Analyzing the Chinese online-to- offline business dynamics Case: Alibaba Group's Alipay MSc program in Information and Service Management Master's thesis Minshu Jia 2016 Department of Information and Service Economy Aalto University School of Business Powered by TCPDF (www.tcpdf.org) Aalto University, P.O. BOX 11000, 00076 AALTO www.aalto.fi Abstract of master’s thesis Author Minshu Jia Title of thesis Analyzing the Chinese online-to-offline business dynamics, case: Alibaba Group’s Alipay Degree Master of Science in Economics and Business Administration Degree programme Information and Service Economy Thesis advisor(s) Timo Saarinen Year of approval 2016 Number of pages 81 Language English Abstract Research objectives As the rapid growing Chinese e-commerce market, the online-to-offline business dynamics gain more market power. However, this business dynamics approach lacks of theoretical framework support and detailed analysis. Therefore, this research study will start to analysis the overall condition of Chinese e-commerce industry. Along with the theoretical literatures, the framework is established to tackle business model, service process and the multi-sided platform effect. Lastly, an empirical case is chosen to detailed evaluate the platform dimensions, network effect, risks and opportunities. Data and methodology The research study is a qualitative research and descriptive analysis with some numeric indicating figures. By reviewing various literatures, the knowledge of creating an effective online business dynamics will be transferred to the empirical case. The case study helps to understand the Chinese online-to-offline business dynamics concretely. The data collected are mostly textual information from published reports, journals, and articles. The case company information are extracted from its official website and reliable Internet sources, such as Reuters, Bloomberg etc. Main findings and conclusion This research study produces four main findings. First, the Chinese e-commerce overview is presented to give readers a broad picture on current development status. Second, The Alibaba Group’s business model is examined from four domains. Alibaba Group, as the platform provider, aims to provide high valued services for both buyers and sellers under secured environment. They focus on gaining market share with flexible yet prioritize critical resources in partner selection. Additionally, the service process analysis matrix illustrates Alipay is a fast routine process with value adding features. Alipay is not only a payment method, but also an integrated application for users to improve user experiences. Lastly, Alibaba and Alipay are both multi-sided platform, which involves users, merchants, platform provider and social media. The strong network effect is observed as a snowball effect. The risks and opportunities are addressed for Alibaba. Keywords e-commerce, online-to-offline, STOF mode, multi-sided network, network effect, Alibaba, Alipay i Acknowledgements From 2015 till beginning of 2016, the thesis writing is quite challenging journey due to the fact of my internship in fall 2015. First, I would like to express my gratitude to my thesis supervisor – Professor Timo Saarinen, who has generous help me for literature suggestions and comments during the writing process. He kindly answer all my questions and confusions with his profound knowledge. Hence, I could keep my research study on the right track. Second, I would like to acknowledge my family. Without their support and understanding, I would not accomplish this work. Last but not the least, I would like to appreciate all the people who direct or indirect help me on completing this thesis. Helsinki, 2016 ii Table of Contents Acknowledgements ....................................................................................................................... ii 1 Introduction .............................................................................................................................. 1 1.1 Background and motivation ...................................................................................................... 1 1.2 Research questions and objectives .......................................................................................... 5 1.3 Thesis structure ............................................................................................................................. 5 2 Literature review .................................................................................................................... 7 2.1 Business model ............................................................................................................................... 7 2.2 STOF model ...................................................................................................................................... 8 2.2.1 Service domain and design .................................................................................................................. 9 2.2.2 Technology domain and design ....................................................................................................... 13 2.2.3 Organization domain and design .................................................................................................... 16 2.2.4 Finance domain and design ............................................................................................................... 18 2.2.5 Section summary ................................................................................................................................... 22 2.3 Service process analysis matrix model ............................................................................... 22 2.3.1 Service and channel types .................................................................................................................. 23 2.3.2 Revised SPA matrix model ................................................................................................................. 26 2.4 Multi-sided platform theory .................................................................................................... 27 2.4.1 Network effect and user sensitivity ............................................................................................... 29 2.4.2 Winner-take-all dynamics and Multi-homing costs ................................................................ 32 2.4.3 Envelopment threat and bundling benefits ................................................................................ 33 3 Research methodology ........................................................................................................ 36 3.1 Research method ........................................................................................................................ 36 3.2 Case study ...................................................................................................................................... 37 3.3 Validity and reliability of research ....................................................................................... 38 4 Chinese e-commerce analysis with case studies ........................................................ 40 4.1 Industry overview analysis ..................................................................................................... 40 4.2 Alibaba’s Alipay case study ...................................................................................................... 45 4.2.1 Alibaba STOF model analysis ........................................................................................................... 48 4.2.2 Alipay SPA matrix analysis ................................................................................................................ 55 4.2.3 Alibaba and Alipay as multi-side platforms ............................................................................... 58 5 Conclusions ............................................................................................................................. 62 6 Bibliography ........................................................................................................................... 65 iii Appendix A: Alipay interfaces and service features ......................................................... 71 Appendix B: Taobao security deposit for new sellers ..................................................... 72 Appendix C: Tmall annual security deposit for new seller ............................................ 74 iv List of Figures Figure 1 Chinese third-party online payment transaction volume (adpoted from iResearch 2015) .................................................................................................................................. 3 Figure 2 China Third-party Mobile Payment Market ................................................................ 4 Figure 3 STOF business model domains ................................................................................... 8 Figure 4 Descriptive model for the service domain ................................................................. 11 Figure 5 Descriptive model for the technology domain .......................................................... 14 Figure 6 Descriptive model for the organization domain ........................................................ 17 Figure 7 Descriptive model for the finance domain ................................................................ 20 Figure 8 Service process analysis matrix ................................................................................. 24 Figure 9 Revised SPA matrix model (adopted from Tinnilä & Vepsäläinen, 1995) ............... 26 Figure 10 Multi-sided platform vs. alternative business model ............................................... 28 Figure 11 Network effect for two-sided platform (adopted from Hagiu 2007 and Eisenmann 2006) ................................................................................................................................ 30 Figure 12 Chinese e-commerce market size ............................................................................ 41 Figure 13 Leading social media apps in China, 2013-2015 ..................................................... 43 Figure 14 The ecosystem of Alibaba ....................................................................................... 46 Figure 15 Market share of third-party online payemnt platforms by transaction value .......... 47 Figure 16 SPA matrix analysis for Alipay ............................................................................... 57 v List of Tables Table 1: Difference between O2O and B2C .............................................................................. 2 Table 2 Critical design issues in service domain ..................................................................... 12 Table 3 Critical design issues in technology domain ............................................................... 15 Table 4 Critical design issues in organization domain ............................................................ 18 Table 5 Critical design issues in finance domain ..................................................................... 22 Table 6 Case study tactics for four design tests ....................................................................... 38 Table 7 Alibaba's critical design issues in service domain ...................................................... 49 Table 8 Alibaba's critical design issues in technology domain ............................................... 51 Table 9 Alibaba's critical design issue in organization domain ............................................... 53 Table 10 Alibaba's critical design issue in finance domain ..................................................... 55 vi Introduction 1 Introduction This chapter will introduce the background and motivation of this study. The study will define the research question and propose the research objectives. This chapter will continue to discuss the methodology to be applied and expected contribution draw. Finally, the structure of this thesis will be present. 1.1 Background and motivation In the modern technology society, the e-commerce innovations have enriched the business development opportunities through multi-access networking. Multi-access networks or channels are promising due to the benefits of high geographically mobility, qualified services, enlarged capacity, etc. (Johansson;Klas;& Furuskar, 2005). Nowadays, the e-commerce is prosperous in China, which mostly observed as online mobile applications. There is a hot trend of booming online to offline (O2O) e-commerce in China with better profit gains, increased market share and more opportunities. The O2O business dynamics usually involve online platform that combines offline digital business opportunities with offline products/services together through internet-connected devices. The customers are directed to offline products/services by online information including e-coupons, store locators or QR codes presented on e-shops (Solution O2O Commerce, 2015). The customers acquire the products/services information through QR code scanning from the offline physical stores and paying on-the-spot or later stage via mobile payment system. This marketing strategic operational approach enlarged the benefits for its stakeholders through third party online payment market. The rapid development in wireless network and mobile information technology empowers better customer user experience engagement and shifts the market power participation. O2O is widely applied across various industry, especially intensive used in service sector including restaurants, traveling, car/house rental service, group selling etc. Along with the expansion of O2O, the traditional industries such as banking services and retail industry start to enable mobile application platform to build a closer customer relationship. Additionally, the O2O enables the entrepreneurs to start the business with lower initial capital requirement. The true innovation of O2O is to boost the economical return in multi-channel access under digitalized development. The O2O business dynamics is a marketing operation that involves of different sides, logistic channels, value network etc. The fundamental value adding of this approach is 1 Introduction to reach the target group more efficiently and effectively mainly from the mobile portal. The platform is a marketing innovation to satisfy the user needs and wishes, which expressed as the mobile downloadable applications. This research focuses on evaluating the O2O business dynamics, which is a broad concept expanding the value chain with both online and offline activities. According to Xu and Zhang (2015), the Chinese O2O has four modes: online to offline, offline to online, online to offline to online and offline to online to offline. The online to offline mode has one prerequisite that requires setting up an online platform first. Along with the online platform’s entry, the offline businesses could establish the relationship with online users. Thus, the O2O platform should entitles a strong resource that supports the ability to interact transactions between online and offline. On the contrast, the offline to online mode requires offline platform establishment first. The offline to online mode is more towards the traditional business expansion path: the successful offline business seeking more customers through online channel. The online platform or third party online platform not only add online commercial flow but also leverage national distribution for online transactions. The online to offline to online mode requires building the online platform first to enable trading activities. The trading activities always realized in offline locations. Additionally, the offline experiences will redirect the customers back to online platform to purchase again. Lastly, the offline to online to offline mode extends the process to offline experiences again based on the offline to online mode. This mode is more likely to choose the readily available or influential social platform to operate their online activities. (Xu & Zhang, 2015) Table 1 shows the difference between B2C and O2O business model. The O2O model emphasizes more on managing customer flow to offline services. B2C model involves logistic process to deliver the products/services to customers. B2C usually provide tangible products, however O2O is more service-oriented business. Table 1: Difference between O2O and B2C B2C O2O Focus Both goods/services Service oriented Logistic process Deliver to spot On-the-spot offline service Stock Tangible products Mainly service 2 Introduction The empirical cases show that the O2O has injected new energy into the Chinese market. It broadens the business horizontally by multi-access network in e-commerce. The whole society has influenced by this O2O innovation particularly through third party online payment system. Thus, the companies are seeking to adapt their business model into multi- access channel to increase market share. O2O business dynamics usually express as online payment system to involve users and merchants. The following figures show the third-party online payment facts. Figure 1 states the yearly online payment transaction volume in China. It is clearly observed that the transaction volume keeps increasing year on year under more stable growth rate (iResearch, 2015). Figure 1 Chinese third-party online payment transaction volume (adpoted from iResearch 2015) The following Figure 2 illustrates the third-paty mobile payment marekt in China. The transaction value increase dramatically during the previous years. There is a huge jump at the end of year 2012. The mobile payment transaction value in total has increaesd by seven times yearly growth rate in 2013. The transaction value reached around 5992 billion yuan at year 2014. Based on the forecast, the total transaction value will steady go up. However, the growth rate is expected to slow down (Cecilia, 2014). 3