Part 6 - Delivering Value: Taobao Case Study

1. Why has Taobao Marketplace succeeded online when eBay has failed?

Chinese culture is very different than occidental ones, than Americans in this case.
Then, consumers expectations and needs are different too. While eBay didnt want or think
to adapt its strategy, Taobao is perfectly adapted to the local culture. It is Taobaos
particularities that allow it to win the war against eBay for the e-commerce in China. To
compete with eBay, Jack Ma (Taobao founder) has decided to give a strong local identity to
Taobao. Many aspect of the platforms design are concerned.
Perfectly adapted to the Chinese culture
In April 2008, Taobao launched Tmall.com which is an online retail destination for
consumers to purchase authentic and quality products of eligible major domestic and
overseas brand. Every member of the Tmall.com administration team had to choose a
nickname, and all of them are from fictional characters from Jin Yongs famous kung fu
novels (Sun Tongyu, Taobaos president). This message is important because Chinese
people are very nationalist. They are proud to be Chinese and as China is a collectivist
country, this kind of identification is stronger than identifying themselves as individuals.
That is why Taobaos manager chose to give a strong Chinese culture reference to the
platform. Another reason for this is to ensure consumers their understanding of their
behaviours and needs. The second thing is choosing nickname is giving an informal attitude,
which is the key to allow people to feel welcoming and being a member of a community.
Secondly, Taobaos colors are red and orange, which symbolize festivity and
prosperity in Chinese culture, a very positive message for online customers. Symbolic is
very important to doing business in China unlike in the occidental world. Moreover,
Taobaos website is well charged with a lot of information everywhere. Life in China is like
that: a lot of people, information and signs everywhere, no empty space mostly of the time.
Its a noisy, collective, moving and colourful environment. That is why Taobaos design is
reflecting this environment: it is what Chinese people are accustomed to. Zhang Yu, vice
president in charge of C2C marketplace operations at Taobao, explains, Chinese consumers
like busy web designs with strong colours. Westerners prefer sparse sites like Googles, but
Chinese customers want their website to be noisy, with lots of links.
Overall, the design is adapted to the Chinese spirit. Taobaos design seems much
more usable for Chinese eyes compare to eBays. It reflected how Chinese shoppers think.
Even some small details, such as including a mens navigation tab and a womens
navigation tab, made the navigation more suitable to Chinese online shoppers. It was like
being in a Chinese department store. It is not in the occidental culture to create one separated
navigation tab for men and women at all, even if differences of men and women thinks have
been proved. It was clear that Taobao had an upper hand against its global counterpart
because it really understood Chinese customers. As a result, Taobao had higher customer
satisfaction than eBay EachNet. According to iResearch, a Beijing-based research firm, the
user satisfaction level was 77 percent for Taobao versus 62 percent for eBay EachNet.
Meanwhile, eBay failed to recognize that the Chinese market and the business
environment are very different from that of the West. EBay sent a German manager to lead
the China operation and brought in a chief technology officer from the United States.
Neither one spoke Chinese or understood the local market. It was eBays biggest mistake.
Besides, because the top management team of eBay didnt understand the local market, they
spent a lot of money doing the wrong things, such as advertising on the Internet in a country
where small businesses didnt use the Internet. The fact that eBay had a strong brand in the
United States didnt mean it would be a strong brand in China. Lastly, rather than adapt
products and services to local customers, eBay stuck to its global platform, which again
did not fit local customers tastes and preferences.

No listing or commission fees
Besides the development of Internet economy and its effective competitive strategies
in China, there are many factors to conclude Taobaos success. According to Wang Jing-yi
(2006), the main reasons Taobao is get into market quickly with free charge at first, and the
company chooses accustomed setting to win users. Unlike eBay EachNet, which charged its
sellers for listing and transaction fees, Taobao was free to use. While e-bay charged
merchants to list on their website, Taobao only charges merchant a transaction and annual
technology service fee as well as security deposit. Even so, they charged much lower
transaction fee (1-2%) from merchants while e-bay charged much higher rates of (6-7%).
Taobao got a quick start with its free listings and continued to gain momentum as more and
more users switched from eBay EachNet to Taobao, it could now derive more and more
revenues from advertisements.

Safe and satisfying shopping experience
According to Yang and Liu (2009), an investigation of online Chinese consumers,
there are two major characteristics when Chinese consumers shopping online, they would
like see the goods first, and uses to cut the price and Chinese consumers do not trust online
payment so much. Ou and Davison (2009) revealed there is an extremely high risk of fraud
in China. In order to solve these issues, Taobao launched the unique corresponding tools
Taobao Wangwang and Alipay. Wangwang is an instant messaging service into the
sellers webpage, usually the seller will provide full contact information on it, like phone
numbers. Wangwang plays an important role to reduce uncertatinty. By using Wangwang,
buyers and sellers can make a good discussion in terms of quality and price of commodities
and enhance confidence between both parties (Yang and Liu, 2009). By contrast, eBay and
Each-net lack of an instant communication system original. eBay brought in the same
approach it had in the US, expecting consumers to email questions or join online discussion
by Skype, instead of offer buyers or sellers a phone number (Gopalkrishnan, 2007). Alipay,
lauched in 2004 is an escrow service of Taobao. The buyer put the money on Alipay which
inform the seller the money was given. Then, the seller send the item to the buyer, and only
when the buyer tells the good is received, Alipay allows the seller taking the money. This
service can be used for free.



2(a). What is unique about Taobao Marketplaces channel management
process?

TaoBao helps buyers and sellers simulate close personal relationships and build
something called swift guanxi. This is a Chinese concept broadly defined as a close and
pervasive interpersonal relationship and based on high-quality social interactions and the
reciprocal exchange of mutual benefits, according to a study by Ou, Pavlou, and Davison,
entitled Swift Guanxi in Online Marketplaces: The Role of Computer-Mediated-
Communication Technologies. To Taobao, encouraging interactions between sellers and
buyers is the best way to promote sales.
Taobao sellers have to use their national identity card and their bank account to do
their registration on the site. A rating system of both sellers and buyers allows people to
know who is trustable or not without taking the time to speak with the person. eBay offers a
rating system for sellers only, but it is not enough in China. Moreover, in a collectivist
society people like sharing and it is human trusting a person who has a good reputation.
Thus, both buyers and sellers have to build and maintain a good reputation being honest if
they want keep selling or buying on Taobao.
According to a Morgan Stanley report, Taobao was more customer focused and user
friendly than eBay EachNet. With most users not sophisticated about auctions, the majority
of Taobaos listings were for sales. Only 10 percent of its listings were for auctions, while
eBay EachNet had about 40 percent of its listings for auctions. Taobaos listings appeared to
be more customer-centric while eBay EachNets listings more product-centric. For example,
Taobaos listings were organized into several categories, such as Men, Women, and so
on, while eBay EachNet stuck to its global platform, grouping users into Buyers and
Sellers. At that time, China had about three hundred million cell phone users versus ninety
million Internet users. Taobao offered instant messaging and voice mail to mobile phones
for buyers and sellers because Chinese users were cell-phone savvy rather than computer
savvy.






2(b). What components can other online shopping sites borrow or implement?

In building Taobao, Ma understood swift guanxi, and he equipped his online
marketplace with tools that would allow this kind of relationship to bloom. The main one is
Taobao Wangwang, the Alibabas chat. Its function is to allow sellers and buyers to
communicate. This tool has 2 main advantages. The first one is that Taobao proposes mostly
fixed prices and only few auctions on the contrary of eBay. It means that people can
negotiate prices with sellers. It is interesting financially, but more than that, the bargaining is
a part of the trust building between seller and buyer in Chinese culture. The second
advantage is that people can directly ask their questions about the product to the seller or
asking for assistance. Customers on Taobao spend an average of 45 minutes using what the
researchers call computer-mediated-communication technologies (think instant messaging)
to ask sellers questions about themselves and their products before purchasing anything.
Taobao also employs Alipay a third party payment method to process payment.
Alipay acts as a secure payment service which temporarily keeps the money of the purchase
before the buyers confirm to receive the purchase as show in the progress chart below.



Jeff Menzise, a doctor of clinical psychology and a research associate with the
Institute for Urban Research at Morgan State University, said that the factor underlying the
success of TaoBao in China has everything to do with cultural worldview and their specific
axiology. One of the highest values is on personal relationships, he said. Thats how you
see the technology theyre developing now is effective, and that is why Taobao provides
many aspects to facilitate confidence among sellers and buyers.
3. What is next for Taobao Marketplace? Should it go into cloud computing?
Where else can it grow?

Cloud computing is a transformative technology delivery model that is changing the
way vendors, distributors, resellers, and consumers think about, approach, and
implement IT systems. While it is opening many new opportunities for the channel, it is
also providing a platform for a business to achieve its ambitions of having an inclusive
IT system that covers the entire supply chain and its customers, enabling and generating
business growth more effectively. Meanwhile, the growth of the cloud computing market
segment is nothing short of explosive. According to many analyst, cloud computing will
expand from $46.4 billion in sales in 2008 to more than $200 billion by 2015. In context,
that would make cloud computing roughly one-fifth of total global IT spending. Due to
these advantages, Taobao should get involve into cloud computing business.
Since late 2011, Alibaba Group already involve in cloud computing. Alibabas cloud
computing platforms five systems, including cloud computing, large-scale storage,
cloud network, data crunching, and Yun OS, will be integrated and renamed the Feitian
platform. According to Wang Jian, president and chief technology officer for
Aliyun.com, Feitian is the cloud computing platform specially designed for Chinese
developers. It can help a single person complete the workload of an entire company;
while it can do the jobs of each person in a company. Aliyun.com is one seven major
business units of Alibaba Group besides Tmall.com, Taobao.com, Etao.com, group
buying business, international business, and small-enterprise business founded in
September 2009. The reason for Aliyun to develop the operating system is to provide a
mobile Internet platform which can connect developers with mobile phone
manufacturers.
These mobile phone operating systems also allows users to run the applications
without downloading them to mobile phones. Users only need a unified cloud account
and they can run various applications on the operating system platform via the mobile
Internet. For application products, Alibabas new cloud mobile operating system has
integrated Alibaba-developed basic applications, covering contacts, short message, input
method, search engine, and email. It also carries Alibabas consumer-based
applications.With the launch of the new operating system, Alibabas first customized
mobile phone will also be put into the market. The Chinese mobile phone maker K-
Touch has reportedly developed a mobile phone that uses the Nvidia Tegra 2 dual-core
chip for Alibaba. The new mobile phone product will adopt Alibabas cloud mobile
operating system and will gain operating resource support from Alibabas many
subsidiaries including Taobao.com.