Executive Summary
This management report is a Strategic Business Analytic report based on Alibaba’s Macro and Micro Environmental Factors. The Macro Factor Analysis employs two types of analysis; PESTLE framework and Porter’s 5 forces whereas the Micro Factors are analysed by two frameworks; VRIO and SWOT Analysis.
1.0 Introduction
2.0 Alibaba’s External Business Environment – Macro Factors Analysis
2.1 PESTLE Framework
POLITICAL
i) China’s initiatives supporting the development of E-Commerce
Due to the rising importance of IT, multimedia and communication in the 90s, the Chinese Government proposed a plan (China National Information Infrastructure) to regulate the new technologies and encourage e-governance. The series of projects termed as China’s ‘Golden Projects’ eventually became a regulatory framework and infrastructure for future emerging e-Commerce markets (Li & Suomi 2006).
ii) Trade War with US
The world’s largest economies, US and China, is currently at trade war as President Trump proceeds with his election promise of making trade war fairer. China was placed US$50 billion in tariffs earlier this year, and in September 2018, has been recently imposed an addition US$200 billion in US imports of Chinese goods (The Straits Times 2018). Along with the ongoing tensions, China is also experiencing a depreciation of its currency (due to US Federal Reserve increase of interest rates) and a slowdown of its economic growth, investment, factory production and retail sales (Shane 2018). The tariff taxation increments force Chinese retailers to increase its prices for its locally made products, goods and logistics (VOA 2018).
iii) Cross-Border E-Commerce (CBEC) Tax Reforms
The CBEC regulations were revised in 2016 to improve E-Commerce’s market regulations. The new policy’s regulations entail certain factors such as e-information can be accessed by the customs; VAT, consumption tax (if applicable) import taxes and tariffs are added, and tax exemptions are not applicable (Shira 2018).
ECONOMICS
i) Purchasing Power
Alibaba strong purchasing power gives it the capacity to expand and penetrate feasible markets within and outside China. In 2018, the company and its Japanese conglomerate affiliate, SoftBank, together funded to horizontally integrate and merge two of the former food delivery businesses in China; Ele.me and Koubei (Kharpal 2018). International coffee chain, Starbucks, has also formed a new retail partnership with the company, whereby the former has partnered with the E-Commerce giant to pilot coffee delivery using the abovementioned food delivery business, Ele.me. Globalisation is its long-term strategy of expansion; with the company investing a further US$2 billion (additional to US $1 billion in 2017) in Singapore’s ecommerce company, Lazada (Liu 2018), and US$1.1 billion (in 2017) in Tokopedia, Indonesia, for the S.E. Asia market.
ii) Change in China’s Economy – Domestic Trends & Monetary Policy
The outlook for China is currently predicted to be bleak as they are suffering from the devaluation of its Yuan and slow domestic growth. Investments, Fixed Assets retail spending and corporate profits have lessened (VOA 2018). The devaluation of its currency also makes it cheaper for American consumers (VOA 2018). The credit policy is tightened thus money supply has weakened (UBS Asset Management china-insights 2018).
iii) Growth in E-Commerce Market
It is estimated that 42% global e-commerce occurs in China, resulting a venture capital of US $17 billion (19% global total) with an estimated annual surplus of US$10 to US$15 billion due to digital services (Smith 2018).
SOCIAL
i) Online shopping consumption & behaviour (Consumption Upgrade)
In 2017, the E-Commerce industry accumulated US$4.26 trillion, an increase of 11.7%, with its CBEC transactions gaining 8.2 trillion Yuan (Atimes 2018). Nielsen China’s online shopper trend evaluated the number of CBEC purchase to 67% in 2017, due to the surge of mobile users, digital payment, ‘new retail’ businesses and social media awareness to be factors of the escalation (Bali 2018).
ii) Internet Usage
In a Forbes article, it was reported that the Chinese Government estimated 802 million people are using the internet (which is 57.7% of the population) and 788 million people are mobile users (McCarthy 2018).
iii) Education Level
A research made by Ünver discovered that higher education levels improve the literacy rate, thus creating a positive contribution to the Internet Penetration Rate and a higher GDP (Ünver 2014). These individuals are also more likely to be digitally literate (Ünver 2014).
TECHNOLOGY
i) Growth of Big Data
Big Data plays a significant role with managing E-Commerce as it assists by enhancing and evaluating the management value chain of online businesses; comprehend consumer and consumption behaviours; sort payments and deliveries and recognise competitors (Ilieva, Yankova and Klisarova-Belchava 2015).
ii) E-Payment
Development of E-payment gateway such as the Alipay by Alibaba has reduced the risk of E-transactions by assuring buyers and sellers of the delivery or fake and damaged products and provided an evaluation system whereby both parties can give feedback and companies to promote honest behaviour, transparency and reliability whilst also protecting privacy rights (Yazdanifard and Hunn Li 2014).
iii) Information Technology – Security & Risk
Regulatory responsibilities of Cybersecurity in China are overseen by the National Network and Information Office and Ministry of Public Security’s telecommunications department of the State Council and its related departments as to minimise the threats and secure E-transactions, banking, data storage and personal information (Cybersecurity in China 2016).
LEGAL
i) Data protection
There is currently no consolidated data protection law nor data protection regulatory authority in China, however, there are personal data protection rules covering “sector-specific Chinese laws and regulations” (The International Comparative Legal Guide to: Data Protection 2017 [Hunton & Williams] 2017). According to the second Draft of the E-Commerce Law, the Cybersecurity Law covers the treatment of data protection (Low et al. 2017).
ii) Intellectual Property (IP)
As stated in the second Draft of the E-Commerce Law, IP owners with sufficient and proven evidence can request the take down of infringing links or closure of E-Commerce shops. Platforms that do not adhere to the regulations can be fined due to damages caused (Low et al. 2017).
iii) E-Contracts & E-Signatures
In 2005, China’s National People’s Congress policy – the Electronic Signature Law of the People’s Republic of China – was officially recognised and implemented (Hu, Wu & Wang 2004). Its purpose is to “realize online contract signing, electronic contract storage on the trusted third party and online or offline verifications” (Gu & Zhu 2014).
ENVIRONMENT
i) Internet Packaging Wastage
In 2017, China’s Singles’ Day online discount sales annual event contributed to 160,000 tonnes of packaging waste with consumers’ expenditure reaching SG $52 billion ( US $37.72 as of Oct 2018), with environmental groups such as Greenpeace stating it consequently surged carbon emissions up to 52,400 tonnes of climate-warming carbon dioxide (The Straits Times 2017).
ii) Green operation – Digital billing and payment system
China is leading on online payments and a cashless society-
with most paying through Alipay, WeChat Pay, Apple Pay and eUnion Pay using QR codes; either through computers or mobiles – reducing the need to print bills and receipts (Aldama 2017)
iii) Low impact on environment – Practice of Green Logistics
Due to China’s pursuit a cashless society and environmental groups concerns about wastage, more companies are adopting a Green logistics ecosystem – which are “practices and strategies that reduce the environmental and energy footprint of freight distribution, which focuses on material handling, waste management, packaging and transport” (Rodrigue et al. 2012) (Seroka-Stolka 2014:303).
2.2 Porter’s Five Forces Model
2.2.1 Threats of New Entrants – Low to Moderate
i) Sufficient Capital Fund
Setting and maintaining an E-Commerce retail store is low, as the internet gives easier access to enter. However, sufficient capital is required for other E-Commerce merchants to sustain due to the competitive and large marketplace environment, especially competing with giants like Alibaba, JD.com and Tencent (China’s E-Commerce: The New Branding Game 2015). Moreover, E-Commerce platforms that are open to foreign sellers need to cover the high logistics costs and visibility need to be paid upfront (E-Commerce in China: Opportunities for Asian Firms 2016) which may prove difficult for those from developing countries.
ii) Legislation & Regulations
B2B and B2C businesses need to abide policies and tax tariffs imposed by the Government (E-Commerce in China: Opportunities for Asian Firms 2016).
iii) Consumer’s Trust
Consumers have shown positive attitudes towards trust on E-marketplaces as consumers’ perception of security on online payments have considerably increased (Liu, Lu and Zhou 2016).
2.2.2 Bargaining Power of Buyers – Moderate to High
i) Price Transparency (Comparable)
Consumers, especially in China, are more inclined to be price sensitive thus price transparency is crucial. Prices on E-Commerce platforms are disclosed publicly thus can be easily comparable amongst different sellers and merchants (Smith Big 2017).
ii) E-Commerce stores is common in China
There is an extensive database consisting of different products and on different platforms thus buyers have the choice to choose which platform to buy from.
iii) Varieties of Promotional Events in the E-Commerce industry
E-Commerce stores such as JD.com and Alibaba frequently hold shopping festival and sales therefore providing opportunities for consumers to buy more (Gautel, 2017).
2.2.3 Bargaining Power of Suppliers – Moderate to High
i) Huge E-Commerce market in China
As previously stated, the E-Commerce industry accumulated US$4.26 trillion, an increase of 11.7% (Atimes 2018) in 2017, thus more suppliers are sought after to comply with the purchases.
ii) Efficient supply chain
E-Commerce companies like Alibaba is planning to invest ¥100 billion ( US $14.4 billion) for their ‘smart logistics’ to improve efficiency and delivery reach; where the products are guaranteed to reach within 72 hours (The Economic Times 2018).
iii) E-Commerce businesses rely heavily on suppliers
The large market demands for many suppliers to cater consumers’ consumption habits.
2.2.4 Substitutes – Moderate to High
i) Offline/Traditional Retail Shops
A study by Burinskiene and Daskevic found that consumers preferred online shopping more; however, some actually preferred the physical aspect of shopping (Burinskiene and Daskevic 2014).
ii) Traditional offline Retail Shops with online stores
Traditional companies who initially started with a retail offline stores are now going online to cater to consumers online. These stores also give similar experience and features as only online-based E-Commerce platforms.
iii) Social Commerce
More social commerce occurs on social media such as Facebook’s Marketplace because it helps consumers to decide better (Friedman 2018).
2.2.5 Competitive Rivalry – High
i) E-Commerce businesses with the same business model
In this digital era, it is a stiff competition in the market. JD.com is leading in 2nd after Alibaba, taking in 16.3% share of E-Commerce sales but niche competitors have also emerged; Suning – an electronic retailer – and Pinduoduo – Group-on style retailer (Long 2018).
ii) International E-Commerce leading companies entering Chinese market
As profits from the Chinese E-commerce industry is attractive, more international companies are entering the market. For example, Kinofy Group has released an CBEC platform to provide a platform for international brands to enter the Chinese market, shortening the waiting time with a lesser fee (The Straits Times 2018).
iii) Similar services provided by other competitors
Since the Business model is easy to replicate and execute, existing and new E-Commerce platforms offer the same or even better services.
2.3 VRIO Framework
R&D Innovation – Sustainable Competitive Advantage
- Value Yes China’s technological shift towards to be a diversified online community encourages the innovation of technology and the demands of big data is sought after. Alibaba Cloud (Aliyun) is currently the largest provider of cloud computing and according to its Fiscal Report of 2018, it is “the leader in China’s market for infrastructure as service”(Alibaba Group 2018).
- Rarity Yes Alibaba’s smart warehouse employs 70% robots to carry out its manual logistics (Pickering 2017).
- Inimitable Yes Alibaba is able to produce a gross merchandise volume of RMB 168.3 billion (US$ 25.3 billion) for its 2017’s Global Shopping Festival (Fung Business Intelligence, 2017).
- Organisational Support Yes Alibaba is investing US$15 billion for seven of its worldwide (Horwitz 2017).
Supply chain – Competitive Parity
- Value Yes Alibaba is spending over ¥100 billion ( US $14.4 billion) for their ‘smart logistics’ to improve its logistics and generate more income (The Economic Times 2018).
- Rarity No The second leading E-Commerce company in China, JD.com, is following suit of the predecessor, Alibaba, with an upgrade of its logistics – with the help from an investment from Google (Matsuda and Harashima 2018).
- Inimitable No Because of what is stated above, it is imitable.
- Organisational support Yes Alibaba is willing to invest billions just to improve efficient and effectiveness of the company’s logistics for consumers within and worldwide (The Economic Times 2018).
Brand – Temporary Competitive Advantage
- Value Yes Alibaba is the leading E-Commerce brand in china, and globally 2nd in the world, behind Amazon (CB Insights Research 2018)..
- Rarity No International companies such as Amazon is globally at the top of the E-Commerce industry worldwide and many other companies are following suit (CB Insights Research 2018).
- Inimitable Yes It is inimitable because the business model is easily copied.
- Organisational Support Yes With the recent merger of its food delivery businesses (Ele.me and Koubei) (Kharpal 2018), the horizontal integration makes the brand stronger as it it tries to increase profits in other industries as well.
2.4 SWOT Analysis
Strengths Weaknesses
i) Strong market share and reputation across e-supply chain i) No control over suppliers
ii) Technology and Innovation (R&D) ii) Over dependent on the Chinese market
iii) Favourable relations with the Chinese Government iii) Counterfeit products
Opportunities Threats
i) Growth of Cloud Computing & Big Data i) China’s Economy
ii) Expansion/Improvement of Business ii) Competition
iii) Raising investments and Demands of e-Commerce iii) Cybersecurity
3.2.1 Strengths
i) Strong market share and reputation across e-supply chain
According to Alibaba’s Press Release of its Fiscal Year (2017-2018) report (2018), the company’s revenue was RMB250,266 million (US $39,898 million) – an increase of 58% year-over-year (Alibaba Group 2018). Alibaba also acquired 85% of the country’s total online retail sales by year-end, taking the top position with 58.2% of market share (Yu 2018).
ii) Technology & Innovation
Allibaba has always been known to be innovative. Zeng (2018) has stated that the company created an ecosystem, coined “smart” business; whereby there’s a community of organisms or entities that work together harmoniously in order for the company to work.
In November 2015, Alibaba started utilising chatbots (AI – Artificial Intelligence) to handle large numbers of inquiries (Alibaba Group 2018).
Its official press release stated that Alibaba’s revenue from innovation initiatives obtained RMB988 million (US $158 million) (Alibaba Group 2018).
iii) Favourable relations with the Chinese Government
Alibaba has had a long history with the government and was assumed to have a “closed” economy, but the Chinese government have utilised Alibaba’s core e-businesses do its international transactions ever since the formation of the company (Somaney 2015). With this relationship, the company has always “looked after” by the government.
3.2.2 Weaknesses
i) No Control over suppliers
Alibaba has no control over suppliers as there is a lack of transparency when it comes to sellers or merchants selling on the platform. Moreover, the platform does not have the capacity to control quality that is received onto the platform or the quality that is received by the consumer.
Intellectual property is also not protected although the Government has regulations concerning the issue. One of the risks that brands or private owners have whilst selling on the platform is that it is easily accessible by anyone thus their products can be copied.
ii) Overdependent on the Chinese Market
The “consumption upgrade” coined by the Chinese Government is not accomplished because the slow economic growth and high debts have made consumers to be more conscious over their spending (Wang 2018).
iii) Counterfeit goods
Alibaba is seen as a “notorious” marketplace to find counterfeit goods and because of the lack of transparency and lack of quality control, counterfeit goods are easily sold onto the website.
3.2.3 Opportunities
i) Growth of Big Data and Cloud computing
In their fiscal report for 2017-2018, Alibaba evaluated that their revenue growth of cloud computing reached 103% (Alibaba Group 2018). Currently, Alibaba’s cloud is the largest cloud provider in China and provides cloud computing for health care companies, financial institutions, media, retail, manufacturing and other large corporations (Alibaba group 2018).
ii) Expansion/Improve of Business
Alibaba Group have diversified their company into many forms and not just E-Commerce. For example, the merge between its local food delivery businesses Koubei and Ele.me is an US $1 trillion opportunity to achieve capital and growth (Kharpal 2018).
iii) Raising Investments and Demands of e-Commerce
Alibaba is expanding its horizons and investing on other international E-Commerce platforms such as Tokopedia (Indonesia), Lazada (South East Asia) and also trying to connect to European brands via its London office (Alibabagroup 2018) (Smith 2018) (Sun 2018).
3.2.4 Threats
i) China’s Economy
The faltering situation of the trade war with US, slowing retail sales and the devaluation of Yuan makes the outlook of the economy very unpredictable and “could push the stocks even lower” (Lahiff 2018).
ii) Cybersecurity
Like any other E-Commerce company exposed to the internet, the company is always under the risk of cyber-attack such as hacking and stolen personal data such especially concerning payment transactions.
iii) Competition
China’s online marketplace is highly competitive with companies like JD.com, Pinduoduo trying to take the top spot and Amazon and ebay trying to penetrate the industry. These companies are also constantly upgrading their services as to compete against Alibaba.
3.0 Conclusion
Alibaba’s constant presence and growth can be contributed to many factors – from the visionary leadership of Jack Ma, to its efficient logistics and its steadfast innovative technologies; however, external analyses confirm that Alibaba have the risk of losing the top spot as a market leader in the E-Commerce industry.
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