Through The Use Of The Pestel
Through the use of the PESTEL framework, Porter’s Five Forces and Porter’s Value Chain, throughout this essay I will be analysing the business environment which Alibaba currently resides in and I will assess the way in which these factors impact on the strategies set out by Alibaba in their annual reports. I will focus on the political and legal sectors of the PESTEL model in order to give an insight into the Chinese government and the way in which they regulate their industries as well as any interlinking economic factors, how Alibaba provide bargaining power for both buyers and sellers through Porter’s Five Forces and finally the reconstruction of Porter’s Value Chain to suit a firm which bases itself entirely around technology as opposed to manufacturing.
Alibaba is the worlds largest e-commerce company which covers aspects of business from eBay, Amazon, Google AdSense, Groupon and Paypal, thus classing it as a conglomerate with 350 million active buyers (Alibaba Group, 2015). If we make the assumption that Alibaba will maintain its current market stature and follow the patterns of Chinese lifestyle, which is shown in the company’s current, yet constantly adapting, business strategy, this dominance will inevitably occur (Sun, 2015). Due to Alibaba’s increased scale and market presence, it is being seen that the firm is now a prominent player in the e-commerce industry and therefore as a company, they are able to experience the advantages of this, in areas such as creating partnership contract agreements and also in reducing the costs of running the company (MarketLine, 2015).
The PESTEL framework revolving around a firm’s strategy considers 6 areas which companies can research in order to analyse factors that impact the organisation. When considering Alibaba, we must begin with the political factors which companies have to legally obey in order to stay in the market, thus meaning that any political change can impact Alibaba. Legislation and regulation are by far the most important factors when considering the political environment which Alibaba is in. The Chinese government have greatly influenced the way in which e-commerce has grown in China in the last decade, specifically in the countries eleventh “Five-year plan” whereby it was highlighted that between 2006 and 2010, the Chinese government wanted to pursue e-commerce due to its huge potential to bring in further revenue to the economy (Yan, 2006).
The economic factors which are analysed with the PESTEL framework show that Alibaba have been extremely important for the development of SMEs (Small-Medium Enterprises) in China due to the country becoming the worlds largest manufacturer as the growth rate of GDP has continued to increase (Baidu, 2012). Through the increase of SMEs, Alibaba has been able to create over 35,000 jobs since it started (Statista, 2016) because more firms list themselves on Alibaba and therefore as the company expands, more employees are needed to maintain efficiency. However, as seen in recent years, governments are becoming stricter on taxation rules for companies that use e-commerce. The most notable case of this was in 2015 when Amazon agreed to pay corporation tax on its UK sales (Bowers, 2015), therefore due to this, Alibaba experienced a great influx of pressure to pay these taxes in order to prevent it from hindering their business activity and financial position.
In terms of socio-cultural analysis, Alibaba was able to connect its customers with the SMEs which worked alongside their group. Similar to eBay, Alibaba provides a platform where buyers and sellers can communicate in order to purchase and sell goods, therefore providing a more personal customer experience and allowing troubleshooting to occur more efficiently, thus meaning that overall customer satisfaction for Alibaba could increase (Sun. 2015). The socio-cultural environment also greatly involves the analysis of population demographics. With rapid economic growth in China, there are now more people than ever who can afford products which allow internet access and therefore this increases the amount of people who are able to shop online. Taobao Mall is a branch of the Alibaba group which provides B2C (Business 2 Consumer) e-commerce, similar to Amazon, and this has seen an annual growth of over 85% of China’s online shopping industry due to the population becoming much more open to purchasing products online (Mackie, 2011). Another factor which Alibaba have used to focus solely on growth in China is the use of its native language on their website, ensuring that competitors from other countries will be at a disadvantage when it comes to trying to get Chinese consumers to use their business as it will be a more difficult experience for Chinese consumers to make transactions and purchase goods. This therefore shows that Alibaba is trying to maximise consumer satisfaction in China, before they begin to expand globally.
When Alibaba was first established, the technology for a safe and secure payment system had not reached China, allowing AliPay to be set up in order to provide a third party transaction platform. AliPay is predominantly a mobile solution for transactions and this interlinks with the government strategy to improve the IT sector and increase mobile data coverage in China’s twelfth 5-year plan. The improvement of the IT industries was listed in the governments top seven priorities which include both improvements of internet security infrastructure and broadband networks. This has been effective in line with the movement to m-commerce, whereby more transactions are being seen through smartphones than ever before which runs alongside the consumer’s desires in China to experience both speed and convenience when it comes to shopping, hence the usefulness of Alibaba moving into the mobile commerce market (KPMG China, 2011). Through research and development at Alibaba, it can be seen that the group is based in an environment in which the need to expand into other markets is essential. Alibaba purchased a large office in Los Angeles shortly after they declared the largest IPO in history at $25billion (Zucchi, 2015) which shows clear signs of an expansion into and also targeting of various American markets (AnalystBox, 2015).
Alibaba have been praised for being an ecological company when it is put into perspective how polluting the rest of China is. Alibaba is known to be a low impact company due to their lack of manufacturing, however the company does run a large amount of servers in order to maintain their online status which emits a large amount of carbon. To combat this, Alibaba take part in the carbon credit program, therefore they pay the government in order to be allowed to emit the amount they do, and this money is recycled into developing more ecological and sustainable environments. The company also largely invests in disaster relief and fair trade to improve the quality of life of people who have been affected (Alibaba.com Limited, 2012). Due to government regulation, Alibaba uses the sustainable energy sources which are provided in the country and they also made both air and water quality in China their top priorities which was shown when they distributed a percentage of their revenue to increase environmental awareness worldwide.
These legal procedures tie into the final stage of the PESTEL model where it is seen by many people that the reason for Alibaba’s success is due to the legal safety net that the Chinese government have provided. This has occurred by blocking many foreign websites including Google which would guarantee a search result of Amazon or eBay when searching for an e-commerce website, however due to Google being inaccessible, the website who takes priority in web searches is Alibaba, allowing all traffic to go to the site. Other legal bodies, from countries such as the USA and Canada have criticised Alibaba for allowing counterfeit goods to be distributed worldwide due to the ability for any person or business to list products on their marketplace. This however fits with Alibaba’s strategy as their service is clearly making a global outreach with more customers being present in countries other than China every day (Congressional-Executive, 2015).
Porter’s Five Forces Framework is used to identify and analyse five competitive forces to establish the attractiveness of an industry through determining its strengths and weaknesses (Johnson, Whittington, Scholes, Angwin, Regnér, 2014, pp. 41 – 42). Firstly, the threat of new entrants is generally rather low in the Chinese e-commerce market due to the fact that Alibaba is completely dominant, however, it is likely that smaller, more focussed businesses will enter the market as they are able to specialise in goods and services which Alibaba don’t provide, such as traditional items. Due to this, these smaller businesses are able to gather a solid reputation in their desired market, however it is unlikely going to affect Alibaba’s strategy which is more globally valued. Despite there being the possibility of other firms entering the market, Alibaba are able to overcome this due to their strategies of providing free membership which allows them to maintain their very large, yet very loyal customer base which thus ensures that they wont lose their customer base to other, much smaller new firms. This also ties in with the fact that there is a lack of threat of substitutes to Alibaba in todays current market. Due to technological advancements, e-commerce is a very efficient and convenient way of doing business and it is unlikely that this would ever be completely replaced by the traditional method of buying/selling goods in person and so this fits in with Alibaba’s strategy to make business easier for everyone (Alibaba Group, 2015, 55-59).
The bargaining power of both buyers and suppliers are two major factors also considered in Porter’s Fiver Forces Framework. When analysing the bargaining power of suppliers in terms of Alibaba, the company tends to provide medium-to-high power due to the suppliers playing a crucial role in the success of Alibaba. Within e-commerce, it is also necessary for firms to provide a regulated level of safety for their customers, therefore Alibaba ensure this by hiring third-party security and insurance/payment in order to provide this level of safety for their customers. These types of suppliers therefore have a high bargaining power. By enhancing the power of suppliers, Alibaba are able to contribute to their strategy goal of expanding their offerings in order to increase the average amount spent per costumer (Alibaba Group, 2015, pp. 55-59). Opposed to this is the impact of the bargaining power of buyers on Alibaba’s strategy. The bargaining power of buyers is typically fairly low when assessing Alibaba due to its predominant market being Business2Business and the fact that Alibaba has a customer base of millions of people who all have differing interests across a diverse range of demographics. Because of these diverse interests, it is unlikely that customers will have the power to ensure all firms improve the quality of their products, reduce prices etc. due to the sheer amount of customers that Alibaba deals with that look for other goods and services.
The final point that Porter makes when analysing a business is the intensity of rivalry which faces a company. Despite dominating the Chinese e-commerce market, currently Alibaba can be seen to have a fairly medium intensity level of rivalry from other firms in China, specifically from JD.com Ltd who have been a long term rival, however Alibaba still maintained 80% of all online shopping traffic in China through their sites last year (Chu Wong, 2015). One of Alibaba’s strategy goals is to develop more cross-border commerce possibilities in order to provide their services to a larger global audience and allow Chinese customers to have access to more products from around the world. This has lead to rivalry from other global forces, including eBay and Amazon, however, the rivalry here is not strong, due to several factors. eBay has a similar business model and eBay uses PayPal as opposed to Alibaba’s AliPay however due to eBay’s largely popular brand recognition, it would be unlikely to see Alibaba ever take precedence over the American online marketplace. When comparing to its apparently rival of Amazon, the links are much weaker as Amazon relies on the more traditional style of retail whereby warehouses and distribution centres are used in the process and therefore it can be predicted that Alibaba and Amazon will stay dominant in their own locations (Bajpai, 2014).
Porter developed the concept of the “Value Chain” in the 1980s as a means for managers to understand the specific procedures within their organisation that are able to achieve an increase in competitive advantage and so should be undertaken and they are also able to identify the activities which can hold the organisation back (Johnson, Whittington, Scholes, Angwin, Regnér, 2014, pp. 83-84). In the original value chain, the primary activities of a company are used step by step to increase the final value of the product which is being manufactured. When applying the traditional value chain to Alibaba, it has been modified to take into account their completely virtual service which they provide. Due to Alibaba being a virtual organisation, they must first have a customer in order to provide a service to because Alibaba relies on providing a platform for consumers to buy goods from businesses who list themselves on the site. With the traditional value chain, a customer is not needed as the goods which are produced will add value to the company that manufacture it due to it being a physical product.
The reengineered value chain model that Alibaba implemented involves technology on a very wide scale that covers all of the primary activities of the firm in order for it to generate both revenue and value. In order for Alibaba to effectively function, it follows the Inputs-Processes-Outputs format, whereby in the input stage customers join their site for free, which is pushed in Alibaba’s strategy, in order to match a company on the site to their demands. The processing or operations stages are then completed through this new technology which Alibaba implemented into the value chain which gathers, organises and distributes the necessary data for the customers in order to reach the output stage where the customer and the supplier are able to agree on completing a transaction for the desired good (Bhowmilk, 2012). Unlike normal manufacturing companies, both the inputs and the outputs of Alibaba are customers, showing that they stick to their very important strategy of a strong value proposition to customers (Alibaba Group, 2015, pp. 55-57).
Overall, it can be seen that Alibaba are a huge force in the e-commerce market who have dominated their native market and are looking to continually grow on a worldwide scale. With their CEO Jack Ma constantly striving to expand into the U.S.A, I am certain that if Alibaba are effective in keeping to their proposed strategies they will become a global power within the next decade due to their constant adaptations to new technologies and constantly updating business frameworks.