CHAPTER 2
NETWORK COORDINATION
How Interconnected Players Change the Game
October is a profoundly important month for consumers in China. For one thing, every October begins with the week-long National Day break, one of the longest holidays in the calendar. But when the holiday is over and the country goes back to work, an even more important holiday arrives just one month later: November 11, Singles Day. With the profusion of discounts and savings on offer during Singles Day, shopping at full price beforehand is imprudent. In October, you would do well not to make large purchases—Singles Day is coming. Also in October, you would be wise to make travel plans for the following year to catch all the best deals—Singles Day is coming. Not just travel plans, but even purchases surrounding important life events are worth the wait until Singles Day. Planning to buy a house, have a child, or get married? Draw up your shopping list early—Singles Day is coming.
But once early November arrives, another headache draws near. Don’t plan to mail anything important during the second week of November. After all, the country’s postal system very well might descend into paralysis the week after the sale. It certainly has in the past.
The entire country remembers November 11, 2012, the fourth time that Singles Day had been celebrated as a major shopping festival. In the retail industry, Alibaba’s transaction volume of nearly 20 billion RMB (US$3 billion) in a twenty-four-hour span gave brands large and small, local and international, a rude awakening. In previous years, e-commerce hadn’t seemed big enough to affect established players. Yet by the morning of the twelfth, the message was clear: e-commerce was here to stay. The waters of online business that had once lapped at the feet of established players were now rising, and everyone wanted a place on the lifeboat.
But consumers saw a different picture, namely, the complete and catastrophic failure of the logistics network around the country. Unable to cope with an unprecedented volume of seventy-two million packages, warehouses overflowed and roads clogged with delivery trucks. (For reference, Singles Day in 2010 and 2011 respectively produced one million and twenty-two million packages.) Planes, trains, and ships stalled. Postal workers and other delivery personnel were stretched to their limits, working around the clock just to keep up. Goods that had been ready for shipping on the eleventh and would only have taken three to five days to ship under regular conditions were stuck en route for more than two weeks. By the end of the month, some packages had still not reached their destinations.
Shocked by the fearsome force of China’s consumers and terrified by the near-certain reality that the following year’s volume of packages would increase by at least 50 percent, Alibaba and China’s logistics companies sprang into action. They invested in infrastructure, but more importantly, they began the hard work on mechanisms and systems for coordination in the nascent logistics industry. On November 10, 2013, executives waited anxiously to see if the previous year’s cataclysm would repeat itself. To everyone’s surprise, it did not, and China was spared: in nine days, two-thirds of the 152 million packages created on November 11 by Alibaba’s e-commerce platforms reached their destinations.
Efficiency only continued to improve. In 2014, 100 million of 278 million packages were fulfilled by the seventeenth, barely a week after Singles Day. By 2016, 100 million packages were fulfilled in a mere three and a half days. Today, Chinese consumer logistics is arguably the most efficient in the world. (It would have to be: between 2009 to 2017, the number of parcels issued as a result of Singles Day increased by a mind-blowing factor of 3,123.) Standard shipping for many packages from all corners of the country can be accomplished overnight or in two days, at minimal cost—a far cry from the disaster of 2012.
The full story of China’s logistics transformation, and of Alibaba’s affiliate Cainiao Network, could fill an entire book. (For an abbreviated version, see appendix B.) But the key to the industry’s rapid evolution was doubtlessly network coordination. Various players, helped by internet platforms and data technology, learned to coordinate efficiently and at scale. In this chapter, I will explain what network coordination is, why it has been so powerful for Alibaba, and how it fits into the greater strategy of smart business.
From Line to Network
Network coordination is the nearly autonomous management of the simultaneous interactions of multiple parties to a business task. This type of coordination produces vastly different results than does a linear value chain, in which hierarchical orders are passed sequentially through players. Consider how the incredible online orchestration of Singles Day—sellers, buyers, producers, suppliers, and logistics players all coming together and processing volumes that no single firm possibly could—was facilitated by Alibaba without direct orders or executive directives. Network coordination allows many people or firms to cooperate online to solve a complicated business problem much more effectively and efficiently than could any party or parties structured through vertical integration. This new approach is what built Alibaba’s e-commerce platforms and helped create niches for many innovative new players on the platforms, including the web celebs highlighted earlier.
Alibaba was initially forced to rely on network coordination since we lacked the time, skills, or investment resources to create some of the capabilities needed in-house. When sellers on Alibaba’s platform wanted someone to ship a product without using China’s very outdated postal system, Alibaba engineers could not just start a delivery company. But they could create some standard online tools and other mechanisms that would integrate the services into Alibaba’s platform. Using those tools and mechanisms, the engineers could then work hard to encourage others to create the services that sellers wanted. In this manner, we at Alibaba brought more and more such complementary services to our platform, and Alibaba effectively became a network of coordination. Appendix B gives a detailed account of the evolution of this coordination network since the founding of Taobao in 2003.
Network coordination unbundles business activities from the traditional linear supply chain. A traditional retailer, online or physical, has a relatively simple task of coordinating a linear information flow from suppliers to customers, whereas Alibaba, an online market, coordinates expansive online networks of almost innumerable players. Inspired by Alibaba’s success, other forward-thinking Chinese companies are using the internet to transform underdeveloped traditional industries from a linear structure to a network. These companies are reconstructing numerous industries, from furniture making to online education, and leapfrogging earlier business formations. Indeed, only a network coordinated through a decentralized structure can simultaneously handle all the core imperatives of today’s business: scale, cost, speed, and customization.
More and more business functions will be reconfigured in this manner, not just in China but also across the world. Harnessing network coordination is one of the essential new drivers for value creation strategies in the coming decades. Let’s see how it is being put into practice, using the newest breed of Taobao sellers: the web celebs.
I briefly told the story of these innovative sellers in this book’s introduction. They have created brands completely online, do not have any offline sales channels, only keep 10 percent of sale volume in stock at any time, and manufacture and ship the rest out within twenty days after orders are placed. In part 2 of this book, I will explore exactly how the web celebs create their brands and manage flexible manufacturing. But first, we need to unearth the fundamental strength of their business model: network coordination.
Behind the Web Celebs: A Coordinated Network
Web celebrities emerged in late 2014 and surprised us at Taobao. With no offline presence or big advertising budgets, these somehow-magnetic people nevertheless displayed an impressive ability to bring in sales and drive conversions. Graphs of their sales volume looked particularly strange: on an average day, they would do little to no business, but their inactivity was punctuated by short and startlingly intense bursts of more than 1 million RMB (US$150 thousand) of sales at a pop. Because these sellers exhibited sales patterns starkly different from the average e-commerce store, Taobao’s employees were originally concerned that the sellers might be engaging in some mysterious fraudulent behavior.
But they were instead something new. Web celebs appeared in the women’s apparel category, selling casual fashion and light luxury items marketed at Taobao’s youngest users, between fourteen and twenty-one. The web celebs would often plaster their Sina Weibo account information (the upgraded Chinese version of Twitter; see the sidebar “Weibo”) in a conspicuous place on the front page of their Taobao storefronts. Most importantly, the face of these stores was, without exception, an attractive young woman. All the pictures for every item in the store would feature her as a model, but these pictures were most often shot in a nonprofessional manner (read: mostly selfies). These young women did not behave like typical models or celebrities; nor did their products and styles fit easily into the traditional categories of Taobao women’s apparel, such as “Korean Urbanwear,” “European Couture,” or “Harajuku Street Style.”
Every three to four weeks, these stores would post a group of new items. Unlike most Taobao apparel stores, which regularly “hang” dozens if not hundreds of SKUs on their virtual racks, web-celeb stores keep no more than twenty to thirty items in stock, mostly clothes but also the occasional shoe or accessory. A few days before new items hit the rack, the stores would announce their upcoming sales, which often begin at designated times like 2 p.m. or 8 p.m. Before every sale, hundreds of thousands of fans would wait before their computer or smartphone screens, ready for the frenzy to ensue. In Chinese, these flash sales are associated with a common term called starvation marketing, in which the impression of deprivation and scarcity drives frenetic consumption. (If you don’t pounce, somebody else will.) Most clothes would be completely snapped up almost immediately.
Furthermore, as soon as the first batch of clothes sells out, the stores begin to offer the same SKUs through presale. In general, a popular SKU could go through two to three rounds of presale in a single sale, with each round specifying a shipping time—for example, the second round might be completed ten days after the sale. Some fans are even willing to wait a month for clothes sold by their favorite online icon, but a month is considered a long time. (Compare this schedule with common US retailers’ backorder times, which easily go into several months.) Web-celeb stores and sales turn standard retail economics on its head. Unlike most retailers worldwide, most of the clothes sold in these stores have not yet been manufactured when they are purchased.
On Weibo, these web celebs also behave very differently from how the average large social media account behaves. There are two types of Weibo accounts: individual and enterprise. Enterprise accounts are often headed by organizations or firms, for example, Alibaba or Nike. Unsurprisingly, most of Weibo’s ad revenue comes from enterprise accounts—they are the ones buying advertising and other services. Most individual users don’t spend money to make friends. Yet the web celebs, while still using individual accounts, spent an enormous amount on advertising to find new fans. And the content of their accounts looks like those of any individual: pictures and stories of their lifestyle, aesthetics, or travel. But these accounts were clearly being used for business purposes, spending significant amounts of money to place ads targeting new fans. This counterintuitive behavior reflected a counterintuitive truth: the web celebs are businesses, albeit businesses operating brands with “individual” faces.
And these businesses do operate: a small web celeb needs to have at least several hundred thousand fans to even make a dent in the industry. Bigger players have millions if not tens of millions of followers. More importantly, these young women spend an inordinate amount of time interacting with their fans, responding to comments and questions, and posting content that their fans request. This interaction is in a sense a service for their followers: explaining how to pair a style with the rest of the fan’s wardrobe, makeup tips, an in-depth description of the stitching or detailing on a particular SKU. At other times, web celebs and fans will talk about their feelings or worries, or how tiring and annoying their jobs or boyfriends are. Interacting with them feels genuine and natural.
By 2017, China’s e-commerce industry had recognized that these young women were not a flash in the pan. Many web-celeb storefronts already place in the top ten within Taobao’s apparel categories—whenever a web celeb runs a sale, it will definitely land a top spot for the day’s sales. Currently, over four hundred web-celeb stores of significant size are operating on Taobao across different product categories, from apparel to cosmetics to sporting goods to food and fast-moving consumer goods. In women’s apparel, several large stores bring in more than US$1 million per sale and close to US$100 million in yearly gross merchandise volume. That category hosts dozens of second-tier stores whose yearly sales hover around US$10 million to US$20 million, and many more up-and-coming competitors who are hot on the high heels of their predecessors.
How do young women like Zhang Linchao, the web celeb we met in the introduction, with a keen aesthetic sense and social influence but little concrete business experience, make this model work? In chapter 5, I will analyze the web celebs’ business model in detail; for now, it is sufficient to observe that these brand-builders are supported by Taobao’s vast network of business functions and services that empower entrepreneurs. Because all the players on the Taobao platform are technologically connected, calling on and bundling a group of services can happen in real time and with little human interaction. Such an infrastructure can enable a small player to scale quickly, taking advantage of these available services.
Fifteen Years of Coordination: Lessons from Taobao as Business Network
The history of Taobao is one of adding increasingly complex business functions to the network and hence supporting businesses of increasing sophistication to grow. As the network has expanded, more players have entered the marketplace, fostering deeper coordination and the recurrent emergence of innovative business models. A full case study of Taobao’s growth could fill an entire book, and indeed, interested readers can consult appendix B for a highly abbreviated version of that story. In this chapter, I will sketch only the briefest outlines of the platform’s evolution to give readers a better understanding of Chinese e-commerce, and how it relies on network coordination and data intelligence.
At its very beginning, in 2003, Taobao was little more than a forum for buyers and sellers to find each other. The Chinese government had encouraged rapid economic development, which gave birth to an enormous number of small sellers without access to large groups of consumers. Simultaneously, buyers wanted access to a vast universe of products from across China and beyond. Foreign companies like eBay were trying to get a foothold. The leadership of Taobao recognized the need for a marketplace for personal, consumer-to-consumer sales, but was unclear on how to jump-start it. Consequently, the platform’s incubation proceeded in steps.1
Initially, Taobao employees did everything they could to populate the market with as many products as they could find—literally posting things from their apartments. The next year, the goal was to bring in as many independent sellers as they could. Finally, with a critical mass of sellers in 2005, Taobao started advertising to attract buyers to the website. It described itself as selling anything you could possibly imagine.
Surprisingly, the Taobao platform encouraged sellers to foster business connections and even formal organizations outside of the platform. Precisely because e-commerce in China emerged without models or precedents, Taobao’s value as an online marketplace quickly began to spill over into the offline world—sellers formed informal networks encouraging more service providers onto the platform. Western readers may be used to companies like Alibaba making all the decisions relating to everything that happens to their business, but the opposite happened in the early days of Taobao. Sellers joined Taobao, saw the tools and mechanisms provided by the platform, and ran with them.2
Many sellers in Taobao’s early days were individuals or very small teams learning on their feet. Although opening a store and doing business online was free, there were still significant hurdles involved in learning to use the growing array of tools provided by Taobao for managing one’s storefront, connecting with customers, and processing transactions, as described below. There were also the perennial difficulties of ensuring product quality and availability in a country plagued by an underdeveloped retail and shipping infrastructure. Sellers often worked together, sometimes on official Taobao forums, but also in informal contexts off of the platform, learning from each other to overcome these hurdles to doing business.
Service with a “Dear”
To help with customer interactions, Taobao built an instant-messenger service in 2005. Every storefront on Taobao has its own account on the official messaging platform, called Wangwang. (The tool’s Chinese name is a cute phonetic that evokes a feeling of brisk business.) Through Wangwang, consumers can ask sellers any question they like at any hour of the day. They can even haggle over prices or just shoot the breeze. The customer-service representatives manning a store’s Wangwang account quickly took on an important new role in the network. In keeping with Taobao’s early “cute” aesthetic, customer-service language even evolved its own suitably saccharine vernacular, popularized by the new idiomatic pronoun qin (“dear”), which was used in place of the Chinese word for “you.” (In Chinese, qin is part of the word for “darling” and also means “kiss.”) This affectionate form of address is quite unusual, given the cool and distant tenor typically associated with interactions with strangers on the internet. Thus, the person behind each Wangwang account is a source of warmth, ensuring a good consumer experience and creating a channel for understanding the customer.
For sellers, the customer-service representative is a highly specialized role, which in larger online stores is regularly handled by at least two groups of employees, one group handling presale inquiries and the other handling after-sale service. Both types of inquiries could come at any hour of the day from consumers used to immediate responses. In addition to training in standard techniques of professional service, Wangwang customer-service reps must know the store’s products backward and forward, as well as how to handle disputes and other issues. These representatives were the first of many new specialized positions that Taobao created. Customer service in particular has provided employment opportunities for millions of people, including those barred from entering the traditional economy due to geographical barriers or physical impediment.
Supporting Independent Services Providers
By 2006, the marketplace was fully formed, and coordination between participants in the Taobao network began to grow deeper. Some sellers saw an opportunity to provide support services for growing merchants and started to change their role. Taobao entered a stage of rapid growth as the first independent service vendors (ISVs), a new and crucially important group of players, were born.
An early challenge for sellers was effectively displaying and describing their products to strangers from all corners of China. Most customers would at least require a picture of the product they were to receive, but in the mid-2000s, smartphones had yet to be invented. Sellers possessed of both professional photography equipment and expertise were rare, but they were willing to share their capabilities. At first, these sellers offered to help other nearby sellers take pictures of their goods, gratis. As time went on, the photography experts formalized the services on offer and gradually became full-time, professional service providers. Photographers, designers, and writers began to partner with sellers to decorate their virtual storefronts.
Taobao, in turn, began to introduce new tools, including Wangpu, a series of standard templates for storefronts, to enable sellers to better manage their online business. Wangpu (in Chinese, “a shop located in a bustling location perfect for business”) quickly became a platform itself, as it opened up to and engendered additional independent software developers. Soon many developers were offering to design customized storefronts and create more features for sellers.
One notable group of ISVs consisted of young women from all over China who began to make an increasingly comfortable living modeling for the growing assortment of apparel merchants on the platform. Over time, both merchants and customers would know which of the large pool of models was best suited for their clothing line, and they would work with those models. Soon, Taobao developed a connecting platform to organize these ISVs, help them find merchant partners, and monetize their modeling services. These women would be henceforth known as Tao models, models whose careers were incubated on Taobao.
Company leadership was constantly talking with sellers about how to make business easier. It was not uncommon to have a half a dozen sellers in the small Taobao offices at Hangzhou a couple of afternoons a week discussing what new tools might be useful. For example, the earliest sellers on Taobao used to print out each order as it was received to begin fulfillment, as they did for their offline business. When you have ten or even dozens of orders a day, this is a workable solution. But sellers faced a farcical yet very real problem from getting hundreds or even thousands of orders a day: their office printers overheated, some of them even catching on fire. It became apparent that to streamline the fulfillment process, sellers had to move more of their offline activities online so that they could better coordinate and optimize—and avoid fires. Without this pressure to improve the entire fulfillment workflow, up to and including logistics, the Cainiao Network—the logistics platform catalyzed by the 2012 delivery debacle—might not have emerged.
Technological Support for Expanding Networks
In the early years, many Taobao sellers had offline businesses and sourcing channels, but by 2008, many new merchants joined the platform in a rush for online gold. They faced the challenge of building their businesses completely from scratch, online. Taobao then had to bring into the online network the many functions of brick-and-mortar retail so that every seller could access them. As time went on, the Taobao marketplace even began to incubate new functional roles unknown to brick-and-mortar retailing.
There was no way Taobao could provide all the services of offline retail by itself. Inspired by early successes such as the Wangpu storefront platform, which had led to the creation of many software service providers, Alibaba articulated a new strategy: fostering the development of an open, collaborative, and flourishing e-commerce ecosystem. The company positioned itself as a platform with the goal of developing the infrastructure to fully enable online commerce. With this step, Taobao entered a new stage of development, powered by the explosive growth of the collaborative business networks built on top of it. As the system grew in complexity, it had to develop data intelligence to improve coordination. Smart business on Taobao was taking shape.
Beginning around 2013, Taobao began to expand its services higher up the value chain into areas such as marketing and financing. Since then, the main challenge has been to connect the Taobao platform with outside platforms like Weibo, Ant Financial Services, logistic companies, and the supply chain. Taobao does not offer the services these networks do, but the e-commerce platform does need to let them interact reliably and safely from a technical perspective. For example, web celebs, who manage their fans aggressively on the Weibo platform, have driven integration between Taobao and Weibo. Data intelligence can coordinate the interactions between platforms and can improve the services each party can apply for the benefit of customers.
Given the complexity of Taobao’s ecosystem, I will examine only a few important business functions that it provides for its users. These examples illustrate the core lessons that we have learned and used to guide Taobao’s development. (For further details, see appendix B.)
ISVs, TPs, and the All-Important API
As the Taobao network evolved, we experienced some real aha moments that informed our strategy going forward.3 Once the online market was up and running, but when straightforward merchants were still the only businesses on the platform, a new and crucial role on the platform emerged: the Taobao partner. This individual or company takes on the job of storefront operations and marketing for individuals and brands.
These TPs, as they are now known, assumed a key role in the ecosystem. Their specialized expertise enabled the largest sellers to expand further and paved the way for offline sellers and brands from the major stores in Beijing and Shanghai as well as luxury-goods importers from abroad to make their way onto the platform. If you are an offline brand with no experience with online selling, you will use a TP to manage the day-to-day operations of your store. (Chapter 6 will tell the story of one of Taobao’s most successful TPs, Baozun.) Beyond TPs, a vast array of third-party service providers sprouted through Taobao. To run an effective business, you need to use all sorts of software, from customer-relationship management to order management, to marketing and search engine optimization. Within a single firm or among partner firms, all this software must work together.
The key thread that connects ISVs to sellers and buyers in the ecosystem is data. For a Taobao seller, it is of the utmost importance to keep the data encoded in incoming orders flowing to those who need it, including customer-service representatives, sourcing, marketing, and logistics. A third-party developer that provides order management software must to be able to access a client’s transaction data. In turn, sellers should be able to share the data created on Taobao with whomever they need to, to effectively do business. As the value of doing business on Taobao grew, the platform attracted a multitude of external entities interested in working with users of the site and using that data to do business.
In 2010, Taobao implemented a technology called application programming interface (API), a set of tools that any programmer can use to create software that interacts smoothly with other software in the system.4 APIs are the technical basis for network coordination, and make it easy for ISVs to provide sellers with comprehensive services. API technology had far-reaching consequences for the whole ecosystem—I will discuss it in detail in chapter 4.
The future, not only for Taobao but also for most other businesses, is to bring higher and higher reaches of the value chain into the network. Advertising and retailing have successfully moved online to platforms such as Google and Taobao. Web celebs, in essence, have moved brand building online. I will explain in part 2 how online interactions through social media build brands more effectively than do traditional approaches, and how business can digitalize core functions across the firm.
Once the network is coordinated in this new way, all sorts of new business models and forms of value creation emerge from ever-new coalitions of players. Each time a new level of network coordination develops on Taobao, the addition expands the reaches of the network and enriches the breadth of the entire online economy.
The Building Blocks of Network Coordination: How to Get Started
We have now seen a multitude of new business roles and functions that have gradually been integrated into the network of Taobao’s market. But how exactly does network coordination operate and how should we facilitate it? Business networks are goal oriented: various players come together to solve a complex commercial problem for a client base. Only those actors who share the vision and are able to contribute to the solution will come online and work together toward that goal. From our experience at Taobao, we can share four operating maxims to foster effective network coordination (table 2-1).
The building blocks of a coordinated network
Step |
Examples from Taobao |
| Direct connection and interaction | Taobao created the Wangwang instant messenger to connect buyers and sellers and created the Taobaoke affiliate marketing platform to connect sellers and small websites. |
| Role evolution | Experienced sellers became Taobao University lecturers; Taobao partners (TPs) emerged as offline brands joined the network. |
| Investment in infrastructure | Alipay lowered barriers to trust; the Taobao application programming interface (API) allowed independent service vendors (ISVs) to work with merchants. |
| Putting business activities online | Taobao’s product database (see chapter 4) allowed for any SKU imaginable to be bought or sold; the web celebs coordinated marketing and manufacturing online. |
To support a network structure, encourage direct connections and interactions.
Networked business is superior to rigid linear organization because collaboration can find the most efficient path through the network. The organizational structure must allow actors to connect directly to and work with whoever is available and most qualified, regardless of how roles are defined.
Wangwang is the earliest example of Taobao’s explicit encouragement of direct communication between buyers and sellers on their own accounts. eBay, by contrast, hid sellers’ information; sellers could only contact buyers through eBay. This closed arrangement discouraged off-platform transactions and allowed eBay to efficiently collect commissions. Taobao believed that direct connection would increase engagement and result in better business. To encourage parties to complete their transactions on the platform, Taobao offered transaction protection and guarantee services, adding value without resorting to artificial barriers to connection. There are many touching stories about the interactions between Taobao buyers and sellers online, and to many people, buying from a small Taobao shop whose customer representatives the buyers know well is almost like buying from an old mom-and-pop store in the neighborhood. This encouragement of direct communication between parties was an important factor in Taobao’s beating out the much larger eBay, which abandoned the China market in 2007.
From then on, each new actor that has entered the Taobao network has been able to directly interact with its collaborators to the greatest extent possible. Direct connection’s chief virtue is its flexibility. But to avoid significant transaction costs, solutions and mechanisms must allow for global coordination, not simply local collaboration. Taobao ensures that all data and software are technically integrated and can be used across the network. The site’s sellers can work with third party software developers to enhance their storefronts or improve marketing campaigns, or connect with their desired logistics provider or providers and share order tracking and shipping order information.
Another mechanism for direct connection is Taobaoke, a marketing affiliate program set up by Taobao’s advertising department Alimama. Taobaoke directly links millions of Taobao sellers with millions of small websites in China to help sellers attract new customers. When a website places an advertising link for a Taobao seller, the website gets a fixed commission if people click and buy, and the seller reaches a new prospective customer. Over time, more of the links are suggested by Taobao’s advertising engine, letting data intelligence make the whole process smarter. (For more information on Alimama and Taobaoke, see appendixes A and B.)
Let players’ roles evolve, and do not rush their codification.
To achieve flexibility, you cannot plan any network meticulously. It must develop according to the actors that enter and the consumers it serves. In practice, this means that participants’ roles initially need to remain fuzzily defined. This unformed state might sacrifice some efficiency, but it allows for emergent forms of collaboration with new functions and capabilities. When roles do solidify, the platform can “recognize” them by giving them official support and a status within the network. In practice, a player’s role is recognized when official avenues allow it to generate income.
The first truly emergent role within the network was the Tao University lecturers. Because so many sellers were inexperienced, knowledgeable sellers were constantly on call with company leadership or platform newbies. Taobao’s leadership realized that it needed a new business to properly train and thus support the development of Taobao University. Under this program, Taobao created a framework for experienced sellers to give teaching seminars to users, who would pay to attend in facilities provided by Taobao or through Taobao’s online education platform created for the lecturers.
Another important early role was the third-party software developers. With Taobao’s rapid growth, the simple standard storefront provided by Taobao soon became a burden for sellers. Taobao initially planned to upgrade its storefront services including the templates offered on Wangpu, but realized that the platform simply couldn’t cope with the diverse needs of so many sellers. So Taobao decided to open this service to third-party software developers, with Taobao itself building software interface tools and creating the rules for mediating relationships and fees. The arrangement worked—third-party developers created a multitude of customization solutions for sellers to use. Consumers enjoy the diverse stores on Taobao, with styles ranging from the most froufrou to the most austere aesthetic. More significantly, Taobao’s choice to promote collaboration and openness set the tone for later growth. This new role on the platform—and the infrastructure that supported it—was the precedent for the development of many new roles.
These adaptable roles filled gaps in the network, stepping in to offer functionalities that sellers lacked. Yet, we found that once gaps were plugged, new gaps—and, hence, new roles—continually emerged.5 Besides TPs and ISVs, which are online versions of offline functions, even more interesting are the new opportunities or new solutions for old problems. These opportunities often appear at the confluence of different networks and create great value. Web celebs are an example, which I will analyze in much detail in chapter 5.
More recently, new examples are developing at the intersection of the PC-based online world and the mobile world; these two areas have only distantly related offline counterparts. The new roles developing at this intersection are product recommenders (daogou), expert buyers who share Taobao products across the internet to consumers and earn commission; live-streamers, who advertise products in real time from around the world; and content creators, who write promotional articles describing sellers and products. Many of these people make substantial income on commission. Appendix B discusses these new roles while chapter 6 illustrates their function within the ecosystem.
From a business perspective, it may seem logical to clearly define roles and responsibilities to facilitate cost-effective collaboration, but in an online setting, such strong definition often hamstrings the network’s growth. As consumers and their needs evolve, so too do businesses. Individual contributors should be able to determine their best contribution and function, and all actors in the network need to be able to experiment to find the best solutions. Once the new opportunities have been effectively filled, the roles can be gradually codified.
Invest in infrastructure to drive network effects.
As newcomers to the online retailing game, traditional players didn’t believe in Taobao’s potential, and Taobao had to go the extra mile to attract sellers. Taobao didn’t charge sellers to open a store and run its daily operation. Especially in the earliest days of the network, this free admission greatly reduced the entry barriers for trying out the new platform. At its core, Taobao created the infrastructure for the marketplace as a whole, and that infrastructure fostered powerful network effects. Infrastructure refers to the tools and mechanisms that undergird a business network, such as reputation systems, search functionality, virtual computing resources, or APIs. As such, infrastructure comprises the basic services needed by every participant in the platform’s work environment. Because infrastructure often requires significant investment, it is akin to a public good in the terminology of economics, whose supply and maintenance exceeds the responsibilities of any single player. It is incumbent on the platform to create infrastructure for the marketplace that will enhance coordination, engendering network effects.
Taobao continually introduced important features to solve major barriers to doing business. One of the most important early innovations was Alipay, whose escrow service significantly reduced trust barriers in the early days of e-commerce. Over the next few years, Taobao began to work with newly formed logistics companies to provide crucial shipping support for sellers. Coupled with strong promotion of the website and the new buyers it brought, virtuous cycles quickly emerged, driving the growth of the marketplace. By the middle of 2006, daily merchandise volume reached 100 million RMB (over US$15 million), and the network started to gain the momentum to grow on its own without constant assistance from the platform. Only then did the team at Taobao feel that the platform had passed the first critical test of survival.
In every stage of Taobao’s development, the platform has intentionally focused on investing in the basic infrastructure of doing business, from marketing (advertising, search, and recommendation engines) to collaboration (APIs) to IT operations (Alibaba Cloud’s cloud-computing platforms). Many of these tools rely on data intelligence. In the current mobile landscape, our company has continued to develop tools and resources for seller success, as I will describe in chapter 4. By deliberately lowering barriers to entering and operating within the network, network effects multiply, and the business grows rapidly.
Encourage parties to put as much information and business activity as possible online in digital form.
I will discuss so-called business “softwaring”—retooling a business and its decisions using digital software, so that it can best achieve network coordination and data intelligence—in the next two chapters, but briefly, network coordination only works when as many business activities as possible are operating online. Taobao has found that our most innovative platform users do the hard work of turning every facet of their business operations into digital form and putting it online. The factories that produce top web celebs’ apparel use sophisticated patterning, fabric layout, and cutting software. This approach allows the manufacture to be seamlessly coordinated across several manufacturers and production steps. When this information and instruction can be transmitted digitally with clarity and immediacy, the network can act on it with confidence.
Our discussion here foreshadows the data-intelligence capability described in chapter 3. Rapid progress in datafication (the encoding of an activity or a phenomenon into a form understandable by computers) has better enabled network coordination. More network coordination generates more data, which leads naturally to data intelligence. In fact, the two poles of my equation for smart business—network coordination and data intelligence—represent the entwined and mutually reinforcing double helix of the business DNA of the future. Although each of these forces has arisen somewhat independently and may be familiar to readers, the business world is now at a tipping point because of the synergy of these forces. The many technological and business advances that enabled both of these forces to emerge, and the amplifying effects of their interdependence, is creating a new economic reality. I will unpack the more complex details of this observation in the following chapters.
Coordinated Networks in the United States
Though this chapter has focused on developments in China, network coordination has played an increasingly important role in the US economy as well. Wikipedia, the news media, and other media are clear examples. While the revenue model of the Wikipedia system may not be transferable, the ability of a coordinated but very loosely controlled network to produce a significantly more comprehensive and accurate catalog of the world’s information testifies to the power of a network structure.
Network coordination could not happen without the development of open-source cooperation as the dominant form of software development. The initial release of the Linux kernel—a kernel is the most fundamental code of an operating system—by Linus Torvalds in 1991 jump-started what is called the open-source movement. At the time, the only operating systems available for computer users were proprietary and costly. They also often had bugs, needed regular updates, and were extremely difficult to customize. All these problems were resolved with the introduction of Linux, now the most commonly used operating system in the world. Like Wikipedia, Linux is constantly updated and improved by individual programmers around the globe, and because the source code is open to all, the operating system is easy to customize. Torvalds’s initial motivation was ethical; he thought that software, as the language of computers, should be free. But his innovation was not an either-or proposition—besides encouraging an ethical standard, it produced better software.
Linux’s resilience and versatility is unsurpassed and has served as a model for many other software development projects. Every time the code is modified, it is labeled and stored so that its progression can be tracked. This process has resulted in software that is more reliable and versatile. When many minds work on a problem, they find better solutions than just one person would; multiplicities of users find more bugs and correct them. Additionally, developers can use and reuse a well-tested base code and simply modify it, making software development much more efficient—the wheel does not need to be reinvented.
Linux initiated the open-source movement, but it was quickly followed by others, including the Apache Software Foundation, which developed Spark, Hadoop, Databricks, and MySQL. (The firm that released MySQL is now owned by Oracle.) These programs are vital for today’s internet and cloud-computing companies. Starting with Netscape, which released its browser source code in 1998, internet companies have pushed the boundaries of the open-source movement much further. Most companies formerly in the business of exclusively proprietary software have been forced to adapt and adopt some parts of the open-source mantra, such as releasing source code but selling proprietary products built on top of them. The introduction of open APIs is a part of this development.6
Fueling the Coordinated Network: Data Intelligence
Although the principle of network coordination has played out mostly in internet-centric sectors in the United States, it has already had far-reaching effects in transforming China. Chinese entrepreneurs are better positioned than their US counterparts to transform traditional industries such as manufacturing and services and to create new types of net-native businesses. In a business context, the network is precisely the dynamic organizational form that can offer consumers the immediate, customized service that they demand.
But to coordinate networks, businesses need more than just a networked structure. They also need the technological solution to coordinate activity across the network. That solution is data intelligence: the data, algorithms, and machine learning needed to ensure efficient, effective coordination. Data intelligence is the yin to the network’s yang, the invisible forces stewarding the network’s growth and dynamics. This is the topic of the next chapter.