Alibaba.

com

INTRODUCTION

Having achieved its objective of becoming one of the three largest internet companies in
the world and having executed a successful IPO, Alibaba.com Corporation's strategic
calculations will now determine whether the company proceeds on a path toward global
domination in its industry or becomes a prime takeover candidate in the dynamic e-
commerce marketplace.

Alibaba.com's recent IPO secured the capital and profile necessary to position the
company globally, and recent management actions substantiate the firm's intent to pursue
a global growth strategy. The objective of this case analysis is to evaluate Alibaba.com's
strategic choices and to direct the use of organizational resources to ensure success.

During the analysis, it is critical to address the following strategic issues.

What are the implications of the company's new ownership structure and
shareholder expectations?
How important is a rapidly expanding domestic market in Alibaba.com's
strategic assessment?
What are the merits of proposed changes to Alibaba.com's pricing strategy?
How can the company position itself competitively against B2B giant, Global
Sources?

ANALYSIS

General Environment

Alibaba.com's general environment is primarily defined by the regional scope of

Chinese markets, which consist of heavy buyer and supplier fragmentation and inefficient
distribution and communication networks. China is an extremely populous nation, and
the booming domestic economy is driven by an explosion in SME's, Alibaba.com's target
market. Anticipated growth in SME's coupled with continued government promotion of
3rd party e-commerce platforms provide a fertile domestic environment for the company's
operations. However, foreign exchange controls and inadequate credit systems do
interfere with the trade process.

Industry Environment

The internet and e-commerce are emergent phenomena in China. Although they
are only surpassed by the number of U.S. users, China's 162 million internet users
represent just 12% of the country's population. The 3% annual increase in internet
penetration does not adequately reflect the rapid pace of technological change occurring
in the industry. Online purchases are experiencing double-digit growth each quarter.
With a current e-commerce utilization rate of only 28% in China and government

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encouragement for SME's to promote their businesses with 3rd party online services, the
potential for B2B e-trade to grow dramatically in the upcoming years is great.

Essentially a B2B e-commerce company, Alibaba.com is faced with limited

domestic competition as barriers to entry are high. The market is composed of small- and
medium-scale regional and local enterprises. Communication channels for promotion of
products and services are limited. Heavy fragmentation reduces the power of individual
suppliers and customers. The threat of substitutes is industry-specific, and competition
with other marketing service providers is indirect. However, such a growth market with a
low level of competitive intensity is likely to attract competitors. A case in point, the
direction taken by Global Sources immediately creates competitive risks for Alibab.com.
And maintaining dominance in its home market is critical to the success of the company's
global growth strategy.

Competitor Environment

Alibaba.com's triumph over eBay's EachNet is a real domestic success story.

Nonetheless, international competitor Global Sources poses a direct challenge to the
company's domestic position and international opportunities with its portfolio of B2B
services. Global Sources' online revenues are increasing dramatically, despite the fact
that the company is media-centric, originally founded on the exchange of information
rather than trade transactions. As the competitor grows its online revenues, it can be
expected to expand into Alibaba.com's transaction arena unless somehow deterred.

A direct comparison between the two companies can provide insight into the extent
and nature of Alibaba.com's rivalry with Global Sources. The following table has been
constructed based on data from the case.

Alibaba.com Global Sources

Online Marketplaces 2 14
Products/Listings 35 million 2 million
Annual Sales Leads n/a 23 million
Storefronts 2.4 million n/a
Auxiliary Communication Tools, Magazines, Research,
Products/Services Online Forums, Directory Trade-Specific Exhibitions
and Search/Browsing Tools
Registered Online Users 16.6 million 1 million
(China)
Revenue US $183.2 million US $156.5 million
(online: US $64.4 million)
Objective To make it easy to do To enable suppliers to sell
business anywhere. to "hard-to-reach" buyers.
China Operations 3100 Sales/CS staff 2000 staff
30 cities 44 cities
Global Scope International users based in 230 countries
US, EU, India, UK and
Canada

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Although the competitors have very similar objectives, this comparative analysis
emphasizes Alibaba.com's heavy transactional trade volume and reveals Global
Resources' international reach beyond the Chinese marketplace. While Alibaba.com has
a significantly larger user base, Global Sources has healthy revenues to provide the
company with resources for expansion and additional services. The competitor has staff
dedicated to operations in mainland China (even exceeding Alibaba.com's reach in the
number of cities staffed with personnel). Global Sources' level of awareness, motivation,
and ability will drive its competitive actions and responses. Even though these measures
are unknown, they can be assumed to be high, validating expectations for intensified
competition for the vast and growing Chinese market.

Internal Environment

Alibaba.com is the largest business-to-business e-commerce company in China.

The breadth and depth of the company's marketplace would be difficult and costly for
competitors to duplicate. Its sales force and customer support team are credited with
attracting and retaining the company's extensive user base (especially its population of
paid members). Dedicated to enhancing the user experience, they are also responsible for
channeling market feedback to drive new product development efforts. Sales and
Marketing expenditures represent 45% of revenue. However, Product Development is
allocated only 8% of revenue to produce innovative services specifically matched to the
lucrative SME sector of online B2B trade.

The company relies on its premium brand reputation in China and its large number
of registered users to attract paying suppliers to its marketplace(s). Maintaining a
generalized platform is necessary to serve such a broad marketplace, but limits the
company's ability to pursue industry specialization.

Management believes that the company's trust rating system also attracts business
where information on trade partners is not readily available and that its paying members
appreciate a fixed subscription fee to prevent budget fluctuations. One area where the
company falls short is in facilitating processes for smooth execution of the trade deal
after the sales transaction has taken place.

Even though Alibaba.com offers a value proposition to both suppliers and buyers,
income is generated only on the supplier side of the trade equation. Value provided to
buyers attracts an extensive pool of customers, which in turn serves to increase supplier
memberships and sales of service packages. It would be worthwhile to determine if the
value provided to buyers has any income-generating potential.

Financial Analysis

A close look at Alibaba.com's income statement shows that the company's 2006
profit is 16% of revenue. With a new ownership structure, management will be
challenged to increase profitability by reducing operational costs or by increasing
revenues while holding costs to current levels. Because public investors paid a premium
for Alibaba.com shares, their expectations for healthy returns will create continual
pressure to improve performance. In addition, share-based compensation totaled 8.4% of

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revenue in 2006, meaning that employee owners will also foster a set of performance and
reward expectations for decision makers to consider when choosing amongst strategic
options.

Reviewing the revenue statement uncovers an alarming incongruity between

international business volume and revenue generation. The following table highlights the
discrepancy by comparing the international and domestic marketplaces along several
measures.

International Marketplace Domestic Marketplace

Registered Users 3.1 million 16.6 million
16% of total 84% of total
60% growth rate 85% growth rate
Paying Members 29,525 (13%) 189,573 (87%)
Revenue 431,481* (73%) 162,156* (27%)
Revenue per user 139.19 Rmb 9.77 Rmb
Revenue per 14,614 Rmb 855 Rmb
paying member
*thousand Rmb

This evaluation vividly conveys that revenues are heavily concentrated in the
smaller international community of users. Domestic revenues per user and per paying
member are significantly lower than those generated internationally. This important
factor must be taken into account when devising both growth and pricing strategies and
when establishing guidelines for resource allocation.

SWOT Analysis

Based upon the internal and external environmental analysis, the following
strategic considerations should be emphasized.

S-O Strategy: The fact that Alibaba.com's dominant domestic position and valued
membership services are matched to terrific market growth patterns in China should be
the foundation for the company's overall strategy. With its foothold in the growing
segment of online B2B commerce, the company offers much needed communication
channels to promote SME trade and to satisfy foreign trade interests in China's
fragmented and elusive regional markets. Again, maintaining dominance in its home
market is critical to the success of the company's global growth strategy.

S-O Strategy: With the company's ability to create profit-generating value for
international members, it is essential to expand these relationships and pursue growth
opportunities beyond China's borders.

S-T Strategy: Alibaba.com's market position in China is enviable, but technology

and globalization are advancing at an ever-rapid pace. Global Sources' notable shift into
the area of online trade poses a threat to the company's home market share. Using its
brand power and extensive user base, Alibaba.com's strategy must establish a strong

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competitive response with the potential to combat Global Sources' competitive behavior
and minimize its effectiveness.

STRATEGY FORMULATION

The environmental analysis conducted above provides valuable insights for assessing
Alibaba.com's current strategy and generating suggestions to maximize its potential for
success.

Increasing Marketplace Size - An extensive and active user base is the cornerstone
of the company's successful business model. Thus, a strategy of targeted marketing to
potential users in specific industries and geographic locations justifies sufficient
allocation of resources dedicated to reaching and expanding the company's quality user
base and volume of active listings. Having the largest number of potential buyers is
essential to attracting suppliers, protecting the company's dominant domestic position,
and achieving growth objectives. With a rapidly expanding domestic market and the
profitability of international opportunities, initiatives in both marketplaces are
recommended.

Enhancing Community Experiences - Ongoing development of new features and

tools also requires an investment in resources to enrich the company's pool of services,
create greater value for customers, and stimulate increased user activity. Satisfying user
needs and building a sense of community will ensure that customer loyalty and brand
trust remain high. Seeking broader and deeper information exchanges with users is one
way to strengthen the richness dimension of customer relationships. Expanding the
informational component of Alibaba.com's online focus (especially where it might
augment industry-specific capabilities) would take direct aim at Global Resources'
strengths, while exploiting Alibaba.com's own field of competitive advantage.

Leveraging the networking capacity of the online marketplace is a suitable

approach for retaining Alibaba.com's domestic lead, achieving international growth, and
acting defensively against Global Resources' competitive entry into the online business.
Planned investments in instant messaging, online forums, and other communication
services will facilitate useful interactions with users and is compatible with the
company's goals and strengths. On the other hand, moving into offline events planning
moves the company away from its core capabilities. Efforts in this direction should be
approached with caution.

Alibaba.com's sales organization is a powerful mechanism for discovering

innovative services which uniquely match customer needs. However, the company's
development team is not expressly considered an internal strength or core competence.
An increase in product development expenditures aimed at creating additional value from
internal innovation efforts should be employed to overcome any weakness in this crucial
area. Internal innovation can be fostered by establishing cross-functional product
development teams and promoting entrepreneurial leadership. Other considerable
sources of innovation include cooperative arrangements and acquisitions to quickly add
new capabilities beyond the company's immediate reach.

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Monetising the User Base - After providing years of free services to establish a
broad base of registered users, it is appropriate for management to establish a more direct
link between value created and revenue generation through an overhaul of its pricing
strategy. Any value proposition (for suppliers and buyers alike) is a potential source of
income. It is advisable for the company to closely monitor and evaluate the activity level
(by frequency and type) of its users. Only with careful thoughtfulness should valued
services be provided free of charge. Alibaba.com is a transaction-based business. The
company provides a storefront for 2.4 million businesses, yet has a paying customer base
of only 219,098 members. Even a nominal fee of $10 per storefront would provide a
13% boost to annual income. In many cases, these storefronts are the suppliers' only
presence on the internet, certainly worth $10 - - especially if Alibaba.com can develop
new ways of increasing their market exposure to potential markets and buyers.
Alternatively, even a token fee of $2 for listings (at current levels of nearly 3 million per
month) would increase total revenues by 38% per year! This demonstrates that there are
several feasible ways to generate revenue from presently untapped spheres of value.

Most importantly, the company needs to understand its value proposition in the
international marketplace, which is so much more lucrative than its domestic model.
Determining the source of this discrepancy will be a critical factor in establishing both its
pricing strategy and in identifying areas of growth which justify an investment of
available capital and resources. Regardless of the systematic approach adopted by the
company to increase domestic revenues, management should reconsider its plans to
converge membership tiers (especially by eliminating the international Gold Supplier
level) until it fully understands the value created for top-tier international customers and
has established a comprehensive pricing strategy.

Expanding International Sales Capabilities - Alibaba.com's intention to position

itself globally is clearly defined by the company's strategy to connect SME's around the
world. Sales efforts will be particularly critical to building brand awareness and
reputation outside of China. In support of a multidomestic international strategy, the
company's new organizational structure creates business units focused on specific
geographic regions beyond its home market in China. To achieve world dominance
patterned after its domestic successes in B2B e-commerce, Alibaba.com has three
options:

enter and grow in established markets (such as the U.S., Japan, and South
Korea markets where internet penetration is at 65%),
expand activity within the Chinese market to become the largest marketplace,
or
expand into emerging internet user markets, growing as they adopt online trade
practices.

The arguments for retaining a domestic focus are great. B2B e-commerce in China is
growing at a double-digit pace quarterly, signifying outstanding market positioning in a
very promising market. SME use of 3rd party e-commerce platforms is expected to
quadruple over the next 5 years. With Jack Ma's civil service connections, it may be
possible to develop or encourage programs that can further stimulate internet access and

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online commerce to facilitate market growth in China. With foreign interest in trade
opportunities in China and in light of the country's regional fragmentation and deficient
networks, Alibaba.com is in an enviable position to dramatically expand domestic
business activity. And attracting international trade partners has already proven to be an
extremely profitable strategy. On the other hand, entering foreign markets introduces
political and economic risks as well as management complexities for Alibaba.com.
Competitors in established markets are well-established and would make penetration a
difficult proposition. Growth in emerging markets is likely to take time and untold
resources before returns can be realized. Management should weigh each of these factors
when determining where to focus international sales initiatives and resources.

Extending the Online Marketplace Platform - Where Alibaba.com can leverage

business applications that are synergistic with Alibaba.com operations and that meet
customer needs, the company should pursue such opportunities. However, stretching
beyond the field of online trade marketing is a strategy that is not compatible with the
company's strengths. In fact, it relies upon Alibaba.com's after-transaction support,
which is an area of weakness for the company. It is questionable whether the
organization is structured to achieve success in this area. With that said, partnerships or
other strategic alliances might offer a logical means for pursuing potential opportunities
to expand beyond the online marketplace platform.

Growing the Business Through Cooperative Strategies - Particularly for achieving

international growth and for augmenting its platform with innovative or industry-specific
services, acquisitions, partnerships, and other cooperative arrangements offer
Alibaba.com quick access to new markets, an enhanced product portfolio, and the
opportunity to share the costs, resources, and risks associated with operating in new
global markets. It is important for Alibaba.com to recognize that building alliances and
evaluating and integrating acquired operations requires an entirely different skill set and
organizational structure to achieve success. In addition, cooperative strategies introduce
a potential loss of control which the company has not experienced in the past.

Cross-border strategic alliances are an especially promising approach to boost the

company's global expansion efforts. Proceeding with the Softbank joint venture in Japan
can serve to both secure entry into an established market (considered impenetrable by
some) beyond China and to provide a model for executing future cooperative strategies.
The ability to establish high levels of trust with alliance partners and to effectively
manage cooperative strategies can become sources of competitive advantage for
Alibaba.com. If executed properly, the company can position itself to aggressively
capture a dominant share of the global market to reach its growth objectives.

While an acquisition strategy can quickly increase market share and eliminate
foreign entry barriers, adequate assessment of acquisition targets and successful
integration can be difficult to achieve and can absorb an enormous amount of
management attention. The opportunity to acquire new capabilities and enhance the
company's portfolio of services can be more plausibly achieved through vertical alliances
and licensing arrangements specifically aimed at creating value for the company's user
base. And seeking partners in specific industries can create opportunities to deliver more
specialized platforms without damaging the company's ability to serve its broad,

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generalized marketplace. It might even be possible to build a horizontal partnership with

Global Resources to simultaneously access enhanced and industry-specific informational
sources while discouraging the competitor from expanding further into the online
transaction market. This type of alliance would require a long-term focus and close
attention to contract detail to prevent opportunistic partner behavior.

SUMMARY

The recommendations outlined in the Strategy Formulation section above establish

strategic actions which take advantage of the company's strengths, attempt to overcome
internal weaknesses, identify opportunities which can be pursued with existing
capabilities and available resources, and defend Alibaba.com's domestic marketplace
against competitive threats. Addressing each of the critical strategic issues and
considerations raised during the SWOT analysis, a pathway is provided for allocating
resources to achieve the objective of global domination, to reduce the likelihood of the
company becoming a takeover target, and to increase profitability to satisfy the
company's stakeholder expectations.

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