Organizing your business for innovation: lessons from Alibaba

Photo Julien Legrand / Yenching Scholar & Mines ParisTech Engineer / January 19th, 2016

One year after the IPO, Alibaba's new investments have started to impact the structure of the company. The group has adopted a modern and innovative way to exploit the funds it raised, shifting from defining itself as an e-commerce platform into what the group now calls an infrastructure for e-commerce.

Alibaba made headlines in the West in 2014 when it had the largest ever IPO, raising US$21.8 billion as the world was discovering China’s fondness for e-commerce and measuring how convenient the Internet could be for affordably penetrating China’s countryside. At that time, Western analysts mainly described Alibaba as a mix of Amazon and eBay, which was a good way to quickly describe the group’s core activities. But that description proves totally inadequate in fully appreciating the originality of the company’s strategy.

It is all the more true one year after the IPO, as Alibaba’s new investments have already started to impact the structure of the company. The group has adopted a modern and innovative way to exploit the funds it raised, shifting from defining itself as an e-commerce platform into what the group now calls an “infrastructure for e-commerce.”

The semantic change is light, but the underlying strategy is dramatically different. The group is moving from trying to master a specific core activity (e-commerce) into creating, organizing and animating a whole ecosystem. This requires a whole new type of corporate organization, moving away from the traditional hierarchical tree-like structure toward a network-based one.

Alibaba started business in 1999 as an e-commerce platform for Chinese small and medium enterprises only, with 1688.com, whose pronunciation in Chinese is close to Alibaba. Building on the success of this first website, Alibaba turned to customer-to-customer e-commerce by launching Taobao in 2003. Taobao quickly replaced eBay in China, increasing its market shares from 7.2% in 2003 to 83.6% in 2007. In 2004, Jack Ma started Alipay, a software company providing current and future e-commerce platforms with an easy-to-use PayPal-like e-payment solution. In 2008, Alibaba founded Tmall, a business-to-customer e-commerce platform, whose business model is very similar to Amazon.

taobao2

At this time, indeed, Alibaba’s activities could easily be described as a combination of eBay and Amazon. However, the Alibaba ecosystem today is much bigger than a combination of those two Western companies. It has now also founded Aliwangwang, a social network connecting buyers and sellers, and Alimama, the marketing platform that helps sellers of Alibaba’s platforms to optimize the ranking of their products. In 2010, the group launched its cloud computing solution, AliCloud. In 2011, Juhuasuan, an online platform for group purchases, was spun off Taobao. Since 2014, Alibaba has invested in and founded diverse mobile apps and internet platforms such as Alitrip, Youku, Weibo, Koubei and Didi Kuaidi.

After 15 years of business, Alibaba has grown into an extensive ecosystem, taking over an increasing number of interactions between its users’ virtual and real worlds. A Chinese person can spend most of their day interacting with Alibaba’s services. They can use Didi Kuaidi to hail a taxi to go to work, and, on the way, watch TV shows on Youku. They can pay for the journey using Alipay. At work, they are likely to take regular breaks to browse Taobao or Tmall and look for items that they can get delivered to the office. Or these days, they may check Alitrip for flight tickets to go back to their hometown for the Spring Festival. Here again, they will pay using Alipay. In the evening, they may want to buy something for dinner, so they can either get food delivered using Koubei or go to Carrefour to buy ingredients. In both cases, they can pay with Alipay. In the evening, they can catch up with friends using Weibo. They are also likely to get information from this social network, known in the West as Twitter’s Chinese copy, since they are aware that CCTV news is biased.

Synergies
All of Alibaba’s services are heavily interlinked, with one very obvious hub: Alipay. By connecting to the e-payment app, one can access a wide variety of Alibaba’s services from the app main menu: Koubei, Alitrip, Taobao, Didi Kuaidi, etc. Then most of these apps rely on Alipay for payment. The underlying strategy is obvious: They rely on a two-sided business model where all those apps need to reach a critical mass of users to become attractive from both sides (sellers and buyers on Taobao or Tmall for example). Linking services together enables an increase in the number of users of those services, therefore making the threshold easier to reach for any newly added service. Obviously, if the objective is to increase the number of users, seducing them through a large variety of services is a critical objective. This is why Alibaba will seek to offer an extensive diversity of services from traditionally very diverse industries like food-delivery, flight tickets, retail, online videos, social networks or e-commerce.

The synergies are, at first sight, not obvious though. Market knowledge in particular is drastically different from one industry to another. Synergies have to be found elsewhere—in the total number of reachable users as well as in the data collected on them. Because Alibaba is operating in such a large number of different industries, it cannot easily centralize decision-making and resources. It has to rely on a decentralized network of companies that need to have much more freedom in their operations than what a usual business unit, or even a subsidiary, could have. Those companies need to be able to build their own market knowledge by themselves, often relying on tighter user feedback, as well as quickly reacting to any novelty—especially with the current digitalization trend. In such conditions, they have to operate as start-ups—something deliberately desired by Alibaba Director Jack Ma.

For example, it is well-known that Taobao and Alipay were launched in secret from Jack Ma’s apartment, not within Alibaba’s headquarters. Today, Alibaba still cultivates this spirit, now known as “Hupan Culture,” based on the name of Jack Ma’s apartment complex. At the end of the day, the holding group is only responsible for issuing a set of rules that all members of the ecosystem need to abide by so as to offer a unified user experience, as well as benefit from the underlying synergies discussed above.

Coordinating a large ecosystem of sub-companies that individually control a specific service and collectively control a whole customer experience is the new type of corporate organization that appears from studying Alibaba’s ecosystem. This is an original form of organization aimed at testing a large number of markets across a large variety of industries, but still capitalizing on very valuable synergies. Doesn’t that ring a bell? It is not specific to Alibaba—a number of big companies from Silicon Valley have adopted similar models.

Google is one of them. Entrepreneurship being in its DNA since its foundation, it is believed to use its large revenue from advertisement to recruit top worldwide talents that are then encouraged to develop their own projects within the company. Those projects, if successful, are then integrated within the Google ecosystem and benefit from the organization’s huge number of users. Thanks to this approach, Google has been able to identify and address new usages of its services. Videos are now browsed mainly on YouTube, e-mail services are dominated by Gmail, finding one’s way is easier than ever thanks to Google Maps, and working in groups is facilitated by Google Drive. That’s how this form of organization becomes interesting for traditional companies. It enables them to test new markets and products, which is especially valuable at a time of high disruption risks due to digitization.
This way of exploring potential new markets is not contradictory with those companies’ traditional ways of operating. The traditional form of organization is well-suited to address a market that is well defined. However, things get a much trickier when looking for unknown usages. So to explore them, companies need to equip themselves with an adaptive exploratory body. Seeking to organize an ecosystem of start-ups around the company may well be the cheapest but surest way to test a large variety of new usages. For traditional companies, however, the big issue is to find a substitute for the synergies Alibaba or Google are able to offer. The question eventually becomes how to identify the infrastructure that will provide those start-ups with the right environment to quickly grow. It can be a customer database, access to production capacities, expertise or anything else.

The exploratory body described above has already started to appear in various companies under more or less mature forms. Most large companies have already begun their incubator or opened their own venture capital department. However, they often lack the ambition, or simply the vision, for organizing a real and successful ecosystem around them. It is within reach for most large traditional companies. GE, for example, has successfully transitioned towards such a corporate organization.

Note from the editors. This article was originally published in our Chinese edition, developed with Shanghai Jiao Tong University, SJTU ParisTech Review.

References

BOOKS
Online

More on paristech review

By the author

  • How to navigate digitization in healthcare in Chinaon September 26th, 2016
  • E-commerce and crowdfunding: why are they the same in China?on April 18th, 2016
  • Organizing your business for innovation: lessons from Alibabaon January 19th, 2016

www.paristechreview.com

This content is licensed under a Creative Commons Attribution 3.0 License
You are free to share, copy, distribute and transmit this content

Logo creative commons

5 quai Voltaire 75007 Paris, France - Email : contact@paristechreview.com / Landline : +33 1 44 50 32 89