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#149 Designing Online Retail Systems

Software-mediated purchases are now displacing walled stores where a customer has to go to shop. When setting up an on-line merchandizing business how should an executive choose what is a superior system design for shopping? Should customers link directly to a vendor, or should customers submit orders through an inventory-holding intermediary? These are two of the principal options that can be considered.

Different approaches to the handling of customer orders offer completely dissimilar designs. For instance, in the case of Alibaba, there is a direct connection between the purchaser and the vendor.  A customer enters an order and the vendor delivers it. In the case of Amazon, the purchaser enters an order on the Amazon network. In most cases the merchandise will be shipped from an Amazon warehouse.

In terms of the delivered business functions the Alibaba and Amazon shopping experiences are similar:
-     Alibaba, has a staff of 101,550 serving 854 million customers. Amazon, with a staff of 647,500 serves only 300 million customers. Alibaba is more efficient because it supports three times more customers with only a sixth of the manpower.
-     Alibaba net income is $12.9 billion and operates with a net margin of 23.2%. Amazon, has a net income of $12.0 billion but only a net margin of 5%. Alibaba has five times greater profitability.
-     Alibaba revenues are $60 billion with a growth of 41.7% per annum. Amazon’s has revenues of $242 billion but grew only by 17%. At current rates Alibaba will surpass Amazon revenues by 2026.
-        Alibaba and Amazon net incomes are approximately identical but Alibaba pays $500 million more in taxes. It appears that Amazon receives greater subsidies.
-    Alibaba, with double the number of Amazon customers, spends only a half of Amazon’s sales, general and administrative costs. Alibaba’s overhead costs are much lower.
-     Alibaba requires $143 millions assets whereas Amazon needs $178 millions of assets to support of a much smaller staff.
-    Alibaba manages 58% of on-line retail sales in China. So far Amazon has captured only 4% of retail sales in the US.

Why is Alibaba so efficient?

The company's business model is different from other e-commerce businesses. It offers a business-to-business platform that connects suppliers and retailers. It also provides direct connections with retail consumers. Amazon conducts its business through a completely centralized network whereas Alibaba’s network  is a hybrid. Alibaba offers a network platform, but executes its transactions via distributed computers. Unlike Amazon, Alibaba Group holds no inventory and owns no warehouses. Amazon must manage an expensive logistics framework. It needs to develop and maintain warehouses from where to ship products directly to shoppers. Instead Alibaba uses software to scale its services rather than building bigger warehouses.


New designs of a global value-chain will have to imitate concepts learned from Alibaba. Organizations will have to seek greater efficiencies through a scaling of distributed computing all the way to the consumer levels.

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