentations, and documents. To ensure adequate "ownership" and consultation, the board circulates and updates the company's plan regularly. These plans provide the different sub-companies affiliated to Alibaba such as Tmall, Taobao, Etao, and Alibaba Cloud Computing among others with a framework to access and compare what they plan to achieve. Ploy According to Mintzberg (1978), every organization that opts to achieve success must establish a good reputation. However, the deceptive ploys that Mintzberg (1978) mentions in his article are not uniformly present in Alibaba. But then, the company can easily choose the kind of image it wants to publicize about itself. For instance, in the case of the need for sponsorship from investors, Alibaba can stress on a highly successful area such as market control and internet marketing. According to Hitt et al. (2012), areas that are less worthy should be overlooked to ensure that that the best of its image reaches investors. To get the best chance of gaining media coverage, the content it opts to publicize must be appropriate. Pattern For any company to collaborate effectively with local and international marketers and partners, it must establish a unique pattern but be consistent in its operation. This is a competitive behaviour that has enabled Alibaba to top in the global e-commerce industry. The company uses this strategy to benefit from distance operations and local knowledge. The strategy is centrally endorsed within the company's operation provisions. For instance, Alibaba made partnerships with Mars Inc. in 2016 and sold more than 17 brands of Mars in China, granting it a share income of $1 billion (To & Lai, 2015). Position Since its foundation in 1999, Alibaba has positioned itself as an online and distant operator. The company equates this idea to the military strategy, wherein the army will defend or attack a position. In this highly competitive market, Alibaba uses this strategy to defend their market share and attack that of other companies such as Amazon and eBay. Perspective In Mintzberg's phrase, "perspectives dictate the way things are done" there is a general idea that every organization is inclined to a set of processes and procedures that determine the perspectives of handling organizational matters. Alibaba's mission regarding this is to remain China's most preferred e-trade company. With this reason, any particular company can be able to control millions of transactions from millions of customers every day (Hitt et al. 2015). Waterman et al.'s 7-S Model This is one of the most prominent Models that is exercised by Alibaba to ensure the establishment of corporate relationships and the achievement of a competitive edge. The company’s skills, staff, structure, systems and strategy are linked together with the common values that are shared within. The following is a diagrammatic representation of Waterman et al.'s 7-S Model (1980); Figure 1: Waterman et al.’s 7-S Model (1980) Structure In Alibaba's organizational structure, daily activities are divided into particular units. Every department in the supplementary company takes a responsibility of accomplishing related tasks to ensure the smooth running of business. The company's board has the mandate to review this activity and draw marketing strategies from the findings. In this idea, Hitt et al. (2015) as recommended that activities are coordinated and integrated in a straightforward manner so as to overcome competition. Alibaba takes care of this specification by exercising labor specialization where individuals who are working in the same department are inclined to the same organizational goals. The company makes use of departments such as finance and marketing as a mechanism of establishing a causal structure. Strategy One of Alibaba's primary mission is to connect local Chinese with international suppliers and customers. To effectively achieve this purpose, the company seeks to enhance its competitive advantage in different ways. First, Alibaba is spending a lot of resources in marketing. Marketing will provide it with an increasingly strong customer base, and this has been witnessed over the years. The company also specializes in strategic pricing, integration of technology and product promotion as mechanisms for achieving a competitive edge. Systems Alibaba has established the use of various performance evaluation procedures. There are procedures for employee motivation and customer satisfaction. Resources are allocated to the sub-companies depending on their extent of need and urgency. There is an informal communication routine, wherein, communication flows across all departments and managers. Customer and employee conflicts are resolved by use of mediation and deliberation. Staff Activities of Alibaba's departments are organized and managed by highly effective staff. The company perceives the staff as a compulsory human resource that can help it to achieve its goals. The staff is grouped into manual and technical units, depending on the skills and knowledge required for a task. According to Warusawitharana (2015), this manner of skill and knowledge differentiation is primary to the achievement of success and growth of a company. Additionally, Hitt et al. (2015) recommend that for effective management of operation activities, employees should be categorized by their attitudinal and educational characteristics. Style The behavior patterns of Alibaba managers, directors, and the staff is based on the company Act. Failure of any of these groups to observe the behavior provisions attracts punishment in the form of a fine, dismissal or both (Alibaba Group 2016). This style of operation enables Alibaba to be effective in its operation and thereby attract a greater market share. Skills Alibaba purposes to achieve global competence by use of distinctive capabilities and core competencies. The company values these aspects as active skills that directors, managers, and the staff should be made aware of. This kind of skill is necessary because the company does not operate in a physical store. It is with the use of these skills that activities and programs are smoothly accomplished (Kersiene & Savaneviciene, 2015). Shared Values The elements discussed above are linked by shared values that are at the center of the 7-S framework. As Monczka et al. (2015) explain in their understanding, this central aspect exists to determine the kind of influence that an organization has towards shareholders, employees and at large, the society in which it operates. Alibaba's orientation to these groups reveals the existence of a link, enhanced by common values and core beliefs. The customization of its websites to fit the language of International market strands such as China, Japanese, Spanish and Korean serves as an indication of this kind of link. Profitability of the Industry According to Caiazza et al. (2015), in evaluating an environmental threat of a firm and its industry profitability, Porter's Five Model analysis is a crucial framework. The following is Porter's five force analysis on Alibaba. Porter's Five Forces Analysis This Model analyzes business strategy development and the level of competition within an industry. It propounds that the intensity of competition in industrial organizations is determined by five forces. These forces also determine the attractiveness of an industry as the combination of all of them drives down overall profitability. Figure: Porter’s Five Forces Model Threat of New Entrants Alibaba operates in an industry that does not pose serious obstructions to new entrants. In China, it is never difficult to establish an e-commerce business (Michael) Zhang & Zhang, 2015). This force is contributed to by the fact that a large population in China interacts through various internet platforms (West et al. 2015). It would, therefore, be easier for any start-up to triumph. Equally, the presence of traditional Chinese businesses that are specialized in online marketing poses potential threats as they have gained sustainability by their good reputation in the marketplace. More importantly, this force is not strong as the level of operation and success that Alibaba has achieved over the years is not easy for the incoming businesses to reach. Presently, the company is controlling up to 72% of the market, a strong chain of distribution and a strong brand name. Bargaining Power of Suppliers This force is relatively weak as suppliers have little bargaining power. Having majored in the dissemination of various services and selling of a wide range of products, the company commands cheap volumes of materials from suppliers. Alibaba is the principle determinant of the prices of goods sourced from suppliers. This force is therefore relatively low. Threat of Substitute Products More often, various businesses have shown efforts to take Alibaba's market shares. This force is relatively high and can lead to a decrease in the company's market shares. Companies like Chinese Cosmetic Suppliers and Avon are a real threat to Alibaba. However, this type of business in China is referred to as a "Ponzi" meaning that it is not such a serious threat when a company is properly organized and structured (Michael) Zhang & Zhang, 2015). Intensity of Rivalry among Competitors This force is relatively high because of the presence of Amazon and eBay. Alibaba's greatest rivalry emanates from global sources. The strength of this force has been propagated by the emergence of global industry leaders like UPS and FedEx that have taken over control in China markets. They have globalized logistics and as such, rivalry among Alibaba, eBay and Amazon is of high intensity. To ensure that it survives, Alibaba is continuously using reactor strategies and defenders for strong competition. Such strategies and defenders include product differentiation through quality and marketing. Bargaining Power of Buyers In this particular case, the force is relatively low. This is evidenced by the fact that buyers are holding less bargaining power. Alibaba is operating in a market with millions of customers who have different preferences. The force is also neutralized by demographic structures among customers and their existence in different interest groups. Customers, therefore, cannot bargain on the prices that the company can set on the products. Growth Strategies Porter Diamond’s Model This model focus on two organizational views; The Resource Based View and the Industrial-View. Its principle view is that the performance of a firm should be used to analyze national competitiveness. It is from the national environment that companies develop their resources, managerial styles, capabilities and identity (McDONALD & Brown, 2016). Hence, for competitive advantage to be sustained, there is the need for dynamic advantage. The components of this theory include; actor endowment, demand conditions, related/supporting industries and strategy. Figure: Porter Diamond’s Model The following is porter Diamond’s Model in Alibaba; Factor conditions Being an online company, technological infrastructure has been successfully achieved in Alibaba. This has been achieved through knowledgeable human resource in maintaining the web design to meet customers’ need. The commitment of the workers in conducting more research has created a healthy competitive position internationally. Related and supporting industries Due to competition from eBay and Amazon, Alibaba has come up with unique strategies, among them, differentiation of its services by improving techniques of competing companies. Alibaba has benefitted greatly from the copying of some of the services offered by their counterparts by offering complementary services. Home demand conditions Alibaba originally operated in China, currently it operates globally due to its quality services it has offered over time. Being an online business entity its market nature is not limited to a specific location. The company has enjoyed high net profit in the home country considering the home market share. Even so, Alibaba has not enjoyed the economies of scale considering the competitive nature of its business environment. Strategy, structure and rivalry The company has recorded a good history in management by achieving most of its core objectives within and globally. Overtime, Alibaba has maintained a good socialization culture between its workers and clients thus reducing possibilities of misunderstanding between both parties. Alibaba faces international rivalry as compared to domestic rivalry making it strive to surpass the competitive nature of the industry. Government The China government has put an enabling environment for operation of most companies (To & Lai, 2015). Most restrictions and regulations favor expansion of Alibaba’s operations to other countries. The tariffs imposed are affordable to the company thus easy to comply. This has made the company operate without any recorded collapse over many years. Chance events Alibaba has more opportunities to expand the market share. The customers are not limited has it entails clients of a wide coverage with the growing internet users. Furthermore, most businesses have shifted their marketing strategies to online advertisements (To & Lai, 2015). Alibaba has an opportunity to develop new Apps for increased access of the target market. References Alibaba.Com (2016) http://m.alibaba.com/ Alibaba Group (2016) www.alibabagroup.com Busch, W., & Moreno, J. P. (2014). Banks' new competitors: Starbucks, Google, and Alibaba. Finance and accounting, Harvard business review. 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