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CASE STUDY 1

Challenging the Status Quo Big-Time: The Case of Ali Baba

It is often said that good things come to those who take big risks. An excellent, recent example of this is Jack Ma’s risk-taking that resulted in the super-successful company Alibaba. But Ma did not simple take risks—he dared to challenge the status quo, supported by many years of conventional wisdom about business and competition in the digital age. His amazing story is full of lessons for novice entrepreneurs and veterans alike.

The September 19 initial public offering of the Chinese-based company Alibaba, and its early run as a publicly listed company, was met with cheers and derision. The cheers were understandable, as the $68 IPO price gave the company an initial value of $167 billion, which eclipsed almost all other technology companies. And in less than two weeks, the market value of Alibaba rose to over $220 billion, exceeding that of even Facebook.

The onslaught of criticism—from competitors, analysts and academics—was tougher to understand. It centered on the actions and remarks of Alibaba’s founder, Jack Ma, who defied conventional wisdom and longstanding corporate governance practices to clear a new path for creative, innovative entrepreneurs.

Competing in the Chinese e-commerce market, Alibaba is, according to Susquehanna Financial Group’s Brian Nowak, “basically a toll-taker, and a wildly profitable one at that.” Nowak notes that Alibaba effectively controls this market as people go in and out of it, by controlling the retail platform, Tmall, and the online setting, Taobao, and disallowing indexing of Taobao.

This is a radical departure from the open-door philosophy of the world’s largest e-retailors. But what has worked for Ebay is not necessarily best for other companies. By sticking to its strategy of locking in shoppers at the beginning and the end of their excursions, Ma has captured huge market share. Which leads to the next criticism of Ma and his company.

Analysts and television personalities have heaped scorn on Ma because he remarked that shareholders are his third concern—after the major owners (partners) and his customers. But why should such a sentiment shock or surprise anyone? After all, it’s hard to imagine the company founder putting limited investors above those who started the enterprise. While a company that relegates customers to third-tier status surely will have public relations problems, putting customers first might not be the best thing a company can do for its shareholders.

Ma’s decision to open on the New York Stock Exchange drew gasps of surprise, once he failed to reach a deal with those in charge of the Hong Kong exchange, because of differences of philosophy about corporate governance. On the NYSE Ma got his way, but even some American analysts questioned the “fairness of the arrangement” whereby Alibaba was placed on the NYSE. Jay Ritter, an IPO expert, cautioned that even if Alibaba grows much richer, this might happen “without investors receiving their fair share” because of what Ritter called a “sweetheart” deal struck by Ma.

What is the complaint? Basically, that too much control remains in the hands of Ma and his close associates. Whether this is wise, or fair, is debatable. What is not in debate is whether such set-ups are common in the U.S.—they are. In fact, Facebook has a very similar model, where power resides almost entirely with founder Mark Zuckerberg.

Perhaps the most salient point concerning this top-down ownership and control model is the fact that Ma owns only about 10% of the shares. Admittedly, this could lead to instability down the line. But instability is always a potential problem, given the range of threats to any market-leading company, especially in China. These include aggressive competition and governmental interference in China, and such threats would exist even if Ma owned 90% of the company.

Perhaps much of the criticism of Ma stems from the simple fact that he is challenging the corporate governance status quo—and this is where people ought to welcome Alibaba and other companies with real vision. That is, most models of corporate governance have, for more than one hundred years, failed to serve society, or even their investors. The scandals, bankruptcies and taxpayer-funded bailouts of recent years have vividly brought into public view a system of corporate governance long characterized by secrecy, greed, and a lack of transparency.

Jack Ma is, if nothing else, honest and direct. He is competing at a time when there are new markets and new corporate players. We should all hope that he ushers in a new paradigm, based on a new brand of corporate governance, one which includes challenging old standards and time-worn often discredited practices. Whether he will do so remains to be seen; whether the business world needs such a thing is, it would seem, beyond question.

Discussion Questions:

  1. What did Jack Ma do that was so different from other company leaders? In what ways is he a revolutionary?
  1. What is “conventional wisdom,” and why is it necessary to challenge it?
  1. Why did so many people criticize Ma and Alibaba?
  1. Jack Ma’s sudden emergence “rocked the boat” in China and around the globe. Are lots of other business leaders likely to follow his example, and challenge the status quo?
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