captured more than 80% of the digital Chinese con-sumer market, and by 2011 it had become a national phenomenon. Many companies would have taken this leadership position as validation and focused on optimizing the successful model. Instead, Alibaba saw the sustained rapid growth of China’s online population and the increasing sophistication of con-sumers and retailers as signals of great uncertainty in the marketplace and a risk to the current model.

Again there was heated debate within the com-pany about which direction to take and which model to build. Instead of relying on a top-down decision, Alibaba chose to place multiple bets and let the market pick the winners. In 2011 the com-pany split the very successful Taobao into three in-dependent businesses. Each took a diff erent view of the future of e-commerce in China. Taobao focused on consumer-to-consumer transactions, Tmall on business-to-consumer transactions, and Etao, a new unit, on product search. Although the outcome might have been the dominance of any one of the models, Alibaba actually succeeded in creating two successful mass-market businesses (Tmall, which has a 60% market share in the fi ercely competitive B2C market, and Taobao, the market leader in C2C) and one strong niche-market model (Etao).

Increasing experimentation at the height of suc-cess runs contrary to established managerial wis-dom, but for Alibaba it was necessary to avoid rigid-ity and create options. Recalibrating how and how

without making a commitment to business model experimentation from very early on. However, when the firm first ventured beyond its core B2B e-com-merce platform to launch Taobao, the decision was hotly debated within the company, as it involved go-ing head-to-head with an apparently almighty eBay. To minimize distraction at the budding B2B business, Taobao was set up as an independent company, with a separate offi ce (or in this case, apartment) and sep-arate funding (a 50/50 joint venture between Alibaba and SoftBank).

At each juncture in its evolution, Alibaba contin-ued to generate new business model options, letting them run as separate units. After testing them, it would scale up the most promising ones and close down or reabsorb those that were less promising. In 2006, for example, spotting two new trends, Alibaba decided to launch two units. To tap the growing B2C market, it began building Taobao Mall, a platform for established brands to reach Chinese consumers, which eventually became Tmall and is a major part of the group portfolio today. To catch the software-as-a-service wave, it started Alisoft, which probably entered the market too early. Alisoft could not fi nd a killer app that generated enough customers. The business was shut down in 2009.

Another driver of Alibaba’s success has been the ability to modulate its rate of business model experimentation to fit the circumstances. For ex-ample, within just four years of launch, Taobao had

intentions from above but, rather, as a network that shifts and develops in response to external feed-back. To see what this means in practice, let’s look at Alibaba.

Started in 1999, the Alibaba Group initially fo-cused on building a B2B website for small Chinese manufacturers. But in the years since, it has ex-panded its portfolio in many directions. Today the group spans 10 businesses and has approximately 27,000 employees and more than $8 billion in rev-enue. In China’s fast-changing e-commerce market, it could not have achieved that level of success with-out constantly retuning the enterprise at all levels. The way Alibaba went about this suggests a number of guidelines for other organizations:

Keep resetting the vision. When Alibaba be-gan operations, internet penetration in China was less than 1%. While most expected that figure to grow, it was diffi cult to predict the nature and shape of that growth. So Alibaba took an experimental ap-proach: At any given time, its vision would be the best working assumption about the future. As the market evolved, the company’s leaders reevaluated the vision, checking their hypotheses against reality and revising them as appropriate.

In the early years, Alibaba’s goal was to be “an e-commerce company serving China’s small ex-porting companies.” This led to an initial focus on Alibaba.com, which created a platform for interna-tional sales. However, when the market changed, so

1999JACK MA FOUNDS ALIBABA IN HIS HANGZHOU APARTMENTALIBABA.COM IS LAUNCHED

2003TAOBAO MARKETPLACE, AN ONLINE SHOPPING SITE, IS LAUNCHED

FOCUS BUILD E-COMMERCE PLATFORM FOR SMALL EXPORT COMPANIES

FOCUS TAP EXPLODING CONSUMER DEMAND IN CHINA

2004ALIPAY IS LAUNCHEDALIWANGWANG, WHICH ALLOWS INSTANT MESSAGING ON TAOBAO, IS LAUNCHED

FOCUS BUILD BASIC INFRASTRUCTURE AND BOOST CONSUMER CONFIDENCE IN DOING BUSINESS ONLINE

FOCUS FOSTER THE DEVELOPMENT OF E-COMMERCE ECOSYSTEM

2009ALIBABA CLOUD COMPUTING IS FOUNDED

FOCUS PLACE DIFFERENT BETS ON THE FUTURE OF E-COMMERCE IN CHINA

2011TMALL AND ETAO ARE SPUN OFF FROM TAOBAO MARKETPLACE AS INDEPENDENT PLATFORMSJUHUASHUAN, A GROUP SHOPPING WEBSITE, BECOMES A SEPARATE BUSINESS

2014ANT FINANCIAL SERVICES GROUP IS ESTABLISHED

FOCUS MOVE BEYOND E-COMMERCE TO ALL COMMERCE, CONCENTRATING ON INFRASTRUCTURE

Alibaba’s EvolutionBy continually readjusting its focus and experimenting with new models, Alibaba grew from a small start-up with 18 employees to an $8 billion enterprise employing 27,000. Here are some of the key moves it made.

did the vision. As Chinese domestic consumption exploded, Alibaba saw an opportunity to expand its off ering to consumers. Accordingly, it launched the online marketplace Taobao in 2003. Soon Alibaba realized that Chinese consumers needed more than just a site for buying and selling goods. They needed greater confi dence in internet business—for example, to be sure that online payments were safe. So in 2004, Alibaba created Alipay, an online payment service. By providing both an escrow service and a merchant rating system, Alipay introduced the ingredients for transparency and trust, which sped up the pen-etration of e-commerce in China. Ultimately, this led Alibaba to change its vision again, in 2008, to foster-ing “the development of an e-commerce ecosystem in China.” It started to off er more infrastructure ser-vices, such as a cloud computing platform, micro-financing, and a smart logistics platform. More re-cently, Alibaba recalibrated that vision in response to the rapid convergence between digital and physical channels. Deliberately dropping the “e” from e-com-merce, its current vision statement reads simply, “We aim to build the future infrastructure of commerce.”

By regularly retuning its vision, Alibaba has been able to not only respond quickly and eff ectively to new market realities but also shape the way consum-ers and businesses interact.

Experiment with business models. Alibaba could not have built a portfolio of companies that spanned virtually the entire digital spectrum

2013CAINIAO (CHINA SMART LOGISTICS NETWORK) IS LAUNCHED

2008TAOBAO MALL, AN ONLINE B2C MARKETPLACE LATER RENAMED TMALL, IS LAUNCHED

2010ALIEXPRESS, AN ONLINE INTERNATIONAL CONSUMER WEBSITE, IS LAUNCHED

FOCUS START GLOBALIZATION

HBR.ORG

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SPOTLIGHT ON MAN AND MACHINE THE SELF-TUNING ENTERPRISE

employee portal. As an initial step, the team built functionality that allowed employees to nominate themselves for promotions. This gave them more control over their own career trajectories. Next the team added a web-based interface through which HR executives could update organizational struc-tures and links to all employee records easily at the same time. This helped internal HR systems and pro-cesses keep up as operational teams frequently re-aligned themselves to market needs. Then the team created a more flexible goal-setting interface that improved the performance review system. Instead of static annual goals, employees can set goals with diff erent time frames for diff erent projects and align their objectives with those of colleagues outside their units. It’s also easier now to give feedback to coworkers through the interface.

WHILE INTERNET natives like Alibaba have been the pioneers of the self-tuning enterprise, the emerging

with the market. The approach leaves more room for innovations to bubble up from the market, as opposed to being pushed down from the top of the organization. Leadership in effect stops manag-ing something that is better left to a market-driven mechanism.

Get good at adapting the organization. At Alibaba, maintaining organizational fl exibility is an area of intense focus. A few lessons stand out from its experience—for instance, that it’s critical to build an expectation of change into the culture from the outset. “Embrace change” has been one of the com-pany’s six core values since its early years. Its founder and chairman, Jack Ma, regularly emphasizes this theme with employees, investors, and customers.

“In the information era,” he says, “change is the best equilibrium. No single organization structure is per-fect and can solve all problems.” That mindset has become a pillar of Alibaba’s recruiting. The company evaluates potential hires not only on their technical skill but also on a demonstrated ability to thrive under conditions of rapid change.

Another important lesson is that change must be actively pursued, not merely tolerated. In traditional companies, organizational change is often executed through infrequent, large-scale initiatives. An enter-prise that regularly retunes itself, in contrast, limits the need for such risky, one-shot transformations.

Consider a new program Alibaba experimented with in 2012, which rotated its top 22 managers across its broad portfolio of businesses. There was some concern about disrupting the continuity of op-erations, but the program proved successful, partly because managers were required to institutionalize and transfer knowledge. In addition to enhancing the skills of top talent, the program showcased the leadership’s commitment to fl exibility. Judged a suc-cess, the program continues: A portion of the senior leadership is rotated every year.

Build systems that support fluidity and feedback. In its early years, Alibaba used a leading enterprise resource planning system to manage infor-mation fl ows and resources. But over time it became clear that ERP was straitjacketing rather than facili-tating change. It was designed for a traditional stable structure with clear unitary reporting lines, and ad-justing it to refl ect an evolving structure was taxing. The company needed something more dynamic.

An Alibaba team set out to create a better alterna-tive by expanding the functionality of the company’s

much to experiment was fundamental to its ability to capitalize on nascent market trends.

Focus on seizing and shaping strategic op-portunities, not on executing plans. In volatile environments, plans can quickly become out-of-date. In Alibaba’s case, rapid advances in technology, shifting consumer expectations in China and beyond, and regulatory uncertainty made it diffi cult to pre-dict the future. To deal with this situation, Alibaba adopted a continuous process of “replanning.” Rather than meticulously executing a fi xed, detailed blueprint, the company keeps revising its strategy and tactics as circumstances change.

Alibaba does have a regular planning cycle, in which business unit leaders and the executive man-agement team iterate on plans in the fourth quarter of each year. However, it’s understood that this is only a starting point. Whenever a unit leader sees a signifi cant market change or a new opportunity, he or she can initiate a “co-creation” process, in which employees, including senior business leaders and lead implementers, develop new directions for the business directly with customers.

At Alibaba co-creation involves four steps. The first is establishing common ground: identifying signals of change (based on data from the market and insights from customers or staff ) and ensuring that the right people are present and set up to work together. This typically happens at a full-day work-ing session. The second step is getting to know the customer. Now participants explore directly with customers their evolving needs or pain points and brainstorm potential solutions. The third step entails developing an action plan based on the outcome of customer discussions. An action plan must identify a leader who can champion the opportunity, the sup-porting team (or teams) that will put the ideas into motion, and the mechanisms that will enable the work to get done. The final step is gathering regu-lar customer feedback as the plan is implemented, which can, in turn, trigger further iterations.

The co-creation process highlights the self-directed nature of self-tuning enterprises. Alibaba’s business units can initiate co-creation sessions whenever they see a relevant market stimulus, with-out any central mandate or oversight. And although the process now follows a successful pattern, each co-creation initiative is tailored to the situation at hand. By creating a forum for regular exchange with customers, Alibaba is able to evolve synchronously

Are You Ready for Self-Tuning?

1How changeable, complex, and uncertain are the markets you play in?

2Are you “managing” some things that are better left to market mechanisms?

3Is the organization good at experimentation and learning?

4What is the fi rst place you could start testing a self-tuning approach?

lessons are relevant for a broad array of companies, in both digital and more-traditional industries. Digital pioneers will need to reinvent themselves in the face of unrelenting technological change, but more-traditional industries will face complex, dynamic environments, too. Technologies like two-sided marketplaces, which help to both create and exploit such environments, are spreading well be-yond the digital sector. By borrowing from the play-book of current experimenters, companies can fi nd a way to keep up with unpredictable markets—and even get ahead of the curve. HBR Reprint R1506E

Martin Reeves is a New York–based senior partner at Boston Consulting Group and a coauthor of Your

Strategy Needs a Strategy (Harvard Business Review Press, 2015), with Knut Haanaes and Janmejaya Sinha. Ming Zeng is the chief strategy offi cer at Alibaba Group. Amin Venjara, a project leader at BCG during the writing of this article, is now a vice president of strategy and business development at ADP.

Alibaba leaves more room for innovations to bubble up from the market, as opposed to being pushed down from the top of the organization.

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“If it’s broke, buy a new one.”

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