Alibaba Case Study (2019)

 

Alibaba Case Study

Complete Alibaba Case Study

As an Internet company, Alibaba has made many crucial innovations in operating procedures, products, technologies, and business models. In this blog, we explain the complete Alibaba Case Study with examples. 

 

In so doing, it has been able to unleash the innovative forces of tens of millions of grassroots entrepreneurs. The question naturally comes to mind: How did Alibaba do this? Was innovation something that happened by chance, or was it a habitual state of mind within the company?

 

Established in 1999, Alibaba is quite young, but youth does not necessarily guarantee the quality of being innovative. Many newly founded companies fail by trying to emulate others or by not being able to turn ideas into innovative products.

 

In contrast, many famous built-to-last companies that keep renewing themselves rely on constant innovation to stay in business, and some have stayed in business for over 100 years.

 

The business results of Alibaba in the course of just 16 years are astonishing—the company is already one of the largest and most influential Internet companies in China. While there is evidence to show that innovation and business results are related, actual success relates to other factors as well.

 

This was particularly true when the Internet was just getting started because the competition was not nearly as fierce as it is now. At that time, reading the market accurately, focusing on execution, controlling costs, and being opportunistic all may have been just as important as innovation.

 

Before 2011, in terms of strategy, Alibaba did not emphasize innovation in any particular way. Innovation was more of a by-product. It was akin to spontaneous behavior.

 

As the Internet community gradually matured, however, and as Alibaba became weightier within that community, and also as unforeseen technological problems became more frequent, Alibaba realized that innovation had to become a conscious policy choice if it wanted to enjoy ongoing sustainable growth.

 

Alibaba’s corporate culture has been encapsulated in six values, what it calls its six “Pulse Excaliburs” or “Six Sacred Swords”: customer first, teamwork, embrace change, integrity, passion, and commitment. Except for the part about embracing change, which has a certain Internet feel to it, the others represent straightforward business values.

 

They are useful in any situation and constitute a basic approach to how to conduct oneself and how to conduct affairs. 

 

They do not “aim the sword” directly at innovation. When one pursues the question of why it is that Alibaba has in fact done so many innovative things, however, one finds that these straightforward values have indeed played a fundamental role.

 

Culture is something intangible, but it has to come about by means of things that are real. Organizing a structure, creating mechanisms, and managing human resources are very matter-of-fact things. As Alibaba grew and its strategy shifted, the company began quite consciously to put effort into using what is real to stimulate creativity.

 

For example, it carried out organizational restructuring, it promoted innovative mechanisms, it consciously hired innovative people, and it rewarded the results of innovation. As a result, the innovative nature of its culture became ever more evident—an intrinsic part of the company.

 

A great deal of research has been done on creating innovative structures. Some of the main elements of an innovative organization include a common outlook, the desire to be a leader in innovation, the appropriate organizational structure, a focus on individuals, effective team cooperation, all members participating in innovation, an innovative atmosphere, and a focus on key externalities.

 

In analyzing factors that apply to innovative-type organizations under noncontinuous conditions, the following three considerations are also key: individual development that continues beyond immediate goals, a great deal of communication, and having a learning-oriented organization.

 

These elements can be grouped into four main categories. First, encourage an innovative corporate culture (e.g., a common outlook, a desire to be a leader in innovation, and all members participating in innovation). Second, create organizational structures that are conducive to innovation (e.g., effective team cooperation and the appropriate organizational structure).

 

Third, make sure that the platform supports innovation (e.g., an innovative atmosphere, a great deal of communication, and a focus on key externalities).

 

Fourth, nurture a type of human resources management that rewards innovation (e.g., a focus on individuals, individual development that is sustained and extends beyond the immediate goals, and a learning-oriented organization).

 

In what follows, each of these categories is used to evaluate which methods allowed Alibaba to become an innovative organization.

 

Vision, Mission, and Set of Values

Vision

An innovative corporate culture must, first and foremost, explicitly set forth a vision, mission, and set of values.

  1. Alibaba’s vision: “Being the number one data-sharing platform, being at the top of the well-being index as an enterprise, living 102 years.”

 

  1. Alibaba’s mission: “To make it easy to do business anywhere (or “To make it no longer difficult to do business around the world”).
  2. Alibaba’s values: “Customer first, teamwork, embrace change, integrity, passion, commitment.”

 

Vision, mission, and values are important for innovation for two main reasons. First, they have a direct impact on stimulating innovation. Alibaba’s culture itself incorporates innovative behavior—from the moment it was founded, the company had an “innovative gene.”

 

In 2001, after Guan Mingsheng joined Alibaba, together with some of the founders, he tried to summarize the “interesting things” about the organization, its general atmosphere, and came up with nine items that could be called a set of values, a kind of “Dugu Nine Swords of Solitude.”

 

These were passion, innovation, teaching that benefits the teacher as well as the learner, openness, simplicity, team effort, focus, quality of service, and respect each other.

 

Later these were combed through and simplified into three categories. The first was the driving force of innovation, which included four items: innovation itself, passion, openness, and teaching that benefits the teacher as well as the learner.

 

When the “Nine Swords” were further simplified into the “Six Swords,” the term innovation was no longer mentioned explicitly, but all the values incorporated the concept itself.

 

Some played a direct role in supporting innovation, such as customer first, embrace change and passion. Later, I discuss the influence these key qualities play in promoting innovation.

 

Second, vision, mission, and a set of values stimulate innovative behavior among people in indirect ways. Matt Kingdon has suggested that behind the paradigm of successful innovation lies “innovative energy.” This is the fusion of three different forces, including personal attitude, team behavior, and the organization itself.

 

Regarding attitude, he notes that the great majority of people one sees who make a difference in a company have an inner desire to do something significant. They want to make an impact, and they want the approval of the team.

 

They like pursuing the objectives of the corporate entity—it feels good to them, and they are happy to be a part of it. This is why vision and objectives are the keys to innovation. They set the pulse of innovative energy.

 

All people are creative. The difference lies in the degree to which this is sparked and the direction in which it is applied.

 

An inspirational vision and mission can serve to galvanize the creativity of people and their enthusiasm for work. At the same time, these things can guide the creativity of different people in the direction of a common goal.

 

The combined force of innovation is much stronger as a result. This is why one of the founders of Alibaba, Peng Lei, has said that “the essence of innovation is idealism.”

 

Major innovations can face all kinds of internal obstructions if they cannot break through the core rigidities that were the original sources of the organization’s strength. At such times, clearly defining the company’s new vision can lead to consensus among all workers and allow for repositioning and smooth change.

 

Alibaba’s major transformations have all begun with a redefinition of the corporate vision. When the company was established in 1999, its vision was “to become one of the world’s top 10 websites.”

 

By 2008, as the company’s strategic plans changed, this was changed to “becoming the largest e-commerce services provider on the globe.” In 2013, this changed again to “being the number one data-sharing platform.”

 

Changes in the company’s vision reflected the changing times. They also reflected the way in which Alibaba defined its objectives and its group strategy in a more targeted and specific way. For example, Alibaba has now come to define its positioning in the market as an ecosystem. 

 

At the same time, recognizing that the core operations and management of the company will be existing in a digital age, it seems that its current organizational structure, management methods, mode of thinking, technological demands, and so on need a major adjustment.

 

The new vision, “being the number one data-sharing platform,” serves as a foundation for future changes and innovations as well as those currently underway.

 

Customer First

Customer First

Where does innovation come from? In its most classic form, innovation is pushed by knowledge and pulled by demand as the two primary forces that bring it into being. Later models that address this subject have added all kinds of new factors and improvements, but these two, push and pull, still occupy a fundamental position.

 

Alibaba’s innovation has benefited enormously from the pull of demand. It set its sights on helping tens of millions of enterprises grow, providing job opportunities to 100 million people, and providing services to a billion consumers. The very first value of the company states this ideal in succinct terms: “Put the customer first.”

 

For a long time, Alibaba was positioned as a services company and not a tech company. It was not even regarded as an Internet company. During the period in which its business-to-business (B2B) enterprise was being established, salespeople ran the show, not technical people, and as a result, this was not a productive period in terms of technical innovations.

 

Instead, salespeople crisscrossed the country making sales calls on customers. When the Internet bubble burst and tech companies went into a dormant period, senior management formulated correct strategies that enabled Alibaba to weather the hard times.

 

They increased customer services and investment in staff and employees and stopped “burning” investors’ money, which is where the idea first arose of the customer first, employees second, and investors third.

 

The reason Taobao was able to beat out eBay was almost totally due to eBay’s blind spot when it came to understanding Chinese business.

 

By using the not-very-original motto of “Customer first,” Alibaba honed its consumer-to-consumer (C2C) business into what became a fine skill. First, it was free. At the time, per-capita income in China was one-thirtieth that in the United States, and a market economy had only been going for 25 years.

 

The Internet was a new kind of thing for communicating, and people were not very sure how reliable it was. Asking people to pay a fee to sell on the Internet was psychologically unacceptable.

 

It was outside the bounds of Chinese people’s tolerance at the time. As Jack Ma later said, “We did not adopt this free policy in order to compete with the opposition. We adopted it because the market demanded it. We did it completely in order to serve the customer.”

 

Second, it dealt with the issue of payment. At the time, Chinese people rarely used credit cards, and there was no system in the country as yet to certify individual credit. In the United States, eBay fundamentally did not have to take creditworthiness into account, whereas in China, this was a monumental problem.

 

In essence, Alipay was nothing more than an intermediary guarantor of payment, a new form of a very ancient kind of service. By creating this innovative product called Alipay, Alibaba found a solution to the problem.

 

Finally, it improved communications. The no-compensation model that Alibaba adopted meant that varying qualities of products were all commingled on the platform. Excellent communications between buyer and seller were the sole route to actually achieving sales because they reduced the asymmetry of information.

 

The story of Alibaba’s product “Zhao Cai Jin Bao,” which means “bring in wealth and treasure,” lends another perspective on how customer first influences innovation. In June 2003, a product that Taobao had spent three months of concentrated R&D effort on was summarily taken offline after just one month, voted down by the public. This astonished everyone.

 

At the time, this had been a secret innovative project given preferential treatment by Taobao. A super team had been selected to work on it, with all the resources the company could offer.

 

In its initial period, it went through a week of detailed testing, analysis, and modeling. The software-engineering phase was carried out on Ali’s “blessed venue”—the Lakeside Garden.

 

The CEO of Taobao.com, Sun Tongyu, personally took on the major responsibility for the project. During the R&D process, the entire team, top to bottom, coordinated secretly and worked flat out.

 

The trial run passed, marketing was successful, but the formal launch of the product then aroused totally unexpected controversy and opposition.

 

In the end, Sun Tongyu decided to allow public opinion to determine whether to keep or to toss the product. He decided to ask users themselves to vote on it. After 20 days, the votes of those opposing were greater than those supporting it. In the end, the product was taken offline.

 

Innovation is a business process that incorporates four main links: search, selection, implementation, and the harvesting of results. The search involves looking for innovative ideas, though in fact, the mechanisms that spark innovation are omnipresent.

 

Even the best-funded organization is not able to undertake everything, however, so the selection of projects becomes critical—formulating the right proposals and allocating the appropriate resources.

 

At this point, the customer first becomes an important selection criterion. No matter how good the idea or how much money is spent on it, without customers’ approval, it will not generate value.

 

It then becomes unfeasible as an innovation. The code of putting the customer first at Alibaba is what led the team to cut loose from an idea that, from every other perspective, had seemed the perfect innovative project.

 

As an aside, this story has a good sequel. The hard work that the R&D team put into the project was not in vain. All the ideas behind the product eventually flowed into a different channel and were realized in other products. Taobao’s pay-for-performance (P4P) product and its Tao-customer product are the concrete expressions of the original ideas.

 

Embrace Change

Embrace Change

Taking just one aspect of e-commerce, after a preparatory period that lasted several years, the industry entered an explosive stage of growth in 2010.

 

Already-existing e-commerce companies went for round after round of massive amounts of financing. New vertically integrated e-commerce entities emerged in droves, and platform transformation became the new buzzword.

 

Merchants who dealt in the real world also began transforming their business models, and price wars began to heat up. Mergers and acquisitions threw off sparks in all directions.

 

By the time the situation had calmed down a little, the age of big data and mobile Internet then arose like a mighty wave, creating innumerable new variables to deal with in the future.

 

In the bigger picture, things are changing constantly, but they are at the micro level of individuals as well. Personal demand changes daily, and the essence of the Internet is that it is personalized. Even the biggest and mightiest of contenders have to consider the “long tail” and ply their wares there.

 

They also have to recognize that tastes change. “It is not enough to say [that] you understand someone since that person is different tomorrow. Today she may want a pineapple, but tomorrow she may want something else.”

 

In an industry that is growing so rapidly, in which nothing is nailed down for sure, innovative opportunities are all over the place. The prerequisite for success, however, is having an attitude that embraces change.

 

When it comes to the elements that make for an innovative organization, it is more fundamental to embrace change in innovative activities than it is to have an innovative atmosphere.

 

Embracing change is to innovation what water is to fish. When Alibaba changed the value of innovation in the Dugu Nine Swords into “Embrace change” in the Six Swords, it was, in fact, inserting an even more fundamental requirement into its code of values.

 

One interesting example of this idea of embracing change can be seen in Alibaba’s practice of making people stand on their heads. Alibaba would like for its staff and employees to look at the world from a new perspective, upside down, in order to learn to change.

 

So the company has every new employee, old or young, fat or thin, learn to stand on his or her head against a wall within three months. Men must hold that position for at least 30 seconds. Women have to hold it for 10 seconds. Otherwise, the new recruits are told to roll up their mats and go home.

 

Many people inside and outside the company have explained this in various ways, saying, for example, that it is done for health or that it makes people realize that the impossible can actually be possible. The most significant thing about it in terms of culture, however, is that it forces people to think from a different perspective.

 

Jack Ma has said, “Everyone has to learn to stand on his head because when you’re upside down, the blood rushes into your brain, and you see things differently than you normally would. You also can think over issues in ways that you would have found unimaginable before.”

 

Rotating positions is another of the ways that Alibaba’s systems express the company’s spirit of constant change. Alibaba has always had a strict program of rotating positions. Every year, management-level positions are reassigned. If managers have any desire to be promoted, they must have fulfilled two considerations.

 

First, they must have a good plan in mind for who is going to succeed them in their current position. Second, they must have experienced the process of rotating positions. Many of the more outstanding staff at Alibaba have done every single job in the company.

 

Alibaba’s highly qualified Deputy CEO Deng Kangming explains it this way: “As you change positions, you eliminate the barriers between one position and the next.

 

Only if you do that can people really understand things from a different perspective, use different ways of thinking about things. Only by analyzing things from different perspectives can you truly cultivate the capacity to think systematically, that is, in terms of the total system.”

 

Sometimes the difference between jobs is considerable. Someone in charge of human resources will be sent to run sales channels and major customers, or personnel from sales will be sent to do human resources. Someone with no background in technology, who is involved in editing content on the website, may be sent to manage technology.

 

A chief financial officer may be transferred to the management of the business in general. In early 2013, Alibaba spun off 25 different business units (BUs), which represented “the hardest reform of all in the past 13 years.” In considering all the horizontal and vertical business interactions, cooperation among business units had become extremely important.

 

The frequent rotation of positions for many years was good preparation for this organizational change. It also helped the business continue to function properly after it had taken place.

 

Another unusual feature of Alibaba’s system of rotating positions is that it sometimes does not happen according to predetermined processes, which is extremely important in testing people’s ability to embrace change.

 

The need for employees to participate in new projects may have no forewarning at all— people may find out from one day to the next that they have been transferred to a different department.

 

If one wants to be successful in embracing change, the necessary attitude is said to be, “Forget about success; start over again.” A previous situation may have been one that felt successful and that therefore was hard to relinquish.

 

After the fact, we always think that a given innovation is a great success. Before it comes about, however, the people who have to do it must be brave enough to forget about success and actually embrace change.

 

Alibaba’s earliest website was built by one of the founders of the company, Zhou Yuehong, using a language called Perl. As inquiries to the website increased in number, the system quickly became overloaded, and it also became hard to increase the number of its functions.

 

Despite the extremely high hurdles that the program now presented, it was something Zhou was extremely proud of, a kind of asset that he owned. Nevertheless, it was making it hard for the website to continue working.

 

An American engineer was asked to come in and look at the situation, and he decided to use Java, new at the time, to completely rewrite the system. This made Zhou Yuehong, who knew everything there was to know about the old program, feel terrible. His opposition to this proposal was strong enough that this founder of the company eventually had to be let go.

 

After a great deal of persuasion, he came back into the company on a trial basis of three months as a completely new employee with a salary that had been cut in half. The change worked; he applied himself to learning the new technology, and he soon became a master of Java.

 

Not only can individuals become infatuated with their own past successes, but companies too can sometimes find it hard to move forward from a basis of existing success.

 

Taking such a step often can be an important form of innovation, however. The independence of Taobao Mall is one such example (in January 2012, Taobao Mall was renamed Tmall). Between 2008 and 2010, Taobao held 80 percent of the market share for C2C business in China.

 

Because of this, the idea of making the business-to-consumer (B2C) business part of Taobao independent was not given much serious attention, and anyway, the feeling was that this would affect the size of and the traffic on the Taobao Marketplace. Because of this, that segment of the market went through various twists and turns.

 

The first “independence” was in 2008 when senior management decided that the B2C model had no future, so the people responsible for it, who were both capable and trustworthy, were notified that they would have to leave.

 

The board of directors then used an operating procedure that gave Taobao Mall the least degree of independence because they were unwilling to upset their C-store vendors. Half a year later, Taobao Mall Department was disbanded, and the mall was again merged with Taobao.

 

In August 2009 came another attempt to operate it independently, but again, little progress was made. On November 1, 2010, six days after the B2C company Mecox Lane Limited was listed on the Nasdaq, Taobao Mall finally declared real independence. Only then did its managers hold a news conference and announce an independent domain name, and only then did they begin to do major brand publicity.

 

Before that, other companies had been allowed to grab the stronghold of B2C opportunities first. Only in final recognition of the need to do so did Taobao agree to cut out a chunk of its own livelihood and release Tmall. This then formally enabled Taobao itself to put its energies toward developing its B2C model.

 

One of the founders of the Taobao Marketplace, Huang Ruo, summarized this by saying, “What Taobao Mall did was to deny itself on an already successful platform, thinking in a ‘headstand’ way.

 

It was trying to cast off its existing procedures and to find new operating models according to how the market functioned. Meanwhile, it also had to make the operating rules and design the architecture of a B2C platform.”

 

Fortunately, Alibaba finally allowed Taobao Mall to become independent. A number of innovative ways of thinking in the Taobao Marketplace that could not previously be realized then found good use in the Taobao Mall.

 

Furthermore, Taobao.com finally found a winning model. Thanks to all of this, Tmall now holds over 50 percent of the B2C market share in China, and the 11.11 Shopping Festival has been a miracle of sales for three consecutive years.

 

Hiring People

Hiring People

Alibaba has continued to hire more people every year as it has grown. In recent years, this hiring has been characterized by the need for more technical personnel, which has led people outside the company to feel that Alibaba is shifting from being business led to being technology led.

 

As Alibaba’s Chief Technical Officer Wang Jian says, however, the way the business has developed has brought with it a host of unanticipated technical problems, which have led to the need for technical talent.

 

It is certainly true that Alibaba has confronted problems nobody else ever handled, so the company has had to devise its own ways to handle them. Innovative solutions have been applied with tremendous frequency as a result, and coming up with solutions is a capability that the group as a whole has emphasized.

 

To give one example, many companies use Hadoop (a distributed form of basic framework system), but this cannot cope with the superfast speed at which Alibaba’s data are growing.

 

Alibaba, therefore, uses its own multifunctional Flying Apsaras for its cloud-computing platform, which has already surpassed Hadoop.

 

The previously used Oracle is already useless within Alibaba, and the company has instead substituted OceanBase for it, a system that the company developed itself, as supplemented by a reconfigured MySQL.

 

IBM’s small-scale computers were always the mark of high functionality, but they too have already been replaced by hardware that Alibaba has made for itself. Alibaba has an internal team that focuses exclusively on optimizing and revising the Linux system for internal use. It has had a custom-made Linux system built for its own purposes.

 

Alipay processes tens of millions of transactions every day, with total transaction amounts in the tens of billions. The company’s business requires a dedicated security solution. Given this level of activity, Alibaba requires not just technical personnel but highly creative thinking.

 

The launch of a plan called “A-Star” (for “Alibaba Star”) was the ultimate expression of Alibaba’s desire to attract innovative technical personnel. In 2013, Ali selected 10 trainees from among college graduates entering the company to participate in a training exercise.

 

It sent them to the most challenging of its various projects, where the head of the technology team was directly responsible for them and focused on training.

 

The compensation package for these people: 600,000 RMB in annual salary with no cap on increases, a certain number of stock options, and obtaining a Beijing Hukou for the person. This generous compensation package went beyond what other companies offered, but the things required to get it also were quite stringent.

 

Candidates had to undergo a face-to-face interview with Alibaba’s chief technical officer to test a number of considerations. In terms of competitive nature, did the person aim for the ultimate in technical excellence, and was he or she qualified to be an expert in his or her field as well as competent to write about it?

 

In terms of technology, was the person passionate and immersed in his or her subject and wanting to find technical solutions wherever possible?

 

In terms of empirical experience, was the person the kind who talked about soldiers on paper as opposed to getting things done, and was he or she a core member of any project because of being adept at solving problems?

 

In terms of logical thinking, was the person able to define the key issue in a complex situation, did he or she think through to the underlying issues, and was he or she then able to arrive at his or her goals in a structured and logical way?

 

In terms of approach to learning, was the person strongly curious about new things, and could he or she absorb them quickly into his or her own way of structuring a conceptual approach?

 

Innovative qualifications are emphasized more and more in job postings and review procedures for other kinds of positions as well.

 

In the personal interview, the “Official Smeller” (an experienced Ali employee who investigates whether or not the applicant has the “Ali Smell”) focuses particularly on whether or not a person is curious, and has a natural passion for understanding things and a strong desire to know what is not yet known in the world.

 

This is in addition to finding out the normal things about a person—ambitions, interests, sense of mission, ability to cooperate with a team, and so on.

 

Training, Research, and Development

Training

Alibaba puts considerable effort into training its human resources. During the Internet freeze of 2003 and during the global economic crisis of 2008, when Internet companies and indeed most companies were in dire straits, Alibaba chose those worst of times to invest in humans themselves. The company began to practice what is called Nei Gong and to improve training of personnel.

 

By now, Alibaba has created a powerful and systematic process of training. It is becoming a learning-type organization, which is a key requirement if today’s innovations are to be successful. Following are two cases that illustrate Alibaba’s unique form of training.

 

Technology Carnival: The importance of technical advances to Alibaba was described earlier. The Technology Carnival is a platform that enables people to get together, interact, and learn from one another.

 

It was started by some engineers in the Alibaba Group who are passionate about technology. Held in Hangzhou in July of every year, this forum had been going for three consecutive years.

 

By 2013, participants had increased from an initial 1,600 people to 3,400 people—the event has become wildly successful. Software engineers from many companies gather to discuss what is happening in the industry and what the future will hold. They discuss framework design, HTML5, and other such subjects.

 

Since participants are all top-tier R&D people, the sense of “actual combat” is fairly intense, and the event has become known for sharing truly useful content and getting real work done.

 

Alibaba also has maintained the ability to do self-study within the organization by designing a variety of systems or institutions. First, it has set up training halls within the Park campus.

 

Each can accommodate between 80 and 100 people, and each holds a full set of learning facilities. Second, each business department holds learning sessions at regular intervals, with specialists who are invited in to discuss specific subjects.

 

Third, Alibaba’s internal network has a learning platform that contains materials on courses taught by experts from within as well as outside the company. The employees are informed of specific sessions via mass e-mail or internal notice, and attendance is limited to a certain number of people. Sessions are almost always fully booked.

 

Course subjects range from big data to wireless Internet and from insurance to individual tourism. Fourth, people on the internal network can both upload and download learning materials, so this has become a resource that the 20,000+ Ali-people are building together.

 

By June 2014, this resource already had 15,000 items on it. Fifth, once major projects are completed, the team will review the process to learn lessons from it.

 

Performance Evaluations and Compensation

Performance Evaluations

Alibaba may be the only company in China to put the evaluation of an employee’s code of values on a par with an evaluation of his or her business performance. Most companies are guided solely by business results.

 

Alibaba instead uses two coordinates. The vertical coordinate measures business results, whereas the horizontal coordinate measures the person’s values. The “Six Swords” are further subdivided into 30 smaller items, each with a potential grading.

 

If one’s business performance is excellent but one’s values are not up to what is required, this is called being a “wild dog.” And wild dogs must be “killed.”

 

If one’s values are excellent but business results are not, this is called being a “little white rabbit.” Little white rabbits also must be “killed.” In the company’s grading system, 50 points go to business results and 50 points go to values.

 

If values are poor, the person will definitely be asked to leave. If business results are poor, however, the person may be given another chance. Twenty percent of people in Alibaba are allowed to get higher increases in salary, bonuses, or promotions.

 

Seventy percent of people get average salary increases and bonuses. Ten percent are given no bonuses, whereas some may well be asked to change positions, may be demoted, or may be asked to leave the company.

 

In 2013, Alibaba launched a reform in its performance evaluation system. This had many specific details to it, but it also included two main points that had to do with innovation. First, Rule 271 became Rule 361.

 

Behind this change was the desire to elicit a greater number of outstanding employees and a greater diversity of voices to provide support for innovative strategies.

 

Another more important part of the reform was to moderate the effect of KPI on how people were graded. This was in line with the strategic adjustments and organizational changes in 2013.

 

At the group level, the gross merchandise volume (GMV) within a period and the KPI of each business department were uncoupled to the degree that each department could decide for itself whether or not the teams under it should be judged at a similar level.

 

In traditional enterprises that are operating on a stable basis, the pursuit of the KPI ensures that operations continue to be highly effective. In a highly volatile environment, however, the KPI can become an obstacle to generating completely new things. In volatile situations, nobody knows what KPI is reasonable.

 

Alibaba deeply understood the reasoning behind this and therefore took the risk of experimenting with employee evaluations. For example, innovation itself had already become an important item by which people are evaluated, but the method of doing evaluations proceeds by a kind of case-example system.

 

If a business department can justify high marks by saying that a certain innovation has opened new markets and is being adopted by customers, that consideration is enough to merit points.

 

Passion

Passion

The passion of Ali-people is expressed in many different ways. When sales champions lost bets to Jack Ma, they had to jump in Hangzhou’s West Lake in the wintertime.

 

When Taobao’s ranking exceeded eBay’s, Taobao staff beat thunderously on garbage cans out of sheer exuberance. When Alipay’s sales figures exceeded 7 million RMB, the technical staff who had worked night and day on perfecting the product ran naked in a special kind of celebration. 

 

Innovation requires this. It is an activity that involves massive amounts of energy and enthusiasm. Not only do people need to create and organize new things, but they also need to break through the constraints of old things. Just as energy is needed in physics to break through inertia, innovation implies the breaking out of routine ways of thinking and doing things.

 

This puts demands on mental forces, physical forces, and the force of a person’s ambition or desire.

 

The expression of this kind of force is passion, whether it stems from enthusiasm or from responsibility. In general, an organization that is well endowed with passion finds it easier to generate innovations.

 

Inside the company, Ali-people uses a great deal of what is called “Alibaba slang.” The term that most galvanizes people is da zhang, which means “fighting a war.” In the Alibaba sense, it refers to crossing swords head-on with an opponent, particularly one that is bigger than you are.

 

Despite this, Jack Ma often says, “Only if you feel internal that you have no enemies will you really have no enemies in the actual world.”

 

By this he means that competition is a by-product of what you should be doing anyway—the key point is to provide incomparable service to customers. It seems a nice thing to say, but it also seems to sum things up after the fact.

 

The reason is simple: in some spheres and at certain stages, Alibaba has truly been a company without any contenders on the horizon, “even if you look for them with a telescope.”

 

Alibaba has no competitors for various reasons: its model is unique (it was the earliest B2B company), and its forces are already too strong (today’s C2C business). Given such things, there naturally is no need to pick a fight with anyone.

 

However, when competitors do appear, nobody is going to ignore them either. You may put the customer first, but so does the competition, so why should the customer choose you? When strong competitors appear in important areas, therefore, even Alibaba does not disregard them and go its own way.

 

Instead, it makes its moves depending on the specific qualities of its opponent. What enables it to beat that competition is not the only customer first but also a kind of invincible passion.

 

Meanwhile, the pressure of competition makes it easier to force innovations out of the company, whereas passion ensures that these innovations get implemented. This reinforcing process continues until the battle is won.

 

The classic example of a winning campaign was when Taobao went up against eBay. In terms of marketing and promotion methods, Taobao’s innovations were absolutely forced into being by its situation. In July 2003, eBay set up exclusive advertising agreements with other Chinese sites, including Sina, Sohu, Netease, and TOM.

 

If any of these major sites cooperated in any way with Taobao, Yabao, or other online auction houses, in the promotion or otherwise, eBay was allowed to levy high fines on its site as punishment. Faced with this kind of “tyrannical” blockade, all Taobao could do was stage a kind of guerrilla war and “encircle the cities by taking the countryside.”

 

At fairly low prices, it put advertisements on thousands of smaller websites. Taobao’s sales staff swept through the ranks of China’s “website alliance” and got all these small and medium-sized sites to post Taobao advertisements from one night to the next.

 

At the same time, its salespeople covered the offline advertising territory—subway stations, train stations, lampposts along the streets, any possible venue. In the end, Taobao was also advertising on television.

 

The up-to-date rankings of the two companies hung beside each employee, motivating everyone each moment of the day. Many people waited every night until 11 p.m. or even later to go home to sleep—they would not leave until Alexa changed its rating for the day.

 

Loose on the Outside, Tight on the Inside

innovation

Is a tense work atmosphere more conducive to innovation, or is it better to have a relaxed environment?

 

Peng Lei, vice president and head of the Human Resources Department, encapsulates the answer to this question within Alibaba by noting that the company is “externally loose [or relaxed] while internally tight [strict or intense].”

 

A loose approach to interacting with the external world allows the company to maintain an open attitude and be more receptive to new things. It also gives people the freedom to unleash their own imaginative forces.

 

A strict internal environment keeps the work results-oriented and focused on execution, which allows innovative ideas to come to fruition more quickly.

 

Alibaba’s “loose” culture is expressed in a number of ways, but three specific aspects are most apparent. The first is the physical environment of Alibaba. A company’s physical surroundings are very important for innovative energies. As soon as you walk into Alibaba, you sense that the company is young, vital, and encourages unconstrained thinking.

 

Any sense of hierarchy is quite muted. Work areas are open style, with more senior people stuck in among a crowd of young people. Walls are adorned with amusing caricatures and photographs of Alibaba recreational events. Meeting rooms are named for places that hark back to Alibaba’s Outlaws of the Marsh type of culture.

 

All kinds of excellent facilities are available for exercise, recreation, eating and drinking, and studying.

 

The second aspect of looseness is a management style that gives full rein to the individual expression of employees. Taobao acts as an incubator that fosters a list of Alibaba’s innovations, including Alipay, Tmall, eTao, Juhuasuan, and Taobao Wireless, among other businesses. Taobao represents the beginning of Alibaba’s innovation culture.

 

It is the most innovative platform within the Alibaba Group. This is related to the way in which senior management “looks after the bigger picture and doesn’t concern itself too much with small things,” as expressed by former Taobao CEO Lu Zhaoxi.

 

Operating innovations are more likely to be generated from the bottom and move upward as a result of this unconstrained atmosphere. People can be more experimental. The downside is that efforts may be duplicated as too many people focus on a given product or business.

 

The advantage is that people are free to do something new without worrying too much about making mistakes, which increases the probability of successful innovations.

 

Finally, Alibaba has a kind of “gene” that inclines it to enjoy having fun. This is not to say that people who enjoy having fun are necessarily more innovative, but there is something about refusing to be mediocre that links the two things together. Most people who know Alibaba well would agree to this characterization.

 

A small anecdote reveals one way in which this works. Within the Alibaba Technology Association campus, a person in the technical department ran into a problem when he could not get a certain program to complete its response in less than 600 seconds.

 

He, therefore, put out a notice offering a reward—a case of Coke—to the person who could reduce the time to less than 200 seconds. Someone was intrigued by the problem, spent a couple of days looking into it, and was able to reduce the response time to less than 50 seconds.

 

Alibaba’s more stringent environment is demonstrated first and foremost in the company’s very results-oriented performance standards. A person can have as much fun as he or she likes, but ultimately he or she must come up with results.

 

What’s more, that person must ensure that the results are reproducible through a defined process. As the saying goes, results without a process are no more useful than garbage, while a process without results is like a fart.

 

Second, Alibaba enforces strict discipline. Economist William Baumol has noted that entrepreneurship within an entity can be productive but also nonproductive and potentially also destructive. People’s energies are finite.

 

If entrepreneurial efforts are poured into nonproductive or even destructive endeavors, this necessarily reduces the amount of energy going into productive endeavors.

 

An organization’s entrepreneurial capacities will suffer as a result, which is why the right kind of disciplined approach plays such an important role.

 

Integrity is one of the cardinal rules in Alibaba when it comes to relations with the outside world. It is one of the Six Sacred Swords. In December 2009, the Alibaba Group set forth regulations on business conduct.

 

These established a “high-voltage line” with respect to the company’s code of values—they went further in explicitly defining the standards of ethical conduct.

 

If any employee “touched” this line, he or she would be asked to leave the company. Alibaba has in the past asked a number of superlative salespeople to leave the company despite their excellent performance record. In 2010, Jack Ma went so far as to “kill” Wei Zhe as a result of the way certain B2B staff had colluded with merchants to defraud customers.

 

With respect to internal relations, Alibaba espouses simple and straightforward human relations and rules out any kind of office politics.

 

The company advises employees that the Alibaba Group is still in the midst of rapid growth, which means that there will be abundant opportunities for all, with new job positions and new benefits coming along every year. People do not have to fight over limited resources and interests.

 

If each person does his or her own job well, the prospects for personal development are huge.

 

Jack Ma is in charge of the former.

business groups

The second step is to decentralize and restructure. In May 2013, the seven business groups that had been created just six months earlier were now spun off into 25 different business departments that were managed correspondingly by the group’s strategic management and execution committee.

 

Three months after that, four more business departments were created under the auspices of the Ali Finance Group.

 

In wanting to expand the outer boundaries of its ecosystem, it has been logical and necessary for Alibaba to reform internally as a means of “ecologizing,” or creating a greater diversity of species.

 

Not only do these internal adjustments more fully interweave the horizontal and vertical aspects of business, but also they gave more weight to the horizontal ways in which all parts of the company take advantage of the platform.

 

As vertical lines of business generate features that can be used in common, the system precipitates those out onto a platform that is shared by all.

 

For example, if a given line of business has a certain set of marketing processes, other business units can take advantage of them as well.

 

The shared platform becomes an internal system that allows for broadening the whole. It enables the advantages of one to be shared by all through the application of common standards.

 

The new organization is managed through the use of data and supported by a shared platform. In general terms, the hope and intent are to rest easy about relinquishing control by turning the organization into a networked structure.

 

Alibaba’s platform has always contained mechanisms that allow for the free flow of communications, bottom up, that enable innovation. As the phrase goes, “If you dare to be crazy, I dare to invest.”

 

Free and Unhindered Communications

Communication

Equality and openness are said to embody the spirit of the Internet. If this is so, an Internet company should quite naturally implement this free spirit in how it conducts itself. Jack Ma has said, “The hope of the Internet lies in innovation.”

 

However, such innovation must be born out of a climate that allows all voices to be heard equally and that allows different ideas to contend freely with one another.

 

Alibaba works hard to create an atmosphere in which this can happen. Not only can people debate issues, but the debates can be heard.

 

Alibaba espouses communication methods that are simple and direct. The embryonic form of Ali’s code of values is “believable, intimate, simple”—this was the corporate culture with respect to communications when the enterprise was still in its early period.

 

Jack Ma believes that “if I have something to say to you, I should go knock on your door and talk to you for a couple of hours. Either we have a fight, or we get the thing resolved.

 

If you have something to say to me, you should come to find me as well. If you have to go to some third party, then you should get out of this team.” In Alibaba, if personnel have any problems, they take the notebook in hand and clump together to talk it through.

 

One can see small groups of people discussing things all the time in the company. Teams may be located in different cities, but there still is a sense of close communication.

 

The internal communication network of Ali is called “Ali Flavor.” The name of its forum is “Say What You Want.” On this network are such bulletin boards as business chats, news on customers, and other such subjects, but then there are also bulletin boards relating to hobbies, interests, and sundry other enjoyments.

 

On these things, items that receive an unusual number of hits are called “Magic.” As an example, in early 2013, the company was thinking of outsourcing its security, something that had been handled internally in the past.

 

Staff uploaded the departure statement of one of the security officers of the company, which then turned into a sensation on the internal communications system.

 

His statement complained that the company had no sense of humanity whatsoever— the incident almost turned into a cultural crisis. The result was that senior management overturned the decision and maintained security internally.

 

Alibaba’s position is that anything should be allowed on the internal network —“poisonous weeds” included. They should see the light of day.

 

Anything should be open for discussion and should not be the occasion for censorship or shutting down the internal network. Senior management takes the attitude that it is willing to be criticized and does not control what people say.

 

No individual point of view is censored. Upper levels cannot force lower levels to hold back a very lively way of thinking, which creates an atmosphere that is conducive to innovation.

 

Alibaba in its earliest days was a simpler organization—as soon as new products were put online, the internal bulletin board service (BBS) would start criticizing them. This part was faulty, that part had problems—and products were gradually improved in the midst of the clamor. This tradition continues.

 

Yet another unusual format for communications within Alibaba is called WCBBS (which stands for Water Closet Bulletin Board Service). The Human Resources Department puts a pad of paper on the back of the door of every toilet in Alibaba, with A4 paper on which people can write their opinions and ideas.

 

The pad has topics that can be addressed and that are changed from time to time. Whenever employees feel the urge, so to speak, they can jot down their thoughts. Subjects vary from light topics to the more serious and provocative. Alibaba goes to encourage a grassroots spirit.

 

Innovative Mechanisms That Go from Bottom Up

Innovative Mechanisms

In its early days, Alibaba’s innovations generally took the form of top-down and were called “CEO projects.” Once senior management had proposed an idea and it had been approved for preferential handling on a top-tier basis, its implementation was guaranteed by having the company invest money, staff, and materials. Results were often not all that impressive, however.

 

Vice President of Human Resources Lu Yang says that the reason was that people were not able to internalize a project that they had been ordered to do. They did not “take it into their own bones.”

 

One of Taobao’s innovations was to change the direction of idea generation and make it go from bottom up. It adopted all kinds of methods to enable the voices of ordinary staff members to be heard by senior management.

 

This process unearthed new ideas via competitions, ways of encouraging staff to innovate, and so on. The general approach was to enable ordinary people to do extraordinary things. This concept ran through all the innovative activities of the company.

 

One classic example from Alibaba’s early period was called “My Growth.” In 2005, at the time of the “second founding” of the company, each person was asked to keep a diary every day called “So-and-So’s Growth.” Each was then uploaded onto the internal Taobao network in diary form.

 

One of the tasks of the Human Resources Department back then was to check to see if each employee had written in his or her diary or not. Many innovations came out of discoveries from these diaries.

 

A second example is an annual competition for innovation held by Alibaba. Starting in around 2007, when the Taobao platform was fairly large and had quite a few products on it, the “innovation points” came in so fast that staff started compiling them into a weekly report.

 

A competition began among the different departments that resulted in a prize at the end. At the time, people would say to one another, “Have you written your weekly report yet? What new innovations have you got?”

 

One of the more influential innovative mechanisms was the annual “horse race.” Lu Zhaoxi was CEO of Taobao at the time it started, in 2010, and it was his idea to have a contest to determine what companies would be started up from within Taobao itself. The project took two different forms.

 

One was purely among the people in that any staff member could come up with an idea, organize his or her own team, and run with the idea if it was voted in and approved. The second used ideas generated by the company. People could still form their own teams, vote, and run the idea if it won.

 

The idea was an instant hit. At the time, Taobao had around 4,500 employees, and close to 1,000 of this poured energy into their own ideas. Their teams would gather after work every day and on weekends, discussing and planning.

 

Out of this, 350 project ideas were generated and passed through several rounds of evaluations. Ten were approved in the end. The company had high hopes for these 10 projects.

 

It dedicated a specific working area to these efforts and gave the people the authority to pull together a team as they wished (naturally, this also led to some conflicts).

 

It gave them half a year within which to hand over their completed proposals. Despite the fact that this was year one of the contest, a number of excellent products coming out of it.

 

In the first season of the contest, the greatest virtue of the entire scheme was that it made every person realize that the company was serious about encouraging innovation.

 

The process in 2011 basically continued what had been begun in 2010, and 85 projects came out of it. In 2012, after considerable reflection, the orientation shifted somewhat.

 

The purpose was no longer founding companies internally but rather resolving the major issues that the company was encountering in the course of innovation. Under the influence of the key performance index (KPI), it had become easy for innovative thinking that went from bottom up to be stolen by someone else.

 

This meant that the company had to work harder to keep open a path to protect creative thinking, and the “horse race” became that path. The positioning of the contest went from being the internal founding of companies to micro innovation.

 

The third season of the race made two major changes. First, the race was extended from Taobao to the entire group and to innovations that went from the bottom up. One of the key issues was the number of “dots”—the group allowed these to increase suddenly in number to more than 20,000.

 

Second, multiple racecourses began to appear in addition to the main racecourse. Given the complex structures of various subsidiaries, many companies or departments instituted their own races, and the best ideas were then fed into the main racecourse of the overall group.

 

In 2013, the main racecourse proposed 155 projects, while each company handled its own projects and selections in more flexible and well-developed ways, as seen in the following three examples.

 

“I want to send it by express”: Several employees in the Customer Satisfaction Department suggested a project that stemmed from their understanding of the “pain points” of customers with respect to shipping.

 

In the end, this was adopted by the Logistics Department, and the winning team quickly changed positions and began to do things in which they took a stronger interest.

 

A staff member involved in technology suggested a tool designed to automate certain internal processes, which resulted in saving the cost of several hundred jobs. In the end, the KPI of this person was successfully adjusted so that he could spend his entire time working on this tool.

 

A History of Taobao Products: A product manager suggested that Taobao should have a book describing the history of its products. The company agreed and allowed him to spend 20 percent of his time working on it.

 

When the contest (horse race) entered its fourth season in 2013, it was upgraded in several ways. First, it became the vehicle for explorations into a new form of organization.

 

Alibaba’s original intent was to have people doing what they themselves wanted to do because this would motivate them more than having the company tell them what to do.

 

However this works out, in the future, the corporate structure will definitely not be as it is today, namely, a bureaucratic system that operates in hierarchical layers.

 

It may be supplemented by the kind of task-oriented system, as practiced in the United States. A group working on a given task can assemble in a bottom-up mode and then disband once the task is completed.

 

Second, the horse race became a channel for communicating a culture of innovation. As with other forms of organizational culture, it turned intangible things into real things. For example, starting in 2013, the evaluation group communicated much more thoroughly with projects that had been selected.

 

Innovation is necessarily something with a high failure rate, and in the early period of any project, the company cannot invest too much. Alibaba, like Google, talks about 20 percent, but Google’s 20 percent is 20 percent of 100 percent, whereas Alibaba’s is 20 percent of 120 percent.

 

An Alibaba employee must first complete his or her own work, and well before he or she does any extra innovating. Because of this, employees must choose things that they themselves are truly interested in doing—the kinds of things where it doesn’t matter how things end up as long as they can have a try at them because the learning and growing are what make them happy.

 

In the fourth season, the horse race also had some very practical breakthroughs. First, it combined the two ends—individual micro-innovations that go from the bottom up and the organizational need for innovation that goes from the top down.

 

For individual micro innovations to work, they must pass through a kind of innovation funnel that includes guidance from periodic infusions of resources.

 

The main stages of the funnel are the idea, registering its name, online screening, gestation period, offline evaluation, and realization. Resources that can be applied at the various stages include such things as service tools, testing environments, horse race vacations, training drills, legal and financial consulting, horse race trainer, bonus money, testing of formats, and so on.

 

Meanwhile, the organizational need for innovation is now divided into three stages as well. One is the official call for projects, similar to the way the first season called for subjects. The second is an activity that draws ideas together. In this process, a small team can have access to more minds than just those within his or her own department.

 

The third is individual horse races in different companies and subsidiaries. These are managed by the department or team itself, with the group supporting the efforts. These individual horse races (or contests) take all forms.

 

As long as they revolve around the subject of innovation, they are fine. For example, they could be an engineer’s night that is aimed at technical personnel or the Ali Cloud Computing horse race put on by Ali Cloud Computing.

 

Finally, the horse race changed directions somewhat in the fourth season. It was made more of a habit and less of a one-off event.

 

It became a path that allowed for the year-round gestation of new ideas within the group. To ensure that this happened, the company set up what it called an “Innovation Farm” on its online platform.

 

This was open all year. The interesting thing is that this site was one of the ideas proposed by a group of employees in the course of participating in the horse race.

 

In addition to being made an ongoing event, the horse race became market-oriented. Instead of having a few high-level committee members decide on which projects would live and which would die, the company now thought that the market should decide the issue.

 

In 2014, it, therefore, added an online filtering link to the process that enabled all 20,000+ employees of the company to judge each concept.

 

This too was something a former winner had proposed. In the future, the company hopes to broaden the market-oriented nature of the process even further by asking Ali’s customers at large to evaluate projects. They will determine who is up and who is shot down.

 

The third shift in orientation was that the contests gave more rein to, particularly outstanding projects. Everybody felt the same about these contests, namely, that their creators should be allowed to run with an idea more fully. The people winning the races should be true winners.

 

Although for many contestants, ideas being recognized by existing business was an acceptable path, learning and growing from the course itself was fulfilling, and for the race, its goal had already gone beyond just founding a business within the company.

 

Alibaba dreamed bigger, envisioning a future in which altogether new subsidiaries and companies would result from these competitions.

 

What this required was the latter part of the innovation funnel. It involved many follow-on decisions that were summarized by the term special zone of results. For example, an employee might gradually stop receiving a salary and, in incremental stages, start receiving actual investment from the company.

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