HaiDiLao Hot Pot: Entrepreneurship at Scale
We often write about how Zhang Ruimin boosted incredible levels of entrepreneurship at the Chinese firm, Haier. We even wrote a book about it: "Start-Up Factory." I recently learned about another Zhang that achieved a similar feat at another Chinese company, and it is definitely a story worth sharing. This is the story of Zhang Yong and a Chinese firm called HaiDiLao.
I'm always on the lookout for new pioneers to learn about for our Bucket List. So, when Harvard professor Tatiana Sandino introduced me to the HaiDiLao case (during a recent collaboration on a HBS teaching case about Buurtzorg), I was immediately fascinated.
I was even more fascinated after reading a Tsinghua SEM teaching case by Zheng & Zhao and a similar HBS teaching case by Cambell, Zou, Lin & Aymonod.
And I think most of you will be fascinated by the story as well.
Let me share what I learned and why I now think both Haidilau and Zhang Yong belong on our Bucket List.
First, a bit of history. In 1994, Zhang Yong decided to open a hot pot restaurant with his wife, Shu, his friend Shi Yonghong, and Shi's wife, Li Haiyan. They decided to call the restaurant HaiDiLao—a term from Mahjong, the popular Chinese tile-based game invented in the 18th century.
Despite opening a hot pot restaurant, none of the founders had any formal culinary background. So, Zhang Yong read hot pot cookbooks to teach himself and became the chef of their restaurant.
Zhang’s culinary skills were not enough to set the restaurant apart from the competition, so the team found other ways to attract customers by emphasizing excellent and friendly service. This included offering customers free massages, popcorn, and manicures while they waited for a table. The strategy worked.
Zhang Yong and his co-founders weren’t exactly surprised by the success. "If customers leave, you earn nothing,” he observes. “But if they stay, there's got to be a way for you to get something from them. The rent and cost of employees are there already. The cost of manicures and popcorn is trivial in comparison."
This common sense approach worked. HaiDiLao quickly became one of China’s most popular hot pot restaurant chains.
HaiDiLao's common sense approach worked so well that by 2010, the chain operated around 40 restaurants throughout China. Zhang Yong later had a chance meeting with the legendary Japanese management god, Kazuo Inamori.
Inamori is most famous for his Amoeba management philosophy that he’s implemented in large Japanese companies like Kyocera and Japan Airlines. The Amoeba philosophy argues that organizations should be divided into small independent units connected via market-based mechanisms.
These units can be regarded as self-managing profit centers and are intended to be entrepreneurial in nature. They are to be guided by a clear goal of making a profit and can voluntarily contract with other units to achieve such goals.
Zhang Yong was inspired by Inamori's philosophy and decided to restructure HaiDiLao from a multi-layered, pyramid-like hierarchy to one that aligns with the Amoeba philosophy.
A year later, in 2011, the chain started the transformation process by converting functional divisions into separate companies. One by one, each of HaiDiLao's former divisions became independent subsidiaries: the supply chain division was spun off as the Shuhai supply chain company, the construction and interior decoration unit became the Shuyun Oriental company, the soup base production division became the Yihai company, and the home delivery part of Haidilao became the HiLaosong company.
In the spirit of the market-based philosophy of Inamori, the new subsidiaries now provide fee-based services not only to HaiDiLao's locations but to other restaurants as well. And some of them have become very successful in doing so—Yihai (HaiDiLao's former soup base production division) went public on the Hong Kong Stock Exchange in 2016.
By 2016, the company had expanded to more than 150 restaurants. This rapid expansion resulted in the creation of several middle management layers: managers reported to district managers, who reported to regional managers, who reported to the company’s headquarters.
Zhang Yong, convinced that this structure was made inefficient by the emergence of digital technologies, saw it fit to introduce the Amoeba philosophy to the core of his business:
"In the past, board decisions had to go through many layers to reach the frontline employees. However, with WeChat, Dingding, and smartphones, management could easily reach any employee. The intermediary process became redundant, so we wanted to make the organization as flat as possible."
Zhang started to radically decentralize the restaurant operations so restaurant managers could communicate directly with the headquarters again. The solution was straightforward: they simply removed all the middle management layers. This move radically flattened the company’s hierarchy.
Three concepts stand out and deserve more explanation as to how HaiDiLao managed to make this work:
- A network of autonomous restaurants
- An apprenticeship program
- An innovation platform
1. A network of autonomous restaurants
Following Inamori's Amoeba philosophy to boost entrepreneurship, HaiDiLao decided to divide the company into a network of autonomous units.
There are now three autonomous units with their own roles and responsibilities: autonomous restaurants, headquarters, and coaches.
The most important units in the network are the autonomous restaurants. Each restaurant now functions as an Amoeba unit—an independently run company with its own leader.
The company started to rely on these leaders to run their restaurant as if it was their own. They set their own goals, develop their own plans, hire and fire their own people, do their own marketing, launch their own promotions, and communicate directly with the headquarters.
However, this decentralization of decision-making did come with an increased level of accountability. Zhang Yong, a non-believer in strict KPIs, introduced a centralized performance review system. This system started to regularly assess the autonomous restaurants on a selective set of performance parameters: employee effort, customer satisfaction, and food safety. Note the lack of any financial parameters.
The system starts with each restaurant being visited by at least 15 mystery guests each quarter. These guests rate their experience on the three performance parameters and score the restaurant by giving it an overall grade of A (high), B (middle), or C (low).
At the end of each quarter, scores are gathered, and the restaurant leaders each receive an average grade. A list showing each restaurant’s grade is then distributed to all restaurant leaders, so they can see how they measure up to the others.
The rating of a restaurant defines the “rights” or “restrictions” of its leader. For example, the leaders of “A-rated” restaurants earn the right to open new locations (more on this later).
On the other hand, leaders of “B-rated” restaurants are encouraged to seek advice and support from a group of coaches (more on this later as well).
Leaders of “C-rated” restaurants are encouraged to follow intensive training by the same group of coaches to turn the performance of their restaurant around. If they do not manage to increase their performance within a year (as evidenced by another C-rating), the leader is removed from their position.
Since most decision-making rights were now delegated to autonomous restaurants, HaiDiLao could drastically reduce the size of the staff at its headquarters.
This left the small team at the headquarters with three main responsibilities:
- Taking care of strategic issues that impact the entire organization (e.g., negotiating strategic deals)
- Setting standards to monitor organizational-wide risks (e.g., the performance parameters above)
- Finding resources to support the success of the autonomous restaurants in their day-to-day activities
HaiDiLao also introduced an interesting practice for their headquarters staff: every member of the management team had to work at least two days a month in one of the autonomous restaurants. The work includes frontline tasks like welcoming guests, cleaning tables, and washing dishes. This practice gives management better empathy and understanding of what frontline employees deal with on a daily basis.
Teams of coaches
As we already saw above, autonomous restaurants are also supported by a team of coaches consisting of people with extensive experience managing restaurants themselves.
Their responsibilities include:
- Monitoring the performance of the restaurants they are coaching
- Organizing and facilitating training
- Providing support to restaurants when requested
The restaurants are free to select whichever coaching team they want to work with. The idea here is that the coaching teams are there simply to provide support, guidance, and advice on various topics, such as management, products, services, and even restaurant decor. In fact, coaches do not have any control over the restaurants whatsoever.
During the transition to the Amoeba structure, Zhang Yong provided all former middle managers with the opportunity to join a coaching team, a restaurant, or leave the company and receive severance pay of RMB80,000 (roughly €12,000). Most middle managers ended up leaving the company due to their newfound lack of power.
But it was for the better.
2. The apprenticeship program
Another important and unique concept HaiDiLao uses to boost the level of entrepreneurship in their organization is their apprenticeship program.
By radically decentralizing the firm, Zhang Yong also removed the traditional “up-the-ladder” career path for its employees. However, HaiDiLao needed an alternative way to motivate and retain its most talented people since simply promoting them up the ladder was no longer an option.
Furthermore, HaiDiLao needed to open new restaurants on a consistent basis to scale the organization. And to be able to do that, they needed new leaders that were willing to do so.
Zhang designed and introduced an apprenticeship program inspired by one of their core values: "changing your destiny with your own hands". The program involves mentors (experienced restaurant leaders) and apprentices (talented restaurant employees).
Here’s how it works:
- All leaders of A-rated restaurants are allowed to become a mentor and pick their own proteges.
- The mentor then equips the protege(s) with on-the-job entrepreneurial skills and knowledge until they are ready to run their own restaurant on a day-to-day basis.
- The mentor is then allowed to open a new HaiDiLao restaurant and install one of its proteges as the restaurant's leader. The mentor will then do everything in their power to make the new restaurant a success (i.e., offering help in building the new team or sending the best employees to the new restaurant).
A reward scheme was developed to ensure motivation. While the scheme certainly motivates leaders to boost the performance of their own restaurants, it also motivates them to help others run their restaurants better instead of competing with them. Under this model, the mentor's income consists of two elements: a basic income, and profit sharing.
The profit-sharing element is the most interesting. It dictates that restaurant leaders receive 0.4% of the profits of their own restaurant. However, it also dictates that they receive 3.1% of the profit of their apprentices' restaurants (a so-called “first-generation apprentice”). Moreover, when first-generation apprentices become mentors of second-generation apprentices, the original mentor also receives 1.5% of the profit from their restaurants.
There is no profit-sharing for mentors beyond their second-generation' restaurants. As a result, restaurant leaders’ rewards are primarily determined by the success of their first and second-generation proteges.
This model ensures that mentors are motivated to train their proteges as best as possible and to do everything in their power to make their apprentices succeed.
3. An innovation platform
Aside from the apprenticeship program, there is another concept HaiDiLao relies upon to boost its levels of entrepreneurship: “the innovation platform.” This concept also involves profit sharing.
It’s relatively straightforward: employees are free to post any new business ideas on the platform.
A committee, composed of a diverse range of employees with different backgrounds (e.g., frontline staff, management, IT, finance), rates all new ideas and picks out the ones they think hold the most potential for future success.
The company then provides all the necessary resources (e.g., capital, branding, legal) for the employee to test their idea in practice. If the test turns out to be a success, and if the new idea is actually implemented into the company’s operations, the employee shares in the profits generated by their innovation.
By radically decentralizing the organization and simultaneously introducing mechanisms to boost the entrepreneurship of its highly autonomous employees, it seems that HaiDiLao has given itself a widely successful growth engine.
In fact, by 2020, the company had grown to more than 900 restaurants worldwide with more than 60,000 employees.
It’s clear that HaiDiLao has truly pioneered an organizational model that allows for entrepreneurship at scale. An organizational model that we will certainly write more about in the future. Bet on it.