UNIVERSITE CATHOLIQUE DE LOUVAIN LOUVAIN SCHOOL OF MANAGEMENT Alibaba vs. Amazon: A business model comparison Supervisor: Professor Paul Belleflamme Research Master Thesis submitted by Feifei Xu With a view of getting the degree Master in Management (in Business Engineering) ACADEMIC YEAR 2015-2016 Acknowledgement First and foremost, I would like to thank my academic advisor Professor Paul Belleflamme for his valuable help and guidance throughout the realization of this thesis. I am very grateful for his insightful comments and precise review of my work. I would also like to thank all the great people who have provided me with support and motivation during the writing process: my parents and family in China, my boyfriend, my friends and classmates, and all the wonderful individuals I have met during my internship in Beijing and my exchanges at the University of Cologne and the London School of Economics. i. Table of content Introduction ................................................................................................................................ 1 Part 1. Literature review ........................................................................................................ 5 1.1 The business model ..................................................................................................................... 5 1.1.1 Review of the conceptualization, definitions and classifications ...................................... 5 1.1.2 Commonalities across studies ........................................................................................................ 14 1.1.3 Differences between business model and strategy .............................................................. 15 1.1.4 Other common misconceptions .................................................................................................... 16 1.1.5 The business model as value driver and source of competitive advantage ............... 17 1.2 Comparison of business models .......................................................................................... 18 1.3 Concluding remarks and observations .............................................................................. 19 Part 2. Methodology .............................................................................................................. 21 2.1 Theoretical foundations ......................................................................................................... 21 2.1.1 Transaction costs economics ......................................................................................................... 21 2.1.2 The impact of ICT ................................................................................................................................. 23 2.2 Analytical framework .............................................................................................................. 25 2.2.1 Matching .................................................................................................................................................. 27 2.2.2 Assembling ............................................................................................................................................. 28 2.2.3 Knowledge management .................................................................................................................. 29 2.3 Choice of comparison target and data collection ........................................................... 29 Part 3. Company Overview ................................................................................................. 31 3.1 Alibaba .......................................................................................................................................... 31 3.2 Amazon ......................................................................................................................................... 32 3.3 Economics .................................................................................................................................... 33 Part 4. Analysis ....................................................................................................................... 37 ii. 4.1 Matching ....................................................................................................................................... 37 4.1.1 Search costs ............................................................................................................................................ 37 4.1.2 Negotiating costs ................................................................................................................................. 40 4.1.3 Enforcement costs ............................................................................................................................... 43 4.1.4 Summary and trade-off analysis ................................................................................................... 50 4.2 Assembling .................................................................................................................................. 51 4.2.1 Retail business ...................................................................................................................................... 51 4.2.2 Membership programs ...................................................................................................................... 54 4.2.3 Logistics and delivery ........................................................................................................................ 55 4.2.4 Payment ................................................................................................................................................... 56 4.2.5 Advertising ............................................................................................................................................. 57 4.2.6 Proprietary technology ..................................................................................................................... 58 4.2.7 Hardware ................................................................................................................................................ 59 4.2.8 Online-to-offline services ................................................................................................................. 60 4.2.9 Publishing ............................................................................................................................................... 61 4.2.10 FinTech .................................................................................................................................................. 62 4.2.11 Content production and streaming service ........................................................................... 63 4.2.12 Summary and trade-off analysis ................................................................................................ 63 4.3 Knowledge management ........................................................................................................ 65 4.3.1 Transaction ............................................................................................................................................ 65 4.3.2 Assembling ............................................................................................................................................. 66 4.3.3 Cognition ................................................................................................................................................. 68 4.3.4 Summary and trade-off analysis ................................................................................................... 69 Conclusion ................................................................................................................................ 71 References ................................................................................................................................ 75 Appendices ............................................................................................................................... 91 iii. List of abbreviations and acronyms AMS: Amazon Marketing Service AWS: Amazon Web Service BBS: Bulletin Board System B2B: Business-to-Business B2C: Business-to-Consumer C2C: Consumer-to-Consumer FAQ: Frequently Asked Questions FBA: Fulfilment By Amazon FinTech: Financial Technology FY: Financial Year ICT: Information and Communication Technology IPO: Initial Public Offering M&A: Merger and Acquisition O2O: Online-to-Offline P2P: Peer-to-Peer RTB: Real-Time Bidding SME: Small and Medium Enterprise SRE: Seller-Reputation-Escalation TBO: Tmall Box Office iv. 1. Introduction Although still lacking a clear conceptualization, the term “business model” has been an essential element in the vocabulary of consultants, managers and academics for a while. One of the main reasons for this is that a well-engineered business model has been defined as a key factor behind the success of a company that may, often, even beat a better idea or technology (Afuah, 2004; Chesbrough, 2007). The understanding of the concept is not universal among practitioners (see works by George and Bock, 2011; Osterwalder, Pigneur and Tucci, 2005; Nielsen and Bukh, 2011) but these are well aware of the power and necessity of a sound business model. A survey from the Economist Intelligence Unit (2005) revealed that 54% out of more than 4,000 senior executives believed that a company’s competitive advantage would depend on innovation in terms of business model rather than in terms of services (p. 9). In practice, figures from the Boston Consulting Group (2009) showed that business model innovators outperformed their industry peers – with an average premium that was more than four times greater – and the return provided by such innovation tended to be more sustainable, lasting for a decade and more (p. 3). The business model has also emerged as a new level unit of analysis for scholars (Zott, Amit and Massa, 2011, p. 1020). The importance of adopting a business model perspective has been stressed in the literature, as it assists executives in the task of structuring the activity system of their company and helps them adopt a holistic approach when considering innovation and change (Amit and Zott, 2012, p. 48). A string of success stories have been used in manuals and business reviews to illustrate the benefit of a competitive business model that is able to challenge the way business is done and reinvent the industry (Voelpel, Leibold and Tekie, 2004), as shown by the cases of Wal-Mart, Dell, Southwest Airlines, Apple or IKEA, just to name a few. Furthermore, as business models have the function to define and organize the firm’s activities in the process of executing the strategy (Richardson, 2008, p. 141), they represent powerful tools for analysing, implementing, and communicating these strategic choices (Shafer, Smith and Linder, 2005, p. 200). In such circumstances, the business model could be compared to a story that tells everyone in the firm how to align so as to generate the value desired (Magretta, 2002, p. 92), which is one of the main priorities of a firm that wants to succeed. For these reasons, the notion of business model is crucial for understanding all aspects of a firm. In this paper, the business models of Alibaba and Amazon in particular will be 2. examined. Indeed, being both well established in their respective home market, the two technology giants are often compared due to the nature of their core business, the size and richness of their ecosystems, and more importantly their capacity to innovate and create value for their customers. The aim of this thesis is therefore to explore the differences and similarities Alibaba and Amazon hold on these various aspects and the value creation mechanisms they are bringing forward by comparing their business models. From a more personal standpoint, this subject was appealing because e-commerce has become an integral part of our lives, especially for my generation. Indeed, the Nielsen Company (2014) reported that 52% to 63% of millennials (aged between 21 and 34) intend to buy online (p. 13). Furthermore, various publications from consulting firms (see Wang, Lau and Gong, 2016; Ben-Shabat, Nilforoushan, Yuen and Moriarty, 2015) show that the two largest and most attractive e-commerce markets were China and the USA, i.e. the countries where Alibaba and Amazon are respectively based. This further reinforces their positions as established players for now but also potentially for the years to come. The fact that few are actually aware of all the various other fields Alibaba and Amazon have stakes on besides e- tailing is another reason that motivated a deeper investigation of the overall presence of the two companies. Also, Alibaba being considered as a possible contender for Amazon is a quite recent development that was mainly steered by Alibaba’s record-breaking IPO in 2014. In this regard, this topic can be considered as quite current. Finally, the media has generally portrayed the Chinese company in a negative light due to the various counterfeiting scandals that have been exposed over the years. Consequently, the positive achievements that the company has managed to build might have been undermined. This paper therefore wishes to bring an objective comparison of the two technology giants. As no prior formal comparison of Alibaba and Amazon was made (apart from the few mentions from the business press and websites), this thesis is meant to bring a structured review of the two business models in question. In this sense, it is the first attempt at comparing these two companies in light of a coherent framework. By looking at their respective business models, the stories of the two companies are told in a way that encompasses a snapshot of their strategy, the various businesses they are in, and the developments they are undergoing currently. Furthermore, the business model viewpoint is also important in the sense that it allows us to fathom how these companies have ultimately been able to succeed.