The Age Of Community Capitalism
We first visited Haier headquarters in Qingdao, China in 2017. We enjoyed an extended conversation with CEO Zhang Ruimin. He told us "there is no such thing as a successful company. There are only companies that move with the times". Those words intrigued me. In hindsight, I never truly understood them. Now I think I do. Let me explain.
It started with our most recent trip to Haier HQ in January 2020. We learned about Haier's new ‘EMC model’. It made me think of a classic HBR article (2010) by Prof. Roger L. Martin (of which I was reminded by a recent Forbes article by Steve Denning). It also prompted thoughts about a TED talk by Chobani´s founder Hamdi Ulukaya, the ‘Onion model’ of Dutch Buurtzorg, and the ‘NER model’ of the Spanish NER Group.
But more on Chobani, Buurtzorg, and NER Group later. First, Roger Martin’s HBR piece. He said "modern capitalism can be broken down into two major eras. The first, managerial capitalism, began in 1932 and was defined by the then radical notion that firms ought to have professional management. The second, shareholder value capitalism, began in 1976." Martin then argues it is time to move on again: to abandon the concept of 'shareholder value capitalism' and shift to an era of 'customer-driven capitalism'.
In this post I explain both 'shareholder value capitalism' and 'customer-driven capitalism' in more detail. Then I want to introduce the idea of 'community capitalism'. So, this post spans:
- Shareholder value capitalism,
- Customer-driven capitalism,
- Community capitalism.
I will try to explain all three by how they differ in four ways.
- The purpose of firms.
- The interaction between firms and their customers for each.
- The desired organizational models.
- The desired incentive systems for firms in each stage.
And I will illustrate two concepts ('customer-driven capitalism' & 'community capitalism') using these four companies:
- NER Group
We have written extensively about Haier, NER Group and Buurtzorg. Haier is the largest white-goods manufacturer in the world with 70,000+ staff. NER is a group of 20+ Spanish companies near Bilbao with 1,300+ staff. Buurtzorg is a Dutch health-care organization with 15,000+ nurses in the Netherlands.
We have not yet visited nor written about Chobani, an American yogurt manufacturer founded in 2005 by Hamdi Ulukaya. He bought an 85-year-old yoghurt plant in upstate New York which had been closed by Kraft Foods. It is now a billion-dollar business with 2,000+ staff. To hear this fascinating story, watch his TED talk. (I quote from this later.)
Let’s start with the first concept—'shareholder value capitalism'.
1980 - 2010 Shareholder Value Capitalism
'Shareholder value capitalism' is what we are most familiar with. It has ruled most of the business world since the 1980s. I argue that, today, most businesses around the globe are guided by the Friedman doctrine—a firm's main responsibility is to its shareholders.
Purpose of firms
This approach views shareholders as the economic engine of the organization, and the group to which it is socially responsible. The goal is to maximize returns to shareholders.
In his HBR piece, Martin says that the governing premise of ‘shareholder value capitalism’ is that every corporation should maximize shareholder wealth. If firms pursue this goal, the thinking goes, both shareholders and society will benefit.
In this view, the shareholder is king.
Interaction with consumers
During the age of 'shareholder value capitalism', interaction between firms and customers was mostly human-to-human, think shops and showrooms. Customers bought (mostly) from brick and mortar shops and expected to buy a product or service.
For example, if you wanted to buy a new fridge you would go to your local white-goods shop. Customer contact was face-to-face, and of high quality. But it was irregular. How often do you buy a new fridge? And how often does it need fixing? Not often, right?
This meant that the number of interactions during which firms could collect feedback, get customer data and hear dreams were limited. But most companies did not mind. They organized for efficiency and the sale of mass-produced products and services. I guess many still are. These companies assume they know what customers want (after some market research?) and then mass produced to provide it. Or as Henry Ford is supposed to have said: "You can have your car in any color, as long as it's black".
Because contact between firms and customers was sporadic, only a small proportion of employees were in this role. In fact, the only people who talked to customers were sales sharks, marketers, and the occasional R&D fellow.
Companies of this era were typically pyramidal. This structure is a spike, with shareholders at the top, above layers of management and, at the bottom of the heap, the people who carry out the real work in functions like Sales, Finance, R&D, HR, Marketing, and Production. These functions ran in departments, all perfecting their own performance and efficiency.
This is a recipe for disaster. All departments were inclined to defend their fiefdoms. That is understandable. Each was judged on its performance. Sales made a deal, tossed it to Production, who tried to run with the ball but, in doing so, might clash with Marketing—who had their own battles with Finance, and Finance fought everyone. This cold warfare could take precedence over pleasing customers—which did no-one any favors.
In the age of 'shareholder value capitalism' and hierarchical structures, monetary rewards were commonly tied to one’s position in the hierarchy. That is, not necessarily to the performance of the firm, let alone any added value to customers. The incentive system was bolstered via a promotion system in which employees were ranked in hierarchies and paid according to rank. Positions were revised every now and then to reward performance and loyalty.
In these systems, those who were higher on the pyramid earned more, with a small group at the top receiving the highest incomes and most recognition. For some, there might be stock-based compensation. Unfortunately, short-term rewards encouraged short-term expectations.
Note, we are talking about the short-term expectations of shareholders here—not the expectations of staff, customers, and other stakeholders. As Martin writes, "increases in shareholder value had very little to do with genuine business performance and a lot to do with the fertile imaginations of shareholders, who were speculating what the company's future might hold."
From a customer perspective, this is problematic—the business model rewards top management for increasing shareholder value. Top-management is tempted to maximize their own compensation by manipulating shareholder expectations in unhealthy ways, and at the cost of the other stakeholders—including customers.
2010 - 2020 Customer-driven Capitalism
'Customer-driven capitalism' argues that firms should not be organized around shareholders, but around customers. They should, therefore, build trusting relationships with them.
Purpose of firms
Now, the customer is king. Customers create long and short-term value for businesses. Rather than maximizing shareholder value, Martin argues, "companies should seek to maximize customer satisfaction while ensuring that shareholders earn an acceptable risk-adjusted return on their equity."
He says that no company can serve two masters (in this case, shareholders and customers). Martin: "I firmly believe that if more companies made customers the top priority, the quality of corporate decision making would improve because thinking about the customer forces you to focus on improving your operations and the products and services you provide, rather than on spinning lines to shareholders."
Interaction with consumers
The rapid rise of digital technologies in the last decade drastically changes the way firms and customers can interact. These interactions are no longer restricted to single, offline, human-to-human channels. They now include online human-to-device channels like e-commerce websites and apps. This creates multiple channels of interaction. Over the last decade, customers bought products and services not only in brick and mortar shops, but also online.
For example, if you want to buy a new fridge today you might still go to your local white-goods shop. However, you could equally buy one on an e-commerce site and then have it delivered to your house. Or, you might first browse online to study the product, and then buy at a brick and mortar shop. The choice is yours.
In the age of 'customer-driven capitalism', consumers are often still seen as buyers of a certain product or service. And firms can still interact through offline human-to-human channels with customers. Now, online human-to-device channels create other ways for firms to interact with customers. Digital interaction, however, is more easily accessed than face-to-face interaction in stores. Note, digital interaction is typically also of less quality.
Because of advances in computer technology and digital analytics firms can now use all kinds of sources to gather fast and cheap input from customers. These help them understand what factors improve satisfaction, and the likelihood of buying or recommending a product or service. This means a huge increase in the number of interactions firms can use to gather data about customer wishes.
Because of intensified contact with customers, firms should operate better with a model built around them, rather than shareholders. A customer-centric doctrine, however, seems at odds with the hierarchical organization models most of us are familiar with from the 'shareholder value capitalism' age.
This is because most traditional models do not track customer satisfaction as a leading performance metric. In the 'shareholder value capitalism' age, firms rarely linked performance directly to the value delivered to customers. They measure things like the number of products moved around, profits per quarter and new contracts signed.
In the 'customer-driven capitalism' age it is argued that organizational models should shift focus from shareholder value to customer value. Chinese firm Haier solved this puzzle by re-organizing into a 'network of teams'. They broke the hierarchical pyramid down to organize 70,000 staff into 4,000 microenterprises. These are small, autonomous companies run by the staff. This allows a larger proportion of the workforce to be in contact with customers.
In fact, the staff — or entrepreneurs, as they are referred to—are solely responsible for the provision of products and services. That is, they must keep their microenterprises afloat and ensure best customer care. Customers may be internal (delivering to others in the firm), or external (delivering direct to customers who buy products of the firm). The microenterprises connect directly with each other and their suppliers.
In this way, Haier managed to make customer satisfaction a leading performance metric. Teams manage performance of the microenterprise, and are the point of contact for customers. They must ensure all issues are resolved. This not only helps the client, but also increases engagement and motivation. Although this may sound utopian, it does result in pressure. When shit hits the fan, the team must resolve the problems themselves.
One result of a network of the teams structure is that monetary rewards are not necessarily tied to fixed salary ranges, but to the short and long-term performance of the team (or microenterprise). These are based on the value they deliver to internal and external customers. Thus, staff report to the consumer, not to corporate boards and shareholders.
In addition, Haier is experimenting with shared ownership. Staff can be shareholders of the microenterprises. The incentive to perform is, typically, a profit-sharing system. They are compensated according to the performance of their microenterprise. People in a microenterprise that delivers high value to their internal and external customers are well rewarded. And people in an underperforming microenterprise are poorly rewarded.
From a customer perspective, focusing too much on the performance of the microenterprise can be problematic. An unhealthy focus on internal competition can lead to a narrow scope of behavior. That is, staff can try to maximize results for their microenterprise, and their 'direct' customers, and ignore the collaboration needs of other stakeholders. The overall performance of the firm, and value to the consumer can, thereby, suffer.
2020 - .... Community Capitalism
'Community capitalism' argues that firms should not focus solely on their customers, but on communities—so that all members of the community succeed—and all stakeholders benefit, over time.
Purpose of firms
In this model, the community is king. It places a priority on the well-being and sustainability of the community. This can include all kinds of communities. It can be the ‘real’ community, like a town, a metropolitan area, or an entire region (like at Chobani and Buurtzorg). But it can also be a community of businesses (like Haier). Or a hybrid of both (like the NER Group).
This approach to capitalism departs further from the 'shareholder value capitalism' version. It recognizes that communities create both short and long-term value for firms—and not just one, homogeneous group, like staff, shareholders or customers.
The founding story of the American yoghurt factory Chobani is a telling example. Ulukaya bought the factory from Kraft Foods. He says the old factory could have been closed by a "CEO far away, in a tower somewhere, after looking at the spreadsheets." But "spreadsheets are lazy", he says. "They don't tell you about people. They don't tell you about communities."
He says we should look beyond profits: "today's business book says: business exist to maximize profit for the shareholders. I think that is the dumbest idea I have ever heard in my life. In reality, businesses should take care of their employees first. In the new way of business, it is your employees you take care of first. Not the profits. It’s all about communities.”, says Ulukaya. "Businesses should go to struggling communities and ask, 'how can I help you?'. The new way of business is communities. Go search for communities that you can be part of. Ask for permission. And be with them. Open the walls and succeed together."
Interaction with consumers
On my last visit to Haier in China, I became aware of the rise of a new channel that enables interaction between firms and consumers. This channel is possible by the introduction of the 'Internet of Things' (IoT) and 'connected devices' into our daily lives. They are better known as 'smart devices'. They can be all kinds of electronic devices that connect through networks with other 'smart devices'. Think about products like 'smart thermostats', 'smart doorbells', 'smart refrigerators', 'smart speakers', etc.
Those 'smart devices' are regularly gathering data about consumer demands and wishes. This interaction between firms and consumers is largely hidden from consumers. The devices can gather data without human intervention. This means much richer, more frequent feedback. In fact, 'IoT connected devices' refers to the ability of devices to transfer data over a network without human-to-human or human-to-device interaction. Which means there are now three channels through which firms can interact with consumers; offline human-to-human channels like brick and mortar shops, online human-to-device channels like e-commerce websites, and IoT device-to-device channels.
Haier gave us a tour of a so-called ‘smart home with a smart kitchen’. It showed the results of these ‘smart technological’ developments in the interaction between firms and their consumers. Imagine this: you walk into your ‘smart kitchen’ in your ‘smart house’. In the ‘smart kitchen’ is a ‘smart fridge’, connected to other ‘smart devices’ in your house, plus other internet-enabled devices (like your ‘smart phone’). Via an app on your phone you can select what you would like to eat and drink this week. Your phone connects to your ‘smart fridge’. It can determine what products are currently in your fridge, and their expiry dates. Your app then checks what ingredients need to be ordered online and will do so without your intervention.
This is just a simple application of what this technology can bring to our lives. You can imagine how this ‘smart technology’ might change the way we consume products and services. And what new possibilities this creates for firms to gather feedback about consumers.
So, if you want to buy a fridge in the next decade you might still go to your local white-goods shop (or e-commerce website) to select one. But your new ‘smart fridge’ will not be a standalone product. It can be an integrated part of your ‘smart kitchen’. The level of integration of your ‘smart fridge’ into your ‘smart kitchen’ will become more important than the functionality of the product itself.
The business models of manufacturing firms will thus turn towards what we are already used to with producers of movies and music. We purchase less products (e.g. videotapes, CDs), but purchase access to services that supply temporary use products (like Netflix, Spotify). So, for manufacturing companies like Haier, the emphasis will no longer be on selling products, but selling access to services.
What doesn’t change is that consumers will generate current-period revenue, or short-term value. But every ‘experience’ consumers enjoy via a product or brand can create long-term value for the firm. Every ‘experience’ can impact consumer attitudes to firms in positive or negative ways. In turn, this will build or destroy consumer loyalty. And those ‘experiences’ will only increase with the development of ‘smart technology’.
Indeed, the development of ‘smart technology’ will fundamentally change our view of consumers. In the ages of 'shareholder value capitalism' and 'customer-driven capitalism', consumers were buyers of a product or service. This changes rapidly with 'smart devices'. Increasingly, consumers will be users of services, not one-time consumers of products. Or as Zhang Ruimin told us a few years ago already, "customers are just one-time buyers. We want to turn one-time buyers into long-life users".
The introduction of smart technologies will lead to at least two changes in how firms interact with consumers. And these will affect how organizations structure themselves in an age of ‘community capitalism’.
First, firms will handle massive amounts of consumer data. This will increase the complexity they must deal with (more about solving complexity with simplicity in a future post). Second, consumers will be long-life users rather than one-time buyers.
These changes mean it will not be enough for firms to structure themselves solely around teams (or microenterprises) focused on a product or service. There will be more need for teams in the same area to collaborate with other stakeholders—to deliver the best 'experiences' to the client. To encourage this, teams will form communities with relevant stakeholders to perfect collaborative effort.
Over the years we have seen a few approaches to this ‘community approach’: for example, the ‘EMC model’ of Haier, the ‘Onion model’ of Buurtzorg, and the ‘NER model’ of NER Group. I describe these three models, briefly, so you can form an idea of what they are in real life.
First, Haier’s ‘EMC model’. As noted earlier, implementing a free internal market mechanism via a 'network of teams' can be counterproductive. Haier realized that, to maximize the performance of the entire firm, and therefore added value for users, they had to introduce incentives for collaboration between microenterprises. And they needed an incentive to do this without jeopardizing the healthy competition between them.
They solved this by introducing the so-called ‘Ecosystem Micro Communities’ (EMCs). So, how does the ‘EMC model’ work? Recall the 'smart kitchen' scenario? In the past, all 4000+ microenterprises in Haier could deliver products/services in isolation. Now, with 'smart technologies' they need to collaborate with other microenterprises. For example, in the 'smart kitchen' scenario, they need to deliver the best 'experience' to users. All microenterprises in the same area will form an ‘EMC’, and will align collective goals to satisfy common end-users as best they can. This creates a strong incentive to collaborate, and receive collective incentives as a result. There are even ‘EMC contracts’ signed, tied to the performance of the ‘micro-community’. (Want to learn more about Haier's EMC model? Join me on Haier's Rendanheyi platform to learn all the details.)
Second, Buurtzorg’s ‘Onion model’. Buurtzorg is structured around 1,000+ small, self-organizing teams to deliver home nursing care all over The Netherlands. These teams operate with high autonomy in their dedicated region. They are deeply rooted in local communities. They use the so-called ‘Onion Model’ to leverage all resources available to serve their local clients as best they can. This means nurses in Buurtzorg try to leverage all formal sources (e.g. other Buurtzorg teams, hospitals, GPs), and informal ones (e.g. family, friends, neighbours) communities and networks, to provide clients with best possible care.
As Alieke van Dijken, a Buurtzorg nurse, explains: “Maybe this is not what you might think nurses do. You might think home nurses are only occupied with tasks like treating wounds and so on. You might not directly link them to tasks like chatting with a neighbour about concerns you might have, like having a cup of coffee with friends and family of their clients. But at Buurtzorg that is exactly what the nurses do.”, Alieke says. In fact, at Buurtzorg they argue it is important to leverage and strengthen the community around the client, so the need for formal care can be reduced.
Van Dijken: “Though the system is not constructed to pay for all this preventive care, we choose to do that, and the figures prove there are less admissions to hospital, more happy nurses and more happy clients. It’s all about relationships. If you focus on this, and you create an organisation focused on relationships, and everything supports this – well, everyone gets happy, everyone gets motivated, and you get good results.”
Last, the ‘NER model’ of the NER Group from Bilbao. ‘NER’ stands for the Spanish ‘Nuevo Estilo de Relaciones’ – roughly translated as ‘New Style Relationships’. The NER group is structured around 20+ companies that voluntarily form a ‘community of businesses’ in and around the Basque country. The group has members across industries as diverse as engineering, manufacturing, law, cybersecurity, and education.
The businesses in the community operate as autonomous companies. But the key to their success lies in the awareness of the group to leverage each other’s strengths when needed. They even share and relocate staff when others in the community are in need. This implies a solidarity agreement between the companies to voluntary relocate staff to other firms in the group for the time the crisis lasts, and to guarantee job security for staff. More than 100 such relocations have already taken place. The result? No-one has ever been fired from the NER Group for economic reasons. This is remarkable for a group of companies in a region plagued by economic hardship and high unemployment.
Moreover, companies in the NER Group have a strong social commitment to their own staff and the community. The group has a fund to help staff who find themselves in critical economic situations. The group even founded a bank to provide favourable mortgages to staff. Furthermore, firms in the community donate 2.5% of profits, and 2% of staff time, to community projects. Over 15 years they have developed 150+ initiatives with partners to develop and strengthen local communities: from education programs to the production, distribution and commercialisation of organic food. So, the people from NER not only take care of themselves, and other business in their community, but also of the region in which they are firmly rooted.
Organizational models are becoming a blend between the ‘network of teams’ structure and the ‘community approach’. In an age of ‘community capitalism’, monetary rewards for staff should no longer be tied only to the performance of their team or microenterprise. In fact, incentives in the age of ‘community capitalism’ should also account for the value a team brings to the wider community.
The monetary rewards of staff at Haier, for example, are based partly on the performance of their own microenterprise, and partly on the performance of all the ‘micro-communities’ they are part of. Indeed, there are ‘EMC contracts’ being signed between microenterprises to make sure these incentives are tied to the performance of the ‘micro-community’. These encourage in-community prioritization.
This prioritization we have already discussed when explaining Buurtzorg’s ‘Onion model’, and the ‘NER model’. But Ulukaya of Chobani also talks about the rebirth of the local community when they revived the Kraft factory. For every person Chobani hired, 10 local jobs were created, he says. The town came back to life. From the first money the factory made, Chobani built baseball fields for local children. Five years later, Chobani became the number one Greek yogurt brand in the USA.
"Businesses should take care of their employees first," Ulukaya insists. "If you are right with your people, if you are right with your community, if you are right with your product, you will be more profitable, you will be more innovative, you will have more passionate people working for you and a community that supports you."
This is something we can only agree with. What do you think?