How To Disrupt A 70,000 Employee Manufacturing Company

Indeed, we’ve travelled to China three times on this learning journey. More recently we met with CEO Zhang Ruimin in Vienna. Here’s what we discussed.

Disrupting the past

Many organizations live in the past. Their structures and processes were designed 100 years ago. They have clearly missed a few crucial upgrades. It’s like playing the latest Rockstar game on a Nokia 3310. The inevitable outcomes are frustration and anger.

CEO Zhang Ruimin believes Haier was in this position a decade ago. He felt they lacked entrepreneurship, motivation and speed. He decided to disrupt things – in three ways.

1. Disrupting the role of employees

The first disruption was the positioning of employees. Ruimin set out to design an organization that functions as a platform for entrepreneurship. Employees, then, are no longer pawns executing the commands of senior management. They become entrepreneurs. In fact, Haier now refers to employees as entrepreneurs.

But this is more than a change in title. They aim to emancipate and mobilize the ability of people. Not simply to recruit, train, deploy and retain them, but to leverage their entrepreneurial skills via a platform built for that purpose.

Indeed, Haier now allows both internal and external entrepreneurs (employees and independent contractors) to join their platforms. Organization boundaries melt away as they blend. It aims to allow both to fully unleash their talents. (There is a powerful example in previous blog posts on Haier.)

2. Disrupting the organization

The second disruption is aimed at destroying bureaucracy. That is, eliminating the structures that held employees back– leaving them as cogs in a machine.

This was massive. It included the tough choice to eliminate 10,000 middle management positions. They simply didn’t exist in the new model. Now, entrepreneurs were in charge of their own decisions – without the interference of other managers. The consequence was highly reduced organization systems. Many were dismantled. Self-organizing processes replaced them.

CEO Zhang Ruimin: “We replaced the bureaucratic model with a model based on self-employment, self-motivation, and self-organization. Our goal is to let everyone become their own CEO – as the wise Peter Drucker used to say.”

For example: the company was split into more than 4,000 micro-enterprises. This pushed entrepreneurship and decision-making to those on the front-line. Inside the micro-enterprises, employees select their own leaders – enabling supportive leadership to flourish. All employees have the possibility to unleash their inner entrepreneur.

And entrepreneurs can set up their own micro-enterprises, in one of three ways:

• Identify a market niche, and turn it into a business opportunity in which Haier then invests.
• Combine with other resources to develop a business opportunity in which the firm invests.
• Invest their own money and/or funds from outside investors in an opportunity.

These options illustrate the huge change in Haier’s organization model. They removed lots of bureaucracy, and replaced it with a platform for entrepreneurship.

3. Disrupting compensation

The third disruption involved Haier’s compensation model. Many companies expect entrepreneurship from employees, but are unwilling to support it with a compensation model that rewards the very nature of entrepreneurship.

Haier tries to avoid that trap. They focus their entrepreneurs on the users. Their fixed income model moved to a “pay-by-users” model, and the added value of entrepreneurs is rewarded by – among other things – financial returns.

Let’s clarify with an example. In many traditional organizations an HR department gets a budget to provide support services to other departments. That budget is paid for by these other departments and is commonly allocated in a fixed manner. At Haier though, HR can be a micro-enterprise and treated like a separate entity that provides services to other micro-enterprises.

Meaning, the better it provides these services, the more value it adds. The more value it adds, the more the micro-enterprise (ME) reaps the benefits. However, if the HR ME provides poor service it will not be hired, and income will decrease. Eventually, the micro-enterprise will cease to exist – as with any company that doesn’t generate enough income.

Clearly, entrepreneurship is strongly promoted within Haier, partly via its disrupted compensation model.

Embracing the future

With these three disruptions Haier has radically reinvented itself. They have unleashed entrepreneurship on many levels. They pioneer what organizations of the 21st Century can look like.

They have found an antidote to what Gary Hamel calls “the bureaucracy disease”. They show what can be done to upgrade our old-fashioned operating models: one app at a time, and on a massive scale!