Don’t let the previous cases (see our blogs on Semco, Morning Star and Nucor Steel) suggest that changing the way an organization works is a typical Western phenomenon. From the East comes an impressive example of a company that today is a role model for many Western companies and a case study for international business schools. It exemplifies how vital it is to be open to change and to shrug off fear of letting go of the existing.
A bit of history
The early roots of Haier Group Corporation (Haier) lie in Qingdao, a city on the east coast of China, mid-way between Beijing and Shanghai. Originally a refrigerator company, it was set up nearly 100 years ago. After the Popular Republic of China was founded 1949, Haier became a state-owned company.
Fast forward 35 years: the company is nearly bankrupt. End 1984, the Qingdao city authorities appoint Mr Zhang Ruimin, a 35 year young assistant city manager, to run the factory. A final attempt after several other managers had failed.
Under Zhang Ruimin’s long standing tenure, Haier evolved “…from the small factory on the verge of collapse into an ecological enterprise led by the Internet of Things” making Haier Group today a global company (70,000+ employees), the largest white goods manufacturer in the world with a global volume market share of 14%, a global platform in the Internet of Things (IoT) era and an inspiring role model whose continuous innovation philosophy is taught at leading international business schools.
A schoolbook example of adaptability
One of the fascinating aspects of Haier’s success story is how, over a period of 34 years, an individual with an initially limited business background managed to drive the organization through a series of important transformations to become the global player and role model it is today. It testifies the top management’s enduring willingness to adapt the organization to the needs of the market, their openness and curiosity to learn from the best and the lack of arrogance required to do that. From the outset, Zhang Ruimin and his team implemented strategic transformation - thereby continuously adapting the company to the needs of the market, first by adopting the best management insights from advanced countries like Japan and the USA and then, since 2012, leaping ahead of Western companies with new, self-developed concepts because they couldn’t find models that completely satisfied their vision.
Over the years and as the company grew, Haier’s strategy evolved through a number of stages that illustrate the company’s adaptive capability: brand building, diversification, internationalization, global branding and, since 2013, networking.
1. Brand building
The freshly appointed new manager quickly finds that Qingdao Refrigerator is a heavily indebted company in very bad shape: the new manger has to borrow money to pay salaries, quality performance is appalling (the produced equipment inventory has a 20% defect ratio), employee engagement is extremely low and there is a severe lack of management. Zhang Ruimin realizes he first needs to put the house in order. To achieve that he introduces traditional top down management techniques namely structure (hierarchy!) and Japanese total quality management. As an early warning signal to staff that poor quality will no longer be tolerated, he forces employees to smash 78 defect refrigerators to pieces, an act that makes history. After a number of years, he manages to build a strong local quality refrigerator brand.
In the early nineties it becomes obvious that Haier needs more than one leg to stand on. So Zhang Ruimin chooses an active diversification and expansion path characterized by acquisitions and mergers whereby Haier copy/pastes its own management style onto the acquired companies. However, in the following years Zhang Ruimin converts entities into more autonomous business units.
Towards the end of the 90’s decade, the company is China’s largest refrigerator manufacturer and it feels strong enough to go international with its own brand. Rather than first experimenting in easier markets, Zhang Ruimin immediately tackles the tougher European and US markets (opening the first Chinese owned factory in South Carolina in 2000) in order to prove that Haier’s products more than meet the high quality requirements of those markets. To accelerate the company’s competitiveness and improve its closeness to the market (zero distance to customers in Haier-speak) Zhang Ruimin boosts staff autonomy by introducing self-managed teams as we know them from Semco and Morning Star (a great source of inspiration to him).
The company’s international performance and presence gets noticed and both the company and CEO Zhang Ruimin increasingly receive international recognition. In the early years of the new century, just like Amazon founder Jeff Bezos did a few years earlier, the CEO becomes aware of the massive potential of the internet. In particular, he grasps how the internet facilitates collaboration and self-organization (Clay Shirky inspired him in this context) and the far-reaching impact of that phenomenon on a business and its customers. This insight becomes the foundation for the next transformation stages.
4. Global branding
Customers becoming ever more demanding, offering the company a bigger differentiation potential by working on niches, they increasingly become Haier’s focus. The company thus starts to build on strong local brands rather than mass production. To meet those demands, local production becomes ever more important as well as acquiring strong brands. That leads to the acquisition of Japanese Sanyo Electric's home appliance business (2012), New Zealand’s prime brand Fisher & Paykel Appliances (2012) and US-based GE Appliances (2016). At the organizational level, the company completely shifts to self-management by creating some 2000 autonomous project teams called ZZJYT, meaning self-managed teams, that are in direct contact with customers via the internet.
Working further on his earlier awareness about the future wide-spread impact of the internet, Zhang Ruimin fully captures the strategic importance of owning a platform rather than depending on someone else’s. Therefore, around 2005 he initiates the development of the RenDanHeYi-model aimed at transforming Haier Group into a networked enterprise ready for the Internet of Things (IoT) era. It is an ambitious, intense and far-reaching project towards an advanced form of self-management. It will lead to the elimination of 10,000 middle management positions after which many of the affected employees can reapply for a new role.
5. Networking and the IoT
In December 2012 the new strategy is implemented making the company an open, networked and platform-based organization engaging employees, customers and a broad range of other stakeholders. At the heart is the RenDanHeYi-organization model consisting of 200+ micro-enterprises each with their own Profit &Loss accounts and a huge autonomy to serve clients. Through the platform they can call on resources worldwide for their innovative projects. In a climate of zero distance to customers, the platform enables customers to interact with production workers while production workers can interact with product designers who in turn can interact with partners, researchers, competitors, etc. so as to create optimal solutions for the customers. Lateral processes and distributed teams have replaced hierarchy because they significantly outperform it.
As an example: for a smartphone-controlled air quality monitoring system for buildings, Haier partnered, through its platform, with Samsung and Apple to meet consumer requirements. Zhang Ruimin calls RenDanHeYi a Win-win model because it aligns employee goals with user needs. It also maximizes execution speed and creativity.
The user is always right
In the new strategy, the key position of the customer (or user in Haier terms) is clearly reflected in Haier’s culture, composed of three concepts: users are always right while we need to constantly improve ourselves; in order to improve we need the spirits of entrepreneurship and innovation; in this way we serve all interests and create a Win-win situation.
Fundamentally new positioning
The company has thus shifted from mass production to mass customization whereby entrepreneurial employees create personalized user experiences for customers. According to Zhang Ruimin: “In the past employees listened to their boss, now they listen to customers”. Through the platform, Haier’s positioning has evolved from a mass manufacturer of refrigerators to “a global leading provider of better-life solutions”.
Some personal thoughts
When looking at this impressive success story, it is particularly interesting to observe how well Zhang Ruimin mastered the timing of necessary change. It is as if throughout his tenure he has been, more than the average CEO, aware of the emerging future and of the inevitable resulting need for transformation. Even more important: he seems to have been less attached than his contemporary CEOs to maintaining the status quo. Zhang Ruimin himself mentions self-negation (a ceaseless questioning: how can we improve what we are doing?) as a core habit of Haier. He has observed that many large organizations don’t share that attitude and actually tend to remain arrogant.
Over the years, CEO Zhang Ruimin has been receiving plenty of international recognition for his track record and that of the company. However, that has not diminished his own sense of self-negation. Rather than seeing himself as a guarantee for future success, he says “my task is not to cultivate a replacement but to cultivate many people who are willing to challenge both themselves and the status quo” so that in the end there may no longer be a need for a single CEO since the people working in the community will be their own CEO’s. The late management expert Peter Drucker would have been in full agreement.
His sensitivity to the emerging future reminds me of the continual transition that is at the heart of the I Ching, the ancient Chinese Book of Changes which has roots in Taoism and Confucianism. It states that attention centres not on things in their state of being - as is chiefly the case in the West - but upon their movements in change. Wise people understand that at the top of success, decline is already lurking behind the corner. That requires constant adaptation.
The attitude of self-negation and the constant curiosity to find the appropriate management style to optimize the company’s development, enabled Zhang Ruimin to make a powerful blend of western management thinking and ancient Chinese philosophy. Haier integrated western management techniques according to the Chinese saying “If you want to learn how to play chess, you need to play with a grand master” because then you will learn fast. But it also honoured the Chinese approach, as in Chinese medicine, to treat something as a whole system rather than as an individual thing. This has proven to be much more effective and is typical of the oriental long term way of looking at reality as compared to the short-term focus often practiced by Western companies and authorities.