Alibaba Expansion Strategy Thesis

Tanaka Business School
Imperial College London
(University of London)
Alibaba Case Study:

Alibabas Expansion Strategy
By
Jiajia Ge
A report submitted in partial fulfilment of the
Requirements for the MBA degree and the Diploma of Imperial College London
September 2006
FTMBA 2005 Jiajia Ge
SYNOPSIS
The main objective of this project is to identify the possible expansion strategy for
Alibaba, a leading e-commerce company in China.
Ever since its emergence in the mid-1990s, Chinas e-commerce industry has
experienced a booming growth, owing to fast growing national economy, favourable
government policies, improving broadband access across the whole of china, as well
as the increasing number of Internet users.
Alibaba, the biggest B2B e-commerce company in China, showed its strong
ambitions for expansion after achieving profitability. It has developed from a single
B2B e-commerce company to a large group, with a portfolio consisting of four
business areas: B2B e-commerce (Alibaba), C2C e-commerce (Taobao), online
payment (Alipay), and gateway and searching engine (Yahoo! China).
In order to achieve the objective of the project, a two-stage research methodology
was implemented. The research involves the following key aspects: 1) review the
business growth process/expansion process of Alibaba; 2) analyse the driving forces
behind Alibabas expansion; 3) identify new business opportunities for Alibaba; 4)
analyse the barriers to expansion. An analysis of strategic alliance between Yahoo!
and Alibaba is also undertaken in order to identify lessons from expansion.
Based on the research, it is concluded that the more appropriate expansion strategy
for Alibaba is to focus on market penetration, geographic market expansion in
domestic market, innovative redesign of existing services and concentric
diversification. A series of activities are recommended with regards to Alibabas
future expansion. Moreover, recommendations are also made to eliminate the
barriers to expansion.
I
ACKNOWLEDGEMENTS
Sincere thanks are due to Dr. Nicos Nicolaou for his supervision and great
assistance during the project.
I also gratefully acknowledge the invaluable opinions received from the interviewees.
Finally, I would like to thank my family and my friends for their support during the past
year.
II
TABLE OF CONTENT
CHAPTER 1: INTRODUCTION ................................................................. - 1 -

1.1 PROJECT BACKGROUND ..................................................................................- 1 -
1.2 AIMS AND OBJECTIVES ....................................................................................- 2 -
1.3 STRUCTURE OF THE THESIS .............................................................................- 2 -
CHAPTER 2: LITERATURE REVIEW ....................................................... - 4 -

2.1 CHINESE E-COMMERCE INDUSTRY OVERVIEW ..................................................- 4 -
2.1.1 Business-to-Business (B2B).................................................................. - 5 -
2.1.2 Business-to-Consumer (B2C)................................................................ - 8 -
2.1.3 Consumer-to-Consumer (C2C)............................................................ - 10 -
2.2 BUSINESS GROWTH MODELS ........................................................................ - 11 -
2.3 THEORIES OF EXPANSION ..............................................................................- 14 -
2.3.1 Driving Forces behind Expansion ........................................................ - 14 -
2.3.2 Expansion Strategies........................................................................... - 15 -
2.3.3 Barriers to Expansion .......................................................................... - 15 -
2.4 THEORIES OF BUSINESS OPPORTUNITY RECOGNITION AND EXPLOITATION ......- 16 -
2.4.1 Sources of New Business Opportunities ............................................. - 17 -
2.4.2 Opportunity Recognition Process ........................................................ - 17 -
2.4.3 Key Factors Affecting Opportunity Recognition Process ..................... - 19 -
2.4.4 Opportunity Exploitation Strategy ........................................................ - 20 -
2.5 SUCCESSFUL EXPANSION STRATEGIES IN PRACTICE ......................................- 22 -
2.5.1 Amazon................................................................................................ - 22 -
2.5.2 eBay .................................................................................................... - 24 -
2.6 SUMMARY .....................................................................................................- 27 -
CHAPTER 3: RESEARCH METHODOLOGY ......................................... - 28 -

3.1 RESEARCH STRATEGY...................................................................................- 28 -
3.2 RESEARCH METHODOLOGY ...........................................................................- 29 -
CHAPTER 4: ANALYSIS & RESULTS.................................................... - 31 -

4.1 ANALYSIS ......................................................................................................- 31 -
4.1.1 Alibabas Business Growth Process / Expansion Process .................. - 31 -
4.1.2 Driving Forces behind Alibabas Expansion......................................... - 34 -
4.1.3 New business Opportunities identified for Alibaba .............................. - 35 -
4.1.4 Barriers to Expansion .......................................................................... - 42 -
4.1.5 Acquisition of Yahoo! China ................................................................. - 44 -
4.2 RESULTS ......................................................................................................- 46 -
4.2.1 Expansion Strategy.............................................................................. - 46 -
4.2.2 Mitigation of the Barriers ..................................................................................... - 48 -
4.3 SUMMARY .....................................................................................................- 50 -
III
CHAPTER 5: CONCLUSION .................................................................. - 51 -

REFERENCES ........................................................................................ - 53 -
APPENDIX INTERVIEW OUTLINE ...................................................... - 60 -
List of Figures
Figure 1: The life cycle of Chinese B2B industry (Source: iResearch, 2005) ....... - 6 -
Figure 2: The life cycle of Chinese B2C industry (Source: iResearch, 2005)....... - 8 -
Figure 3: Value chain of Chinese B2C e-commerce (Source: iResearch, 2005).. - 9 -
Figure 4: The life cycle of Chinese C2C industry (Source: iResearch, 2005)..... - 10 -
Figure 5: Stage model of business growth (adapted from Churchill and Lewis, 1983)
.................................................................................................................... - 13 -
Figure 6: Creativity-based Model of Entrepreneurial Opportunity Recognition... - 18 -
Figure 7: Strategies to preserve profits against competition (Shane, 2003) ....... - 21 -
Figure 8: Alibabas business growth model ........................................................ - 32 -
Figure 9: Possibilities identified.......................................................................... - 38 -
List of Tables
Table 1: The five phases of Growth (adapted from Greiner, 1972)..................... - 12 -
Table 2: Amazons expansion Process (Source: Datamonitor, 2005) ................. - 24 -
Table 3: eBays expansion Process (Source: Datamonitor, 2005)...................... - 26 -
Table 4: Evaluation of opportunities identified .................................................... - 41 -
IV
Chapter 1: Introduction
1.1 Project Background
Chinas e-commerce industry emerged in the mid-1990s. Benefiting from a robust
economic growth rate, favourable government policies, improving broadband access
across the whole of china, as well as the increasing number of Internet users,
Chinas e-commerce industry has entered into a fast growing period. In 2005,
Chinas total e-commerce transaction value achieved $ 92.5 billion, growing by
54.2%, representing approximately 2.23% of the global market.1 This industry is
predicted to keep growing, with a market capitalization of $ 212.5 billion in 2007
(iResearch, 2005a).
Alibaba, founded in 1998, is a leading e-commerce company in China. Starting with
B2B business, Alibaba aims to offer a reliable and convenient online B2B platform to
numerous Chinese small and medium-sized enterprises, which are fast developing
and eager to seek opportunities to enter into global market.
After achieving profitability, Alibaba showed its strong ambitions for expansion. In
2003, it expanded into C2C e-commerce market by launching its own C2C website,
Taobao, which exceeded eBay China and became the leading C2C e-commerce
website in China after two years development. Later that year, Alibaba entered into
online payment market. Moreover, Alibaba also attempted to expand its territory by
cooperating with Yahoo!. In 2005, the two companies announced a strategic alliance
agreement, involving Alibabas acquisition of Yahoo! China and the investment of $1
billion from Yahoo! for 40% stake in Alibaba. To date, Alibaba has developed from a
single B2B e-commerce company to a large group, with a portfolio consisting of four
business areas: B2B e-commerce (Alibaba), C2C e-commerce (Taobao), online

1
Chinese e-commerce market is entering the mature stage. http://it.enorth.com.cn/system/2006/05/16/
001305120.shtml
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payment (Alipay), and gateway and searching engine (Yahoo! China).
1.2 Aims and Objectives
The aim of this project is to identify possible expansion strategy for Alibaba and the
research questions of this project are as follows:
What are the expansion opportunities for Alibaba? How can Alibaba explore
the appropriate opportunities? What are the benefits and risks involved?
In order to answer the questions above, the research will include the following key
aspects:
Review the business growth process/expansion process of Alibaba and
analyse the driving forces behind Alibabas expansion. This analysis will
facilitate the background understanding of Chinese e-commerce industry
environment as well as Alibabas development process and the need to
expand.
Identify new business opportunities for Alibaba and analyse the potential
barriers to expansion. Based on the findings, recommendations with regards
to possible expansion strategy and mitigation of the barriers will be made.
An analysis of strategic alliance between Yahoo! and Alibaba will be
undertaken in order to identify benefits and risks of expansion.
1.3 Structure of the thesis
The next chapter begins with a review of existing theories and best-practices,
including an overall landscape of Chinese e-commerce industry, theories concerning
business growth, business expansion, opportunities recognition and exploitation, as
well as expansion strategies in practice.
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Chapter 3 illustrates the research strategy, the rationales and the methodology of the
research.
In Chapter 4, the academic theories presented in Chapter 2 are applied to the
analysis of the information collected. This chapter encompasses two sections. The
first section includes the analysis of Alibabas business growth process, the driving
forces of expansion, the identified business opportunities for Alibaba, barriers to
expansion and lessons from expansion. The second section provides some
recommendations on the possible expansion strategy and the mitigation of the
The last chapter summarises the key findings of the research, and points out the
directions for future research as well as the limitations of the project.
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Chapter 2: Literature Review
This chapter reviews existing theories and best-practices which will lay an academic
foundation for the analysis in the following chapters. This chapter encompasses five
sections: first, Chinese e-commerce industry overview, including history, business
models, driving forces as well as barriers; second, business growth models; third,
driving forces behind expansion, expansion strategies and barriers to expansion;
fourth, theories of business opportunity recognition, including sources of
opportunities, opportunity recognition process and opportunity exploitation strategies;
finally, successful expansion strategies adopted by other e-commerce companies.
2.1 Chinese E-commerce Industry Overview
Canzer (2003) defined e-commerce as the activities involved in buying and selling
online, which may include identifying suppliers, selecting products or services,
making purchase commitments, completing financial transactions, and obtaining
services. Generally speaking, e-commerce involves any form of economic activity
conducted via electronic connections (Wigand, 1997). E-commerce exploded quickly
on a world-wide scale, partly because it reduces the transaction cost inherent in the
traditional way of doing business by efficient use of information technology (Cheng
and Pant, 2000).
In China, e-commerce has been developing since 1995 when Internet access began
to be available to the public (Wang, 2002). Chinese governments favourable policy
and regulation of e-commerce, the rapidly increasing user base, the fast
development of Internet industry as well as the IT and telecommunications
infrastructure have created a sound environment for e-commerce industry to thrive
(Ho and Chen, 1999).
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At an organisational level, many Chinese organisations have witnessed the fast
development of e-commerce on a world-wide scale and realised e-commerce as an
efficient way of doing business. Based on a global e-commerce survey conducted in
10 countries including China, the driving forces behind e-commerce development in
Chinese enterprises are similar to those for global firms. The development is driven
by market expansion for existing products, customers demanded it, entering new
market, and cost reduction (Tan and Wu, 2004).
However, given the current economic environment and infrastructure conditions,
e-commerce in China is still at a start-up stage with uneven diffusion among different
geographic areas, demographics and industry sectors (Tan and Wu, 2002; Tan and
Wu, 2004).
E-commerce industry can be divided into three sectors: Business-to-Business (B2B)
e-commerce, Business-to-Consumer (B2C) e-commerce and Consumer-to-
Consumer (C2C) e-commerce. In the following section, these three sectors will be
discussed respectively featuring development process, business models, driving
forces and barriers.
2.1.1 Business-to-Business (B2B)
2.1.1.1 Development process
B2B e-commerce is the biggest e-commerce industry sector in China, representing
approximately 95% of the entire market, in terms of transaction value. The
development process of Chinese B2B industry can be divided into four stages:
preparation, growth, take-off and maturity (iResearch, 2005a) (Figure 1).
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2010-
Maturity
2004-2009
Take-off
1998-2003
Growth
1993-1997
Preparation
.
Figure 1: The life cycle of Chinese B2B industry (Source: iResearch, 2005a)
Preparation. During this period, Internet and e-commerce were introduced
into China. Service providers began to build up online systems as Internet
became popular to the public.
Growth. With the first B2B deal in 1998, Chinese B2B e-commerce industry
came into the take-off stage, as a result of the flourishing international trade
as well as the favourable policy issued by the government.
Take-off. Since 2004, foreign VCs have shown their interests in Chinese
market and Chinese B2B industry has attracted a great number of
international investments. During this period, B2B service became more
functional. More functions such as electronic signature and online payment
are integrated into B2B system by some service providers.
Maturity. This stage is also called as vertical integration stage. B2B service
providers need to further enhance user experience by bringing more
functions into the system. For example, CRM (customer relationship
management) module may be integrated into the system to add value for the
suppliers.
2.1.1.2 Business Models
Ho and Chen (2002) identified three business models in B2B e-commerce industry: 1)
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supplier-oriented model. Consumers and business buyers all use the same
electronic marketplace provided by the supplier. 2) buyer-oriented model. Big buyers
may open their own online market and invite potential suppliers to bid on orders. 3)
intermediary-oriented model. Business buyers and sellers are matched to conduct
their business via the B2B e-commerce platform.
2.1.1.3 Key Drivers
In the work of Tan and Wu (2002), three key drivers are identified for the
development of Chinese B2B e-commerce:
Favourable government policy. Government keeps promoting Internet and
e-commerce among government agencies and enterprises.
Willingness of enterprises. Companies, especially the large ones, are keen to
be connected with the global economy after Chinas entry into WTO. B2B
e-commerce is viewed as one of the most efficient and effective ways for
Chinese firms to enter global production networks.
Potential profitability. B2B e-commerce is predicted to be one of the most fast
growing sectors in China. As a result, the potential profits would attract both
domestic and foreign IT service providers to enter this sector and allocate
more resources in this sector.
2.1.1.4 Barriers
Tan and Wu (2002) also identified the barriers to develop B2B e-commerce in China
as follows:
Lack of trust. A solid legal and technical foundation to monitor and enforce the
trust among B2B participants is currently absent.
Resistance to Change. The implementation of B2B e-commerce often
eliminates the privileged power of middle-level managers, especially those in
state-owned enterprises.
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2.1.2 Business-to-Consumer (B2C)
2.1.2.1 Development Process
The development process of Chinese B2C e-commerce can also be divided into four
stages: introduction, growth, take-off and maturity (iResearch, 2005b) (Figure 2).
2010-
Maturity
2006-2009
Take-off
2003-2005
Growth
1998-2002
Introduction
.
Figure 2: The life cycle of Chinese B2C industry (Source: iResearch, 2005b)
Introduction. From the introduction of B2C e-commerce into China to the end
of 1999, more than 300 B2C service providers emerged. This number
doubled in 2000. However, after the .com bubble in 2000, Chinese B2C
e-commerce experienced a staggering period till 2002.
Growth. Since 2003, online shopping environment has been greatly improved
in China. The entire e-commerce industry, including B2C e-commerce, began
to thrive in 2004.
Take-off. This stage is characterised by the improvement of credit system, the
promotion of online payment as well as the enhancement of the distribution
networks.
Maturity. Chinese B2C e-commerce industry is predicted to enter a healthy,
sustainable stage after 2010. Online retailing will be an important component
of national economy.
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2.1.2.2 Industry Value Chain
The value chain of Chinese B2C e-commerce includes five components: supplier,
B2C service provider, bank, logistics and individual user (iResearch, 2005b) (Figure
3).
Bank
B2C service Individual
Supplier
provider user
Logistics
Figure 3: Value chain of Chinese B2C e-commerce (Source: iResearch, 2005b)
2.1.2.3 Key Drivers
The key drivers for the development of B2C e-commerce are as follows (Tan and Wu,
2002; Ho and Chen, 2002):
Potential profits. The large size of the Chinese customer base is attractive to
both traditional service provider and new technology-oriented firms and
individuals into this sector.
Demographic changes. B2C is increasingly viewed as more convenient and
timesaving by young and well-educated consumers.
2.1.2.4 Barriers
The barriers to develop B2C e-commerce in China are identified as follows (Tan and
Wu, 2002; Tan and Wu, 2004):
IT and Telecom infrastructure. The infrastructure conditions in China are still
poor, compared to other Asia-pacific nations.
Limited disposable income. The disposable income of Chinese consumers
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remains low, which dilutes the impacts of market size.
Lack of general credibility monitoring system and online payment issues. The
use of credit card in china remains low and there is no credibility monitoring
system currently in China. Moreover, the majority of the credit cards issued
can not be used for e-commerce transactions directly.
2.1.3 Consumer-to-Consumer (C2C)
The development process of Chinese C2C e-commerce industry can be divided into
three stages: introduction, growth and maturity (iResearch, 2005c).
Figure 4 illustrates the development process of Chinese C2C e-commerce.
2010-
Maturity
2003-2009
Growth
1999-2002
Introduction
.
Figure 4: The life cycle of Chinese C2C industry (Source: iResearch, 2005c)
Introduction. Chinese C2C e-commerce emerged in 1999 when the first
online auction website, eachNet, was launched. After a staggering period,
Chinese C2C e-commerce began to re-attract interests from both domestic
and foreign investors. In 2002, eBay entered Chinese market by acquiring a
33% stake in eachNet.
Growth. During this period, as investments and personnel rapidly moved into
Chinese C2C e-commerce industry, competition became more intense. As a
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result, resources are reallocated. Moreover, the issue of relevant law and
rules; distribution, the improvement of online payment and security; and the
increase of customer base, all of which indicate that Chinese C2C
e-commerce is moving into the maturity stage.
Maturity. Chinese C2C e-commerce industry is projected to enter the maturity
stage in 2010 after rapid development and resource reallocation.
According to the survey of iResearch (2005b), the difference between B2C
e-commerce and C2C e-commerce is diminishing. Some service providers integrate
these two kinds of services into one system in order to diversify the offerings.
2.2 Business Growth Models
Numerous literatures have been developed with reference to the research of
business growth, especially the growth of SMEs (e.g. Penrose, 1995; Greiner, 1972;
Churchill and Lewis, 1983; Dodge and Robins, 1992; Freel, 2000). Different
approaches have been adopted to analyse the development process of the business,
among which characteristics/predictive modelling of growth and stage modelling of
firm growth are two main branches (Freel, 2000). Here the stage model of firm
growth is selected for further elaboration, for it is more relevant to this project.
Greiner's (1972) work established the basic foundations for the theory of stage
modelling of firm growth (Masurel and van Montfort, 2006). He divided organisations
growth process into five phases, each of which contains a stage of evolution, which is
a relatively placid growth period, and ends with a stage of revolution, where a
management crisis occurs (Table 1). Each stage of evolution fosters its own
revolution and management solutions to each revolution lead to the next stage of
evolution.
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Phase No. Evolution stage Revolution stage
1 Growth through creativity Crisis of leadership
2 Growth through direction Crisis of autonomy
3 Growth through delegation Crisis of control
4 Growth through coordination Crisis of red tape
5 Growth through collaboration Crisis of psychological saturation among employees
Table 1: The five phases of growth (adapted from Greiner, 1972)
Based on the findings of Greiner (1972), Churchill and Lewis (1983) further
developed the stage model. They divided a firms business growth into the following
five stages: Existence, Survival, Success, Take-off and Resource Maturity. Each
stage is characterised by an index of firm size, diversity and complexity and
described by five management factors: managerial style, organisational structure,
extent of formal systems, major strategic goals, and the owners involvement in the
business. (Churchill and Lewis, 1983)
At the stage of Success, a common question that owners normally faces is whether
to keep the company stable and maintain the profitability or exploit the companys
accomplishments and expand. According to different responses, for each single
company, this stage can be either Success-Disengagement Stage or
Success-Growth Stage (Churchill and Lewis, 1983).
Figure 5 illustrates the five stages of development as well as the characteristics of
business at each stage of development.
- 12 -
Size, Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

dispersion Existence Survival Take-off Resource
Success- Success-
complexity maturity
Disengagement Growth
Large
Small
Management Direct Supervised Functional Functional Divisional Line and Staff
Style Supervision supervision
Organisation Simple Still simple Growing Growing Decentralised Decentralised
Extent of Nonexistent Minimal Basic Developing Maturing Extensive
Formal to minimal
Systems
Major Existence Survival Maintain Get Growth Return on
Strategy profitability resources for investment

growth
Business Owner Owner still Owner moving Owner still Owner Owner
and Owner being being apart from being deeply reasonably separating
business business business involved in separating from
business from business business
Figure 5: Stage model of business growth (adapted from Churchill and Lewis, 1983)
During the business growth process, the following firm level management factors are
fundamental to the firms ultimate success (Churchill and Lewis, 1983):
Financial resources, including cash and borrowing power.
Personnel resources, relating to the quantity and quality of people, especially
at the management and staff levels.
Systems resources, with regards to the extent of sophistication of both
information and planning and control systems.
Business resources, such as customer relations, market share, supplier
relations, manufacturing and distribution process, technology and reputation,
etc., all of which give the company a position in its industry and market.
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2.3 Theories of Expansion
As mentioned in Section 2.2, while entering the success stage, enterprises are facing
two possibilities: disengagement or growth. At the success-disengagement stage,
the company stops growing and this stage could be the last stage of development.
The other possibility is to pursue growth (Churchill and Lewis, 1983; Masurel and van
Montfort, 2006). It is during the growth stage (including both growth stage and
take-off stage in Churchill and Lewis model) that rapid expansion occurs (Gupta and
Chin, 1994). In this section, theories of expansion, including driving forces behind
expansion, expansion strategies and barriers to expansion will be reviewed.
2.3.1 Driving Forces behind Expansion
Penrose (1995) analysed the drivers of expansion and pointed out that the drivers
may be outside the firm or within the firm. The external inducements encompass
growing demand for particular products; technological changes; special opportunities
to obtain a better market position or achieve some monopolistic advantage; changes
that might influence a firms existing operations negatively and against which a firm
could protect itself through expansion in particular directions, etc. Internal drivers of
expansion stem largely from the existence of a pool of unused productive services,
resources, and special knowledge.
From a firm growth point of view, Greiner (1972) pointed out that decentralised
organisational structure also contributes to the organisations expansion through
motivation at lower levels. Managers with more authority are motivated and able to
respond quicker to the market and identify new business opportunities (such as
opportunities to penetrate larger markets or to develop new products).
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2.3.2 Expansion Strategies
Scott and Bruce (1987) claimed that expansion is made possible by growth through
coordination, delegation, and an extended range of product markets (Masurel and
van Montfort, 2006). Tan and Tan (2004) applied the resource-based view and
identified growth strategies for entrepreneurial firms, which are as follows:
Internal growth, the primary goal of which is generic expansion. However, this
kind of growth is limited as no firm is capable of generating internally driven
expansion indefinitely because of managerial and organizational capabilities.
Acquisitions, which enable firms to acquire external resources to achieve
boundary expansion.
Interorganisational relationships, such as strategic alliances and joint
ventures. This growth strategy enables firms to obtain access to
complementary assets, therefore reduce environmental uncertainties.
Taking the characteristics of services into consideration, Carman and Langard (1980)
developed minimum risk growth strategy paths for service firms, which are: market
penetration; geographic market expansion (domestic expansion); innovative
redesign of existing services; new core service development or concentric
diversification; expand to out-of-country markets; and conglomerate diversification.
2.3.3 Barriers to Expansion
From a general point of view, Penrose (1995) identified three limits on expansion,
which are: 1) managerial ability, referring to conditions within the firm; 2) product or
factor markets, referring to conditions outside the firm; 3) uncertainty and risk, a
combination of internal attitudes and external conditions.
In the work of Feldman and Klofsten (2000), specific barriers to expansion faced by
SMEs are pointed out and categorised into the following three groups:
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Finance. SMEs need to face the problems generating from the division
between financiers (or financial functions) and engineering (or innovative
functions) (Veblen, 1965; Feldman and Klofsten, 2000). For example, the
short-term time horizon may prevent external financiers and internal
managers from reinvesting in technology or making new investments that are
needed to expand market reach (Feldman and Klofsten, 2000).
Organisation. Issues related to organisational integration may preclude firms
from expanding further. When organisations become larger, functions
become divided according to specialist responsibilities. As a result,
cooperation among different functions becomes more difficult. Moreover,
firms may develop the bureaucracy and problems of communication and
coordination may occur during the process of growth (Feldman and Klofsten,
2000).
Competition from new firms or products. SMEs often face greater competition
pressures than large firms. Smaller firms can become vulnerable as
competition increases and growth is not stable because innovation-based
rents can be temporary (Conner, 1991; Feldman and Klofsten, 2000).
2.4 Theories of Business Opportunity Recognition and Exploitation
Hulbert (1997) defined business opportunity as the chance to meet an unsatisfied
need where there is sufficient demand to make meeting that need worthwhile.
Identifying and developing right opportunities is essential not only to new businesses
(Stevenson et al., 1985; Shane, 2003), but also to established businesses (Hulbert,
1997). In this section, literatures of business opportunity recognition will be reviewed
with focus on sources of opportunities, opportunity recognition process, major factors
that influence this process as well as the strategies to exploit opportunities.
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2.4.1 Sources of New Business Opportunities
Shane (2003) summarised the sources of opportunities and categorised them in the
following three groups:
Changes in technology. Technological changes enable the allocation of
resources in different and potentially more productive ways (Casson, 1995).
Changes in politics and regulation. Political and regulatory changes enable
the re-allocation of resources to new uses, resulting in either creating more
profits or redistributing wealth from one member of society to another.
Changes in social and demographic factors. Social and demographic
changes facilitate the creation and transmission of information about
opportunities and the generation of additional demand. Socio-demographic
factors can be divided into three categories: urbanization, population
dynamics and educational infrastructure.
2.4.2 Opportunity Recognition Process
Christensen, et al (1989) defined opportunity recognition as either perceiving a
possibility to create new business or significantly improving the position of an
existing business, both of which will result in new profit potential (Ardichvili, 2000).
This process is not a singular event; it is an iterative process, through which an idea
for a business is formed into an opportunity (Ardichvili et al, 2003; Lumpkin and
Lichtenstein, 2005) that adds value to the firm (Timmons, 1994).
Creativity-based model of opportunity recognition developed by Lumpkin and
Lichtenstein (2005) divides the opportunity recognition process into two phases:
discovery phase and formation phase. Discovery phase consists of preparation,
incubation and insight while formation phase consists of evaluation and elaboration
(Figure 6).
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Discovery Formation
Insight
Preparation Eureka! Elaboration
Deliberate Problem
Unintended solved
Incubation Idea shared Evaluation
Figure 6: Creativity-based model of entrepreneurial opportunity recognition

(Lumpkin and Lichtenstein, 2005)
The five elements are reviewed as follows (Lumpkin and Lichtenstein, 2005):
Preparation, referring to both deliberate and unintended accumulation of
experience and knowledge preceding the opportunity discovery process (Kao,
1989). At organisational level, the ideas often emerge from the firms
background, current products or services or technological expertises.
Incubation, typically referring to an intuitive, unconscious style of considering
various possibilities or options by individual / group.
Insight, referring to a moment of recognition (Csikszentmihalyi, 1996),
sudden and unexpected in many cases. Insights may occur recursively
throughout the opportunity recognition process. Entrepreneurial insights
typically encompass the sudden recognition of a business opportunity, the
solution to a well-considered problem, and the acquisition of an idea from
external sources.
Evaluation, involving the analysis of whether the concept generated in the
discovery phase is workable, whether the entrepreneur / team has sufficient
resources and capabilities, and whether the idea is novel enough therefore
worthwhile to pursue.
Elaboration, involving forming the business into a feasible opportunity by
subjecting it to external scrutiny and building its support system. (Lumpkin
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and Lichtenstein, 2005)
2.4.3 Key Factors Affecting Opportunity Recognition Process
Ardichvili et al (2003) summarised major factors that affect the business opportunity
recognition process and explained the relationship between the key factors and
opportunity identification as follows:
Entrepreneurship alertness. Ray and Cardozo (1996) believed that all
recognitions of opportunity by prospective entrepreneurs originate from
entrepreneurs alertness to information. Personality characteristics interact
with the environment; therefore create conditions that foster higher
entrepreneurial awareness. Kaish and Gilard (1991) claimed entrepreneurs
are exposed to more information and more alert to opportunities than
managers.
Prior knowledge. Prior knowledge helps entrepreneurs to recognise the value
of the new information, therefore identify new business opportunities (Shane,
1999). Sigrist (1999) addressed that prior knowledge relevant to the
opportunity recognition process is from two resources: knowledge in an area
of special interest to the entrepreneurs and knowledge gained through work
experiences. The accumulation of knowledge as well as integration of two
resources leads to the discovery of a new opportunity.
Creativity. Hills et al (1997) found through their survey, that 90% of the
interviewees regard creativity as an important factor in opportunity
identification, especially those solo entrepreneurs.
Optimism. Optimism here refers to an inside view of the potential success of
the venture, largely based on entrepreneurs self-efficacy beliefs (Krueger
and Dickson, 1994; Krueger and Brazeal, 1994; Guth et al, 1991).
Social networks. It is generally believed that the entrepreneurs networks are
essential to opportunity recognition. Hills et al (1997) asserted the
entrepreneurs who have more network contacts are more likely to identify
- 19 -
opportunities, and the quality of network contacts can influence other
characteristics (e.g. alertness and creativity).
2.4.4 Opportunity Exploitation Strategy
After the identification of the new business opportunities, strategies need to be taken
to exploit these opportunities. Shane (2003) demonstrated that opportunity
exploitation strategy involves two major issues: the development of a competitive
advantage and the management of uncertainty and information asymmetry. In this
section, the strategic actions to exploit opportunities will be reviewed from these two
perspectives.
2.4.4.1 Strategies to develop a competitive advantage
In order to preserve the profits generated from exploiting new business opportunity,
the individual/group that identifies the opportunity need to preclude others from
imitation. Efforts to prevent imitation involve keeping the secret of information which
was used to discover the opportunity, or setting barriers to the competitors (Figure 3)
(Shane, 2003).
- 20 -
Strategy to
preserve profits
Secrecy Barriers
Preclude access Control resources
Preclude understanding Legal obstacles
Scale
Reputation
Innovation
Figure 7: Strategies to preserve profits against competition (Shane, 2003)
2.4.4.2 Strategies to manage uncertainty and information asymmetry
Shane (2003) discussed that entrepreneurs have to make assumptions about
resource combinations that are uncertain. Therefore, during the opportunity
exploitation process, strategic actions need to be taken to manage the uncertainty,
including technical uncertainty, market uncertainty and competition uncertainty.
Moreover, as mentioned in Section 2.4.4.1, entrepreneurs have to limit access to
information about the opportunity to prevent the others from imitation. Specific
strategies to manage information asymmetry need to be adopted.
The specific strategies to manage uncertainty and information asymmetry are as
follows (Shane, 2003):
Growth from small scale. Due to the information asymmetry and uncertainty
throughout the opportunity exploitation process, entrepreneurs always need
to self-finance while bearing a high level of risk. As s result, entrepreneurs
tend to initiate business on a small scale in order to avoid large, irreversible
investment (Starr et al, 1990).
Entry by acquisition. Entry via acquisition helps to reduce uncertainty as
- 21 -
demand and production are better known in an existing business.
Focus strategy. To resolve uncertainty about the assumption, investment
needs to be made in order to gather information about the opportunity. This
could be very costly for new ventures. In order to reduce costs, it is more
efficient for entrepreneurs to adopt focus strategy rather than developing
multiple products/markets simultaneously. In addition, targeting a niche
market helps to mitigate the head-to-head competition with established firms.
Flexibility and adaptability. To overcome uncertainty, the entrepreneur needs
to keep the venture flexible and adapt to develop new solutions while
encountering unanticipated events.
Forming alliances. Forming alliance with established companies helps
entrepreneurs to speed up opportunity exploitation process with access to
existing assets, to obtain control over resources without purchasing them,
and to benefit from the established companys reputation.
Legitimation. In order to preserve profit from information asymmetry,
entrepreneurs can adopt the following measures to demonstrate the
legitimacy of the opportunity and the approach to exploitation: imitating
existing firms routines and competencies to reduce uncertainty and
information asymmetry; achieving collective agreement on standards and
designs; and obtaining certification from reputable authorities.
2.5 Successful Expansion Strategies in Practice
In this section, the growth and expansion strategies adopted by two successful
e-commerce companies, Amazon and eBay, will be reviewed for reference.
2.5.1 Amazon
Founded in 1994, Amazon is one of the first entrants onto the Internet (Javalgi et al,
- 22 -
2004). Amazon was publicly launched as an online book retailer in 1995 and
expanded its business through several acquisitions in the first a few years. As the
business became stable, Amazon expanded further into a variety of new product
categories (e.g. movies, health, tools, electronics, etc) as well as other offerings,
including alliance with Virgin Entertainment Group as e-Commerce platform provider
(Javalgi et al, 2004; Amazon Inc., 2005). Amazon also followed an aggressive
expansion strategy across borders. As for foreign market entry, they adopted both
traditional entry modes such as exports and foreign direct investment, and new
strategies which are exclusively applicable to the web. For instance, Amazon
adopted e-mediation strategy to enter the Canadian market. They arrange product
deliveries to Canadian customers from local suppliers, all using the U.S. website
(Chakrabarti and Scholnick, 2002).
Table 2 illustrates main expansion activities Amazon has adopted are as follows:
- 23 -
Year Expansion Type Expansion Activities
1998 Acquisition Acquired Bookpages, Telebook, Internet Movie

Database, Planet all and Junglee Corp
1999 Acquisition Acquired drugstore.com, HomeGrocer.com, Pets.com
and Exchange.com.
2000 Strategic Alliance Formed a strategic alliance with Toysrus.com
2001 Strategic Alliance Formed a strategic alliance with Borders to re-launch the
Borders.com
Joint Venture Launched Babies R Us and Imaginarium.com with Toys

R Us
2002 Strategic Alliance Formed a strategic alliance with Virgin Entertainment

Group
2003 New Investment launched Amazon Canadian website, as well as its

specialist electronics store in Japan
Strategic Alliance Achieved agreement with the National Basketball
Association (NBA) and Foot Locker to operate the NBA
Store on NBA.com and the WNBA Store on WNBA.com
2004 Strategic Alliance Launched new websites powered by Amazons

eCommerce technology for Bombay, Bombay Kids,
Bombay Outlet, and Bombays Canadian operations
Cooperated with American Express and moved into B2B
domain
Acquisition Acquired Joyo.com to enter Chinese market
2005 New Investment Launched search engine A9
Table 2: Amazons expansion Process (Source: Datamonitor, 2005)
2.5.2 eBay
eBay was launched in 1995 and was the first mover into the C2C auction business. It
is among the few online sites which has been profitable almost from the very
beginning. Its revenue comes from fees and commissions from customers who use
their services. Different from the strategy of Amazons, eBay expansion strategy
mainly focused on expanding its customer base by promoting its core service
competencies, rather than the expansion of product lines and offerings (Javalgi et al,
2004). As a result, eBay has adopted an ambitious international expansion strategy.
Also, eBay expanded its customer base by creating new marketplaces. For example,
- 24 -
eBay moves on from its online auction market for the individual customers to extend
its expertise into areas such as business to business (Strategic Direction, 2005).
Table 3 shows the main expansion activities eBay has adopted.
- 25 -
Year Expansion Type Expansion Activities
1998 Strategic Alliance Achieved a three-year agreement with AOL which

enabled e-Bay access to AOLs customer base
1999 Acquisition Acquired Butterfield & Butterfield, alando.de, Kruse

International
2000 Joint venture Cooperated with based eCorp to enter the Australian
market
Strategic Alliance Allied with NEC and moved into the Japanese market
Acquisition Took an equity stake in AutoTrader.com and acquired

Half.com
2001 Acquisition Acquired French Internet auction firm iBazar, and took
over its online trading sites in Belgium, Brazil, France,
Italy, the Netherlands, Portugal, Spain, and Sweden.
Alliance Sold iBazars Brazilian subsidiary to MercadoLibre, in

exchange for a stake in MercadoLibre
New Investment Launched eBay Singapore
2002 Acquisition Entered the Taiwanese market by acquiring Neocom.

Acquired 33% stake in EachNet , Chinas leading online
trading community
Acquired PayPal, the worlds biggest web micro
payments platform
2003 New Investment Launched its new business-to-business site, eBay

Business
Strategic Alliance Allied with Dr Pepper/Seven Up to develop a marketing

platform
Acquisition Acquired Fair Markets technology and business assets

Acquired the remaining shares of EachNet
Acquired the remaining shares of Internet Auction,
increasing eBays stake from 50% to 62%.
2004 Acquisition Acquired mobile.de and moved into the Indian market by
acquiring Baazee.com
Increased its holding in Internet Auction from 62%
to 86%
Acquired Marktplaats.nl
New Investment Expanded its business to Malaysia and the Philippines
2005 Acquisition Acquired Kurants technology assets

Acquired Rent.com
Acquired Skype
Table 3: eBays expansion Process (Source: Datamonitor, 2005)
- 26 -
2.6 Summary
This chapter started with an overview of the Chinese e-commerce industry, in order
to provide a macro view for the project and facilitate the understanding of the industry
environment. Sections 2.2-2.4 reviewed (i) business growth models, (ii) expansion,
and (iii) opportunity recognition and exploitation theories, which will constitute the
academic framework for the analysis in the following chapters. Finally, the successful
expansion strategies adopted by Amazon and eBay were reviewed for reference.
- 27 -
Chapter 3: Research Methodology
This chapter aims to illustrate the research strategy adopted in conducting the report
and address the rationales of the research. In addition, the two-stage research
methodology will be reviewed.
3.1 Research Strategy
In the work of Yin (2003), case study is defined as a research strategy, together with
other research strategies, such as experiment, survey, archival analysis and history.
Each research strategy is a different way of collecting and analyzing empirical
evidence, following its own logic. The decision of choosing one specific research
strategy is made on the basis of the following three conditions (Yin, 2003):
The type of research questions.
The extent of control an investigator has over actual behavioural events.
The degree of focus on contemporary as opposed to historical events.
For this project, the single-case study is selected as the main research strategy
with the following rationales:
Focus on exploratory research questions, such as what, why and how
questions. The goal of what questions is to develop pertinent hypotheses
and propositions for further inquiry. Why and how questions lead to an
exploratory study with a combined use of case studies, histories and
experiments (Yin, 2003).
Focus on a contemporary event.
This single case is a representative case, the lessons from which are
expected to be informative and inspiring.
- 28 -
3.2 Research Methodology
For this project, a two-stage research methodology is adopted:
Stage 1: Data collection
In order to achieve the objective of this report, both primary and secondary
researches are carried out.
For primary research, documentation and interviews are used as major sources of
information. Documentation can include communiqus like letters and memoranda,
announcements, minutes of meetings, written reports, administrative documents,
newspaper clippings, and formal studies, etc (Yin, 2003). Due to the confidentiality,
some of the information mentioned above is difficult to obtain. As a result, the book
Alibaba: there is no difficult business is used as a major source of documentation
for background research and company development process. It was written by
Zheng (2006) who was empowered to access all the documents and files of Alibaba
(excluding those business contracts protected by special terms and conditions), and
was free to conduct interviews with any employee in Alibaba.
Interviews also play an important role in information collection process. The selected
interviewees cover the employees from Alibaba and industry consultants. The
interviews were set to be open-ended, where interviewees were asked about the
facts as well as their opinions about the companys development and expansion
activities. Interviewees were also encouraged to propose their own insights into the
companys future expansion and offer other useful contacts as well as other
information sources. In addition, the public interviews of Jack Ma and the other
senior managers are also used as primary information sources.
Sources of secondary information include:
Academic journals
- 29 -
Databases (e.g. EBSCO, Factiva, etc.)
Industry research reports
Market research reports
Books
Company websites
Other Internet websites
Abstracts, quotations and other bibliographies
Stage 2: Data analysis
Data analysis involves examining, categorising, tabulating, testing or recombining the
information collected in the previous stage to address the initial propositions of the
case study (Yin, 2003). Yin (2003) also developed three general analytic strategies,
which are relying on theoretical propositions, setting up a framework based on rival
explanations, and developing case descriptions. For this project, relying on
theoretical propositions is selected as the major analytic strategy to review the
business growth process/expansion process of Alibaba, analyse the driving forces
behind Alibabas expansion, identify new business opportunities for Alibaba, and
therefore develop appropriate expansion strategy.
- 30 -
Chapter 4: Analysis & Results
This chapter is divided into two sections. The first section applies the academic
theories that are reviewed in Chapter 2 to the analysis of the information collected
from both primary sources and secondary sources. The second section aims to
propose recommendations regarding Alibabas future expansion.
4.1 Analysis
This section intends to analyse Alibabas business growth process/expansion
process, driving forces behind Alibabas expansion, new business opportunities
identified for Alibaba as well as barriers to expansion. In addition, the strategic
alliance between Yahoo! and Alibaba will also be inspected to generate a benefits
and risks analysis over the companys expansion.
4.1.1 Alibabas Business Growth Process / Expansion Process
This section applies stage model of business growth (Section 2.2) to the analysis of
Alibabas business growth process, therefore identifies the growth stages for Alibaba.
In addition, the expansion activities adopted by Alibaba will also be analysed.
Figure 8 illustrates the development process of Alibaba.
- 31 -
Size, Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

dispersion Existence Survival Success - Take-off Resource
complexity Growth maturity
Large 2006 -
2002 - 2005
2000 - 2001
1998 - 1999
Small
Figure 8: Alibabas business growth model
Stage 1: Existence (1998-1999)
Alibabas initial B2B e-commerce website was launched in 1998 and Alibaba was
incorporated in 1999. During the period of 1998-1999, Alibaba acquired its first
venture capital, which was essential for the company to remain alive. The objective of
the company at this stage is to obtain sufficient customer acceptance and deliver
service. The organisational structure is very simple without any formal planning
system. At this stage, the company is owned by the founder, Jack Ma, who directly
supervised the business and performed all the major tasks.
Stage 2: Survival (2000-2001)
During this period, as Alibaba built up its reputation in Chinese e-commerce market,
the growth of customer base was significant and Alibaba eventually achieved
break-even point in 2001 (Zheng, 2006). Moreover, Alibaba successfully won access
to critical venture capital from Softbank Capital, which also contributed to its survival
from the .com bubble. At this stage, despite the enlarged employee base, the
organisational structure stayed simple and it was still Jack Ma who made the major
decisions. The managers received orders from Jack Ma and carried out tasks
accordingly instead of making their own decisions. The major goal of the company at
this stage is still to survive.
Stage 3: Growth (2002-2005)
As the entire Chinese e-commerce industry entered into the stage of growth, Alibaba
- 32 -
was also prepared for the further development. In 2002, Alibaba achieved profitability.
During the period from 2002 to 2005, Alibaba was continuously growing. The major
business area of Alibaba, B2B e-commerce, stayed profitable and kept its growing
trend. In addition, having perceived that there is no existing credibility monitoring
system in China, Alibaba started to construct its own credibility system in 2002, in
order to enhance the service it offered (Zheng, 2006). In terms of expansion, Alibaba
extended its territory by launching new businesses, C2C e-commerce (Taobao) and
online payment (Alipay). Moreover, Alibaba further enriched its portfolio through the
strategic alliance between Alibaba and Yahoo!, which involved Alibabas acquisition
of the entire assets of Yahoo! China,, including its online auction section, gateway
section and search engine section. Through this alliance, Alibaba obtained brand
equity, technology, 600 employees and an investment of $ 1 billion2. Through all the
expansion activities mentioned above, Alibaba not only exploited the market depth by
introducing supplementary products and offerings into the existing market, but also
expanded its customer base by developing new market.
In the aspect of the organisation, the organisation structure became more tiered and
professional managers were introduced into the senior management team as well as
mid-level management team. The organisation entered into a fast growing period
with the number of employees increasing dramatically. Systems and operational
planning were formalised; yet strategic planning heavily depended on the owner.
Jack Ma and the co-founders of the company were still deeply involved in the
business.
Stage 4: Take-off (2006- )
Since the beginning of 2006, Alibaba has adopted a series of measures to make
changes in organisational structure and improve the strategic planning process. 13
agencies that used to cover the East and South-east China were integrated into
three subsidiary companies, which facilitated Alibaba to further formalise its systems,
2
Jack Ma, interview with Chinese Entrepreneurs, 2005
- 33 -
improve services by standardising quality control process, build up a unified brand
image and reallocate resources, therefore get ready for the expansion into the other
domestic markets. Moreover, it was also realised that Alibaba lacks strategic
thinking3. To resolve this problem, a specific division of strategy planning was built
up and directed by Min Zeng, who enjoyed a high reputation in strategic
management area in China; several senior managers have joined or will join Alibaba,
all of which indicated Jack Mas determination to delegate responsibilities to the
professionals to improve the strategic planning process and managerial
effectiveness.
4.1.2 Driving Forces behind Alibabas Expansion
This section applies the theories of Penrose (1995) and Greiner (1972) presented in
the literature review section to the analysis of the driving forces behind Alibabas
expansion. The drivers identified are as follows:
Market demand. SMEs play an important role in the Chinese economy.
There are over 30 million SMEs in China4; more than 5 million Chinese
enterprises are seeking export opportunities every year; and the value of
inventory in China exceeds $ 375 billion (Zheng, 2006), all of which reveal a
significant gap between manufacturers and the market. E-commerce
represents an efficient and effective way to bridge the gap. However,
according to a survey conducted by iResearch in 2005, currently only 20%
of the Chinese enterprises are adopting e-commerce to do business. All of
the facts above imply huge growth potential for e-commerce companies
such as Alibaba.
Competition. As Chinese e-commerce market shows strong growth potential,
many domestic and international service providers rush into this market,
3
Jack Ma, interview with Chinese Entrepreneurs, 2005
4
Li, Z., The development of e-commerce among SMEs contributes to the new business opportunity for
software enterprises, http://industry.ccidnet.com/art/1544/20060829/883265_1.html
- 34 -
trying to obtain an advantageous market position in the worlds most fast
growing market. Under such condition, either diversification of products and
offerings or geographic expansion in domestic market will efficiently facilitate
Alibaba to extend its market reach and depth; therefore win an upper hand in
the increasingly competitive environment.
Decentralised organisational structure. As Alibaba entered into the take-off
stage, the organisational structure is becoming more decentralised. One of
the direct evidences is that Jack Ma starts to allocate much greater
responsibilities to the professional managers. Now with all the
responsibilities and more importantly, the actual right to make decisions, the
managers have more incentives and space to sense the market changes
and identify new business opportunities.
4.1.3 New business Opportunities identified for Alibaba
This section uses the creativity-based model of opportunity recognition developed by
Lumpkin et al (2005) as well as the theory of Shane (2003) (Section 2.4), to seek new
business opportunities for Alibaba.
Stage 1: Preparation
This stage involves the accumulation of information and knowledge, from which
ideas may generate. In this subsection, information is collected in the following three
categories: technological changes; political and regulation changes; social and
demographic changes (Shane, 2003). Information has been screened according to
Alibabas background, current products and offerings as well as expertise.
Changes in technology.
The emergence of web 2.0. The concept of Web 2.0 was raised in
2004. The strategic positioning of web 2.0 is to define web as
platform, where users can control their own data. Compared with
- 35 -
early web development, which is labelled as web 1.0, web 2.0 is
more dynamic and interactive, therefore enriches user experiences
significantly.5
The development of wireless technology. Wireless technology,
combined with Internet applications, creates a new marketplace,
wireless value-added services market, including Short Message
Service (SMS), Multimedia Message Service (MMS), video
streaming, wide bandwidth and Wireless Application Protocol (WAP),
etc.
The emergence of vertical search engine. According a research
conducted by PIP6, the use of search engines is one of the most
frequently performed Internet activities7. In the past a few years,
search engine has been moving from generic to vertical, which
refers to specialised search engine that mines data in one specific
area.
The development of online video technology. Benefiting from the
great improvement in online video technology, the standardisation of
online video format as well as the widespread adoption of
broadband, the online video becomes more popular. It is expected
that the potential market for online video content will grow from 13
million households in 2005 to 131 million households in 2010 on a
world-wide scale.8
The emergence of integrated system. By offering an integrated
service package, which encompasses enterprise IT systems, such
as ERP, SCM and CRM, and e-commerce service, service providers
are able to add value to the customers - both suppliers and buyers.
5
Tim OReilly, What is Web 2.0?, http://www.oreillynet.com/pub/a/oreilly/tim/news/2005/09/30/what-is-
web -20.htm l?page=1
6
Pew Internet Project
7
Lee Rainie and Graham Mudd, The popularity and importance of search engines,
http://www.pewInternet.org /pdfs/PIP_Data_Memo_Searchengines.pdf
8
Ben Macklin, Online Video Stats Say It All, http://www.emarketer.com/Article.aspx?1004105
- 36 -
Changes in politics and regulation.
Favourable government policy. Government shows strong
determination to encourage the development of information industry
and keep promoting Internet applications among government
agencies and enterprises. In 2005, a policy aiming to propel the
development of e-commerce was approved.
Legislation of Electronic Signature. Electronic Signature Law has
been implemented in China since the April of 2005. It is the first
legislation in Chinese Internet and web application area. The aim of
this law is to secure the online transaction safety.
Changes in social and demographic factors.
Growing interest in e-commerce. At individual level, e-commerce is
perceived as convenient and efficient by increasingly more young
and well-educated individuals. At organisational level, encouraged
by continually improving Internet environment and driven by the
desire to connect to the global economy, companies, especially the
large ones are increasingly adopting e-commerce to enter global
production networks.
The development in West China. West China has experienced fast
development in the past a few years, thanks to a favourable national
strategy implemented since 1999. The average annual economic
growth rate achieved 10.7 percent for the period 1999-20059.
The development of SMEs. SMEs currently account for more than
98% of all business enterprises in China10 and the development of
SMEs is estimated to be the prime contributor to national
economy.11
9
Xinhua (2006) Development Strategy Boosts West China, http://en.chinabroadcast.cn/2946/2006/08/
30/ 272@133051.htm
10
Luo, Z.W, Guo, C.X. (2005) The Policy to Speed up the Development of SMEs in China,
http://theory.people.com.cn/GB/49154/49155/3871074.html
11
Zhou, T.Y. (2004) Blueprint for China's economic growth, http://english.people.com.cn/200407/15/
eng20040715_149647.html
- 37 -
Higher disposable personal income. According to a survey
conducted by National Bureau of Statistics of China, disposable
personal income of urban residents raised by 9.8% in the first three
quarters of 200512.
Growing wireless value-added services market. In 2004, the number
of mobile telecommunication subscribers reached 400 million13. The
market capitalisation of Chinese wireless value-added services
market is estimated to achieve $ 4 billion in 2008 and $ 6.6 billion in
2010 (iResearch, 2005d).
Stage 2: Incubation
Based on the information collected at the preparation stage, the possibilities are
identified and categorised in four groups (Figure 9):
Figure 9: Possibilities identified
B2B e-commerce section
Provide integrated service package, including enterprise IT systems,
such as ERP, SCM and CRM.
12
The issues in the distribution of income 2005-2006, http://www.china.com.cn/zhuanti2005/txt/
2006-01/19/content_6097387.htm
13
China business forecast Report, 2006, Business Monitor International
- 38 -
Develop m-commerce based on the current e-commerce resources.
Geographic expansion in domestic market (e.g. West China).
C2C e-commerce section
Provide integrated service package. Besides the existing services
such as online payment and instant messenger, etc, integrate
value-added service (e.g. CRM and logistics) into the service
package.
Increase user participation by adopting new web technologies (e.g.
leverage customer self-service).
Develop wireless value-added services.
Online payment
Develop m-payment.
Gateway and search engine section
Develop vertical search engine.
Diversify wireless value-added services.
Promote online video advertisement.
Stage 3: Insight
The aim of this stage is to identify appropriate business opportunities for Alibaba. The
ideas generated at the previous stage will be assessed against the following
selection criteria: market maturity, market size, market need, competition, barriers to
entry and time to market.
- 39 -
Delphi Chart
Market Maturity Market Need Market Size Competition Barriers to Entry Time to Market AVG. Grade
B2B e-commerce
Integrated service package 6 7 10 7 7 7 7.33
M-commerce 8 6 7 8 6 8 7.17
Domestic expansion 5 8 9 7 9 10 8.00
C2C e-commerce
Integrated service package 6 6 5 7 7 8 6.50
Increase user participation 6 7 3 6 9 8 6.50
Wireless value-added service 8 7 6 2 8 9 6.67
Online Payment
M-payment 8 8 7 3 7 9 7.00
Gateway & Search engine

vertical search engine 8 7 6 3 8 8 6.67
Wireless value-added service 9 6 8 1 8 10 7.00
Online video advertisement 3 4 7 5 7 6 5.33
Band 1 - 10 Colour
Low Score 1 - 3.9 Red
Mid Score 4.0 - 6.9 Yellow
High Score 7.0 - 10 Green
Figure 10: Possibility screening Delphi Chart
Based on the analysis above, it is concluded that the main new business
opportunities still lie in Alibabas major business area, B2B e-commerce section,
partly due to the huge market size of B2B e-commerce and relatively low competition.
The development of C2C e-commerce is restrained, to a large extent, by the limited
market size.
The top three opportunities identified at this stage are domestic expansion in B2B
e-commerce sector, wireless value-added services (including m-commerce,
m-payment and other wireless value-added services) and integrated service package
in B2B e-commerce sector.
Stage 4: Evaluation
This stage aims to evaluate the opportunities by analysing the drivers and inhibitors
(Table 4).
- 40 -
Opportunity Drivers Inhibitors
Domestic Favourable government policy with Market uncertainty

expansion regards to the development of Managerial capability
West China development and Investment in promotion
e-commerce
Existing expertise
Huge market potential
Low competition
Economy of scale
Wireless Market maturity Government regulation restricting
value-added Potential profitability entry
services The fast development of wireless High competition
telecommunication technology Difficulty to develop differentiation
The popularization of mobile phone competitive advantage
Economy of diversification
Ablility to enhance user experience
and penetrate the existing market
Integrated Favourable government policy Investment in research and
service package promoting Internet applications development
among government agencies and Market uncertainty
enterprises
Big market potential in B2B
e-commerce sector due to the
market size
Alibabas reputation in B2B
e-commerce industry
Economy of diversification
Ability to extend market breadth
and depth
Table 4: Evaluation of opportunities identified
Stage 5: Elaboration
This stage involves the planning activities to exploit the opportunities. Shanes (2003)
theory of the opportunity exploitation strategy will be applied to plan appropriate
opportunity exploitation activities for Alibaba.
Domestic expansion
Grow progressively to avoid rapidly expanding organisation and
employee base, which are more than likely to result in poor
- 41 -
management and increasing costs.
Offer localized service to reduce market uncertainty.
Keep flexible and adaptable to market responses.
Maintain the profitability of the current B2B e-commerce business
and penetrate the existing market.
Wireless value-added services
Diversify the current wireless value-added services.
Enter m-payment market by acquiring an existing business as it is a
relatively mature market and the demand and production are better
known in an existing business (Shane, 2003).
Develop m-commerce from fundamental functions to sophisticated
applications; therefore be able to keep the product flexible and
adaptable to market responses.
Integrated service package
Grow from small scale to reduce market uncertainty.
Take full advantage of Alibabas e-commerce resources, such as
reputation in B2B e-commerce industry, customer base, information
resources, etc.
Keep the service flexible to accommodate different customer needs
and make adaptations according to market responses.
Enhance product support, including not only after-sale service, but
also educating the market before sale.
4.1.4 Barriers to Expansion
Using the theories of Penrose (1995) and Feldman and Klofsten (2000), which are
presented in Section 2.3.3, this section analyses the barriers to expansion for
Alibaba and identifies them as follows:
Finance. Although Alibabas main business, B2B e-commerce, keeps
- 42 -
profitable, its other two businesses, C2C e-commerce (Taobao) and
gateway and search engine (Yahoo! China) have not found sustainable
business model yet. As a result, Alibaba may be exposed to suspicions from
external financier and other big stakeholders, both of who are more than
likely to exert negative influences on Alibabas future expansion.
Organisational integration. As many other SMEs, Alibaba, to some extent,
also developed bureaucracy, inefficient communication and cooperation
between different divisions as the company became larger and more
divisional. Measures have been implemented to improve communication
and cooperation cross between divisions. For example, the management
teams from different divisions meet up regularly to work collectively 14 .
However, the effects of these measures have not been proved yet.
Managerial ability. Despite the fact that Alibaba has attracted quite a few
senior and mid-level professional managers in the past a few years, the
issue of lacking managerial ability still exists. Currently, the strategic
planning still relies on Jack Ma to a large extent. Moreover, Jack Ma and the
co-founders of Alibaba are still deeply involved in daily running of the
business, which may preclude the more appropriate managerial personnel
from being approved and promoted.
Competition. Alibabas earlier success benefited a great deal from lack of
competition in Chinese B2B e-commerce industry before 2003. From 2004,
numerous foreign and domestic service providers started to enter Chinese
e-commerce industry, which may threaten Alibabas future growth. Moreover,
at present, the competition strategies adopted by most Chinese e-commerce
companies are very likely to lead to malignant competition, which will
jeopardize the development of the entire industry as Chinese e-commerce
industry is still at a start-up stage and the industry environment needs be
fostered15.
14
Information obtained from interviews with employees of Alibaba
15
Jack Ma, interview with the Economic Observer, 2004
- 43 -
Market uncertainty. As mentioned in Section 4.2, e-commerce, as an
efficient and effective way of bridging the gap between domestic
manufacturers and global market, has not been widely applied among
Chinese enterprises yet. To which extent these enterprises can accept
e-commerce will largely affect Alibabas growth potential.
4.1.5 Acquisition of Yahoo! China
The acquisition of Yahoo! China was the most explosive event in Chinese Internet
industry in 2005. It is also the most aggressive expansion activity Alibaba has ever
adopted, considering the money involved and changes to organisational structure.
This section analyses the benefits and risks brought by the acquisition from Alibabas
perspective, therefore learn lessons from this expansion attempt for Alibaba.
4.1.5.1 Benefits
Enlarged products and offerings. Yahoo! Chinas major offerings, including
gateway, search engine, online auction, online advertising, wireless services,
e-mail service and instant messenger, are efficient supplementary to
Alibabas current business. By integrating those offerings into Alibabas
business, Alibaba is expected to diversify its revenue model. Moreover, with
new functions being integrated into the existing system, Alibaba is able to
enhance customer experiences, therefore build customer loyalty and extend
market depth.
Finance. Alibaba had invested a great deal in the expansion activities during
the period 2003-2005. For instance, the establishment of the C2C
e-commerce website (Taobao) and the consequent competition with eBay
have cost Alibaba at least $ 56 million16. As more companies enter into this
16
http://www.taobao.com/about/intro.php
- 44 -
sector, further investment is required. The injection of $ 1 billion through this
acquisition would greatly ease the strain on Alibabas cash flow.
Customer base. This acquisition also secured Alibaba a large potential
customer base taken over from Yahoo! China.
International reputation. Yahoo! enjoys a high reputation in the international
Internet industry. Through this acquisition, Alibaba has raised the value of its
brand equity, which could facilitate its expansion into global market in the
future.
4.1.5.2 Risks
Business model. Yahoo! entered into Chinese market in 1999. During its six
years of development before the acquisition, it had not found an appropriate
business model. Facing the competition from both local and international
players, Yahoo! China had been increasingly losing its market share.
However, the situation has not been improved so far. Alibaba has not found a
sustainable business model for it either.
Lack of experiences. As the businesses of Yahoo! China and Alibaba are
mutually complementary, Alibaba is actually inexperienced in the business
areas such as gateway and search engine. In November of 2005, three
months after the acquisition, Alibaba claimed that Yahoo! China would focus
on search engine and abandoned the gateway business. However, after one
years development, Yahoo! China returned to the starting point, with gateway
website relaunched, indicating Alibaba has not had clear logic with regard to
the development of Yahoo! China.
Management capability. The acquisition of Yahoo! China created challenges
for the management team of Alibaba. The depth of the management team, to
a large extent, would determine the outcome of the acquisition.
More complex organisational structure and increasing costs. After the
acquisition, the online auction division of Yahoo! China was directly merged
- 45 -
into Alibabas C2C e-commerce division (Taobao) and the other divisions
were integrated into one division of Alibaba. As a result, Alibaba has to handle
with an expanding employee base, a more complex organisational structure
and increasing overheads as the organization grows larger.
Losing control of the company. Through this acquisition, Yahoo! becomes a
big shareholder of Alibaba by obtaining 40% stake in Alibaba, which imposes
a threat to Alibabas control of the entire company.
4.2 Results
Based on the analysis in the previous section, this section aims to exploit possible
expansion strategy for Alibaba and recommend on how to mitigate the barriers to
expansion, including finance, organisational integration, managerial ability,
competition and market uncertainty.
4.2.1 Expansion Strategy
The aim of this section is to develop expansion strategies for Alibaba, by applying
Carman and Langards (1980) theory of the minimum risk growth strategy paths for
service firms. For Alibaba, it is still too early to adopt international expansion due to
its own limitations. For example, Alibabas core competencies are developed in
accordance with the local customer needs and its current success can largely be
attributed to the fast growing national economy, the robust development of Chinese
SMEs as well as the rapid development of Internet in China (Zheng, 2006). Alibabas
potential in international market need to be further examined. Currently, the more
appropriate expansion strategy path for Alibaba is to focus on market penetration,
geographic market expansion in domestic market, innovative redesign of existing
services and concentric diversification. The exploitation of the opportunities identified
in Section 4.1.3 will also be fit in this expansion process.
- 46 -
The detailed recommendations with regard to each expansion step are as follows:
Market penetration. For Alibaba, the primary expansion step is penetration
into the existing market (i.e. B2B e-commerce, C2C e-commerce, online
payment and gateway and search engine). Meanwhile, wireless
value-added service is a good option for diversifying offerings, which
facilitates Alibabas market penetration by enhancing customer experiences.
The basic wireless value-added services are expected to generate revenue
in a very short term due to the large market size and quick deployment.
Moreover, by developing the wireless value-added services, Alibaba will be
able to gain technical advantage in advanced wireless applications, such as
m-payment and m-commerce. Furthermore, during this period, Alibaba
needs to develop differentiation competitive advantage by building brand
equity and creating strong customer relationship, which can not be easily
imitated.
Geographic market expansion in domestic market. Alibabas initial domestic
expansion needs to focus on B2B e-commerce due to the market size and
the mature business model. Market selection criteria should take local
industrial scale as well as IT and telecommunication infrastructure into
account. One potential market is South-west China. Benefiting from the
national strategy to develop the West China, this region becomes
increasingly winning to big IT companies such as Microsoft, Cisco and Intel.
In return, the entries of these companies will contribute to the improvement
in local IT infrastructure. Moreover, South-west China has a large
manufacturing base. All of the above suggest that South-west China is an
ideal new market for B2B e-commerce. During the domestic expansion, the
planning and control systems need to be formalised and the brand image of
Alibaba needs to be further strengthened.
Innovative redesign of existing services. With innovation in products and
services, Alibaba is expected to further develop differentiation competitive
- 47 -
advantage. One possible expansion activity at this stage is to integrate
vertically, and therefore offer integrated service packages to add value to
each section of e-commerce value chain. For example, by integrating
ERP/SCM/CRM systems into e-commerce platform, Alibaba will enable
customers to manage their business more efficiently. Another possibility is to
diminish the boundary between different e-commerce sectors (i.e. B2B, B2C
and C2C) to offer diversified services on one platform.
Concentric diversification. This expansion stage involves developing
peripheral products and services around core offerings. For example, by
adopting wireless technology, m-payment and m-commerce, which enable
customers to do business via mobile devices, will be efficient supplementary
to Alibabas current offerings. At this stage, Alibaba will focus on expanding
customer base while maintaining and developing its core competencies.
Generally speaking, restrained from the limiting factors, such as finance or
managerial ability, Alibabas expansion strategy has to focus on organic growth from
current operations rather than rapid expansion through acquisitions.
4.2.2 Mitigation of the Barriers
As mentioned in Section 4.1.4, Alibabas expansion is restricted by the following
factors: finance, organisational integration, managerial ability, competition and
market uncertainty. This section aims to raise appropriate recommendations on the
mitigation of these barriers.
Finance. The mitigation of financial pressure involves penetrating the
existing market to ensure the profitability, diversifying revenue sources and
evolving business models according to the market changes. Moreover, it is
essential to take into account both long-term return and immediate interests
- 48 -
while expanding.
Organisational Integration. This barrier to expansion needs to be remedied
through consistent and coherent management action. The measures such
as collective work program need to be further implemented to examine the
effects. Moreover, in order to improve the cooperation and communication
within the organisation, creating an open environment should be included in
organisational culture and promoted at every level.
Managerial Ability. By establishing a talent pool, Alibaba can improve the
depth and breadth of the management team in the long run. Moreover, as
promotion is generally perceived as difficult within the organisation17, it is
necessary to develop an open and transparent promotion mechanism in
order to ensure the identification and promotion of the appropriate
managerial personnel, which will also contribute to employee motivation and
commitment.
Competition. As Chinese e-commerce industry is still at a start-up stage,
forming alliance with peer companies will facilitate the fostering of the
market environment. Furthermore, in order to maintain the competitive
advantage, it is critical for Alibaba to keep offerings differentiate from
competitors by both innovation in products and marketing activities such as
brand building. Customer relationship management also plays an important
role in differentiation strategy. By managing customer relationship efficiently,
Alibaba will be able to perceive market change and therefore respond to
market more quickly.
Market Uncertainty. To reduce market uncertainty, Alibaba need to make
efforts to before sale service, therefore educate the market. Furthermore,
Alibaba should keep flexible, and adapt products, services or even business
model according to the market responses.
17
Information obtained from interviews with employees of Alibaba
- 49 -
4.3 Summary
Section 4.1 used the academic framework presented in Chapter 2 to analyse
Alibabas business/expansion process, driving forces behind Alibabas expansion,
new business opportunities for Alibaba and barriers to expansion. The strategic
alliance between Yahoo! And Alibaba was also analysed to identify lessons from
expansion. Based on the analysis, section 4.2 made recommendations on Alibabas
future expansion, including possible expansion strategies and the mitigation of
- 50 -
Chapter 5: Conclusion
The entire Chinese e-commerce industry has moved into a fast growing period,
creating a sound industry environment for Alibabas further growth. B2B e-commerce
is still the biggest e-commerce industry sector in China, accounting for approximately
95% of the entire market (iResearch, 2005a). The difference between B2C
e-commerce and C2C e-commerce is diminishing.
By applying the stage model business growth theory of Churchill and Lewis (1983) to
the analysis of Alibabas growth/expansion process, it is concluded that Alibaba has
gone through existence, survive and success-growth stages, and is currently at the
take-off stage, where rapid expansion occurs (Gupta and Chin, 1994). This stage is
also characterised by an increasingly decentralised organisational structure, which is
perceived as a driver of Alibabas further expansion. The other driving forces behind
Alibabas expansion encompass huge market potential and the strategic imperative
to win an upper hand in the worlds most fast growing market.
Following the creativity-based model of opportunity recognition developed by
Lumpkin and Lichtenstein (2005), three major business opportunities are identified,
which are domestic expansion, wireless value-added services and integrated service
package. The exploitation of these opportunities involves a series of activities aiming
to reduce market uncertainty and information asymmetry (Shane, 2003). The
activities include growing progressively, entry by acquisition, keeping flexible and
adaptable to market responses, and educating the market, etc.
The strategic alliance between Alibaba and Yahoo! has been analysed to identify
benefits and risks of expansion. Despite enjoying economy of diversification through
this acquisition, Alibaba exposes itself to the risks of poor management, growing
organisation, increasing costs and losing control of the company. Moreover, the
- 51 -
business model of Yahoo! China needs to be further improved.
With regard to Alibabas future expansion, Alibaba has not got sufficient resources to
enter into global market yet. At present, the more appropriate expansion strategy for
Alibaba is to focus on market penetration, geographic market expansion in domestic
market, innovative redesign of existing services and concentric diversification. During
the expansion process, it is critical for Alibaba to develop differentiation competitive
advantages by building brand equity, strengthening brand image, creating strong
customer relationship and innovation in products and services.
Alibabas expansion is inhibited by factors such as finance, organisational integration,
managerial ability, competition and market uncertainty. A series of measures,
including diversification of revenue sources and evolution of business model,
development of an open and transparent promotion mechanism, and forming alliance
with peer companies, etc., are recommended to mitigate these barriers to expansion.
Due to the time constraints and availability of information sources, this project has
mainly focused on the exploitation of short and mid-term expansion strategies for
Alibaba. Future researches could further develop expansion strategy in the long run.
Another limitation of the project is the data collection process, where the majority of
the interviewees are from the e-commerce sectors of Alibaba. As a result, this project
may put more emphasis on e-commerce sectors and overlook some new business
opportunities in other sectors.
This project provides some useful information in Chinese e-commerce industry, the
development and growth potential of Chinese e-commerce companies, which may
contribute to the strategic planning of other Chinese e-commerce companies, or the
entry of international e-commerce companies into Chinese market.
- 52 -
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Appendix Interview Outline
1. How do you think the acquisition of Yahoo! China?

Is it a success or a failure? Why is it successful or failed?
2. How do you think the strategic cooperation between e-Bay and Yahoo!?
Do you think it will influence Alibabas future strategy? If so, what effects does it
have?
3. Aside from Alibabas current business domains, what new area do you think
Alibaba will enter? Why?
4. Do you think Alibaba will enter international market? Is it ready for

internationalization? Why?
5. What barriers are there to expansion? What is the general attitude to expansion?
Are there sufficient resources and capabilities (funding, people, technology,
management capabilities, etc.)?
- 60 -

Alibaba Expansion Strategy Thesis

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Tanaka Business School

Imperial College London

Alibaba Case Study:

A report submitted in partial fulfilment of the

Alibaba, a leading e-commerce company in China.

experienced a booming growth, owing to fast growing national economy, favourable

as the increasing number of Internet users.

B2B e-commerce company to a large group, with a portfolio consisting of four

business areas: B2B e-commerce (Alibaba), C2C e-commerce (Taobao), online

payment (Alipay), and gateway and searching engine (Yahoo! China).

In order to achieve the objective of the project, a two-stage research methodology

business growth process/expansion process of Alibaba; 2) analyse the driving forces

behind Alibabas expansion; 3) identify new business opportunities for Alibaba; 4)

analyse the barriers to expansion. An analysis of strategic alliance between Yahoo!

and Alibaba is also undertaken in order to identify lessons from expansion.

for Alibaba is to focus on market penetration, geographic market expansion in

domestic market, innovative redesign of existing services and concentric

diversification. A series of activities are recommended with regards to Alibabas

future expansion. Moreover, recommendations are also made to eliminate the

assistance during the project.

CHAPTER 1: INTRODUCTION ................................................................. - 1 -

CHAPTER 2: LITERATURE REVIEW ....................................................... - 4 -

CHAPTER 3: RESEARCH METHODOLOGY ......................................... - 28 -

CHAPTER 4: ANALYSIS & RESULTS.................................................... - 31 -

CHAPTER 5: CONCLUSION .................................................................. - 51 -

1.1 Project Background

Chinas e-commerce industry emerged in the mid-1990s. Benefiting from a robust

economic growth rate, favourable government policies, improving broadband access

Chinas total e-commerce transaction value achieved $ 92.5 billion, growing by

54.2%, representing approximately 2.23% of the global market.1 This industry is

predicted to keep growing, with a market capitalization of $ 212.5 billion in 2007

Alibaba, founded in 1998, is a leading e-commerce company in China. Starting with

and eager to seek opportunities to enter into global market.

agreement, involving Alibabas acquisition of Yahoo! China and the investment of $1

business areas: B2B e-commerce (Alibaba), C2C e-commerce (Taobao), online

payment (Alipay), and gateway and searching engine (Yahoo! China).

1.2 Aims and Objectives

research questions of this project are as follows:

Review the business growth process/expansion process of Alibaba and

facilitate the background understanding of Chinese e-commerce industry

environment as well as Alibabas development process and the need to

barriers to expansion. Based on the findings, recommendations with regards

to possible expansion strategy and mitigation of the barriers will be made.

An analysis of strategic alliance between Yahoo! and Alibaba will be

undertaken in order to identify benefits and risks of expansion.

1.3 Structure of the thesis

including an overall landscape of Chinese e-commerce industry, theories concerning

business growth, business expansion, opportunities recognition and exploitation, as

well as expansion strategies in practice.

In Chapter 4, the academic theories presented in Chapter 2 are applied to the

forces of expansion, the identified business opportunities for Alibaba, barriers to

recommendations on the possible expansion strategy and the mitigation of the

directions for future research as well as the limitations of the project.

Chapter 2: Literature Review

sections: first, Chinese e-commerce industry overview, including history, business

driving forces behind expansion, expansion strategies and barriers to expansion;

fourth, theories of business opportunity recognition, including sources of

opportunities, opportunity recognition process and opportunity exploitation strategies;

finally, successful expansion strategies adopted by other e-commerce companies.

2.1 Chinese E-commerce Industry Overview

online, which may include identifying suppliers, selecting products or services,

making purchase commitments, completing financial transactions, and obtaining

services. Generally speaking, e-commerce involves any form of economic activity

conducted via electronic connections (Wigand, 1997). E-commerce exploded quickly