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About This Book
How Strategy Works in an Interconnected, Automated World
Leaders already know that the classic approach to strategy--analyze, plan, execute--is losing relevance. But they don't yet know what replaces it. As everyone and everything becomes more interconnected and digitized, how do you operate, compete, and win?
Ming Zeng, the former Chief of Staff and strategy adviser to Alibaba Group's founder Jack Ma, explains how the latest technological developments, such as artificial intelligence, machine learning, the mobile internet, and cloud computing are redefining how value is created. Written especially for those outside the technology industry or the startup arena, this book introduces a simple, overarching framework to guide strategy formulation and execution in this data-rich and highly interactive environment.
Revealing the revolutionary practices that he and his team have developed at Alibaba, Zeng shows how to:
- Automate decisions through machine learning
- Create products informed by real-time data from customers
- Determine the right strategic positioning to maximize value from platforms and suppliers
- Repurpose your organization to further human insight and enable creativity
- Lead your company's transformation into a smart business
With insights into the strategies and tools used by leaders at Alibaba and other companies such as Ruhan and Red Collar, in a variety of industries from furniture making to banking to custom tailoring, Smart Business outlines a radically new approach to strategy that can be applied everywhere.
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Singles Day has grown from a tongue-in-cheek holiday for unattached young people to the biggest shopping day in human history. Taobao has grown from a small online forum for buyers and sellers to the largest e-commerce platform in the world. To understand Alibabaâs phenomenal success, we need to analyze the forces behind its rise. By understanding Alibabaâs story, we come to appreciate the innovative power of Chinese business. By understanding Chinese innovation, we can grasp a full vision of the future of strategy.
These first three chapters define the two core pillars of smart business, network coordination and data intelligence, and explain how to make them work. Network coordination enables large-scale business networks, while data intelligence ensures efficient operations and decisions across the network. Through examples from Alibabaâs platforms, I will show how data and networks reinvent strategy. Every firm needs to know how these two new capabilities change the dynamics of value creation, and how these capabilities will affect their business.
CHAPTER 1
THE NEW FORCES OF VALUE CREATION
To get a handle on what smart business means in practice, we need to look closer at Alibaba. Every day, millions of business actors connect and coordinate through the Alibaba Groupâs vast consumer e-commerce networks, made up of Tmall, the website for larger brands, and Taobao, the wider online marketplace for small boutique brands, independent sellers, and innovators like the web celebs. (See the sidebar âAlibaba at a Glanceâ for a snapshot of all Alibaba Groupâs businesses and networks.) These networks present each customer with a personalized shopping experience, an individualized, virtual mall for every shopper. On the supply side, sellers have all the tools to run an online storefront, to partner with manufacturers, to coordinate with logistics players, and to arrange payments online on Alibabaâs own platforms. And all of it is coordinated by data technology.
Alibaba exemplifies smart business, painting a vivid picture of the new, emerging business world. In this world, businesses use machine learning to gather data from their networks of participants to automatically respond to customer behavior and preferences. Smart business allows the entire value chain to be reconfigured to achieve both scale and customization, using the combination of two forces, network coordination and data intelligence (defined and discussed below). These twin forces engender smart business.
The Essence of Smart Business
The formula for smart businesses can be summarized in a single simple equation:
Network Coordination + Data Intelligence = Smart Business
That simple equation reveals what is behind Alibabaâs success and captures everything you need to know about business in the future. As Iâll explain, network coordination and data intelligence, two new capabilities enabled by technology, have powerful advantages over traditional business processes and structures.
In its broadest sense, network coordination is the breaking down of complicated business activity so that groups of people or firms can get it done more effectively.1 Functions that were historically locked into vertically integrated structures or rigid supply chains are more easily coordinated through online connections. Nobel laureate Ronald Coase explained that businesses have been structured to manage prohibitive transaction costs.2 But new technologies have driven down these costs, enabling new networked approaches. Using network coordination, business activities like sales, marketing, and all aspects of production are transformed into decentralized, flexible, scalable, and globally optimized processes.
Singles Day, with Tmall and Taobao behind it, is a perfect example of network coordination. Taobao holds no inventory and is instead a vast network of more than ten million sellers. These sellers coordinate with millions more partners, and all the parties work together to accomplish the complex work of online retail, transaction processing, and distribution all the way to the customerâs doorstep. Impossible for humans, this level of interaction is the essence of network coordination: autonomous coordination with almost unlimited scale and a boundless number of partners over the internet.
As the network of business actors coordinates online, business activities are also getting smarter. That is, constantly flowing data, created from real-time interactions and processes online, creates a continuous feedback loop that automatically generates decisions that become increasingly âintelligent.â For example, today, much of Taobaoâs routine work in finding and displaying products to customers is done by machines. Traditional retailers employ thousands of buyers, display artists, style editors, personal shoppers, and so forth, to accomplish something similar. Machine learning is the tool that enables this capability at Taobao. At peak on Singles Day 2017, Alibabaâs databases made forty-two million calculations a second. This sheer volume means that machine-learning algorithms ran billions of iterations throughout the day to decide which items should be displayed on your smartphone screen after you had already bought a cell phone, tickets to Bali, and even those rainbow pajamas youâd been eyeing for the past month. Data intelligence is what I call this business capability of effectively iterating products and services according to consumer activity and response.3 It is a radically different approach from how most firms today generate products and services.
By data intelligence, I refer to the capability of businesses to rapidly and automatically improve using machine-learning technology. You will recognize data intelligence in action if you have ever encountered recommendation engines. This most basic form of data intelligence is standard business practice for any company online, but the capability Iâm describing is much more sophisticated. Companies can develop more highly evolved applications of data intelligence if they automate decision making and constantly run real-time dataâsay, suppliersâ shipping times, fabricatorsâ finishing notices, logistics tracking, or customer preferences. This automation is achieved through machine-learning algorithms that enhance coordination and optimize every link in the value chain. As more and more business activities go online, the decisions associated with all those activities can be automated and constantly refined. This is what I mean by data intelligence.
The advances in machine learning (a branch of computer science often understood as a subset of the larger field of artificial intelligence, or AI) have broadened the reach and effectiveness of what companies can do with data intelligence in a step function manner over the last decade. In the same way that machines have mastered the games Go and chess, algorithms can churn through extremely long chains of calculations or explore multiple scenarios to quickly arrive at optimum solutions. As new results occur, the algorithms recalibrate themselves to reflect this new information. Algorithms learn through continuous iterations, and their results improve as the volume and diversity of data increase. Through this machine learning, data intelligence increases. As more business processes go online and as business activities increasingly require the coordination of interconnected players, companies can transform themselves by ensuring that routine decisions are made automatically and with more computing power than is available to humans. This is the essence of smart business.
The Emergence of Smart Business and Its Implications
At Alibaba, link after link in the value chain is being modularized and reconfigured into technologically optimized networks, and much of business decision making is powered by algorithms. This heavy use of innovative technology changes everything. Data is the primary asset, a crucial factor of production. Strategy no longer means analysis and planning, but rather a process of real-time experimentation and customer engagement.
In smart businesses, as I will show in this book, the familiar forces of competition are falling away and giving rise to new forms of cooperation between businesses and myriad other players. When strategy is no longer predicated on competition but centers on coordination, the ways of creating value are completely transformed. And when companies apply machine learning not only to automate routine business processes and consumer interactions but also to continually improve them, managementâs role in creating value is radically changed. Organizations are no longer static, hierarchical structures that need managing and controlling, but rather are dynamic, fluid networks of interconnected players that must be engaged by mission and opportunity.
Donât fool yourself into thinking that network coordination and data intelligence are only relevant to so-called internet companies or digital natives. I have worked with and studied furniture manufacturers, apparel companies, and beauty salons in China. Even these more traditional companies are reorganizing to exploit these new forces. Indeed, it is precisely my global perspective that has led me to arrive at this new strategic theory. Network coordination and data intelligence exemplify what you get when you combine the cutting edge of technology in the West with the dynamism of business model innovation in the East.
Chinese companies are better positioned to take advantage of network coordinationâcombining business actors seamlessly across the internet versus building up corporate organizations. Because most Chinese industries have a relatively weak infrastructure and few dominant players, there is more room to reconstruct whole industries on the internet. Companies in the United States generally tend to excel at data intelligence, using the most advanced incarnations of machine learning to automate knowledge creation, applying technology to problems of image recognition, language translation, and DNA sequencing. Years of research and business experience in both countries has convinced me that the forces of network coordination and data intelligenceâand their reinforcing power when the two forces are combinedâare acting on all businesses, old and new, everywhere.
Networks or data as I present them are not new concepts, but they have not previously been integrated into a theoretical whole. They are the twin helix that makes up the new business DNA. Looking at business from both East and West reveals the whole picture. Only when the yin and yang of West and East, of data and network, combine do we get a clear view of the future. Only then can we effectively formulate strategy in the present.
Strategy as taught in business schools since the early 1990s has focused on competitive advantages through either market positioning or core competences. But the sources of competitive advantages have shifted dramatically. Businesses need a new strategic approach that fits into an era when networks and data dominate. Under this approach, companies will use network coordination to achieve value, scope, and scale greater than that of their competitors and will deploy data intelligence to make their business smart enough to adjust nimbly to changes in the outside environment and the minds of consumers. The most successful internet companies in the United States and China are adept on both networks and data. This observation will hold for all winners in the future economy.
Various economists and business strategists have made valuable contributions to update for the internet age Porterâs classic analysis of strategyâincluding Michael Porter himself. These contributions on digital and platform strategies have been deep and illuminating. This book tries to go a step further, creating a more overarching strategic framework that places both traditional and digital businesses in a unified landscape. (Appendix C discusses this in more detail.)
From Chinese Buddhism, there is an aphorism: ...
Table of contents
- Cover
- Title Page
- Copyright
- Dedication
- Contents
- Foreword, by Jack Ma
- Introduction: Why You Need to Know about Alibaba
- PART ONE: ALIBABA: The Emergence of a Smart Business
- PART TWO: HOW SMART BUSINESSES COMPETE: Strategic Principles
- PART THREE: HOW SMART BUSINESSES RUN: Organizational Implications
- Appendix A: Alibaba and Its Affiliated Businesses
- Appendix B: The Evolution of Taobao as a Smart Ecosystem
- Appendix C: Conceptual Foundations
- Notes
- Further Reading
- Index
- Acknowledgments
- About the Author