Evolve Or Die

1984-1991 Traditional pyramid with strict management control

Back in 1984, Zhang Ruimin became the Director of Qingdao’s General Refrigerator factory and he became responsible for rescuing the company that was on the verge of bankruptcy. In the previous years his predecessors tried the same, and all of them without any success.

Zhang realized that the only thing that could save the factory was a strong strategy. To realize that, Zhang invited all the employees to list which of the existing rules they felt were not needed anymore. Only 13 rules made the cut, Zhang used the top-down management structure to implement these rules focused on creating quality products and a healthy work environment. Those rules were enforced very strict, which has led to the iconic smashing of the faulty refrigerators. Using his authority, Zhang ordered the employees to destroy the products they made with their own hands. At the time those products, even if they were not working properly, were worth about two year wages. No way the employees would destroy the fridges if nobody forced them do it. Zhang leveraged his authority to send a strong message.

1991-1998 Enter the matrix

Haier’s strategy worked; they grew steadily as the brand earned a trustworthy reputation across China. It was time to diversify by taking over rival companies. Zhang focused on companies he called “Stunned Fish”: loss-making companies that had good products but poor management. To turn them around he introduced Haier’s management style and culture and reactivated those ‘fish’.

This rapid expansion made Haier realize that the traditional pyramid structure wasn’t capable of meeting the needs of the company during rapid expansion. Rigidity was slowing them down. Haier, like many other organizations, implemented a matrix structure made up of separate Strategic Business Units (SBUs). This gave the divisions autonomy to operate and coordinate independently, and Haier the flexibility it needed to manage the rapid expansion.

1998-2005 SBU Satellites

By now Haier was China’s largest fridge-maker and employed over 30,000 employees. When China joined the World Trade organization, and opened its borders to foreigners, a lot of new opportunities and threats arose. Zhang realized that Haier needed to react quick, and again the management model was re-engineered so that it was linked to the market. He hoped that those changes could further ramp up the innovation efforts and increase Haier’s reaction speed.

To avoid, what he called, the “big company disease”, Zhang transformed the command & control way of doing things, like administrative orders, top-bottom decision making and policy setting, with a transactional and contractual alternative. He hoped that this would create equal relations because every SBU could negotiate the contracts with other SBU’s, instead of being told to do things by their superiors.

By making everyone responsible for their tasks and results and enabling them to profit if they did better than the targets that were set, Zhang hoped that the employees would grow a sense of ownership. This was a big change for the people working in Haier. Employees got more autonomy to decide how to complete their tasks, but they were also directly affected, either positively or negatively, by the outcome of their efforts. In the previous structure, your job was to carry boxes from point a to point b and you would receive salary at the end of the day. Now your target is to move 100 boxes from point a to point b. If you would succeed, you’ll get a bonus. If you managed to find a quicker or better method and managed to move 150 boxes, you would get an even higher bonus.

This is the stage where Haier’s employees shifted from being a regular Employee to becoming Entrepreneurs.

2005-2012 Self-managed Business Units

During the Global Branding stage, Haier’s business strategy was focused on creating users that would remain loyal to the brand, instead of being involved in one-off purchases. In previous stages, Haier had created thousands of SBU’s that were responsible for their own profits & losses. This gave them more flexibility and autonomy, but in practice it resulted in SBU’s signing contracts within the same silos fulfilling the needs of the other SBU’s, and not those of the end-user.

Haier needed a model that could empower Haier’s employees to meet the ever-growing demands of users. Whereas in the past SBU’s were organized in silo’s, they now created >2000 “Zi Zhu Jing Ying Ti’s”(please pronounce at your own risk), forever abandoning the silos.

These ZZJYT’s are best seen as business units. Each is independent. It is responsible for its own P&L. It can hire its own staff and it can make its own decisions. Anyone can propose a new ZZJYT for a new product or service that can meet user needs and aligns with Haier’s overall strategy. Entrepreneurs are free to join or leave any ZZJYT. When working in a ZZJYT their pay will be based on the value they add for the customer.

On a day to day basis this changed a lot. Entrepreneurs were suddenly directly affected by how much products were sold. Entrepreneurs would earn their money based on the value they created in that product creation process and whether the user was willing to buy the product or not. Previously, it had been enough for a designer to make a design, give it to the manufacturing SBU and they would receive an income. Now, they were directly affected if their design ended up in a product that wouldn’t sell. On the other hand, if the design was successful, the designer would benefit.

These self-managing teams usually contained employees with different backgrounds. This way, Haier hoped to spread information throughout the organization. For example, a team would consist of a designer, a couple of engineers, someone from R&D and two marketing experts who all collaborate in creating a product that fulfills the needs of a specific user group.

In addition, Haier introduced the “RenDanHeYi Win-Win” management model. The model motivates entrepreneurs to add as much value for the users as possible. If they succeed at that, the entrepreneurs will receive a bigger share in the profits, how big is agreed beforehand. By creating contracts that are beneficial for all parties involved, Haier ensures the rest of the organization benefits as well.

2012-2019 Micro Enterprises

Central in the evolution of Haier’s model, is Zhang’s strong believe that people are the value-adding asset in any organization. He reasons that there are two type of people involved in the process of creating value; 1. Haier’s Entrepreneurs (inside) and 2. the Users (outside). During the complete evolution of Haier’s management model, the focus has always been on reducing the distance between these two groups, enabling those who create the solutions (the Entrepreneurs), and those that evaluate the value of the solutions created (the Users), are closely aligned. This evaluation is done mostly by the users answering two questions; Does the created solution solve my problem? And how much am I willing to pay to solve my problem?

In 2012 the IoT was getting bigger and bigger, and the problems of users were becoming more complex. Previously users wanted a simple refrigerator that could store their food, now they wanted one that had a webcam so that they could check their inventory via an app on their phone. The inverted satellite structure of Haier was not efficient enough to solve these problems quickly, another radical change was needed.

The entire middle management of 12,000 employees had to choose, be fired or become a real entrepreneur. Zhang described this as the hardest decision he had ever made. But he reasoned it was needed to reach this goal: “I want to turn this organization into an ecosystem, consisting of many small organizations. So what would be the role of a middle layer of management?”

Where the ZZJYTs operated as self-managing business units, the newly created Micro Enterprises (MEs) took it a step further. In essence they are small independent companies, and all the people working there are considered entrepreneurs. A ME can consist of just two or three people or of many hundreds. There are different types of MEs. All of them have different characteristics and are in different developmental stages. Again, these MEs create value based on customer demand. They face the market directly and strive to create value based on customer demands. They ask the market “What can we make or do for you?”.

In most organizations, the market, and therefore market dynamics, are only outside the organization’s boundaries. At Haier they created an internal market. ME’s can offer services, products or parts for other ME’s using the same principles as the external market. So if a ME needs a specific HR service, they look for a ME that can provide that service. If they can’t find a ME that can help them solve their problem for the price they are willing to pay, the ME can just as easily sign a contract with a company outside of Haier, no questions asked, and most of all, no managers to ask for a signature!

Instead of having silos, Haier now introduced several platforms on which MEs would be active, these platforms provide a strategic direction for the MEs. Think of it as Apple’s “App-Store”. Apple is not in charge of creating all the apps themselves. They provide the necessary infrastructure, brand and resources for others to create apps that can operate on their platform. The Platform Head tries to do the same. They provide MEs that get access to resources such as capital, social or intellectual.

To stimulate entrepreneurship even more, Haier introduces another mechanism. User problems are clearly formulated in specific goals and rewards, and every entrepreneur can “bid” to be in the lead of solving a user problem. If their bid, which is usually a business plan, is accepted, that entrepreneur becomes a ME-owner. After that a contract that contains clear agreements about the goals and rewards is created and, again keeping in mind the same principle as introduced years ago, “the more value you add, the more you will earn”. When the contract is signed, the ME-owner is free to achieve the goal in their way, without anyone telling them what the do. Using the same mechanism those ME-owners formulate goals and possible rewards for entrepreneurs to join their ME.

In practice this mechanism means that if the balance between the goal and the possible reward is not right, no entrepreneurs bid on that goal. Providing direct feedback for the ME-owner so that they can adjust accordingly. The result? An organization where 80.000 people behave as entrepreneurs, get rewarded for being innovative and where everyone is focused on satisfying the user's needs.

Today: Ecosystems full of MEs

Surely, an organization this dynamic and entrepreneurial is more than the average CEO could dream of. However, when we attended the 2019 RenDanHeYi management forum and during 20+ interviews we held when we were in the birthplace of Haier, Qingdao, we also learned that the ME structure had its downsides, it stimulated MEs to focus more on their own goals, and less on helping each other.

The concept Ecosystem-Micro Communities (EMC’s) was proposed in 2019. Two years before that philosophy became already visible, when several MEs shifted from solving a user problem like “I want to buy a washing machine”, to scenario thinking; “I want clean clothes”. The difference? Instead of only selling the washing machine, now you could leverage your resources to provide clothes, advice for how to wash them, detergent, and a place to dry your clothes or develop a laundry service. To make this work it was essential to align all the goals of the involved ME’s, so that all of them would collaborate to reach the goal and receive the rewards accordingly.

Where this EMC was invented did not become clear during our visits, but that is exactly the power of this structure. Solutions and best practices emerge and if others think they work, they spread throughout the organization. Sure, extra resources and systems are created to help the adoption, but the solution came from the organization itself and was not forced upon by top-management. How different that is from 35 years ago. CEO Zhang seems to merely have an inspiring role instead of a deciding one.

I know the description of the Ecosystem Micro-Communities is way too short and there is a lot to be told about Haier’s latest evolutionary step, but writing all of that here will make this blog never ending so I’ll be sharing a dedicated blog about Haier’s Ecosystems very soon. Make sure to leave a comment if there is anything specific you would like to know!

Evolve or Die

If there’s one thing I hope you take away from this blog, it is that Haier is constantly evolving. Not just their products, but more importantly their way of organizing. Each of the stages seemed to be the right fit at the right time. Every time that appeared to be temporary, Haier reacted and kept evolving. Sometimes radically, sometimes gradually, sometimes both, resulting in parts of the organization evolving slower than others, to later on benefit from those that evolved quicker, either way they evolved.

Why was everyone so motivated to evolve? Well, I believe that has mainly to do with the power that drove the evolution. It started just like in any other traditional organization, a CEO telling the rest of the organization they needed to change. A lot has changed since then. Now the motivation to evolve comes from the entrepreneurs. They have a strong incentive to satisfy the needs of the user to the best of their capabilities. If that need changes, it’s common sense for those entrepreneurs that they must change as well. If they evolve successfully, they’ll be rewarded in a way that feels fair and is not based on experience, age, gender or friends within the organization. If a ME isn’t capable of evolving it will die, and the entrepreneurs will need to bid on a new goal.

FYI; This blog is part of a series and is the result of a research collaboration between Haier & Corporate Rebels. Want to know more?

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