The World's Most Pioneering Company Of Our Times
When we discuss progressive organizations, many think of high-tech start-ups in Silicon Valley. And some are surprised that we do not mention them more. Today they might get a bigger surprise: we will talk about a Chinese white goods manufacturer. Meet Haier.
No longer need we look west to Apple, Amazon or Google to learn about experiments and innovation in large corporations. Instead, we invite you to look east: and to Haier, specifically. Maybe they will become your benchmark. For us, they are the most pioneering corporation of our times.
Haier is the world’s #1 home appliance maker. It is also a Chinese colossus with over 70,000 employees. Even more notably, it’s also one of the most innovative companies in the world. We find this an interesting, even intriguing and very rare combination. It is time for a visit to China to uncover Haier’s secrets.
A few weeks ago, at short notice, we found ourselves in the Far East. We had been invited to visit Haier’s headquarters in Qingdao, and one of their high tech factories nearby. We discussed their unique approach with several employees and with Haier’s legendary CEO and chairman, Zhang Ruimin.
Ruimin is arguably the leading management strategist of modern times. He is one of the few entrepreneurs who understands organizational transformations so deeply. He sees them as true revolutions.
Zhang has led several revolutions at Haier since 1984. Under his leadership, Haier was transformed from a near-bankrupt manufacturer of poor quality refrigerators to the world’s largest white goods manufacturer (with a 10.2% retail market share, by volume).
Time after time, Zhang led Haier in the right direction at the right time. Haier seems addicted to change. They manage to move before they really need to. They are rarely late in adapting. They seem to have a masterful sense of timing—selecting the right moment to abolish the old and embrace the new.
Zhang says that ‘successful companies move with the times’. But instead of only talking about it (like so many others) he also walks his talk. Over 30 years he has led Haier through five strategic cycles—with great success.
Let’s describe the five cycles at Haier:
1984 - 1991 Brand Building Stage
The Ruimin era begins in 1984. He followed several predecessors who failed to turn the loss-making factory in Qingdao around. So, the municipal government of the city appointed this young man as boss. It was a gamble.
Suddenly he found himself in charge of a lousy local factory. But he was determined to turn it to excellence. Inspired by Taylorism, Zhang first implements 13 ground rules—and posts them on the factory walls. These regulations must transform the factory from chaos to order. The workplace was miserable, as one of the 13 rules makes clear: “No urination or defecation in the working area.“
The next standout moment in the transformation happens a year later, when Zhang receives a customer complaint about the quality of a refrigerator. He immediately orders an inspection of all fridges in stock. To his shock, 20% have a defect!
This moved him to a symbolic act that won him national fame. After lining up the 76 defective fridges in the main hall, he invites the employees to join him in destroying them with sledgehammers. Together they smash all the fridges to a pulp. (At that time, a refrigerator was worth about two years salary for a factory worker.)
This symbolic act sent a strong message. Defective products are no longer tolerated. Zhang develops an obsession with quality and branding, a rarity in China at the time. (Other Chinese enterprises often acted as OEM manufacturers, and focused on volume.)
Creating a famous brand became Zhang’s top goal. It was also a way to win honour for the nation. And they did. In the ‘Brand Building Stage’ Haier developed high-quality refrigerators via constant innovation—aided by the introduction of Lean and Total Quality Management principles. This established them as a famous (domestic) supplier. It all happened at breakneck speed.
1991 - 1998 Diversification Stage
After establishing the brand in China, Zhang guides Haier to the next stage—earning a reputation in the global market.
He also knows that to grow the company they need to diversify the product line beyond refrigerators. In this ‘Diversification Stage’ Haier expands by merging with, and acquiring, other local firms. The strategy is to acquire loss-making rivals, and turn them around. Zhang calls them “stunned fish“: firms with strong products but poor leadership. He turns many around solely by introducing a new style of management.
Haier expands rapidly, and offers a rich diversity of top-quality white goods and services. Their expanded product line—refrigerators, washing machines, air-conditioners, freezers and TVs—illustrates this success.
1998 - 2005 Internationalization Stage
In 1999, Haier became China’s biggest fridge-maker. Two years later, China joined the World Trade Organization (WTO). Zhang seizes this opportunity to initiate a new strategy—the ‘Internationalization Stage’. Haier adopts a new global approach to brand building.
And competition flows the other way. From the mid-1990’s, the Chinese market was targeted by foreign multinationals. Fierce competition resulted. Zhang addresses this. He calls the multinationals ‘wolves’, saying ‘in order not to be eaten by the wolves, Haier had to become a strong wolf itself, and should be able to dance with the other wolves.’
One result is that Haier decides to expand overseas, too, with it’s own brand (instead of as an OEM exporter). They choose a difficult path. Instead of targeting less competitive regions like South-East Asia or Africa, Haier chooses to enter, and conquer, the most competitive markets of America and Europe.
They choose markets with the strictest entry standards, first. This forces the company to learn how to satisfy the world’s most demanding consumers. Eventually, this bold strategy succeeds. Haier successfully enters both developed and emerging markets. It is now well established in the world market, with a global network of operations.
2005 - 2012 Global Branding Stage
As the world enters the Internet era, Zhang is determined to lead yet another transformation, into the ‘Global Branding Stage’.
In this period, Haier shifts the focus from high quality, mass production to the customers, and their personalized requirements. ‘Globalization’ now means taking advantage of global resources to create mainstream, local brands. Haier actively integrates its unique management culture into local operations and cultures to deliver ‘on-demand manufacturing and delivery based on zero-inventory’.
This new strategy requires them to manufacture more products locally. Haier acquires famous local brands like Japanese Sanyo’s white goods business, New Zealand’s iconic home appliance brand, Fisher&Paykel and, most recently, GE Appliances.
2012 - 2018 Networking Stage
But Haier doesn’t want to be just a firm in the Internet era, they want to establish a real Internet presence. In the early 2000s, Zhang publishes an article with the title ‘My opinions on the new economy’. He writes: ‘No Internet, No Future‘, meaning Haier enters the ‘Networking Stage’ for good.
According to Zhang, in the era of the Internet, a firm either owns a platform or is owned by a platform. So, in April 2005, Haier proposes a ‘1000-day process re-engineering’ plan to prepare for a platform-based, and networked, enterprise. In December 2012, Haier makes their move, and puts the networking strategy into top gear.
They transform their internally focused, closed system, into an open one that can connect to all kinds of resources. They aim to move from mass production to mass customization. They make their focus a ‘platform-based enterprise‘, with ‘entrepreneurial employees‘ and ‘personalized user experience‘.
A ‘platform-based enterprise‘ no longer functions as a self-contained system, but as a network platform; one that integrates the Internet into everything they do. It gives seamless access to word-class resources. All stakeholders can co-create with shared interests, risks and successes.
‘Entrepreneurial employees‘ means employees are no longer passive workers, but are active partners—stakeholders in the firm. They are encouraged to be innovative and entrepreneurial makers who can grow together with the firm.
‘Personalized user experience‘ means customers are no longer passive, one time consumers, but long term users who can be involved in all aspects of the manufacturing and innovation processes.
Experimentation and adaptation in management
Arguably the real uniqueness of Haier’s transformation journey lies in its constant attempts to adapt, and to continually experiment with its organizational structure to meet employee and user demands. They constantly challenge the status quo, and a clear change in management style can be observed in all the stages.
Let’s look at these one by one. It reads like a journey through contemporary management history:
1984 - 1991 Traditional hierarchical pyramid
In the early days, the small and somewhat chaotic firm needs to be brought to order. The typical hierarchical pyramid structure, with its top-down management style, helps them achieve a high level of productivity and quality of product.
1991 - 1998 Matrix Organization with Strategic Business Units
The traditional, line-function pyramid soon proves unable to meet the company’s needs during rapid expansion. The rigidity has a negative impact on competitiveness. It became time to re-engineer the primary business processes to improve flexibility.
So, Haier implements a matrix organization with separate Strategic Business Units (SBUs). This divisional structure with a decentralized management approach (‘cell division’) is designed to improve flexibility. It gave promising business units the autonomy to operate independently.
1998 - 2005 Satellite Companies with project teams
In order to serve local customer demands faster, the structure is further flattened. It gives new levels of autonomy to satellite companies, and forces the SBU model all the way down to project teams. They aim for ‘zero distance to customers’, and promote self-management principles among employees.
Realizing that everything should be connected to the market, Haier re-engineers workflow. The market chain is now the main link. The essence of the market chain is to transform external market pressure into internal market pressure, so that every project team faces the market directly. All project teams become self-managing SBUs with assigned company goals. They become the primary resources for innovation.
2005 - 2012 Inverted pyramid with self-managed teams
The firm’s employees still work in distinct silos like manufacturing, sales, R&D, production and so on. It turns out the next obstacle to innovation and satisfying personalized customer demands forces Haier to turn the organization upside down.
They invert the traditional pyramid and organize themselves into circa 2,000 zi zhu jing ying ti (ZZJYTs). ZZJYTs are self-managed teams that perform many different roles. Each functions as an independent unit, responsible for their own profit and loss.
Anyone in the firm can propose to develop a new product or service. Voting by stakeholders (employees, suppliers and customers) will decide which proposed projects become real ZZJYTs. The winner of the voting process becomes the ZZJYT's leader. He or she will form a team by recruiting employees from across the whole firm. Employees are free to join or leave any ZZJYT, and are paid based on performance.
2012 - 2018 Entrepreneurial Microenterprises
The era of the platform-based networked enterprise forces Haier to abolish the inverted pyramid for good. They eliminate the firm’s entire middle management, about 10,000 employees!
Subsequently, Haier reorganizes into small, independent companies (microenterprises). Currently, Haier comprises of 200+ customer-facing microenterprises and 3,800+ service and support microenterprises. It feels like an ecosystem of start-ups, Haier calls it the RenDanHeYi model. This model leaves only three different kinds of roles within Haier; the ‘platform owner‘, the ‘microenterprise owner‘ and the ‘entrepreneur‘.
Each microenterprise enjoys power over its decision-making, personnel selection, and profit distribution. The microenterprises are no longer linked by administrative connection, but by a market-driven contracting mechanism.
Entrepreneurs within the microenterprise often become shareholders, which makes them self-employed, self-organized and self-motivated. Through the global platform they can attract all kinds of research and development resources (e.g. finance, HR, legal, IT) from around the world.
The platform also enables the microenterprises to interact closely and intensively with users, allowing them to participate in the development and production process.
The story of Haier's continuous reinvention is a remarkable one. It's a story many organizations around the world can learn a great deal from.
Meanwhile, Haier’s entrepreneurial platform is open to the public, inspiring Zhang to say the following: “In the past, employees waited to hear from the boss; now, they listen to the customer.“