Appearing on site In the Black Digital, February 2019
In the Digital Age all successful companies use high-level technology but the Chinese giant Alibaba might be the one which has taken the underlying principles of e-commerce the furthest, with a model based on machine learning and the comprehensive datafication of customer interaction.
Alibaba, founded in 1999 by tech-entrepreneur Jack Ma, recorded a net income of 61.41 billion yuan, approximately US$9.6 billion, in the year ending 31 March 2018, and its market cap puts it firmly in the global top ten. A new book by its Chief Strategy Officer Dr Ming Zeng explains how Alibaba’s model was developed and how it keeps the company on a growth path.
In Smart Business: What Alibaba’s Success Says About the Future of Strategy*, Dr Zeng notes that Alibaba is sometimes compared to Amazon but he believes that the comparisons are incorrect. Whereas Amazon is a retailer, Alibaba is a portal to link customers to sellers (although it is now highly diversified, involved in everything from banking to film finance). Its strategy has been to apply technology to every part of the purchase chain, from advertising to delivery.
“Alibaba today is what you get if you take all functions associated with retail and coordinate them online into a sprawling, data-driven network of sellers, marketers, service providers, logistics companies, and manufacturers,” says Dr Zeng. “Alibaba does what Amazon, eBay, PayPal, Google, FedEx, wholesalers, and a good portion of manufacturers do in the United States, with a healthy helping of financial services for garnish.”
Despite his key role Dr Zeng was not a part of the company at its inception. At that time he was working as an academic at Europe’s top business school, INSEAD, after completing his PhD in the US. He was teaching a course on Asian business when Alibaba caught his attention.
“It had no Western counterpart so it was a perfect case for MBAs,” he says. “I contacted the company and management agreed to let me study the ﬁrm and conduct some interviews. I met Jack Ma for the ﬁrst time in 2000 and I later worked as a strategy adviser for Alibaba Group. In 2006 I was ﬁnishing my ﬁrst book in English, Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition**, about emerging multinationals from China. I got a phone call from Ma asking me to join the company, which I accepted.”
Dr Zeng and Jack Ma realised that they had to think of the company as an ecosystem if they were to realise its potential. The strategic imperative was to make sure that the platform provided all the resources, or access to the resources, that an online business would need. The emerging technology of algorithms and machine learning, together with the decreasing cost of computing power, made it possible.
Dr Zeng says: “The formula for smart businesses can be summarized in a simple equation: Network Coordination + Data Intelligence = Smart Business. That equation represents what is behind Alibaba’s success and captures everything you need to know about business in the future.”
The technology allows the company to put customers at the centre of business, constantly collecting data on them and their purchase choices in real time. Dr Zeng calls this the customer-to-business (C2B) model, using feedback loops to drive machine learning. Now, when customers log on they see a customised webpage with a selection of products curated from the billions offered by millions of sellers.
The model requires several connected elements: a network that can dynamically adjust the supply and quality of service offerings, an interface where customers can easily articulate their needs and responses, a modular structure that can grow from an initial beachhead, and purchasing platforms than can provide agility and innovation. Every customer exchange supplies more data, which goes into the feedback loops required for machine learning.
This system requires that a large number of actions and decisions are taken out of human hands. Algorithms automatically make incremental adjustments that increase systemwide efficiency. Alibaba even uses AI-based chat-bots to handle a wide range of customer inquiries and complaints without any human interaction at all.
Facilitating the loop
Dr Zeng puts forward four steps as the basis for creating a smart business: creating datafication processes to enrich the pool of data the business uses to become smarter; using software to put workflows and essential actors online; developing standards and APIs to enable real-time data flow and coordination; and applying machine-learning algorithms to generate business decisions.
In this new environment, leaders no longer manage. Instead, they enable workers to facilitate the feedback loop of user responses to help the company along its evolutionary path.
Dr Zeng is adamant that the C2B model represents the future for all business.
“We live in a time of exponential change,” he says. “Everything I have described in Smart Business will soon be conventional knowledge. Change will be disruptive. But it will also bring massive opportunity.”
* Smart Business: What Alibaba’s Success Says About the Future of Strategy by Ming Zeng, Harvard Business School Press.
** Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition by Ming Zeng, Harvard Business School Press.