Alibaba: The First Real Test For Amazon

[Tom Spencer]

HBR posted an interesting article last Tuesday about the planned IPO of Alibaba in the USA this year, and its strategic implications for Amazon.

 

For those not familiar with Clay Christensen's theory of disruptive innovation, you will want to read about how disruptive innovators often beat successful incumbents (read the article).

 

If you don't have time to read the article, here's the summary. Basically, when a disruptive innovator enters an existing market they will enter with an inferior product at the bottom of the market where margins are lowest. The established incumbent is happy to give up that part of the market because the margins are so low. This give the disruptive innovator a toehold, a point from which it can improve and move upmarket, often eventually displacing the incumbent.  Incredible, but true. 

 

So, the situation for Amazon is that Alibaba has a largely inferior product and a different business model. Most of Alibaba's profits come from advertising and the vast majority of its products are sold with zero margin. On the other hand, Amazon focuses more on customer service, charges margins (albeit very low ones) and earns only a small fraction of its revenue from advertising.

 

The risk for Amazon is that Alibaba will be able to gain a toehold in the American market by selling low margin products to customers at a discount to Amazon and making profit from ad sales. If Amazon gives up the bottom end of the market, this will give Alibaba an opportunity to grow and improve. By starting at the bottom and gradually moving upmarket, this could enable Alibaba to eventually displace Amazon.

 

It will be very interesting to see how Amazon responds to this disruptive threat posed by Alibaba.

 

Do you have any thoughts on the matter?

[Tone]

Disruptive innovation sounds incredibly interesting. I'm curious to see how this plays out as Amazon is such a major brand, usually you wouldn't to twice about going up against such a large and influential competitor holding such a big portion of the market share; however if you are going to do such a thing, disruptive innovation certainly seems like its has the potential to get you in the market place and give you a good shot at it.

 

I do think critical points here though are a killer marketing plan and really listening to your initial and low end customers so you can rely on them to carry you through as you attempt to penetrate the market and move up through the ranks as this is when you will need support the most. The opinion of your audience is invaluable.