Contrasting Business Models of Amazon and Alibaba - Essay Example

Business Table of Contents Table of Contents 2 Introduction 3 Amazon 4 Alibaba Group Holdings Limited 5 Comparison between current achievements and future success of Amazon and Alibaba 6 Globalization 6 Internationalization operation 7 Contrasting business models of Amazon and Alibaba 9 Success of Alibaba against business of Amazon 11 Political environment 11 Cultural and economic environment affecting both the business 13 Conclusion 13 Reference list 15 Introduction The international business environment in twenty first century has become very complex, dynamic and interdependent on a number of factors (Ghemawat, 2001). International business environment (IBE) has the distinctive characteristics, which are attached to international business research. Hence, IBE is regarded as the environment present in a different country, which has contrasting exogenous factors from that of the home country of an organisation. The factors influence the decision making power of the organisation on the resource utilisation and availability (Langlois and Steinmueller, 2000; Nandi, 2010). Due to the rapid change of the business environment the organisations have to understand the political, social, economical, technological, environment and legal condition of expanding markets. These foreign markets have augmented the probability of failure for the organisations and there are several examples pertaining to unsuccessful foreign ventures (Jaffe, Nebenzahl and Schorr, 2005). Hence, it is significant for an organisation to study the market condition of a new target market of an emerging country before commencing with the international business plan. IBE has changed over the years to such an extent that the organisation in the foreign markets has to amend their management styles and devise strategies to operate successfully. Though there are several risk factors associated with expanding a business internationally but the organisations perceives the international markets as opportunities, which assists in growth of the business (Sirmon, Hitt and Ireland, 2007). In order to achieve the predetermined goal, the organisations aim at producing specialized products, which have huge demand in the intentional markets. In this process they utilise the resources that are available worldwide (Gupta, 2013; Nandi, 2010). The business often experiences severe challenges in the international markets such as issues related to legal, social, political, technological and cultural system in the global context. Hence, global management is required to develop strategies that help the organisation to sustain in long run in the international grounds. The organisations have to make huge investments in the international markets to as to compete with their rivals and increase the markets global market share (Sirmon and Hitt, 2003). Hence, the importance of internal business environments is quite clear and this report highlights the current achievements, potential for future success and business operation of two renowned companies that operate globally, Amazon and Alibaba. Both the companies have tried to increase their business operation by seeking access to new markets in any emerging economies. The main purpose of the report is to enumerate the contrasting features of the two companies i.e. Alibaba and Amazon, pertaining to their business operation related to international business environment. It is observed that both the companies have assisted the consumers to meet their demand appropriately. The significant increase in competition in America and China has made challenged the existence of both the companies in the domestic markets. The companies have also extended their boundary beyond the domestic market in order to cater the needs of the global customers. Amazon Amazon.com, Inc is regarded as the renowned American electronic company, which is headquartered in Washington. The core segment of the company is online bookstore; however, it has diversified into many segments such as video games, software, accessories, furniture, food, jewellery and toys (Amazon.com, Inc., 2014b). The company also aims at manufacturing consumer electronic such as Kindle e-Book, Fire Phone and Fire TV, which is well known for its cloud computing services. The company has separate websites for the UK, Ireland, France, Germany, Australia, China, India and many more (Amazon.com, Inc., 2014a). It is one of the most important customer centric companies, which help the customers to get their desired products at low prices and also have the opportunity to select from a vast range of options. The company use multi-level strategies pertaining to e-commerce and concentrates on B2C, B2B and C2B relationships. It also facilitates C2C relationships through the Amazon marketplace that plays the role of an intermediary in order to facilitate the consumer to consumer transactions. The mission of the company is to ensure its customers 100% Purchase Protection (Amazon.com, Inc., 2014b). It indicates that the company provides a secure online shopping experience, safe electronic payments, easy return, convenient cash on delivery option and 24X7 Amazon online customer service (Amazon.com, Inc., 2014a). Alibaba Group Holdings Limited Alibaba Group Holdings Limited is referred as the best e-commerce Company operating in China. It provides B2C, C2C and B2B sales services with the help of web portals. The company’s main operation is in China (Alibaba group Holding Limited, 2014b); however, it has entered India, Hong Kong and few Asia-Pacific Countries. It is also regarded as the largest mobile and online commerce company in the world in 2013. It has changed the outlook of commerce in China by using internet. It has helped the country to overcome the issues related to vast population size and underdeveloped retail industry in China (Alibaba group Holding Limited, 2014c). The mission of the company highlights that the company aims at simplifying business by providing improved technology and services to the merchants and consumers in the ecosystem. Moreover, the vision of the company is to meet the demand of the customers and last for at least 102 years (Alibaba group Holding Limited, 2014a). Alibaba is well known in the US as Alibaba.com, where the Chinese businesses and factories are connected with the US for B2B operations. More than 80% of online purchase accounts from the Chinese consumers and merchants (eCommerceFuel, 2014). Comparison between current achievements and future success of Amazon and Alibaba The comparison between the two companies is drawn with respect to their performance in dynamic international business environment. Both the companies have entered international markets to expand their business, increase profit margin and customer’s base. Amazon operates almost in all countries with the help of separate websites. The same process is followed by Alibaba but the company mainly operates in China, entered India recently and also have access to few places in Asia-Pacific regions. This international operates is challenged v\by several factors such as social, political, environmental, legal, demographic and cultural. The following discussion highlights the comparison of the two companies based on their achievements and also enumerates the issues that are related to the countries where they serve. Globalization Hamilton and Webster (2009) have defined globalization as the political, social, economical and technological association between different countries. It is basically a challenging concept, which indicates the shrinkage of space and time. However, globalization is also defined as the elimination or diminution of restrictions that are levied on the exchanges. This exchanges takes place across the borders and integrate the complex global system (Steger, 2009; Sawhney, 2014). Globalization has brought huge changes in the operation of both the companies. The vast empire of Amazon includes retail, wholesale, payments and group purchasing. It is observed that Alibaba is valuable than eBay and Amazon, whereas the latter has made huge efforts to become prominent in the e-commerce market of China (Sawhney, 2014). Both the companies have many similarities as it is established for fulfilling the demand of the customers by providing a number of goods at low prices. The companies have developed huge base of customers and have become the most prominent players in the home market. Internationalization operation The reason behind internationalization of business is dependent on a series of factors that help in decision making. The factors are organizational and environmental. The environmental factors include unsolicited proposals, attractiveness of host country and bandwagon effect. However, the organizational factors take into account firm specific factors and decision making characteristics (Johanson and Vahlne, 2003). Figure 1: Internationalization process (Source: Johanson and Vahlne, 2003) The figure highlights the internationalization process adopted by a firm in order to expand. Firstly, information pertaining to the target market is obtained and decisions are taken according to its social, political, cultural, environmental and financial status. The current activities of the companies are dependent on these decisions as the management has to device plans for entering the new market. Finally, the company aims at fulfilling all the commitments that it had made before entering the new markets. The commitments are generally related to the fulfillment of the customer demand in the new market (Johanson and Vahlne, 2003; Sawhney, 2014). In the international markets, Alibaba operates in open market where the buyers and sellers are connected. The company has also created an e-ecommerce platform, which aims at assisting the small businesses and brand manufactures to reach their potent customers. However, Alibaba does not sell the product directly and even does not own warehouses. This is the main reason why Alibaba is more profitable than Amazon; as the profit margin of Alibaba is 40% and earnings is recorded to be $ 2 billion in the last quarter of 2014 (Sawhney, 2014). Comparatively, Amazon operates in a managed marketplace, which is closer to the traditional retailing. The company owns huge distribution centers, which assist the company to sell its product directly to the customers. The Amazon also produces its own brand of tablets and smart phones. The business model allows the company to access greater manages over the customer’s needs and demands; it also permits the company to control customer experience (Sawhney, 2014). The companies have built successful and unique e-commerce platforms that suits the home markets. Alibaba has deep knowledge pertaining to taste and preference of Chinese consumers. The company is familiar with the details of Chinese regulations and has maintained a good relationship with national and state governments. On the other hand, Amazon has mastered supply chain and logistics management and has become the world leader by providing cloud infrastructure. The Kindle Fire products of Amazon rely on the vast list of movies, movies, shipping services and cloud structure (Sawhney, 2014). Export activities Both the companies will find it difficult to export products to each other markets as they are well established in their markets. Amazon will require several years and billions of dollars to develop its delivery infrastructure and distribution channels in China. The company has to enter into a fierce battle for market share against a strong competitor, who has better knowledge regarding China. Similarly, it is almost impossible for Alibaba to compete with Amazon in the Western markets, where the latter has well established supply chain in the US (Sawhney, 2014). For potential success in future, both the companies should focus on their home markets and undergo disruptive innovation for wining against its competitors in the foreign markets. Alibaba should remain focused on the under-developed Chinese markets. It should also concentrate on acquisition in Western markets and gain coherent platform assets in Europe and the US (Sawhney, 2014). Contrasting business models of Amazon and Alibaba Amazon was established by Jeff Bezo in his garage during 1994 in Washington; however, Alibaba was set up in 1999 by Jack Ma’s Hupan Garden apartment in China (Soper, 2014). This is quite an inspiring start for both the companies and presently they have become one of the major market leaders in the world. Amazon was recorded as the 9th most visited website in the world however, Alibaba occupied the 10th position (Soper, 2014). Thus, both the companies have maintained their position in their respective market in America and China respectively. However, Amazon is observed to capture majority of world online retail market. The company has dealt with all the cultural factors that have often become hindrance for the business in a new overseas market. The company has always avoided selling those products, which harms a definite culture or religion (Wee, 2014). The business model of Amazon has the ability to capture majority of sales in the retail stores. However, Alibaba is a tough competitor of Amazon, who have different business model from the latter. Despite the strong business model, Alibaba has encountered challenge pertaining to Initial Public Offering (IPO) in the US during 2014. The business model of both is compared henceforth. The business model of Amazon is supported by three main pillars such as low margin; the customers get their products easily and build a customer-oriented service plan (Wee, 2014). The first and foremost important pillar of Amazon is low margin on the products that are sold. Conversely, it is well known that Alibaba does not have any margin; it generates profit and revenue not from the sale of products but on advertising products and premium services on its websites. The businesses model of Alibaba has succeeded in generating group revenue during 2013 (Sampere, 2014). The second pillar of Amazon is to ensure that the customers receive the best deals without much effort. Amazon is active in communicating the deals to their customers and also gives remarkable effort and invests huge sum of money to remain at the top of the results in search engines (Sampere, 2014). On the other hand, Alibaba does not do all this activities; the revenue model of the company is based on the advertisements of the products and the most important part of model is that advertisements are close to search engines. The customers have to search for thei5 desired products in the website of the company itself (Wee, 2014). This is quite profitable as it scale enables the company to charge premium prices to the advertisers. Its revenue is not dependent on the number of clicks. It also helps the company to block its competitors from accessing their customers (Sampere, 2014). The third pillar of Amazon is to develop customer oriented services, which aims at increasing the frequency of purchases. Nevertheless, the purchase frequency is dependent on purchasing power of consumers and annual income. The average household income of the consumers of Amazon is about $89,000, which is 25% higher than average income of $71,000 of the US (Sampere, 2014). Nevertheless, Alibaba generates its revenue from any type of customer regardless of their income (Sampere, 2014). Success of Alibaba against business of Amazon The pricing markets of Alibaba are regarded as milestone for the e-commerce market of the US. Amazon is prominent in the US market but Alibaba has captured significant portion of the US market. Nevertheless, Amazon has remained the biggest e-commerce company in the world with respect to revenue. The revenue of Alibaba is assumed to increase rapidly than Amazon in 2015. The sales are anticipated to grow by 20% in 2015 and by 33% in 2016 (Soper, 2014). This growth is driven by trajectories of Amazon and Alibaba domestic markets. It is observed that China is about to overtake the online spending of the US by 2017 according to the survey conducted by EMarketer Inc. China has experienced fast growth in e-commerce as the populations prefer to do inline shopping (Soper, 201; Andrews, 2014). Political environment The chairman of Alibaba is regarded as the richest man in China in the past 15 years, who owns assets of $21 billion. He had recently visited South Korea and decided to debut IPO in order to yield billions of dollar payout for the sovereign wealth fund of Beijing. The IPO in Beijing will help the company to earn about $200 billion from the investors (Dow Jones & Company, Inc, 2014). However, the political scenario of China can force the lucrative position of Alibaba to vanish. This is due to the effect of factionalism of Communist Party, which refers to the decision that has the ability to curb social and economic power of the technological monopolists (Dow Jones & Company, Inc, 2014). This political risk has been the largest financial risk for the company. Moreover, the government of China have restricted foreign ownership of the Chinese assets and this has resulted in Alibaba’s shareholder not owning the company. Rather the shareholders are only allowed to own variable interest entity (VIE) shares in shell companies that is linked with Alibaba’s profit. Apart from that the Chinses economy is quite profitable where the customers and companies are equally beneficial (Dow Jones & Company, Inc, 2014). Amazon has to encounter political risk in China and could not achieve the expected response in the country. In China google.com is banned as the government argues that it threatens the national market and community with vulnerable contents in their database. Additionally, the company has also lost remarkable market share in China due to different political decision regarding the usage of international websites. The international companies are not permitted to own larger percentage of interest in the technology firms and data centres (Babcock, 2013; Dow Jones & Company, Inc, 2014). Amazon has already succeeded in serving the customers in China in the data centres set up by them, which is situated out of China. Hence, the data centres can be regarded as an extension to the existing business. However, the company took the contact of Chinese government, which was directed at providing cloud computing services for speeding the growth of the economy. However, the company sets its own standard and reveals the practices for Europe and North America (Babcock, 2013). Cultural and economic environment affecting both the business Amazon and Alibaba have always ensured that the products offered by them do not harm the feelings and sentiments of the customers internationally. They try to meet the exact demand of the customers and hence the customers are not dissatisfied with the type of products. Alibaba and Amazon are affected by the economical disruption that occurs in different countries as a result of currency fluctuations. The exchange rate fluctuation results in currency value fluctuations, which brings in profit and loss for the companies. Conclusion Companies such as Alibaba and Amazon have helped the consumers to get the exact products that are demanded by them. However there is significant growth in competition between the two companies America and China, which is the main hub for both of them. Despite the success of the companies in their domestic markets they have extended the business boundaries overseas. In doing so, they have encountered challenge in different countries. This has restricted the growth of Amazon in China and Alibaba in the US. Apart from competition, the companies have also experienced difficulties that originate from political decisions and cultural issues. Nevertheless, in comparing operation of both the companies, it is observed that Alibaba is performing better than Amazon and is expected to increase its business revenue more than Amazon by 2017. Hence, it can be concluded that both Amazon and Alibaba have succeeded to enter new markets by overcoming all the difficulties related to the social, cultural, political, and technological environment of the countries. Reference list Gupta, A., 2013. International Business Environment: Challenges and Changes. Research Journal of Management Science, 2(11), pp. 34-38. Alibaba group Holding Limited, 2014a. Company Overview. [online] Available at: < http://www.alibabagroup.com/en/about/overview > [Accessed 22 December 2014]. Alibaba group Holding Limited, 2014b. History and Milestones. [online] Available at: < http://www.alibabagroup.com/en/about/history > [Accessed 22 December 2014]. Alibaba group Holding Limited, 2014c. Alibaba Group At A Glance. [online] Available at: < http://www.alibabagroup.com/en/ir/glance > [Accessed 22 December 2014]. Amazon.com, Inc., 2014a. About Us. [online] Available at: < http://www.amazon.in/b/ref=gw_m_b_corporate?ie=UTF8&node=1592138031 > [Accessed 22 December 2014]. Amazon.com, Inc., 2014b. Press Releases. [online] Available at: < http://www.amazon.in/b/ref=footer_press?ie=UTF8&node=1592137031 > [Accessed 22 December 2014]. Andrews, 2014. Alibaba vs. Amazon: An In-Depth Comparison of Two eCommerce Giants. [online] Available at: < http://www.ecommercefuel.com/alibaba-vs-amazon/ > [Accessed 22 December 2014]. Babcock, C., 2013. Why Amazon Faces Challenges In China. [online] Available at: < http://www.informationweek.com/cloud/software-as-a-service/why-amazon-faces-challenges-in-china/d/d-id/1113172 > [Accessed 22 December 2014]. Dow Jones & Company, Inc, 2014. Alibabas Political Risk. [online] Available at: < http://www.wsj.com/articles/alibabas-political-risk-1411059836 > [Accessed 22 December 2014]. eCommerceFuel, 2014. Alibaba vs. Amazon: An In-Depth Comparison of Two eCommerce Giants. [online] Available at: < http://www.ecommercefuel.com/alibaba-vs-amazon/ > [Accessed 22 December 2014]. Ghemawat, P., 2001. Distance still matters. The hard reality of global expansion. Harvard Business Review, 79 (8), pp. 137-147. Hamilton, L. And Webster, P., 2009. The International Business Enviroment. New York: Oxford Univeristy Press. Jaffe, E., Nebenzahl, I. and Schorr, I., 2005. Strategic options of home country firms faced with MNC entry. Long Range Planning, 38 (2), pp. 183-195. Johanson, J. and Vahlne, J. E., 2003. Business relationship learning and commitment in the internationalization process. Journal of international entrepreneurship, 1(1), pp. 83-101. Langlois, R. and Steinmueller, W., 2000. Strategy and circumstance: The response of American firms to Japanese competition in semiconductors. Strategic Management Journal, 21, pp. 1163-1173. Nandi, S., 2010. International business environment. New Delhi: Tata McGrawHill. Sampere, J., 2014. Alibaba: The First Real Test for Amazon’s Business Model. [online] Available at: < https://hbr.org/2014/01/alibaba-the-first-real-test-for-amazons-business-model > [Accessed 22 December 2014]. Sawhney, M., 2014. Alibaba vs. Amazon: Who Will Win the Global E-Commerce War? [online] Available at: < http://www.forbes.com/sites/forbesleadershipforum/2014/09/22/alibaba-vs-amazon-who-will-win-the-global-e-commerce-war/ > [Accessed 22 December 2014]. Sirmon, D. and Hitt, M., 2003. Managing resources: Linking unique resources, management and wealth creation in family firms. Entrepreneurship Theory and Practice, 27, pp. 339-358. Sirmon, D., Hitt, M. and Ireland, R., 2007. Managing firm resources in dynamic environments to create value: Looking inside the black box, Academy of Management Review, 32 (1). Soper, S., 2014. Alibaba Overtakes Amazon as Most Highly Valued Online Retailer. [online] Available at: < http://www.bloomberg.com/news/2014-09-18/alibaba-overtakes-amazon-as-most-highly-valued-online-retailer.html > [Accessed 22 December 2014]. Steger, M. B., 2009. Globalization: A Very Short Introduction. Hampshire: Oxford Univeristy Press. Wee, W., 2014. Alibaba Vs Amazon In An Infographic. [online] Available at: < https://www.techinasia.com/alibaba-amazon-infographic/ > [Accessed 22 December 2014]. Read More