dgroup • Alibaba vs. Amazon — How students predict the future of e-commerce

In your opinion, which company has a more sustainable business model: Amazon or Alibaba? The opening question at our workshop at Zeppelin University resulted in a nearly 50/50 split amongst the students.

The workshop was part of our presence at the university’s recruiting days ZUtaten, from where dgroup had already hired several interns and consultants in the past. The workshop at this young and innovative university had two objectives: First, to identify talented students as potential future employees for the digital strategy practice at dgroup. Second, to provide the students with insights into China, the biggest online market globally and into Alibaba, the world`s largest e-commerce company.

The insights were based on our digital consulting projects in China and the dgroup Inside China Summit in October 2015. At the end of the workshop, the students were supposed to answer the “Endgame”-question: Alibaba vs. Amazon — which company or which business model, respectively, will shape the future of global e-commerce?

Understanding Alibaba and Amazon as digital ecosystems

To discuss the question which company would potentially come out on top, it was essential for the students to understand that both players do not have capsuled business models. Both Alibaba and Amazon are ecosystems that combine different products and services. With guidance and input from dgroup, the workshop participants analyzed the two companies in breakout sessions.

Aspects of Amazon’s business model:

The students pointed out the strict customer focus as Amazon’s core strength. A limitless assortment (driven by Amazon’s own products and third party offers), high investments into technology and logistics as well as Amazon Prime and superior customer service together create a unique customer experience and ultimately strong lock-in effects. However, the students also acknowledged that ongoing investments keep company profits continuously on a very low level despite ongoing revenue-growth.

Insights on Alibaba’s business model:

Alibaba has evolved to the world’s biggest e-commerce player and gained huge attention in the Western world with its IPO in 2014. The student group analyzing Alibaba’s business model understood the company as an enabler and facilitator for other companies to do business via one of Alibaba’s platforms (e.g. Tmall, Taobao) — as opposed to being a retailer. In comparison to Amazon, Alibaba does not vertically integrate the value chain (e.g. provide logistic services or produce products) and consequently keeps fix costs low (e.g. no warehouses). On the one hand, this results in higher margins, a better liquidity and a highly scalable business. On the other hand, Alibaba has less power over the full customer journey than Amazon (since the company does not sell products itself), has fewer influence on the holistic user experience and does not provide a full logistics solution yet. The students also marked Alibaba’s strong ecosystem consisting of Marketing, Cloud Computing and Payment Services as a key strength. Especially Alipay has grown into a bank-like financial institution that enables and boosts trade on the platform by giving loans to small companies using the Alibaba platforms.

Shaping the future of e-commerce — who will succeed?

The conceptual task of the workshop was to come up with a growth strategy for either of the two e-commerce giants for the next 5–10 years.

Strategy for Amazon:

• The students described the company’s mission as followed: We want to be the most customer-centric company and a digital companion in all areas of life
• According to the students, Amazon should focus on their core markets in Western Europe and the US. Huge investments to build up an infrastructure (e.g. logistic hubs) have already been made, to suit the high customer expectations
• Within their core markets, Amazon should further integrate additional services into its ecosystem in order to become the one-stop shop for literally all customer needs. However, the students pointed out that this would come along with huge additional investments and the risk to stretch the brand too far
• On a short-term view, further plans of internationalization would be hindered due to an insufficient infrastructure in most developing and emerging countries

Strategy for Alibaba:

• The student group defined a different mission for Alibaba: We shape and enable the future of commerce and strengthen our position as an intermediate between companies and consumers
• In contrast to the Amazon group, the workshop participants suggested that Alibaba should focus on enabling other businesses to reach out to the consumers (e.g. by solely providing the platform) instead of integrating further parts of the value chain
• Taking the enormous size and growth rates of the Chinese market into regard, Alibaba should continue to strengthen its position in this growth market and outsmart uprising competitors such as Tencent
• The strong dependency on the government and the vulnerable Chinese economy remain to be risks for Alibaba if they keep their main focus on China.

The “Endgame”-answer

The workshop concluded with a direct discussion of two student representatives of both companies arguing why they would be the winner and manage to stay ahead of the respective competitor. Team Amazon based their superiority on their high market share in the Western world, combined with the relentless drive for new innovations and a consumer centric vision. Furthermore, the representative claimed that Alibaba will not be able to get a grip on the user experience as strong as Amazon has established it.

The Alibaba team claimed to have a far more scalable business that would not only allow them to maintain the front-runner position in the world’s biggest e-commerce market China, but also to internationalize quicker into other emerging regions. And in comparison to Amazon, the Chinese giant has constantly delivered profits, which still remain absent for Amazon. Arguments were therefore exchanged in favor of both e-commerce giants, but what had changed was the reaction to our introduction question that we asked again at the very end: 75% of the participants would now invest their savings on Alibaba.

It was a very inspirational day at the Zeppelin University with high-level discussions and talks with possible future colleagues. A few days later, we offered several internships to workshop participants at our office in Hamburg.

Max Finne is Senior Analyst at dgroup and a former student of Zeppelin University, where he founded his first e-commerce startup. His expertise lies in digital strategy and marketing analytics.

Originally published at www.d-group.com.