Alibaba CEO talks about reasons behind its biggest restructuring in history 

Recently, Alibaba Group CEO Daniel Zhang gave an interview in Chinese where he talked about leadership, the group’s biggest restructuring in history, culture, value creation, amongst other topics. 

We thought his answers to three questions about Alibaba’s restructuring were particularly interesting. These are acute reflections about how to lead and transform a large and hitherto very successful organisation. With quarter million employees, and many more contractors and ecosystem stakeholders, Alibaba’s transformation will be challenging but potentially offering very useful lessons for all of us. 

Momentum Academy has actually conducted a number of sharings and workshops on Alibaba’s culture, its key success factors, people and organisation practices, as well as its product roadmap. If you are interested in bringing such learnings to your organisation, please contact [email protected].

We have translated an excerpt of the three questions mentioned above. Read on! 

 

Q: In the past, people used to say “too big to fail”. In fact, “too big to change” is the norm. Alibaba’s restructuring this time is the “largest organisational change in 24 years since its establishment”. What key factors did you consider before making this decision?

 

Daniel Zhang: First of all, from a business perspective, what people see as Alibaba is actually a very complex set of businesses. I have studied some large groups carefully, and they either have a single main business or have strong interconnectivity between their main businesses. Alibaba has businesses for consumers (to C), businesses for enterprises (to B), platform-based businesses for consumers, and tool-based businesses for consumers. For example, Gaode Maps (高德地图) requires the spirit of a craftsman because the accuracy of the map is critical and must be constantly improved. In general, we used to be a platform company, but later we acquired companies like Hema – a retail company.

With so many businesses, their focus and characteristics are different. Just like a zoo, different species require different cultivation methods. If we keep running them together, it may be more suitable for some species, but not necessarily for others, and the friction between them will increase. Some businesses are impacted more by the international environment, some are impacted more by technological innovation, and some are impacted more by changes in the consumer trends. The competitors in each business are also different. From the perspective of growth cycles, Taobao has been around for 20 years, while some businesses are only two years old. In terms of growth, it’s hard to imagine how our overseas businesses in Southeast Asia can respond quickly to competitors’ actions while sitting in Hangzhou. Therefore, from the perspective of the development logic of a group with multiple businesses, change is inevitable. We need to make the organisation simpler and more agile, and let our “kids” grow up and face the market independently.

Alibaba Zoo

Secondly, from the perspective of employees, we need to solve the problem of “who we fight for”. It is very important to establish a more direct relationship between employees, middle managers, and senior managers in terms of their contributions, commitment to the business, and incentives, rather than having a long chain of communication in the middle.

This year marks the 24th anniversary of Alibaba. This is also my 16th year at Alibaba. When I was 35 years old, I was the CFO of Taobao, and later founded Tmall and created “Double Eleven”. Now, in our company, have we given responsibility and inspiration to someone who is 40 or 45 years old, let alone 35 years old?

My biggest takeaway from Alibaba is that entrepreneurial spirit is not nurtured but self-inspired. With so many businesses, Alibaba needs a group of entrepreneurs, not just one. Can you train or set targets to cultivate entrepreneurship? It’s impossible. It must be done by a mechanism that helps entrepreneurs self-inspire. As I have mentioned in the letter addressed to the company, “The market is the best judge. In the future, business groups and companies that meet the (good) requirements will have the potential of independent financing and listing.” This is a fundamental reform. 

Of course, today’s restructuring is not accomplished overnight, but with previous preparations, it becomes natural. In 2015, we proposed a “mid-end strategy*” (中台战略), and built a governance model of “big mid-end, small front-end” (大中台、小前台). In 2020, we advocated for an agile organisation, and implemented a ‘management responsibility system’ (经营责任制) i.e.: managers are held responsible for achieving specific business goals and targets, and they are evaluated based on their performance against those objectives. For example, Gaode’s management responsibility system has a three-year cycle instead of one year, so it is willing to invest in innovative businesses that may not immediately pay off. Currently, Alibaba has several independently-operated companies with complete corporate structures, such as Cainiao, Hema, and local services. Based on these explorations, we have further and more thorough reforms, which is the new governance structure of “1+6+N”.

Sidenote: Mid-end: Middle-tier or middleware layer that connects the front-end (user-facing interface and features) and back-end systems (back-end or server-side part of a system, which includes the database, server infrastructure), providing a set of standardised interfaces and services that facilitate communication and integration between different components of the system. The concept of “Mid-end” (中台) has become increasingly important in recent years as companies seek to improve efficiency and streamline operations by creating a modular, service-oriented architecture that enables different parts of the system to work together more seamlessly.

 

Q: Business schools often discuss whether the entrepreneurial spirit is by nature or nurture (through learning). You just mentioned that it is self-inspired. This organisational reform is to inspire various business groups and business companies to move toward the market more independently. Do you think that the “drawbacks” of being managed together outweigh the “benefits” of unified coordination?

 

Daniel Zhang: The division and integration, vertical and horizontal arrangements of the organisation are not absolute. It needs to be dynamically adjusted at different stages. In 2015, we proposed the “big mid-end, small front-end” (大中台，小前台) model. At that time, we considered extracting the common demand of the front-end business lines and creating modular resource packages, which were provided to the front-end in the form of interfaces, thus reducing the need to reinvent the wheel. The mid-end integrates the operational data capabilities and product technology capabilities of the entire group, which effectively supports the front end. Without the middle-end strategy for these 8 years, suddenly separating it now will bring more harm than good. By establishing the mid-end, we have established the coupling effect / interconnectivity of different businesses. Even if the organisation is separated and governed separately now, the coupling relationships of these businesses will not be separated. For business groups and companies, the essence of “separation” is to hand over decision-making power to those closest to the market and who run the day-to-day operations. Businesses and services that have been well-integrated and dependent on each other will not be separated.

For example, today, all Alibaba’s businesses are Alibaba’s cloud clients, and it is impossible for them not to use the cloud services. The maintenance paradigm of the entire infrastructure has been established. Ecommerce, logistics, maps (Gaode), and so on are already on the cloud and cannot be separated. How to better use the cloud, be more proactive in the market, and innovate around customers, all depend on the sense of ownership and proactiveness of each business entity. 

I use this example because this shows that the construction of the middle-end platform has helped everyone establish a collaborative system and working mechanism. In the future, although the market-facing decision-making mechanism is independent of each other, the highly efficient coupling relationship will still exist. The overall organisational values will also be consistent. The reform emphasises that you need to make decisions based on your own business situation, and you need to get rid of the sense of dependence on a large group. You can no longer rely on one or two brains to make decisions on all battlefields. This will change the governance structure – if you have someone above you making the decision for you, you will always have excuses to not change/improve. 

 

Q: Before the reform, you believed that each business in Alibaba should have the final decision-making power. After the reform, each business has its own board of directors. Will you be part of the board of directors of all of the businesses? If you want them to run fast on the battlefield and practise with real guns and swords and also bear the responsibility of the entire Alibaba, how do you balance this?

 

Daniel Zhang: I will not be involved in the board of directors of all businesses, only a few. But this does not mean that I am completely detached from each business.

First, all of Alibaba’s businesses are highly digitised, and I can understand the situation of each business in real-time. The information is transparent.

Second, the visibility of our data is also very good. The data is not result-oriented but process-oriented. I can see the granular original data.

So whether I am part of the board of directors or not does not affect my understanding of the business. The visibility of data is the most critical.

After the reform, Alibaba Group became a holding company. What holding companies are most afraid of is that the subordinates report only the end result, i.e. the headquarters need reports, and the subordinates fill in the metrics. We need to master the original, granular data. It should be transparent and with no concealment. This is also a requirement for the governance of any listed company.

 

Q: Hearing what you have been sharing, I feel that although this restructuring has “split” some parts of the organisation, the internal connection is not broken.

 

Daniel Zhang: If they were broken, the company would have undermined its own efforts. If there is no internal connection and mutual leverage, it will be impossible to form a strategic judgment of the overall market situation, and problems will arise in the long run. Simply put, when a company becomes big, it needs to become small, and after a long time, it needs to be separated. This is the law of nature. And after the separation, there are still commonalities.