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External and Internal Environment Analysis of the Alibaba Group Holding Ltd
Founded in year 1999 by a group of 18 people, which was led by Jack Ma, who was a former English educator from Hangzhou in China, Alibaba Group began as a trade and commerce enabler for small businesses by engaging in internet-based platforms as leverage for these businesses to grow and be competitive in both the domestic and global markets. Today, Alibaba Group Holding Limited, is based in China and a mobile and online company that is involve in wholesale and retail trade, as well as in electronic payment, cloud computing and network services, mobile solutions and advertising and marketing services. It the biggest mobile commerce company around the world.
Alibaba further emphasized its global prominence through its highly-publicized stock offering at the New York Stock Exchange on September 2104 (Alibaba Group, 2015). The initial public offering (IPO) price was at $68 per American depositary share for about 320 million shares with a total offering size of about US$21.77 billion. The exercise options of the offer underwriters increased the total offer size to $25 billion, making the Alibaba IPO on the NYSE a world record-breaker on top of it being the largest US-listed IPO (Forbes, 2014). Accordingly, Alibaba shares opened on trading day at more than 35% above the IPO price.
Alibaba’s main business is selling. The company earns revenues on advertising and commission on product sales. In 2013, Alibaba processed 11.3 billion orders worth US$248 billion through its main platforms, Taobao and Tmall. Revenues of US$ 7.8 billion in 2013 represented 3% of cost of goods sold (Breakingviews, 2014). As stated in its website byline, it seeks to make it easy to do business anywhere, enabling e-trade and e-commerce among the market participants across the globe within its various internet and technology-based selling platforms. Taobao Marketplace (an online shopping destination), Tmall (a third-party platform for brands and retailers) and Juhuasuan are three of its net-based platforms. Alibaba further enhances its e-commerce platform by taking a step further in completing the marketing process through the provision of integrated shipping and delivery using third-party logistics service providers operating on the central logistics information system run by Zheijang Cainiao Supply Management Co. Ltd or ChinaSmartLogistics, Alibaba's 48%-owned affiliate (Alibaba Group, 2015).
The Company provides the fundamental technology infrastructure and marketing reach to help businesses leverage the power of the Internet to establish an online presence and conduct commerce with consumers and businesses. It is engaged in developing online marketplace standards in China. It has made major investments in proprietary infrastructure and technologies so as to support the growing ecosystem. The Company’s technology and infrastructure allows it to bind the significant volume of data generated from marketplaces as well as to further optimize and develop the products offered on its platform.
Environment Analysis: External and Internal
Operating from China, unarguably the world’s center for cheap outsourced products, Alibaba Group leverages on its main business location (also its main enterprise: chief China marketer) and on technology to parlay its global intermediary role in e-commerce and e-trade by connecting businesses to businesses and businesses to consumers in both wholesale and retail markets. Alibaba’s marketer role of China product and services is central to its global success in e-commerce.
As with any competitive market, much of Alibaba’s business strength lies in its utilization of proprietary technology systems that back up its global-scale enterprises, allowing it near-seamless flow and coordination of business transactions. This makes it very attractive for its customers because almost all trade transactions related to the conduct, flow and culmination of e-commerce transactions are integrated or greatly facilitated and aided with robust relevant information.
Even with proprietary solutions, however, Alibaba’s intermediary role in its main trading platforms allows seller-buyer negotiations to take place and business transacted with relative ease and transparency.
Growing from a small business focus to the global player it is now, Alibaba Group establishes dominance in the global e-commerce industry by penetrating and serving specific and profitable market segments so that market needs are met by proprietary Alibaba platforms for different market segments built on the competitive solutions that e-commerce offers. There is great organization for the segmentation of Alibaba markets, or the many markets it wishes to serve, and these segments ride on carefully crafted proprietary solutions that create a single brand monopoly effect within a business model construct that also offers monopolistic industries as well as big businesses to thrive in.
Creating Value-Added for Participants
Alibaba’s business model of connecting suppliers and producers with buyers and consumers on a global scale centered on the main selling point of selling China products and services to the world is its main strength. By connecting businesses to businesses and businesses to consumers, Alibaba is able to offer a wide range of value-creating business sourcing solutions that greatly enhance business growth and profitability for market participants towards the end of the value chain process. The Alibaba business model builds on supply chain advantages that eliminate intermediation costs that are common in the conventional retailing trade model.
With easy access to the internet by its trade customers, Alibaba’s technology-based and internet-based business solutions offer great value-added both on the supply side and demand side, greatly enhancing especially supply chain advantages by undercutting the conventional retail trading system which passes on intermediation costs with a profit along the supply chain route.
Competitive Forces at Work: 5 Forces Framework
As a unique global marketplace intermediary that utilizes internet-based interactions between sellers and buyers operating on its many platforms, Alibaba Group would be most influenced by the interaction between its customer-suppliers, who supply the products sold over its trading platforms, customer-consumers, who source their buy requirements on the same platforms for value-added solutions that outperform conventional marketing business models. As a model for competition, however, the significant factors would be threat of new entrants into the e-commerce online industry, encouraged by Alibaba’s monopoly profits, as well as rivalry among existing competitors.
It is crucial for Alibaba Group to attract great number of suppliers and producers who can provide diverse business solutions for a great number of buyers with a diverse range of buy requirements in order for the Alibaba business model to succeed. The concept of providing cheap business solutions that create greater value-added for buyers on the Alibaba platform rests on its ability to bring on to its platforms a great number of cost-effective rather than cost-push producers as possible.
As marketer of all products and services China, Alibaba Group is constrained to enhance buyer power so that it will continue to attract business and direct customers. As a global e-commerce intermediary, however, Alibaba Group profits well from the trade and commerce interaction between users of its platforms, whether based in China or elsewhere, who see opportunities in both supply chain process as well as the value chain process. It is this huge commercial success that is Alibaba that will attract new entrants to the e-commerce industry. The difficulty for new entrants would be to overcome the barriers that Alibaba has effectively set for the markets it has already conquered and this has been made possible through investments in proprietary technologies. Infrastructure investments translate to heavy costs that may present a barrier to entry for many ambitious providers.
The other significant market force for Alibaba’s competitive position would be the threat of substitutes in its business model. The advent of innovative business sourcing solutions would impact greatly on the effectiveness of that solution that Alibaba offers. Therefore, critical to this competitiveness is building on the competitiveness of China products on the whole in terms of cost-effectiveness and value-added advantage for its customers, especially in the light of increased competitiveness of substitute source-locations like India for example.
Strategies to Improve Competitiveness
Alibaba Group’s proprietary technology solutions and sheer market power rest on its ability to be the chief vehicle for monopolistic businesses that can provide cheap business solutions to small business without the negotiating clout to bargain for better prices. The proprietary technologies give Alibaba a semblance of a monopoly (dominating the market and pulling in revenues through its monopoly hold) while at the same time its business model of global intermediary representing both B2B clients and monopolistic market players (small businesses who ride on the Alibaba trading platform) allow great competitiveness, transparency and price-setting flexibility for Alibaba customers on both producer/supplier and consumer/buyer sides.
This is really the effective strategy to sustain: focus on giving value-added to its clients and customers on both sides of the e-trading transaction by giving cost-effective solutions that work and creating value downstream, to include the ultimate customer base.
Threats and Opportunities
One threat to Alibaba’s dominance in global e-commerce and e-trade would be increasing competitiveness of alternative cost-effective source locations like India, which would be compelled to build its rival marketplaces with which to sell its own competitive products, if it were. The current situation as far as India competitiveness is concerned is that this competitiveness in the manufacturing sector at least is apparent in fewer industries than China. A case in point would be pharmaceutical production in India. As business outsourcing solution, India is poised to compete with China. Alibaba Group must maintain its strength as provider of quality business solutions and this will depend in turn on the competitiveness of suppliers on its trading platforms, in quality, delivery and price, all of which translate to value propositions.
Another threat could be increasing regulation from the Chinese government over its market activities as the company wields monopoly market power. Alibaba is as exposed as other U.S.-listed Chinese companies to accounting regulation as well as questions on semi-legal structures that listed companies use to control their mainland operations (Breakingviews, 2014). Alibaba Group’s founder’s persona is said to drive the success of the company in currying favors from the Chinese Communist Party. Diversification of its businesses, and locations, as in investing portfolio, will probable mitigate the risk of falling out of grace in a highly-politicized business environment that is China. Even then, with a 102 year existence target on the drawing board, Alibaba must craft a succession and longevity plan so that the Alibaba Group and its vast enterprises survive its flamboyant founder and political destabilization that threaten its enviable place and contribution to China’s economy.
Strengths and Weaknesses
The near-monopoly status of Alibaba Group in its global-scale e-commerce industry carries with it both a distinction for business profitability, and may also be a source of its weakness. From an analysis of competitive markets, it should be easy to appreciate that the use of proprietary technologies will keep Alibaba Group on track to its goal of sustainable growth for up to the 102th year of its existence. Such proprietary services must be continually enhanced to better improve quality of service for its users so that participants attain real value for remaining loyal, or voluntarily captive, to Alibaba’s value proposition for its customer base. Understanding the business processes of business segments, as it has demonstrated to do so, and keeping its business platforms flexible to these businesses whatever the size, would be one way to build on its global strength. This global strength translates to dominance not only in the source location that is China but also in individual business regions and markets which comprise the other side, the buying and consumer side, of the e-commerce trading interface. It is important for a global market leader like Alibaba Group to continue to be visible as well on local and regional markets.
Resources, Capabilities and Core Competencies
Alibaba’s connectivity capability enabled by its technology- and internet-based online interface represents its core competency that allows sellers and buyers to link up and make transactions with minimal intervention from the intermediary. Alibaba’s transactions are technology-based and also information-based powered by technology, providing interface users real-time online and offline options and choices to engage in trading transactions with ease. For instance, Alibaba’s trading platform interface offers members a utility service to manage their product listing and requirements and internal websites. The online interface allows a wide array of trading functions and options such as online auctions, online category hosting and real-time negotiation through the Trade Manager (Bhowmik, 2012). These services can be accessed without human involvement coming from Alibaba staff. Three services compensate for this: Ali-college, Ali-forum and TrustPass.
Alibaba’s broad-based yet focused segmentation is another core competency as it addresses the varied business requirements of its diverse markets so that there is always a service and solution for every business problem or opportunity. For example, the Company’s buyers buy on Taobao Marketplace, Tmall and Juhuasuan. Global consumers buy on AliExpress and global wholesalers buy on Alibaba.com. Small sellers in China sell on Taobao Marketplace and AliExpress, Chinese brands sell on Taobao Marketplace, Tmall, Juhuasuan and AliExpress and global brands sell on Tmall Global. Sellers source products on 1688.com. Chinese wholesalers and manufacturers supply retail merchants in China on 1688.com and global wholesale buyers on Alibaba.com. Chinese wholesalers and manufacturers supply directly to global consumers on AliExpress. Global wholesalers and manufacturers supply global wholesale buyers on Alibaba.com (Reuters, 2014).
Finally, Alibaba offers a seamless integrated solution for e-commerce transactions by providing the interface and infrastructure to conduct trade and negotiation and ensure payment for a variety of payment modes as well as offer delivery services within the Alibaba scheme of things.
Value Chain Analysis
Alibaba Group’s value proposition for its clientele is creation of value-added as a result of the elimination of traditional intermediaries as business processes are integrated and served closer to supply sources that accord cost-effective business solutions. Bridging the gap between direct manufacturers and producers with wholesale and retail customers through its technology-based solutions and providing logistics support for the delivery of these transactions complete the marketing process which yields the ultimate value.
Clearly, Alibaba’s business model enhances the supply chain process for its buying customers as well as provides greater value transaction for its selling customers as e-commerce takes place in the various proprietary platforms that Alibaba makes readily available. The design of its trading interface allows minimal intermediary intervention while giving buyers and sellers to negotiate freely for business. Alibaba’s own value-added business rests on its ability to deliver value for its customer base. As earlier mentioned, its revenues are determined by sales volume generated by producer-members as well as advertising revenues raised through its web platforms. There is, therefore, a symbiotic support for enhanced value creation for all participants in the market. This is made possible by access to information relevant to the execution of business transactions and, of course, quick turnaround time made possible by real-time interaction over the web interface. This is the promise of Alibaba and its success demonstrates that this promise has been kept.
Alibaba Group. 2015. Company Website. Retrieved from http://www.alibabagroup.com/en/global/home.
Bhowmik, Roni. 2012. Analysis on the Business Model of Alibaba.Com. Retrieved from http://www.slideshare.net/ronibhowmik/analysis-on-the-business-model.
Breakingviews. 2014. Alibaba and the Twelve Digits. Reuters. Retrieved from http://edition.pagesuite-professional.co.uk/launch.aspx?eid=3e0c48a5-87c3-4846-b1ee-f604ed2a9294.
Damouni, Nadia. 2015. Who’s Afraid of China’s Economy Slowing? Not Alibaba’s Jack Ma. Reuters (U.S. Edition). Retrieved from http://www.reuters.com/article/2015/01/23/us-alibaba-outlook-davos-idUSKBN0KW1B620150123?type=companyNews.
Forbes. 2014. Alibaba Claims Title For Largest Global IPO Ever With Extra Share Sales. Retrieved from http://www.forbes.com/sites/ryanmac/2014/09/22/alibaba-claims-title-for-largest-global-ipo-ever-with-extra-share-sales/.
Reuters (U.S. Edition). 2015. Profile: Alibaba Group Holding Ltd (BABA.N). Retrieved from http://www.reuters.com/finance/stocks/companyProfile?symbol=BABA.N.
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