On September 19th 2014, Alibaba claimed the title for the largest IPO in the history of the NYSE. Rightfully so, Alibaba proved the power of platforms and how they can change the way business is done.
The company’s platform – Alibaba.com – is a trading platform that connects Chinese exporters with worldwide importers. Although the attractiveness of sourcing in China dates back to 1800 BC, Alibaba was the first to succeed at creating a new gold standard for companies to transact with Chinese manufacturers online on a global scale.
There is a number of factors that allowed Alibaba to get where it is now:
First, as a platform, Alibaba enjoys both positive cross-side network effects – manufacturers attract buyers, and buyers attract manufacturers – and positive same-side effects – for users, due to user generated content such as reviews and comments. The network effects are strong, and although the market is a multi-homing one, the richness, reach and affiliation of the platform allow it to become a dominant player.
Second, in contrast with its largest competitor, Amazon, Alibaba does not own any inventory. Alibaba simply facilitates conversation between buyers and sellers and allows them to shift the inventory between themselves.
Third, Alibaba decreased barriers to entry into the Chinese market and significantly shifted the bargaining power to buyers. Furthermore, it reduced coordination costs of companies by enabling to negotiate coherently via the platform.
Fourth, On Alibaba.com, buyers can select from large variety of manufacturers and products. The supply-side drivers of sellers being able increase their reach & decrease promotion costs and the demand-side drivers of buyer using the powerful Alibaba search engine in combination with the product recommendation feature, allowed the company to create long-tail of stock.
The Chinese giant created a textbook-example of a platform with incredibly strong network effects that facilitate an average of 12.7 billion dollars in orders per year. Since Alibaba owns zero inventory, it has the ability to entirely shift its focus on scaling and improving its platform. However, the question is, what’s next?
Hey Kristian,
I think that besides being a great example of how to run a platform, Alibaba has one big advantage to why they are able to perform so well in the Chinese market compared to Western players: they understand the market.
In this article form CNBC (http://www.cnbc.com/id/46009614) they state the commonly heard problems of government protectionism, corruption, or price sensitive clients did not emerge as the major reasons for failure, but more problems that can be assigned to the Western companies themselves.
Although you named one factor in which Alibaba is different form their main competitor Amazon, Amazon is still a successfull platform. So it is not only these four reasons why Alibaba is performing so well!
What I thought is astonishing is that they had their IPO in the US and not in China. There are stock markets in China, however they do not yet work as efficiently as in other countries. Even though the technology is there, the environment around the technology still plays an important role.
What’s next? Having taken a look on Alibaba myself I think it’s quality control. They need to avoid experiencing negative network effects (both same and cross side). While eBay is rather focused on B2C, this is a case where those effects have had an impact on growth (as was presented in the course).
Just some quick thoughts that came to my mind! Thanks for sharing 🙂
Hi Kristian, thanks for the interesting post.
Even though I agree with the fact that Alibaba has provided a great platform and access point for the western world to conduct business throughout China, the platform is still too unregulated to be considered as safe. It is hard to properly distinguish between good and bad suppliers based on the information presented on the website.
The best you can do at the moment is to look at the lists of certifications, feedback as well as activity and trading volume to determine if a company is what the claim to be. However, many of the listed companies are fraudulent or are proxy companies (allows seller to evade responsibilities). As a result, it can be very difficult for startup companies to find traction in the form of a reliable and trustworthy supplier through Alibaba without having to spend too much on consultation and advice.
http://startupbros.com/how-to-avoid-scams-middle-men-and-fraud-on-alibaba/
http://www.chinaimportal.com/blog/alibaba-scams-3-common-types-avoid/