Incubating the Internet Business Model: From Managing Commodities to Managing Customers, From Meeting Demands to Creating Demands

Interviewer Chen: Please tell us how you founded Five-Star Appliances, sold it to Best Buy, and then started a new business to become chairman of Five-Star Holdings?

Jianguo Wang (hereafter referred to as Wang): After graduating from university, I worked for 10 years in a government agency, and for another 10 years in a state-owned enterprise. My most important discovery was that I liked business activities. I thought commerce in China was extremely underdeveloped, mainly because Chinese people had always valued industry and agriculture but despised commerce. Consequently, the government undervalued commerce. Government officials were happy to inspect industrial parks and farms but felt ‘degraded’ if they had to inspect shopping malls. Besides, you rarely saw a party secretary or a mayor with a commercial background; most government officials came from industrial or agricultural sectors. Once I tried to arrange a meeting with the mayor in charge of logistics in Yancheng city, Jiangsu province, but he said he had no time for me because, as he said, he had to receive an ‘important customer.’ Later I learned that the important customer was one of my suppliers who ran a small factory. At that time I was running a 10 billion RMB shopping mall, while his factory yielded just tens of millions. But he was more important because he owned a factory. Why does a factory seem more important when my shopping mall pays more taxes? China’s attitude towards commerce was really backward, though commerce guided its production.

That is why I stayed in the commercial world after selling Five-Star Appliances to Best Buy. I continued to believe that commerce represents a huge opportunity. Consumption, investment and export are the three drivers of China’s future development. I believe that internal demand is the most important driving force of the economy. That realisation led me back to the business world.

Interviewer ChenWhat was your goal in returning to business? You had already accumulated capital from Five-Star Appliances, so making money was no longer the driver. Also, how did you choose what business to focus on?

Wang: My research revealed that the internet was having a tremendous impact on business operations. I decided to give it a go, but did not think that I should start from scratch, so I positioned myself as an investor. I would recruit investors, but I would dedicate myself to a new business model to help ambitious young people create successful businesses. My vision was to help aspirational people to build their dreams. I told my shareholders that even peasants sow seeds after harvesting. I persuaded them to invest some of the several hundred million US dollars we had received from selling Five-Star Appliances to Best Buy. They were very supportive. Previously I had started from the bottom with one enterprise. Now I would start from the top and take a holistic view of the information society to get a more complete picture of future business development.

We decided to define our direction using a scientific approach. We hired a consulting firm to investigate the market and formulate a strategy. A few months later, they recommended four targeted groups our business should focus on: children, the ageing population, the wealthy, and women. I could not cover all four, and chose to target the kids’ market. My team and I went to the United States, the United Kingdom and South Korea to study businesses related to children. Then we went to Taiwan and Hong Kong to observe all businesses related to children in China. I watched, thought, and discussed my ideas with my team members regarding specific methods to approach the huge market relating to products for children in China, where 24 million babies are born every year. At that time, we defined our target segment as children from minus one (prenatal) to 14 years old, split into four to five age groups, a population of around 360 million. We observed that China had no brands dedicated to such a huge market. We could not think of any store a consumer might visit to buy for children. We knew that was not the case in foreign countries. The United States has several brands, such as Babies ‘R’ Us and Toys ‘R’ Us. So does the United Kingdom, but not China. That was the opportunity.

To acquire an international perspective for approaching the business seriously, we studied the US, UK and Japanese models thoroughly. Then we hired Americans to design our logo and Taiwanese to design our business model. One of my ideas was to change from managing commodities to managing customers. In the past, all retail stores managed and sold commodities, but no one cared about customers. My experience at Best Buy showed me that I should focus on customers. I started to think about how to categorise and interact with customers, and how to ascertain customer value.

The second idea was to change from meeting demands to creating/ guiding demands. Meeting demands is fundamental; creating demands and then meeting them hits a higher level. Young parents lack experience in raising babies. Consequently, they are open to recommendations.

Once we clarified those two concepts, we worked to make them operational. My team converted concepts to strategies, strategies to actions, and actions into something operational and measurable.

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