Alibaba doesn’t look much like Facebook, Google, or even Amazon. Instead, it operates more like GE...Interest read on the Strategy Alibaba adopts that was fallen out in the US. So what fails in US works great else where.

Alibaba Looks More Like GE than Google

• Walter Frick

May 14, 2014

Alibaba, the Chinese internet titan that filed for an IPO in the U.S. last week, could be the largest tech IPO in history. But Alibaba doesn’t look much like Facebook, Google, or even Amazon. Instead, it operates more like GE.
Spanning e-commerce, payments, messaging, business software, entertainment, and more, Alibaba looks a lot like a conglomerate. And it sets strategy like one, according to a Harvard Business School case study by professor Julie Wulf. Competition trumps cooperation, and distributed decision-making by individual business units trumps universal strategy.
With its success, Alibaba and its founder Jack Ma are making the case for a strategy approach that has fallen out of favor in the U.S. As the 2010 case describes:

By his own admission, Ma was a fan of Jack Welch, so it was only natural that his organization came to resemble that of GE in some regards. Just as Welch did not dictate an overall theme or strategy for GE, Ma preferred not to set one agenda from Alibaba’s corporate center, but rather to have each subsidiary set its own strategy. Much like Welch’s famed “#1 or #2″ objective for each of this businesses, Alibaba’s governance inspired its subsidiaries to be the leaders of their respective industries. Ma explained, “Business unit presidents must have the freedom to do what is right for their business. I want business units to compete with each other…and focus on being the best in their businesses.

While conglomerates are few and far between in the West, their success in China is no surprise. As a 2013 HBR article explained, “Conglomerates may be regarded as dinosaurs in the developed world, but in emerging markets, diversified business groups continue to thrive.”
The article, by J. Ramachandran, K.S. Manikandan, and Anirvan Pant of the Indian Institute of Management at Bangalore, Tiruchirappalli, and Calcutta, respectively, also offers a concise history of the rise and fall of Western conglomerates:

Conglomerates were all the rage in the United States and Europe for decades, but hardly two dozen of them survive there today. By the early 1980s, they had been laid low by their poor performance, which led to the idea that focused enterprises were better at creating shareholder value than diversified companies were. Most conglomerates shrank into smaller, more specialized entities.

The heart of modern strategy is the alignment of complementary activities. If activities are complementary, they should be combined as divisions of the same firm, the thinking goes. If they are not complementary, part of the firm should be sold. Conglomerates resist this approach, combining more diverse businesses and allowing them separate decision-making structures. Investors are wary of this approach. As the article authors write, “On Wall Street the typical conglomerate discount ranges from 6% to 12%.”
Alibaba’s businesses are not completely diverse, of course. There is a central theme behind them all, and it is the rise of internet usage in China.





What stands out in the Alibaba case isn’t a total rejection of complementarity, but an approach to strategy that mirrors that of conglomerates. Rather than dictating decisions from the top down, Alibaba lets them roll up from the individual businesses. “When internal competitive conflicts arose among Alibaba’s businesses, the firm’s culture tended to favor individual subsidiaries over the group,” according to the case. “Ma constantly made subsidiary heads aware they had the freedom to do what was right for their businesses.”
Like conglomerates, Alibaba’s businesses have separate boards, and even separate technology teams and platforms. The exhibit below, from the 2013 HBR piece, describes how Alibaba and firms like it handle strategy, in light of such a distributed approach: with a “group center.”

A “group center” is a group of executives in a conglomerate tasked with long term strategy, locating cross-business opportunities, and shaping the firm’s identity and values. Sure enough, this resembles how Alibaba is organized. One-hundred and twenty executives from its subsidiaries and C-suite form what is known as the “Group Organization,” a leadership team that meets annually to set long-term strategy and to consider “complementary organizational changes.”
Some group centers emphasize strategy work over identity or vice versa, but the authors suggest that the most successful ones balance the two.

This group-led approach to conglomerate strategy offers key advantages, the authors argue, in balancing the search for cross-business opportunity with a more flexible structure for day-to-day management solutions. They write:

In a sense, the business group liberates strategy from structure. Though structure is supposed to follow strategy, the former’s limitations seem to have decided strategy until now. Too often the need to pass up opportunities in order to satisfy shareholders’ expectations has inhibited companies’ growth. A business group, particularly one led by a dynamic group center, enables the pursuit of shareholder value at the affiliate level as well as strategic value at the group level. That makes the business group a winning organizational structure even if it isn’t popular in North America — yet.

While conglomerates may not be about to catch on in the U.S., there are signs that their bottom-up approach to strategy might be making a comeback. Facebook is unbundling its services, giving up on offering a single, comprehensive online offering and instead offering a series of separate apps. At some point, the company will have to decide whether the strategy flows up from those divisions, or flows down from the top — and what to do when two groups’ interests conflict.
The justification for the move, according to CEO Mark Zuckerberg, is the “premium on creating single-purpose, first-class experiences.” Jack Ma would no doubt agree.

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Walter Frick is a senior associate editor at HBR.

Reference: https://hbr.org/2014/05/alibaba-looks-more-like-ge-than-google/