Why Haier Introduced Ecosystems And How They Work
In 2012, Haier gave 12,000 managers a choice: "you can leave, or join our new structure." Some left, many stayed and joined one of 4,000 small independent companies within Haier—the so-called 'microenterprises' (MEs). Many academics, management gurus and other companies were amazed with how the ME structure stimulated entrepreneurship. So why the hell would Haier fiddle with it's structure, again?
The problem with Micro Enterprises
The ME structure encouraged people to be responsible for their performance and that of their ME. If they were successful, the entrepreneurs would benefit. This seems to have worked well. Haier has been the largest appliance-maker in the world for 10+ years now.
But the ME structure had a downside. Sometimes, the ME’s were too focused on their success. There was a lack of cooperation between ME’s.
Simultaneously, needs of users changed. They became more complicated. The 'Internet of Things' (IoT) was getting attention, and some Haier ME’s realized that they couldn’t fill all needs of their users on their own anymore. They needed to work with others to satisfy these needs. Take the ‘Internet of Food’ (IoF) as an example.
The Internet of Food
Just before the outbreak of coronavirus, we visited Haier’s birthplace again. We interviewed >20 people from many MEs. One was Sun Hang—an entrepreneur previously working in an ME.
“The ME I was working for made refrigerators. I realized our product would at some point become outdated and nobody would buy it anymore. Something needed to change.” So, Sun and his colleagues initiated the “Internet of Food” (IoF).
They had been making and selling refrigerators to store food longer. But the IoF could offer much more—like help in purchasing food, storing it and preparing it. The idea is simple, but brilliant. Sun and his colleagues realized their users were focused on preparing and eating food. A refrigerator (or an oven) was only a step on their way to eating the food they wanted.
Looking at user needs like this opened up opportunities. Whereas Haier had focused on making appliances, they now figured they could aim at delivering food, providing recipes and notifying owners when their tomatoes were going stale! Maybe the platform could even connect with their dietitians.
Doing all these things requires a lot of resources—resources they needed to acquire. That’s where 'Ecosystem-thinking' came in. Haier’s interpretation is an 'Ecosystems of Micro Communities', or EMCs. EMCs are multiple MEs bound by contract in temporary alliances that focus on fulfilling the needs of a specific user group. I know, I know, all the abbreviations are a pain. Let's have a look this.
Experience & Solution EMCs
As you can see, each EMC has two parts—an Experience EMC (in red) and a Solution EMC (in black).
The Experience EMC functions as the user touch point. They know who their users are, where they are, what they want, and how to get in touch with them. It’s their responsibility to figure out the user's ‘pain points’ and needs. Already, this has led to some unusual business ideas. Such as MEs that offer free repair services, so they get a better understanding of customer needs. Those MEs know that specific user knowledge is a precious resource, and that they know there are ways to benefit from those insights.
The Solution EMC, as the name suggests, is responsible for creating solutions. MEs on the solution side design, create, produce and transport products that address user ‘pain-points’. If MEs on the solution side lack resources, they can acquire those from outside the Haier ecosystem. The boundaries between Haier and the 'outside-world' now become transparent. EMCs can attract all kinds of resources (from inside or outside) to meet their goals. These resources could include knowledge, specific parts or, in some cases, money.
Sharing is caring
All of this might seem familiar, however there's a big difference with most traditional organizations. The contract. All these MEs collaborating in an EMC are bound by contract to form temporary alliances. Those contracts also specify how much of the profit a specific ME will receive. So, in the Internet of Food EMC, MEs that create refrigerators will also benefit if an oven is being sold, or if a user hires a dietitian via the platform.
This incentivizes all MEs to help other struggling MEs succeed. Because if one of the MEs fails to do their part of the work, all of the others are at risk of losing part of their income. On the other hand, helping other MEs to succeed could be very profitable. In practice we’ve seen that many MEs share best practices with the other MEs in their EMC and looking after each other is considered to be normal.
Sharing is caring, especially in business!
“We help the ME be successful because they are part of our EMC. Sure, if an ME will fail to meet their targets for months in a row we could try to find a replacement, but it is better to help the original ME be more successful because they are already part of our EMC. Getting a new ME up to speed with our work will cost all of us a lot of time, and that will delay the whole process of fulfilling the user’s needs.”
Finding the balance
Crucial in all of this is finding the right balance between effort, risk and potential profit. Nobody forces MEs to join an EMC. All do so voluntarily. If the balance isn’t perfect, the EMC doesn’t attract enough resources, and won’t succeed.
This is where the contracts come in. Any ME can initiate an EMC by formulating a plan, describing resources they need and how they would reward the providers. This is shared via internal systems. It can be reviewed by all MEs, allowing them to apply, and make offers of solutions. The ME initiating the EMC can choose the ME with the best plan in their view and invite them to join the EMC.
Finding the right balance between effort, risk and potential profit is crucial!
A resilient organization
This ecosystem-thinking allows Haier to create temporary, dynamic and responsive organizations to meet ever-changing user needs. The focus is on collaboration, to attract new resources to solve the pain points of users, rather than trying to invent, create and own everything themselves. This greatly reduces cost, time, and the risk of failure.
Sure, having a monopoly on a single product might be more profitable if it meets the needs of customers perfectly. But if needs change, your whole organization can be in trouble. Based on interviews we had with MEs in the Internet of Food EMC, we were convinced this is a way to make an organization more resilient.
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Good to hear you like our stuff, and great question!
To be honest, its quite simple; it just disappears. If the EMC ends up not being the success all involved ME's hoped for, they can choose to leave. In practice that will only happen if its worth an ME's while, so they need to have a good alternative.
Does that answer your question?
Great work on what has been an iconic China case. One question I would like answered. What are the financial rewards and benefits for the ME re the manager and team. I think this is crucial on a number of fronts particularly the real separation of ownership and control from the mothership.
Great question! Unfortunately the answer is a bit too long for me to write it here. I did however write a blog about it which will be published in the next two weeks! It should describe everything there is to know about Haier's Customer-Paid salary. Let me know if you have any questions after you've read that!
I really appreciate what and how you are doing. Thank you for sharing in such an easy to read way.
I wonder about the relationship of MCs with central management.
When and for which topics central management are interfering MCs?
For instance, when we think that competition is supported, how is the attitude of central management in case of exaggerated competition or conflicts?
Bram, nice piece. Also the one you just posted on salary...related question to the one posted above. I'm curious how the MEs are coordinated at an enterprise level if at all. EMCs seem to be more about mutually beneficial contracts vs. enterprise coordination. Scaling this model to other corporates would require some mechanisms to connect, coordinate (and dare I say direct) front line units together. I'm wondering if there are any roles that sit above clusters of MEs or EMCs? Putting it in traditional terms, I'm curious what the layer above the ME looks like.
I think you're reasoning aligns with how things work at Haier. Indeed there's little enterprise coordination at the ME level. Nevertheless their is some level above, Platforms. These platforms provide the ME's with the necessary resources, think of money, talent, knowledge etc. Those platforms are free to decide how they disperse their resources which of course gives them some influence on the directions of ME's or EMC's. However, these ME's & EMC's are free to find their resources somewhere else if they don't like the requirements of getting access to those resources. They can even look outside Haier. (which happens quite a lot especially for funding)
Let me know if you have any other questions!
Hi Beste! ^^
The relationship with Central Management seems to almost not be there. Based on my interviews it doesn't seem that central management interferes on an ME or EMC level once it's up and running. What they do instead is clearly formulate a goal and closely connect the reward to that BEFORE an ME or EMC is created. (check out the blog about Haier's salary model I wrote). If that goals isn't reached in the time agreed upon at forehand, the EMC or ME dissolves.
Most of us know monopolies are bad. “They have no incentive to deliver better products or to get more efficient.” And if a monopoly can do whatever it likes, the victim is likely to be the customer. If it exists outside an organization, measures can be taken to end that. Within organizations, creating monopolies seems standard practice, but why!?
“It was like being with a parent that didn’t really want us”, says CEO of GE Appliances, Kevin Nolan. He explained: “The one hope everyone had was that Haier bought us because they wanted us, and we were curious to find out what that would mean”. 4 years later, we visited to find out how GEA was doing. Getting to talk to them was harder than we thought: “Our managers and executives are currently working on the assembly lines.” They are doing what!?