Alibaba's Challenges Moving Forward

I think the recent success of Alibaba’s IPO shows that most investors believe they will continue to grow. However, I believe Alibaba’s aspirations to become a global company will require a great deal of time and capital investment. In my opinion, I don’t think Alibaba will have much success outside of China, even if they invest the resources and time. This doesn’t mean that Alibaba will not continue to see dramatic growth in their revenues; those revenues will just continue to be almost exclusively from China.

Looking at the financials provided by Alibaba for their IPO, I see that less than 10% of their revenues for the year ended March 31, 2014, were derived from international commerce. This is down from almost 19% for the same period ending in 2012, and 12% for the period ending in 2013. Although the share of international commerce has decreased as a percentage of total revenues, the total revenue has increased each of these three reporting periods. Revenue from international commerce increased 10.4% from 2012 to 2013, and 16.6% from 2013 to 2014. These increases are not insignificant and would be excellent for any company. Compared to the total domestic income and growth over the same three year period, however, shows that Alibaba’s success is almost entirely due to its revenue from China. The total China commerce revenue over this period increased almost 300%! I believe this shows what a great market Alibaba has in China, and they can continue to see great growth in this market given the room China has for growth in its internet user base.

                Alibaba does face some challenges if it wants to continue the growth it has experienced in China over the past several years. One of the issues that came up related to its IPO was the use of a variable interest entity (VIE) to divert the laws in China of foreign ownership. Alibaba set up a VIE in the Caymen Islands to allow it to be listed on the New York Stock Exchange. This was due to both US regulators and laws in China dealing with ownership percentage from foreign investors in companies based in China. Having to structure the company this way has raised concerns from investors regarding their lack of recourse and control of the company. Another challenge Alibaba faces is competition from other companies looking to gain a share of the market Alibaba has dominated. Some very large companies are looking to get a piece of the Chineese E-commerce pie, including Baidu and Tencent. Baidu is “ the Google of China”, and as the dominant search engine, they are trying to take advantage of the large amount of traffic and turn it into customers for E-commerce. Tencent owns WeChat, and they also have a large user base they are trying to convert to E-commerce customers.

               Another challenge I think Alibaba will face moving forward will be deciding how to best use their resources to strategically grow. I noticed in their IPO documents, Alibaba stated it had over 70 subsidiaries. Several articles I read stated that Alibaba was moving into various industries through their acquisitions. It does not seem that Alibaba has a very focused growth strategy, instead opting to use their money to try and buy into every conceivable industry and try to become a leader. I’m not sure how well this will work for Alibaba, but I cannot think of any other company that has successfully done this. But then again, they are operating in a communist China where they very well may be picked as the winner. I know for certain that they will likely not face much competition from real global companies in their home country. This is why Alibaba will not be a successful global company, in my opinion. The Chinese government can shield them from competition domestically, but outside those borders the free market determines who succeeds.   

SOURCES:           

Tops in E-Commerce, Alibaba Is Now Taking On China’s Banks

http://dealbook.nytimes.com/2014/09/18/tops-in-e-commerce-alibaba-is-now-taking-on-chinas-banks/?_php=true&_type=blogs&_r=0

Why China’s growth story is helping the e-commerce market thrive

http://marketrealist.com/2014/09/alibaba-started-increase-presence-cloud-market/

Alibaba rivals redouble efforts on Single’s Day

http://www.ft.com/cms/s/0/473fae66-49db-11e3-9a21-

00144feabdc0.html#axzz3HJOGkwAc

Embracing Digital Technology

One only has to look at the brief summary of Starbucks in the article to know why it is important for companies to embrace digital technology. Digital technology has the potential to dramatically increase the competitiveness of a company in a short period of time. I believe the two main reasons why companies will have to utilize digital technology are the exponential growth in the number of customer who have smartphones; and, the access customers have to the internet from virtually any location. Although many people still interact on social medial using laptop and desktop computers, the majority of activity on social media is done via the smartphone. This enables individuals to interact with businesses more frequently, since people usually have their phone with them at all times. Companies have to embrace this and offer mobile platforms that will enable this interaction to meet customer expectations and demands. Companies will also have to make resources available to facilitate the operation of these mobile platforms and make sure they are continuously engaging the customers who are using them. Successful use of this digital technology will help create a feeling of participation from the customers and enable a more specialized level of customer service. The expanded availability of the internet, especially through telecommunication service providers, has also required companies to embrace the use of digital technology. More customers, through their smartphones and other mobile devices, now have a way to access the internet at any time and from any location throughout their day. Again, companies who embrace this technology by providing mobile platforms that allow customers to interact with them will undoubtedly create a competitive advantage.

                Many benefits of digital transformation were identified from the survey responses in the article. One of those benefits was an improved customer experience. Digital technology gives customers access to a company’s products and services with the convenience not available through traditional means. As the article states regarding Starbucks, “soon, customers will order directly from their mobile phones.” Enhancing existing products and services, and launching new products and services were also benefits discussed in the article. Making a product or service available through a mobile application will automatically enhance either, if done correctly. General Electric is used as an example of a company using digital technology to launch new products and services. They are offering customers an enhanced experience with information about maintenance services on the products they sell. If successfully implemented, customers would be able to obtain information on scheduling maintenance services and preventing part failures. This could potentially generate a significant amount of revenue for General Electric.

                Challenges in implementing digital technology were also identified in the article. The main challenge identified by survey respondents was no sense of urgency. The reason identified for this was that older managers do not place the same value on technology as younger individuals do, or as a survey respondent was quoted in the article, “they know nothing about technology and its benefits and also don’t want to learn.” There is no doubt that a majority of top managers do know the importance of implementing new technology in their business, regardless of age. However, implementing new technology can cause many problems when trying to merge it with existing older “legacy technology.” This is another challenge identified by the article that many companies are facing. The costs associated with trying to undertake some digital projects can be staggering. I can see how many managers would be risk averse to such projects given the implications an unsuccessful project could have on the entire organization.  

 

Source Article:

 

Embracing Digital Technology: A New Strategic Imperative

By: Michael Fitzgerald, Nina Kruschwitz, Didier Bonnet and Michael Welch