The Next Management Model... Is From China?

Joost
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- 12 min read

Ford's management model became the most influential one in the early 20th century. It embraced the possibilities enabled by the assembly line. This was followed by the General Motors' model (i.e. the multidivisional firm), and later by Toyota's model (i.e. Lean). More recently, electronic technologies (like computers and the Internet) have enabled the rise of the global 'Agile movement' with Spotify's model as the poster child. But now, with more and more IoT technologies, what will become the most influential management model of the future?

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IoT stands for Internet of things. It is the generally accepted term for the phenomenon in which physical objects (like buildings, airplanes, cars, mobile devices, kitchen appliances and many more) are connected to the Internet and thus to each other, gathering massive amounts of data, and often acting on it automatically.

Recently, at the 6th China Manufacturing Power Forum, Zhang Ruimin (CEO of Haier Group) laid out why Haier's model, dubbed Rendanheyi, could be the next influential management model by embracing the possibilities new IoT technologies will enable.

The birth of the Rendanheyi model

Ruimin said: "Until recently, Chinese firms had been emulating and learning from advanced management practices around the world. But in the IoT era, we have run out of templates to follow."

So, Haier decided to create its own management model. Why? Ruimin: "Organizations are only given two options: to evolve or to ossify. To evolve is to transform and stay relevant to times and trends.

To ossify is to hide in a cocoon and inform today's efforts with yesterday's successes. This is why Fortune 500 companies now have shorter lifespans. Things are moving too fast for many to keep pace."

Ruimin continues: "Why disrupt the traditional model? Because organizations are only successful when they are relevant to the times in which they exist.

The so-called 'success' of companies is absolute. It's the result of being in sync with the beat of the times, either intentionally or unintentionally. But keeping in sync with a varying beat over time is difficult.

Rendanheyi was first proposed in 2005, and has evolved over 15 years. We started by breaking up the hierarchical organization and removing all mid-layer departments.

12,000 middle-level managers had to become entrepreneurs or leave. The organization became a platform without imposed leaders. Users are the leaders. 80,000 employees became 4,000+ microenteprises (MEs), each preferably made up of less than 10 people."

At the heart of Haier's Rendanheyi model are not just MEs, there are other important concepts, designed in a way that helps the firm adjust to fast-moving circumstances. In this post I will highlight the most important ones:

  • EMCs
  • Scenarios
  • Ecosystem brands
  • Win-win value-added statement

EMCs

Haier clusters multiple MEs into so-called 'ecosystem micro-communities' (EMCs). Ruimin explains: "EMCs are clusters of MEs along an ecosystem value chain. All related MEs organize themselves together to co-create and share value.

The more value created, the more profit there is to share. Of course, they bear any losses in such ventures, and when losses reach a threshold, the community is dissolved.

Therefore, EMCs do not play games with their leaders. In traditional organizations, subordinates and their superiors are in a game. Both groups want more benefits for themselves, and at the same level different departments operate in silos, almost like enemies. But a community of interest can solve these problems."

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Ruimin wants Haier to become a jellyfish-like kind of organization. Ruimin: "Jellyfish have been around for over 600 million years, longer than dinosaurs, and are a great example of the survival of the fittest.

A jellyfish survives without a brain, with no central nervous system, only tentacles. When a tentacle feels its prey, it does not need a central nervous system to give commands. Other tentacles automatically surround the prey and capture it via coordinated effort.

What if the organization becomes a jellyfish-like autonomous organization? When a contact point senses user needs, there is no need to send a request up the command chain. No need to re-coordinate. Others naturally come forward."

Scenarios

Haier believes that EMCs should not focus on bringing new products to the market. Instead, they should focus on developing so-called 'scenario offerings.'

This is because they believe traditional products will be replaced by 'scenarios', as soon as physical objects (like kitchen appliances) are connected to other devices via IoT enabled technologies.

Ruimin explains: "There is no perfect product, only a scenario that iterates towards perfection. [...] The idea of a product has become obsolete. When each household becomes a smart home, no single product can suffice, and no single industry can meet all needs.

Many products cross many industries will together serve the needs of a household. So, products must become networked appliances connected to provide users with an experience."

Ruimin talked about how their firm turned the experience of eating peking roast duck at home into one of their 'scenario offerings':

Ruimin: "You don't make roast duck at home or get it through food delivery. Haier brings in top roast duck chefs to make a ready-to-cook meal for you to store in the refrigerator.

The refrigerator is connected to other kitchen appliances such as the oven. The oven comes with a special roast program that can transform semi-finished duck into authentic Peking roast duck.

Since its launch, the roast duck scenario has seen fast adoption. In the first month, 20,000 ducks were sold. This is equivalent to the annual sales of a roast duck restaurant."

After the initial success with roast duck, Haier extended their 'scenario offerings' to other authentic dishes not typically not made at home or home-delivered—for example red pepper fishhead, and roast squab.

These offerings came to market through one dedicated EMC, the Smart Cooking EMC. This EMC is a micro-community of a group of internal MEs and external partners.

These products did not exist in the past. But after Haier introduced networked appliances, and clustered their MEs plus external partners into EMCs, they are now able to bring these 'scenario offerings' to the market.

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Ecosystem brands

Haier believes that the 'scenarios offerings' need a new kind of brand to bring them to the market. Ruimin draws a distinction between three types of brands.

Ruimin: "The first category is product brands like Mercedes-Benz, Nike, BMW, and Adidas. They command a premium through quality.

The second type is platform brands, like Taobao and Amazon in the consumer internet space. They command a premium through traffic.

But traditional brands, platforms or products, engage customers only to the extent of a completed transaction, after which there are no further user interactions."

Instead, Haier has a strong focus on creating a new kind of brand, the so-called 'ecosystem brand'. Ruimin explains: "Economists point out that organizations in the 21st century have only one true level of competitiveness—having lifelong users.

Selling only products won't get you lifelong users. In the IoT era, ecosystem brands are the inevitable answer because their premium now depends on experience."

Ruimin talked about an example of how the firm, by constantly talking with users, is aiming to discover small user requests that could become a need for all other users as well.

Ruimin: "For example, let's take the balcony solution (Balcony EMC) in our smart home scenario. In Shanghai, some users wanted more from their balcony, not just a place for washing and drying clothes.

So, Haier first turned the balcony into a wash-and-care balcony and gradually incubated the leisure balcony, entertainment balcony, and teahouse balcony.

These solutions have seen explosive growth. Previously, Haier only sold a washer for some thousands of RMB. But now, by selling a scenario, the average revenue per user is 210,000 RMB."

Win-win added value statements

Haier develops new 'scenario offerings' with external partners they incorporate as 'ecosystem partners' into their own 'ecosystem brands'. This inspired them to create a new kind of financial document, the so-called 'win-win added value statement.'

Ruimin explains the reasons behind the need for such a document: "The 'shareholder primacy' doctrine was proposed by Nobel laureate Milton Friedman in 1970. He argued the purpose of an organization is to make profit and provide returns to its shareholders.

Businesses have been ruled by this mentality for 50 years. The Du Pont model is a framework that leads companies to actively pursue the 'shareholder first' idea.

Shareholder primacy is about maximizing the return on equity and serving the objectives of shareholders. It does not account for the users that are essential to the IoT era.

The Business Roundtable, an association comprised of the CEOs of ~200 leading American companies, released its new Statement of the Purpose of a Corporation in 2019.

It called for forgoing the principle of shareholder primacy and replacing it with creating value for all stakeholders. Still, this provides no guidance on how to achieve such a goal."

So, what did Haier do to achieve this goal? Ruimin: "Haier was the first in the world to propose a fourth financial statement, the win-win value added statement, in addition to three additional financial statements. (The three are the balance sheet, cash flow statement, and income statement.)

A fourth statement should be provided for both public companies and innovative companies, since the three traditional statements cannot provide a full picture of a company's state of operations.

Why can't they? Because these three statements are still product-centric and business centric whereas the fourth statement, the win-win value-added statement, can capture additional value."

Haier's win-win value-added statement consists of six elements. How is this different from what traditional firms do? Ruimin explains.

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1. User resources

Ruimin: "The first element is user resources. Only products and customers, not users, are recognized by traditional business standards." So, the first element of the statement lists all the resources that users provide to the EMC.

2. Resource providers

Ruimin: "The second element is resource providers. Traditional organizations do not have resource providers, only suppliers. The relationship between suppliers and the organization concerns price. Whoever offers a better deal gets the business. Conversely, the 'resource providers' can co-create user experiences with the organization." So, the second element lists all the external partners that provide resources to the EMC.

3. Total ecosystem platform value

Ruimin: "The third element is the total value of the ecosystem platform, which means the platform creates ecosystem revenue, such as in the roast duck scenario (Smart Cooking EMC) or in the balcony scenario (Balcony EMC). This is not product revenue, but ecosystem revenue." So, the third element lists all the profits made from the different 'scenario offerings' that are sold by the EMC.

4. & 5. Revenues & Costs

Ruimin: "The fourth and fifth elements, revenues and costs, are generated in the ecosystem." So, the fourth and fifth element lists are more traditional elements of the statement and state the revenues and costs of the EMC.

6. Marginal gains

Ruimin: "The last element is marginal gains. There is an unbreakable law of economics—diminishing marginal gains. In a product business, the profit per unit starts at RMB10, then diminishes to 9, 8, 6, and so on. The unit economics keep going down, known as diminishing marginal gains. Only by ramping up production and increasing volume can you grow total profit. But expansion always has boundaries.

Now, in the Haier ecosystem, marginal gains are increasing. For example, the Haier roast duck (Smart Cooking EMC) and balcony scenario (Balcony EMC) are not only generating revenue from selling refrigerators or washers, they turn refrigerators and washers into vehicles of ecosystem value that generate ecosystem revenues and gains so that marginal gains can continue to increase."

So, the last item of the statement lists how the EMC manages to turn its 'scenario offerings' into engines of growth.

People at the center of Rendanheyi

Ruimin concludes with explaining the main philosophy of their management model. "The heart of Rendanheyi is human value maximization and dignity for all.

In the past, traditional models revolved around products rather than people. Kant reminded us that we should recognize humans as ends and not mere means to an end. The old models treat humans as a means.

Karl Marx pointed out what gives dignity to a person is the ability to create independently in his own space. Maximizing human value gives dignity to each person. If we want dignity for all, we must give each person a space for independent creation, and Rendanheyi is precisely about that.

Marx argued that workers also have their own cooperative enterprise, and even workers can become their own capitalists as a community. Haier allows EMCs to form and invest autonomously, as members own their enterprises and serve as their own 'capitalists' when they create and realize their value."

How to implement Rendanheyi?

Ruimin: "To achieve this, organization leaders must decentralize power. [...] How to implement the Rendanheyi model? My answer is, first ask if you could decentralize the three decision-making powers:

  • business decisions,
  • people decisions, and
  • compensation decisions.

Managers tend to think they rely on these three powers to exercise control in the organization and therefore cannot relinquish them. Do not be obsessed with control. When you give space to employees, every individual can thrive. Everyone is resourceful, so why not give them the freedom to grow?

Some believe that managers are smarter than employees. This is simply not true. In fact, some employees are very smart. Haier's U-blood and U-vaccine were both founded by ordinary employees.

Haier was not in the healthcare industry, but now not only have we entered, but Haier Biomedical has successfully IPOed on the SSE Star Board with 140x P/E multiple.

Socrates said, 'In every person there is a sun. Just let them shine', but too many are covered and not allowed to shine."

Learn more about Haier in the online courses we've created with them. Visit the Corporate Rebels Academy to learn more.

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Replies (10)

Sjaak Evers

Sjaak Evers

(It's pitty for all management consultants but) the next management model is (no management, like) Buurtzorg (teaches is)!

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DrRossWirth

DrRossWirth

I like the direction Haier is taking, but many of the details of their practices are hidden. This article implies that the EMC is the basic organizing structure with an internal network of departments that are self-organizing but dependent on the EMC for collective value-added benefits. This raises several questions.

1. The "win-win value added statement" is obviously at the EMC and not the ME. Other papers on Haier's management system imply that each microenterprise has its own P&L but that is not clear here.

2. What is the mechanism for benefit sharing between EMCs (or MEs if the P&L is at this level)? Added value often is recognized in one part of the organization with a lesser increase in costs elsewhere. How is this dynamically managed, especially when a ME in the EMC may also be involved in other EMCs?

3. The questions above imply inter-EMC contracting with transfer pricing. Other articles on Haier imply this contracting between inter-ME nodes uses a contract template that Haier has developed over the years. What is known about this contract template and transfer pricing for allocation of value added in shared scenarios?

4. Closely associated with these questions is also Haier's 3-tier goal setting process that connects with sharing of value added and compensation. This article mentions employee participation but does not go deeper into how this is implemented.

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Pete Swanson

Pete Swanson

[quote]I like the direction Haier is taking.....

I agree, Haier is very interesting to read about, but I struggle to get me head around the details of how it really works. In particular how does this work in a mass production facility with thousands of workers where I am guessing there are major production lines working that have to coordinate and operate in (I am guessing) controlled conditions? Would love to know more! :-)

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DrRossWirth

DrRossWirth

The key to understanding Haier is shifting your thinking away from organizing for control to organizing for work. Many of the management practices have roots in complexity science (self-organization & emergence) and effectuation (entrepreneurial principles).

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Joost

Joost

I like the direction Haier is taking, but many of the details of their practices are hidden. This article implies that the EMC is the basic organizing structure with an internal network of departments that are self-organizing but dependent on the EMC for collective value-added benefits. This raises several questions.

1. The "win-win value added statement" is obviously at the EMC and not the ME. Other papers on Haier's management system imply that each microenterprise has its own P&L but that is not clear here.

2. What is the mechanism for benefit sharing between EMCs (or MEs if the P&L is at this level)? Added value often is recognized in one part of the organization with a lesser increase in costs elsewhere. How is this dynamically managed, especially when a ME in the EMC may also be involved in other EMCs?

3. The questions above imply inter-EMC contracting with transfer pricing. Other articles on Haier imply this contracting between inter-ME nodes uses a contract template that Haier has developed over the years. What is known about this contract template and transfer pricing for allocation of value added in shared scenarios?

4. Closely associated with these questions is also Haier's 3-tier goal setting process that connects with sharing of value added and compensation. This article mentions employee participation but does not go deeper into how this is implemented.

DrRossWirth

Hi Ross,

You raise interesting points and questions, some which are also still questions to me.

1. You are right about each ME having its own P&L. That is still the case. However, their P&L is not only influenced by their own performance, but also by the performance of the EMC they are part of (one ME can be part of multiple EMCs).
Btw: most other papers about Haier are still originating from before their most recent EMC-era.

2. Value-added (read: profit) is shared from EMC-level to the ME level, and then from ME-level to individual-level. EMC-leaders and ME-leaders play an important role in the profit-sharing mechanisms. For example, EMC-leaders try to manage and negotiatie with the various MEs and external partners in their EMC to make sure they feel fairly compensated. In one of my recent interviews an EMC leader explained it as follows: “The discussion process is very open and public and fair, and we adjust the profit sharing mechanism once a month. For example, this month if you’re (as ME-leader) not very happy with your sharing you just tell me, and the next month, if I think it is unfair for you, maybe next month I will compensate you with another bonus or another profit. So up to now I haven’t had any problems with the profit sharing."

One of Haier's internal documents describes the evolution of the Peking Duck Project as follows: "On August 1, 2020, Zhang Yu officially registered the Smart Cooking EMC on Haier's internal EMC-platform. Based on four criteria (market capacity, consumption habits, industry scale and team integration ability) the platform system automatically generated a target of 20,000 users and 10 million ecosystem income. The systems also generated that once Zhang Yu would reach this target he would have 600,000 RMB of value-added sharing space.
The huge value-added sharing space attracted lots of MEs to enter the EMC. Zhang Yu evaluated the bids from different nodes and invited a total of 11 MEs to join his EMC. With the successful bidding of each ME in the EMC, they began to determine the proportion of value-added share that can be obtained after completing the goal respectively according to the target they undertake and the value of their contribution. In the early stage the project they focused more on R&D, so the MEs involved in R&D activities share more in the profits. When the technology was mature, the EMC shifted it profit sharing towards MEs involved in marketing, promotion and sales.
The EMC also signed cooperation agreements with external partners like Weili, Huifa Group, duck farms and other companies. All members of the EMC agreed on the share proportion in advance according to the different value contributions of platforms, chefs, food processing enterprises and duck farms. For each roast duck sold, Haier Smart Home Platform, Chef Zhang Weili, Huifa Group and the duck farm were promised to get 2% to 6% of the profit respectively. The remaining profit of 15% or so would go to the Smart Cooking EMC, of which about 6% would be distributed to the MEs as value-added sharing space, and about 9% would be reserved for follow-up development fund.
With the pre-agreed value-added share, each node could clearly understand the share value (profit sharing) it could receive if they would reach their goal. Soon after, the smart duck and duck semi-product were launched on the Haier Smart Home App, and samples were sent to more than 3,000 Haier stores for sale. They reached 20,000 ducks sold in one month, and achieved an ecosystem revenue of 4 million RMB, which was twice the original target. Zhang Weili also successfully obtained the value added share of 57,906 RMB, and this figure is expected to reach more than 150,000 RMB by March 2021. In addition, there are 7 other nodes in the EMC including Hangzhou Refrigeration Group, etc., which also obtained the corresponding value-added share (profit sharing).
On November 5, 2020, Zhang Yu mortgaged his house, and then invested over 1 million RMB in this. Together, the 18 EMC members invested 2.1 million RMB in total, and set up an independent legal entity company. Up to now, the smart cooking EMC has attracted hundreds of ecosystem parties and chefs including Huifa Group, Xinhe Food, Hanrui Food, New Hope, Liuhe and so on to participate in the food co-creation. In addition, the EMC's good performance also won the attention of numerous venture capital. And the Smart Cooking EMC has set plans to receive its first funding by June 2021."

3. I believe there is a standard contract mechanism based on blockchain technology, but I do not know the specifics about it.

4. Bram wrote more about his here: https://corporate-rebels.com/no-more-ass-kissing/

Hope this helps!

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DrRossWirth

DrRossWirth

Thanks Joost for the great information that I can integrate with what I am learning elsewhere. Two more questions come up when reading your comments above.
- What is known about Haier's market forecasting system. I worked on similar forecasting systems early in my career and Haier's forecasts sound very sophisticated, especially for when they are entering new markets.
- You said that you did not know the specifics about Haier's use of blockchain technology in the contract mechanism. In general, how do you know they are using blockchains, which implies multiple linkages?

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Joost

Joost

Thanks Joost for the great information that I can integrate with what I am learning elsewhere. Two more questions come up when reading your comments above.
- What is known about Haier's market forecasting system. I worked on similar forecasting systems early in my career and Haier's forecasts sound very sophisticated, especially for when they are entering new markets.
- You said that you did not know the specifics about Haier's use of blockchain technology in the contract mechanism. In general, how do you know they are using blockchains, which implies multiple linkages?

DrRossWirth

Hi Ross,

Yes, you are right. The target setting mechanisms seems quite sophisticated. I believe there are dedicated MEs involved in the setting of targets and in contract generation. These MEs set the general guidelines for targets in different situations (like exploring a new market vs. exploiting an existing market) and provide the templates for EMC contracts - this are fixed templates. I don't know the specific about either of these things (yet).
Concerning blockchain; how I know that they use blockchain technology? Because that is what several Haier employees told me recently during a round of interviews. I do not know if they have already implemented that firm-wide or if it is only pioneered in part of the organization. Again, I'm sorry, I do not know the specifics (yet).

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Magnus Brehmer

Magnus Brehmer

No new ingredients here, but food for several very interesting reflections.

But to reverse the starting point to “consumers/potential users” (not customers and most definitely not the company) and acquiring an INTIMATE UNDERSTANDING of those dreams and needs, have successfully been implemented historically by for example Inter IKEA Systems B.V. (Brehmer/Korpela/Lindell/ Losert, authors to IMMP, and others).

To decentralize management responsibilities and foster employees to move closer to the end-user-experience and act as own independent entrepreneurs was successfully implemented by the former SAS-CEO Jan Carlzon in his bestseller “Moments of Truth” (Riv Pyramiderna in Swedish). And many other companies around the world. ”Give the staff who are meeting the customers mandate to deliver the ultimate experience”.

Anorher interesting reflection is the time span in the opening of the article. Between Ford and GM it took 10 years. Between GM and Toyota it took 30 years and to Spotify another 50 years. Now, the article siggests that the next major development is happening already 10 years after Spotify. If there really is something into this?

But perhaps most interesting is that this model comes from China, and a political system that typically is perceived with the opposite attitudes! Where people are not expected to take own initiatives, but rather fit in to a pre-decided structure and obeying rules and traditions, instead of creating new ones.

Finally, the article alerts something even more important! The consistent challenges for mankind to operate its existing tools according to its manuals. The reason why we see so much hammering with saws, drilling with screwdrivers and bending with knifes, all boils down to the same challenge: A constant lack of qualified management. Many companies spend too much time and money recruiting thevwrong people, then totally underinvesting in introducing them in a proper way, giving them the right prerequisites to perform well, only to then present a goldfish face expression when the employee suddenly resign due to lack of personal development.

Dividing a large organisation into small “micro enterprises” is really nothing new at all. The reason it usually fails when tested is, again, a lack of management skills. From over-engaged owners via misinformed boards to incapable management teams.

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Gergely Hodicska

Gergely Hodicska

@Magnus: I think what is important to take into consideration the changes in the societies, world, technology, etc. I am not sure that it is the right narrative that: "A constant lack of qualified management."

If we just consider the Laloux book. The new type of organizations are the reflection of what is happening around the organizations. This is why the different cultures run into their limitations, but at a point in the past they were also the breakthroughs.

From that perspective I agree with you, that nowadays it is palpable that the "old" way of management is not working anymore, even though, many management teams act like dinosaurs. On the other hand change is not easy on other dimensions as well. We easily elect Trumps, Putyins, Johnsons, Orbans, etc. So I think this is not simply a management problem.

It is more like a hypothesis from my side. I think humans were not "developed" to manage such a scale of change. For thousands of years the scale of change was much smaller, life was much simpler, people had much more time to adapt, also the environment was able to adapt to the change we made. As the technology improved, in the last 100-250 years we were able to make changes that broke the balance. Also complexity increased everywhere around us. Many people can't keep up with and reason about this change.

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rob

rob

This method of working reminds me of this: https://www.globalnerdy.com/wordpress/wp-content/uploads/2011/07/microsoft-org-chart.jpg

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