Peng Yongdong, CEO of Ke.com, pointed out at Source Code Capital’s 2019 Code Class Annual Meeting that strategy should first look at defining “what our presence means to this industry and its consumers.” We need to clarify where we stand at a given current point A, and where we should be at a future point B. Then we need to define and implement long-term initiatives centered around those two set points and develop a focused mindset. “Strategy,” he said, “is the will to make the right and hard choices.” Based on these timeline principles, through scientific management and building upon a solid value system, Ke.com and Homelink have created a high quality business that offers high-end industrial supply.
Peng Yongdong’s full speech is as follows:
What is Strategy?
Before addressing the que stion “What is Strategy?”, we should first try to answer a fundamental 0.1 question. What value do we create for society, for the industry, and for the consumers?
In the end, strategy revolves around a simple core question – why do we exist? Existence is a primal consideration, and it should be the very first thing we think about when talking about strategy.
The core of Strategy should answer two essential questions.
The first thing to do is to define our current position, point A, and then define our destination, point B. But, where is point A, and where is point B? Secondly, how do we go from point A to point B? On our journey to point B, we will face numerous challenges and we will need a lot of capacity building.
The deconstruction of point A and point B from different perspectives:
The solution for the second problem is to break apart the structure, and at its core, to look at and evaluate the industry from different perspectives.
Take the real estate trading industry for example.
- The first method to achieve this, is to dismantle the industry and look at it from an online and an offline angle.
- The second is to separate it from the product line, and divide it into residential and non-residential categories.
- The third method is to isolate it based on a regional or a city level, because all industries start offline and regional.
- The fourth method is to dismantle the industry according to its industrial chain. Such as, for example, residential areas that include intermediary transactions and the real estate after-sales market.
- The fifth is to segregate it according to 2C and 2B, that is, on a consumer or an industry basis.
- The sixth method is based on the customer life cycle.
The key factor for those different methods, is always to look at the current position and future possible directions. Residential industry is a very low-frequency environment that entails very long user’s transaction periods. A second-hand housing transactions takes, on average, more than ten weeks to be finalized. During those transactions, online and offline activities are constantly segmented.
Now if we use an offline perspective in the case of Ke.com, we can clearly see points A and B. The core of the industry revolves around brokers and service providers. The main strategy is to make predictions, basically, to try to predict what changes will occur in the industry in the future. We think that in this particular industry, the efficiency of service providers will likely double in future, which, therefore, defines our point A and our point B. There is a gap between point A and point B. If we want to bridge that gap, all resources should be invested accordingly around our points A and B axis.
From an online perspective, we see that at the moment, in China, there are around 250 million apartments. But today, there are also about 50 million MAU in China’s online real estate trading. What will happen to this data? In the U.S., that number stands presently at 200 million. In an ever-growing industry, there are a lot of dividends to be made from the online industry. Another very important variable in our industry is the fact that users will consume even more online information in order to make decisions. We believe that, in the future, there will be an online platform available where users will be able to get all the information and services related to residence and housing. From the MAU perspective, that is an APP for over 100 million. This APP will be able to take care of any living needs.
Now to address the previously mentioned points A and B, the key is to figure out what the goal of point B is. I personally think that the goal of point B is to strengthen our current situation at point A.
Finding a way to get to point B from the specific perspective of the industry:
So, how to reach point B? The main difficulty is to figure out what lies at the core of the industry, to find its essence, which is also the main theme and discussion of Code Class 2019.
I think there are several “essences” composing the industrial Internet.
- First, a high quality supply-side business. We are talking customer-end as well as business-end. The core of any service industry is demand and supply. The industrial Internet is all about a high quality supply side. If good, high quality supplies are present on your platform, then final results cannot be bad.
- Second, a quality business. All good services should start with quality. At the core, behind the quality standard, there is always the infrastructure quality standard itself.
- Third, it’s scientific management. Today, in a vast majority of enterprises, the importance of scientific management in organizational growth is seriously underestimated.
- Fourth, business values. The choice of values in this industry is crucial.
The Industrial Internet is a goods business with high quality supply:
There are only two basic models of demand and supply in the industry. One is that supply and demand are independent and separated, the other is that supply and demand are intertwined.
Our focus is to integrate the two basic “supply and demand models” into three groups.
- The first group is the supply and demand between the buyer and the seller. This is the business model where supply and demand are separated.
- The second is the supply and demand between consumers and service providers, and between service providers and brokers. This is the supply and demand of services. The value of exchange is services, which is a business model of separation between supply and demand.
- The third is our industry’s unique business model. Supply and demand are integrated among brokers. Each broker is, at the same time, a supplier and a demander to another broker. Therefore, they are creating a very strong network effect between brokers, which is the true nature of this industry.
For example, when a broker puts his or her house onto a sharing platform, others can have access to this information and even exchange about it. This is a cooperative network. This is the essence of this industry.
The future of the industry will pass by the professionalization of service providers:
We believe that the real core of this industry is the supply of high quality services providers. If the efficiency of all brokers present in the industry can be doubled, users can enjoy real value from it, which is, lower prices. If not, this industry cannot be reversed.
All of our resources are invested towards that purpose. How can we attract high quality service providers onto our platform, and how can we help them grow? For example, our broker organizes two exams every year. We call it “learning examination.” More than 100,000 people take the test each time. The exam results are a very important indicator of professionalism. For example, in future, I think credits (points) can become the currency in all the business world, and to start at Beike, we will establish a mechanism of “Beike credit points.” Polishing, upgrading and optimizing high-quality supply is a very important aspect of our work, and is well worth heavily investing into it.
The Industrial Internet is a high-quality business:
The logic of our work is the following. When the service provider abilities are improved, and services become more satisfying, it generates a positive incentive for the consumers. In return, they will be willing to perform more complex tasks, and thus, creates a virtuous circle. The service industry needs to form a “quality positive cycle.” Services providers are motivated by consumers. By adding more consumers, the abilities and performances of service providers will also improve, entering a positive cycle.
One of the most complex aspects of the industrial Internet is its complexity. It has a lot of roles which are particularly long and very cumbersome processes. There is no SOP for the same set of service mechanisms. But this is something that vertical industries can build in the future. We did it with our real estate dictionary, quality commitment, modular services, SOP sorting, and system building for the whole industry. Many vertical industries can assemble service API, or can be redefined in a data-based way.
Let’s take a look at the real estate dictionary for example. China has around 250 million houses. Each of them can be described by using around 400 terms. For example, does the house has floating windows? How high are the windows from the ground? How many washrooms are there? How many windows are there in each washroom? There is a lot of data in these 400-something terms. Is it difficult to do this? It was not difficult for us to compile a property dictionary for 250 million houses in China. However, it took the team 10 years to feel it had accomplished something. As many organizations are KPI driven, it is difficult to see the value achieved through longer periods of time.
The same goes for quality commitment. When we were building real houses, we actually encountered conflicts between online and offline value options. At that time, Homelink did a good job in Beijing. The core principle of the industry was that if there were more houses, then there would be a greater competitive advantage. However, the core foundation of the Internet is information sharing. Some colleagues thought that information should never be put online, as this was the industry’s most valuable resource. If a competitor had access to our information, then our company’s coverage advantages would become meaningless.
Yet consumers are in dire need for it. How can we resolve this conflict? I think that, when facing a conflict like this one, the most important thing is to go back to your company’s true core belief. We really believe that consumers come first, and what matters the most is what they want. So, back in 2012, we started putting all information online, including transaction prices.
Back to the first question, what does our existence mean for this society, this industry, and the consumers? Today’s era gives vertical companies a lot of opportunities. At this point in time, we can build some infrastructure in the industry, such as creating dictionary, quality commitment, basic system, tools, services, etc. This generation needs to do it. This is the second point I wanted to share with you: the industrial Internet is a business of quality.
What are the long-term initiatives around core values?
When you see the nature of the industry, it is not about how much you invest, but to over-invest. The most important concepts need to be “over invested into,” and you should not invest at all in the unimportant ones.
The conceptual system of the CEO and founder directly determines where you are and where you are going. Around these core unmovable values and management systems, we need to think about long-term actions. What should we do in the next three to five years? What would need to be done in the next 10 years? The core of any strategy is to travel through time, to go and explore the future to see what matters most today.
The industrial Internet is a business with scientific management:
Scientific management gives everyone a systematic and organizational ability to ensure that their goals can be achieved with certainty. The core of scientific management is to break down the objectives, and to do so continuously, from one objective to the next. The deeper you look at your industry, the better you can analyze your objectives and iron out any inherent problems.
Let me use a model here where strategy is a positive feedback process, and management is a negative feedback one. Before achieving a goal, we need to know what the goal is, and what is its status quo. By doing so, we create a gap between those two. By identifying that gap, we can take measures to fill it in, this is negative feedback. It helps you achieve your goals through management.
Industrial Internet is a business of values:
In a sense, values are strategy, a strategy chosen in order to achieve a goal. A strategy to make everyone believe that as long as there is conflict, there is power in your values selection.
- First, what about consumers? I think that, at its core, being good to our customers is to believe that we can be better. We should pay attention to our customers, and their needs and wishes, because their choices directly determine whether we have a future or not.
- Second, what about service providers? What is really good for the supply side is to let it have future long-term development possibilities.
- Third, what about the team? Every organization needs a strong team. In our organization, a lot of emphasis is put on our teams. You are only as good as the people around you, and nothing gets done alone.
- Fourth, the relationship between superiors and subordinates. Regarding a person’s promotion and career development, it is best to have no personal relationship between a superior and a subordinate. We believe that in the future, more and more power should be given to consumers, so that consumers can decide on the whole organization.
- Fifth, what are your organization’s mission and values? When you first start, your mission is not so extensive. You do it, and find yourself valuable. There lies the risk of narcissism. You have to kill narcissism right away, and identify your own weaknesses in order to really find your sense of mission.
Beike’s mission is the following: to propose dignified services and to offer better living opportunities. Our presence can accomplish great changes in China’s living standard by helping consumers achieve a better experience, and helping service providers receive better recognition for their quality. All things revolve around this mission.
Do the hard but right thing:
The first question was, what is strategy? My answer is simple, strategy is the courage to make the difficult but right choices. All things that are right in the world are challenging, but there is no time limit and therefore it is possible. The easy choices are not painful, they do not require a long time, but they also deny you possibilities in the future. There are only two criteria that matter in order to test if you are doing things right:
- Be nice to consumers;
- Help service providers be fair to consumers.
Strategy is to do something difficult but right. Difficult things need longer-term perspectives and need to be done steadfastly.
This is my sharing, thank you.