Executive Summary
Alibaba is a mega e-commerce company that has dominated the Chinese market and ventured into the global e-commerce industry. In 2014, Alibaba entered the New York Stock Exchange, which implies that it has become an international company. Recently, the Chinese government leveled accusations against Alibaba for condoning the sale of counterfeit products in its platform. Such accusations have significant implications on Alibaba if it actually deals with suppliers, who supply counterfeit products.
External environment analysis in terms of the impact of counterfeiting on Alibaba indicates that it has serious impacts. The economic impact of counterfeiting is that it makes suppliers lose billions of profits owing to considerable decrease in sales. In this view, counterfeiting makes major affiliates not to prefer selling their products through Alibaba resulting in customer decline and huge economic downturn.
Since Alibaba has carved its market niche, the counterfeiting affects the sociocultural aspects, such as customer loyalty, purchasing behavior, and lifestyles of customers. In global circles, Alibaba loses its market share because suppliers and customers prefer alternative markets. Counterfeiting reduces the safety and security of online markets as counterfeiters not only present fake products, but corrupt payment systems and supply chains.
As consequence of counterfeiting, Alibaba faces political and legal repercussions, which include trade sanctions, lawsuits, and other forms of restrictions. Counterfeiting transforms the demographics of Alibaba customers from high-end customers to low-end customers. The overall impact of counterfeiting is that Alibaba makes significant losses owing to the decline in the number of customers and suppliers.
Analysis of the e-commerce industry using Porter’s forces shows that counterfeiting destabilizes the online market. The bargaining power of suppliers increases because they are unwilling to sale their products in counterfeit markets. Moreover, the bargaining power of customers increases because customers like to purchase products cheaply, just as fake products. The threats of substitutes increase for counterfeiters come up with many substitutes, which threaten the existence of the genuine products in the markets.
Counterfeiting also increases competition and compels Alibaba to undertake extensive advertisement and improve quality of services to outcompete competitors and counterfeiters. Given that the e-commerce industry has entry barriers, such as high switching costs, and high capital requirement, counterfeiting increases these barriers because global governments impose stringent regulations, which make it difficult for new entrants to venture into the market.
Analysis of competitive environment shows that Amazon, eBay, Walmart are major competitors of Alibaba. These companies apply both horizontal and vertical integration strategies as business-level strategies of boosting their profits, sales, and market share. Financial analysis shows that Walmart is leading in the generation of revenues ($746 billion), however, it has low working capital ratio and quick ratio. Alibaba ranks second ($529 billion) followed by Amazon ($88 billion), while eBay generates the least amount of revenues ($17.9 billion).
The analysis of the case study indicates that Alibaba needs to curb the problem of counterfeiting for it to remain competitive in the e-commerce industry. Therefore, the study recommend that Alibaba should collaborate with its business affiliates, governments, business bodies, and consumers in ensuring that counterfeit products do not enter their market. To implement the recommendation, Alibaba should ensure that its business affiliates, which are major players, should supply and trade genuine products.
Moreover, business affiliates, who are suppliers, should register their products with relevant bodies so that Alibaba can take appropriate measures when they supply and trade counterfeit products. The measures should include hefty penalties and removal from Alibaba. To curb global counterfeiting, Alibaba needs to collaborate with governments and business bodies in identifying, tracking, and prosecuting counterfeiters.
For consumers to participate in curbing counterfeiting, Alibaba should educate them through press information, forums, demonstrations, and case studies regarding the harmful effects of counterfeit products on economy, company, and themselves. Education of customers changes their purchasing behavior of customers because it makes them insist on buying genuine products from online markets.
Introduction
Alibaba is one of the giant companies across the world in the e-commerce industry. It is a Chinese company that Jack Ma and other co-founders started in 1999 and has exponentially grown within a period of less than two decades. In 2007 Alibaba became a national e-commerce company when it entered the Hong Kong Stock Exchange and in 2014 it became an international e-commerce company when it entered the New York Stock Exchange.
Currently, Alibaba is a renowned e-commerce company across the world owing to its stature in the e-commerce industry. Alibaba provides diverse products to its customers through business-to-business, business-to-customer, and customer-to-customer models. The business-to-business is a leading model that has propelled Alibaba to attain international stance.
According to Yazdanifard and Li, Alibaba comprise several business affiliates, namely, Taobao, eTao, Alibaba Cloud Computing, Xia Mi, Juhuasuan, Laiwang, and AliExpress amongst others (33). Currently, Alibaba is the leading e-commerce company in Asia and offers stiff competition to American e-commerce companies, such as eBay and Amazon.
Despite the fact that the current situation of Alibaba is stable and robust, it has some challenges that need immediate redress for it to achieve optimum growth and maintain its competitive position in the e-commerce industry. Company executives and e-commerce experts hold that Alibaba experiences the challenge of identifying counterfeit products and preventing their sale through its online markets because it deals with diverse products obtained from different companies (Yan par. 5).
In this view, the Chinese government has filed a report that has sufficient evidence, which indicate that Alibaba is dealing with counterfeit products. Fundamentally, the Chinese government is accusing Alibaba for condoning illegal and unethical business activities by failing to identify and curb the sale of counterfeit products in its online marketplaces.
The accusation implies that Alibaba offers liberal market where merchants can sell their counterfeit products without due regard for legal and ethical requirements of e-commerce. Since businesses are subject to legal and ethical requirements, their violation has significant impact on Alibaba because of trade sanctions and lawsuits. Therefore, this case study analyzes the impact of the accusations on Alibaba by undertaking external environment analysis and giving appropriate recommendations.
External Environment Analysis
General Environment
Counterfeiting comprise illegal and unethical business practices, which have significant impact on economic growth of Alibaba. Counterfeiters steal ideas and products from trademark owners, and thus, prevent them from competing effectively and earning optimum profits.
Chu states that Alibaba uses $16.1 million annually in curbing counterfeits in its markets (par. 7). Lewis argues that counterfeit products constitute 7% of world trade and has serious economic impacts because it costs the United States’ economy about $250 billion and 750,000 jobs annually. Given that the worth of Alibaba is approximately $230 billion, counterfeit goods make its affiliates to lose over $20 billion and thousands of jobs.
Counterfeiting also affects sociocultural aspects of Alibaba, such as consumer lifestyle and loyalty. Alibaba has grown exponentially because it provides quality products, which have enhanced consumer lifestyles and loyalty. Counterfeiting usually results in the production and sale of harmful products.
For instance, a customer in the United States purchased counterfeit drugs, which were not only ineffective, but also harmful because they caused death (48). Hence, the existence of counterfeit products makes shy away from purchasing products from Alibaba and shift their loyalty to other e-commerce companies, which sell quality products. In essence, customers change their lifestyles and purchasing behavior in favor of competitors.
Globally, counterfeiting reduces the market share of Alibaba. Yan states that Alibaba has bad reputation in global markets because customers have noted that 82% of products that Taobao sells are fake (par. 4). The effect is that current and potential customers and businesses boycott selling and buying products through Alibaba resulting in marked decrease in sales. Given that online markets are very competitive, competitors such as eBay and Amazon gain a competitive advantage and outcompete Alibaba in the e-commerce industry globally.
As counterfeiting is an illegal business practice, it affects the application of technology in e-commerce. Counterfeiters do not only have the capacity to corrupt products, but also the ability to corrupt information systems that are applicable in supply chain, logistics, service provision, and purchase of products. Lewis argues that counterfeiting reduces security and safety of e-commerce operations (53).
Thus, counterfeiting has serious impact on the information systems that Alibaba applies in undertaking its operations and logistics. For instance, markets that support counterfeit products are prone to hacking and spoofing because pirates and counterfeiters are dominant. The overall effect is that counterfeiting makes operations and logistics of Alibaba to be vulnerable to hacking and spoofing.
The illegal and unethical issue of counterfeit has marked impact on the operations of Alibaba because it violates political and legal requirements. Yan reports that the Office of the United States Trade Representative has noted that Taobao, a major business affiliate of Alibaba, deals with counterfeit products, and thus, the United States should take appropriate measures against it (par. 9).
In such an instance, Alibaba attracts political and legal measures against itself. According to Lewis, governments across the world impose political interventions, such as lower quotas, higher tariffs, and embargo, in curbing counterfeit products (56).
In this case, several governments across the world might impose such political sanctions on Alibaba if it does not curb proliferation of counterfeit market in its online markets. In 2014, Yves Saint Laurent and Gucci and other dominant brands in the United States filed a lawsuit against Alibaba for colluding with counterfeiters in selling counterfeit products (Chu par. 3). Ultimately, trade restrictions affect the market share of Alibaba leading to a massive decline in sales and profits.
Counterfeiting influences demographic attributes of customers and business affiliates that Alibaba deals with in the e-commerce industry. For example, analysis of counterfeit markets in the United States indicates that demographic attributes of customers differ considerably from that of genuine markets (Lewis 53). Hence, counterfeiting has marked impact demographic attributes of Alibaba’s customers.
In this view, Lewis holds that most counterfeiters target low-income earners, who do not mind buying fake products at cheaper prices than the genuine products (50). In contrast, given that high-income earners prefer to purchase quality products at premium prices, the existence of cheap and fake products turns them away from Alibaba. The outcome is the proportion of low-income earners increases, whereas the proportion of high-income earners declines.
Industrial Environment
In the view of the prevalence of counterfeiting, the bargaining power of suppliers increases because suppliers become unwilling to trade their products in online markets. Progress, Whilhemia, and Tarisai state that high bargaining power can discourage suppliers from selling their products through business-to-business model, but encourage them to employ business-to-consumer model (173).
Since counterfeiting reduces the demands for genuine products, suppliers make huge losses in markets where counterfeit products dominate. In this case, Alibaba experiences tough challenges in maintaining suppliers and attracting new ones.
Counterfeit products increase the bargaining power of customers because they become used to cheap prices, and thus, unable to purchase products at premium prices that suppliers set. Progress, Whilhemia, and Tarisai argue that informed customers have high bargaining power because they understand quality of products and market prices (174).
The understanding of the counterfeit products, genuine products, and their respective prices gives customers an upper hand in purchasing. In this case, Alibaba and business affiliates grapple with the high bargaining power of customers, which pressures them to reduce market prices to be in tandem with counterfeit products, which have low or similar quality.
Counterfeiting increases the threats of the substitute products that suppliers can offer and customers can buy. Progress, Whilhemia, and Tarisai state that substitute products threaten to change the dynamics of markets because they cause customers to switch to alternative products, which suit their interests and purchasing power (174).
Depending on the profitable model, suppliers can choose business-to-business model, business-to-customer model, and customer-to-customer model. To overcome counterfeits, suppliers may choose to sell their products through business-to-customer model. Moreover, the existence of counterfeit products increases threats of substitute products, as customers access diverse products, which vary according to quality and price.
There is stiff competition in the e-commerce industry owing to the emergence of information technology. Alibaba is experiencing stiff competition from numerous e-commerce companies such as Amazon, Walmart, and eBay, which are in the United States. Lewis states that counterfeiting increases rivalry among companies because counterfeit products are cheaper than genuine products (52).
In this case, it implies that Alibaba provides a robust platform for counterfeiting and fuels rivalry among competing e-commerce companies in global markets. The net outcome of counterfeiting is that e-commerce companies experience unhealthy competition, which does not favor the growth of the e-commerce industry.
The characteristics of the e-commerce industry that Alibaba operates are high fixed costs, high switching costs, high strategic states, and low exit barriers. Low exit barriers allow companies that are unable to remain competitive in the e-commerce industry to exit easily leaving competitive companies to dominate.
The threat of new entrants is very high because the e-commerce is a lucrative online market, where customers and suppliers meet. The existence of counterfeiting in Alibaba complicates entry to e-commerce industry because of the existence of barriers, such as huge capital requirement, high switching costs, expensive distribution channels, product differentiation, and government policies.
Establishment of an e-commerce company requires huge capital for the development of safe and secure information systems for database, supply chain, and payment amongst others. Since e-commerce companies monitor purchasing behavior of customers, switching costs are very high because it entails the transfer or loss of customers’ data (Progress, Whilhemia, and Tarisai 174). For successful entry, a company must construct secure distribution channels and differentiate products in a manner that is difficult to counterfeit.
Competitor’s Environment
The three primary competitors of Alibaba are Amazon, eBay, and Walmart. Financial growth of Alibaba has increased exponentially because its revenues increased from $209 billion in 2012 to $529 billion in 2014 (United States Securities and Exchange Commission par. 12). Amazon is an American e-commerce based in Seattle, Washington, which started in 1994 is currently trading on the New York Stock Exchange.
Last financial year, Amazon generated a net revenue of $89 billion, which reflects its growth in global markets (United States Securities and Exchange Commission par. 25). eBay is also an American e-commerce company based in San Jose, California, which started in 1995 and has grown exponentially to become a global e-commerce company.
The growth of eBay is stagnating because its revenues increased from $14 billion in 2012 to $17.9 billion in 2014 (United States Securities and Exchange Commission par 14). Walmart is an American e-commerce company based in Bentonville, Arkansas, which started in 1962 and entered the New York Stock Exchange ten years later. Currently, Walmart is performing well because it generated $746 billion in the fiscal year of 2014 (United States Securities and Exchange Commission par. 23).
In the aspect of business-level strategies, Alibaba, Amazon, eBay, and Walmart employ vertical or horizontal integration strategies. Alibaba uses vertical integration as a business-level strategy that has made it acquire affiliates in different regions across the world. Amazon also uses vertical integration strategy in opening distribution centers and merging with related companies for it to expand market share globally.
The business-level strategy that eBay employs in expanding its growth and diversification of products is horizontal integration. As Walmart aims to own its supply chain globally, it employs vertical integration as a business-level strategy. The key success factors in e-commerce industry are information systems, supply chain infrastructure, availability of shipping industry, the Internet, secure online payments, legislations, global trade, and liberalization of markets.
Working capital ratio and quick ratio are two ratios that effectively assess performance of Alibaba, Amazon, Walmart, and eBay. Business analyst states that working capital ratio and quick ratio are traditional financial ratios, which are appropriate in analyzing short-term financial liquidity of a business enterprise (Kirkham 2). The working capital ratios for Alibaba, Amazon, Walmart, and eBay are 1.7:1, 1.1:1, 0.9:1, and 1.5.1 respectively.
The working ratios mean that Alibaba, Amazon, and eBay can easily settle their liabilities using current assets, while Walmart is unable. The quick ratios for Alibaba, Amazon, Walmart, and eBay are 0.9:1, 0.8:1, 0.2:1, and 0.7:1 respectively. The ratios imply that Alibaba, Amazon, and eBay have more cash than inventories, while Walmart does not have sufficient cash to settle the current liabilities.
The performance of Alibaba, Walmart, and Amazon is robust because they have differentiated and diversified their products and ventured into global markets. The performance of eBay is stagnating because its market share is small when compared to Walmart, Amazon, and Alibaba. The future objectives of these e-commerce companies are to expand their market share and reach global markets, provide quality products, diversify services, and differentiate products.
The strengths of these companies are that they access global markets, offer diverse products, determine the supply of products in the markets, and apply information technology. The weaknesses are that they are prone to counterfeiting, shipping of products is expensive, limited to certain jurisdictions, and bargaining power of suppliers dictates their operations.
Recommendations
Given that the issue of counterfeiting has significant impact on Alibaba, the following recommendations are necessary. The first recommendation is that Alibaba should collaborate with its business affiliates in ensuring that counterfeit products do not enter their market. Analysis of business operations indicates that Alibaba do not have its own merchandise products on the online market, and thus, it purely retails products from its business affiliates, who are the suppliers.
Evidently, Taobao, AliExpress and Tmall are major business of affiliates that are notorious for supplying and trading counterfeit products in Alibaba. In the implementation of this recommendation, Alibaba needs to delegate its anti-counterfeit responsibility to business affiliates so that they can contribute to the fight against counterfeit products. Thus, every business affiliate should take responsibility of ensuring that they do not supply or trade fake products in Alibaba, and further identify and report the existence of fake products.
The second recommendation is that Alibaba should ensure that suppliers register their trademarks with relevant bodies so that they can launch legal suits in case counterfeit products appear in markets. Alibaba is experiencing difficulties in identifying counterfeit products and differentiating them from the fake products because some suppliers have not registered their trademarks.
In this case, all business affiliates, which supply products to Alibaba, must ensure that they supply registered products so that Alibaba can help them in identifying counterfeits products and counterfeiters. Moreover, Alibaba can launch litigation process that can lead to the arrest and prosecution of counterfeiters in the e-commerce industry. Hence, registration of trademarks enhances legal fight against counterfeit products and counterfeiters.
The third recommendation is that Alibaba should collaborate with the Chinese government and other international governments in curbing counterfeit products. Since Alibaba has no powers to impose trade sanctions and political restrictions, it requires the assistance of the Chinese and other international governments. The Chinese government needs to impose appropriate trade sanctions on Chinese companies that supply and trade counterfeit products on the online platforms of Alibaba.
The Chinese government should formulate stringent regulations and impose hefty penalties on companies that supply and trade fake products within its jurisdictions. Moreover, Alibaba needs international governments to aid in the imposition of trade sanctions and political restrictions.
Analysis of Alibaba shows that the American, European, and Canadian markets have reported increased cases of counterfeit products. As Alibaba has limited jurisdiction, it requires assistance of international governments for they have the ability to ensure that all companies within their jurisdictions, which trade online, do not engage in counterfeiting.
The fourth recommendation is that Alibaba should educate its consumers regarding the harmful effects of counterfeit products on economy, company, and utility of the products. Education of customers should occur through press information, forums, demonstrations, and case studies. Alibaba needs to caution customers against purchasing fake products and encourage them to purchase genuine products through newspapers, magazines, adverts, and brochures.
Forums also provide robust means of educating customers because it allows them to interact with representatives from Alibaba and have their questions answered. Given that it is difficult for customers to differentiate fake products from genuine products, Alibaba needs to demonstrate how customers can identify genuine products through online videos.
Alibaba should offer case studies in its websites for customers to give their feedback regarding post-consumption experiences so that potential customers can understand what to expect when they purchase genuine products lest they buy fake ones.
Works Cited
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Lewis, Kevin. “The Fake and the Fatal: The Consequences of Counterfeits.” The Park Place Economist 17.1 (2009): 47-59. Print.
Kirkham, Ross. “Liquidity analysis using cash flow ratios and traditional ratios: The telecommunications in Australia.” Journal of New Business Ideas & Trends 10.1 (2012): 1-13. Print.
Progress, Hove, Smith Whilhemia, and Chikungwa Tarisai. “The delineation of Porter’s five competitive forces model from a technological marketing perspective: A case study of Buffalo City Metropolitan Municipality.” Journal of Economics 4.2 (2013): 169-182. Print.
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Yazdanifard, Rashad, and Merveen Li. “The Review of Alibaba’s Online Business Marketing Strategies Which Navigate Them to Present Success.” Global Journal of Business and Management 14.7 (2014): 32-40. Print.
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