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Thursday, July 6, 2017

Leading to Become Obsolete 07-07

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Haier CEO Zhang Ruimin is transforming a manufacturing giant into a platform for entrepreneurship — and his employees into self-governing entrepreneurs.We live and work in an age when the need for corporate reinvention is treated almost as a given. Countless CEOs talk about reducing hierarchy and increasing agility, flexibility, and connectedness to the market, and virtually every large company is “transforming for digital.” Yet in most organizations, lip service to change remains more the order of the day than real change itself.

Then again, you might work with Zhang Ruimin. The CEO and chairman of the white goods giant Haier Group Corp., based in Qingdao, China, has done what most chief executives dare not even dream about. He blew up much of the administrative structure of a global manufacturing enterprise, eliminating 10,000 management jobs that once held it together. And he has guided the organization to reemerge as a network of entrepreneurial ventures run by employees, whose compensation is based on the success of their products in the market.

In its transformed state, Haier is no longer a traditional manufacturer corporation so much as a platform that provides financing, support, and coordination for microenterprises all focused on developing products and services for the “smart home,” the internet of things (IoT)-based concept of a fully connected and networked household.

Haier calls its management model Rendanheyi, a term that refers to connecting employees with users. The company sees it as a “win-win” model for reducing the distance between the organization and its end users to zero and moving as close as possible to a state of co-creation with the customer.
This isn’t the first organizational innovation Zhang has led at Haier during his three decades with the company, but it is certainly the most profound. The 68-year-old executive, who has been named to a number of “most admired” and “top thinker” lists, received the Legend in Leadership Award from the Yale School of Management’s Chief Executive Leadership Institute in 2016. In noting the honor, Jeffrey Sonnenfeld, a senior associate dean of leadership programs at Yale, called Zhang “a genuine global business giant who inspires mythic awe in his competitors, his peers, and his fellow Chinese business leaders.”

During a spring 2017 trip to Washington, D.C., Zhang sat down with MIT Sloan Management Review editor in chief Paul Michelman to discuss Haier’s latest reinvention. The interview was conducted through a translator, and a further exchange took place via email. What follows is an edited and condensed version of the conversation.

MIT Sloan Management Review: The strategic transformation that you are undertaking right now is unprecedented in many ways. I’d like to begin by asking: Why now?

Two things make us believe now is the time. One is the internet, and the other is the internet of things. The internet has closed the distance between parts of the organization and between the organization and its customers to zero. This means that traditional management models — like Taylorism and bureaucracy as proposed by Max Weber — are no longer relevant. Then there is the internet of things, which represents the next generation of the internet. Despite a dozen years of development, the idea of IoT has not taken off — or as we like to say, it has not been ignited. We are undertaking this fundamental transformation of our corporate structure using the internet in the hope of becoming a leader in IoT.

Do you believe that this is the only viable path to lead in IoT? Did you consider other possible organizational forms?

We looked at this question from two different angles. First, we have been coming to the U.S. for years. We’ve talked to many corporations in the hope of finding a management model from which we can learn. But we have failed to identify the right one. So we decided to explore on our own. And we have come to believe that the traditional corporate model has to be upended and disrupted to survive in the internet era.

Secondly, what’s called for in the IoT age? It’s a direct interaction with users and a focus on creating the best user experience. However, in the traditional economy, there are no “users,” there are only “customers.” Customers are anonymous; users are real people who are directly involved in the process of creation.

Why hasn’t IoT been ignited? Because an interactive platform for users — where companies can take direction from the people who will buy their products — has yet to be created. We need to establish a “community economy” with zero distance between customers and companies. Our end goal is to have a true connection with our users and to create legitimate lifetime value for them via the internet of things.

Will every Haier business run on the platform? Will anything be carved off and managed in a more traditional way?

The platform is the only place for a business to go to. By eradicating our middle management layer — and laying off more than 10,000 middle-level managers — we have destroyed the original hierarchical structure. So we are merely a platform for entrepreneurs. All the businesses have to succeed as innovative entrepreneurial enterprises, or they will be kicked off the platform. The platform is also accessible to entrepreneurial projects from outside Haier. Today, we have more than 3,000 microenterprises operating on it.

What has surprised you the most along this transformative journey?

Three things. The first is our transformation from a traditional hierarchical organization to one with more than 200 different entrepreneurial teams operating thousands of microenterprises on our platform. This was totally unimaginable back in 2005, when the idea for this strategic transformation was proposed. The structure we have now is totally different.

The second thing is the variety of markets the entrepreneurial teams can enter. For example, our gaming laptop has grown to become the No. 1 market player in China in the short span of two to three years since the laptop team became entrepreneurial. The team did not come to me for approval. All the decisions were made by the [team].

But what has surprised me most is that employees have accepted the radical compensation change. Previously, we used IBM’s broadbanding model, where pay was determined based on an employee’s position and contribution. Now, compensation is determined by how much value is created for the user. When employees create value, they get paid. If they don’t create measurable value, they don’t get paid. Ultimately, if they don’t create value, they have to leave.

As we think about the Haier platform as a place where entrepreneurship occurs, many of us will draw on what we’ve learned and witnessed about successful entrepreneurs — that they possess a set of skills and characteristics that differ significantly from people who succeed in more directed environments.

We don’t require employees to possess certain skills. We don’t impose a training system or coach employees on how to be entrepreneurial. I don’t believe there is any training that is so effective as to transform people into entrepreneurs overnight. If someone can meet the requirements — if they can help start up a business — then they will prosper on the platform. If they cannot, they probably have to leave.

At the same time, we have external IoT entrepreneurs joining our platform because they believe it offers resources and support that other platforms do not. We have developed a networked organization that attracts the most capable people. We often say that the whole world is now our human resources department.

Was there anything done to support employees’ transition?

What we do is help people form communities of interest so that they can work together as entrepreneurs.

The process begins with an objective. For instance, someone comes up with an idea for a product targeting a certain niche of the market. And then people from different departments or disciplines — research and development [R&D], sales, manufacturing, marketing — will sit down and analyze its viability across all the relevant dimensions. If they believe it is viable, they will form a community to bring it forward as a new microenterprise.

Then they need to attach their plan to their compensation. We call it a predefined value adjustment mechanism, or VAM, which defines what goal the plan has to realize and how the members of the community will be paid if the goal is achieved. This is a signed agreement between Haier and its microenterprises.

We also have microenterprises that focus on more cutting-edge projects. These teams may not plan to achieve revenue for a couple of years. Here, we set different targets and schedules. For example, at a certain point of this endeavor, they must be able to attract external venture capital. If they can’t achieve the investment by an agreed-upon time, then they have to let it [the project] go, or we might invite another entrepreneurial team to work on the project.

Many leaders have a vision for the way people in their organizations will act. I’m curious to know if you’ve imagined certain core behaviors that indicate whether an individual will be successful?
I think most business leaders tend to view their employees as passive performers who take orders from their superiors. According to traditional management philosophy, there are managers and those to be managed. But in my opinion, everyone is capable of leadership — or in our words, “Everyone can be their own CEO.”

The reason why a company’s employees are not leaders is that they have not had the soil or platform to grow upon. With access to such a platform and with entrepreneurial competence, anyone can prosper.

In our model we have delegated the major powers of corporate executives to the employees — or at least to the microenterprises — including the power of decision-making, the power of selecting and appointing personnel, and the power of financial allocation. Other companies would not do that. They believe that if these powers are delegated, managers will lose control. Our goal is different: We are trying to motivate employees to unleash their potential and realize their own value. We don’t want to control them.

How does this transformation affect frontline employees, particularly in the manufacturing area? What has changed with respect to the factories themselves, such as how they’re run and how individuals in manufacturing jobs are compensated?

That’s a very important question, and one of our biggest challenges. It’s true that manufacturing workers do not typically face the market directly, but we can create a connection to the market by allowing our different production lines to compete with one another.

We have 108 factories all around the world, each possessing many production lines; every production line is a microenterprise. We evaluate the performance of these microenterprises based on cost, delivery and service quality, and market response to the products they make. This evaluation determines how they are qualified to get subsequent orders. Some production lines are able to acquire many orders. Some get fewer — and as a result employees on those lines are not paid as well. Lines gaining more orders can merge with those having fewer.

In this way the production lines are organically connected with the market. Moving forward, we are forging an even tighter connection by allowing users to work directly with the factory to place, customize, monitor, and take delivery straight from the production line. We have eight of these “interconnected factories” operating now.

As a fully realized open platform for entrepreneurship, what will Haier provide or enable that can’t be replicated? Thinking ahead, what will Haier be good for?

This is a question we are constantly reflecting upon, and it guides our direction. Though we have turned Haier into an entrepreneurial platform, we are not an investment company. The goal of an investment company is to put in money and take out profit. After an IPO, the goal is fulfilled — that is not our aim.

Our primary aim is to ignite the internet of things. All the entrepreneurial teams on the platform — even though they cross industries — focus on the smart home in some way. This is also why so many teams outside of Haier are willing to start up smart-home businesses on our platform. If they turn to venture capitalists, they will get money but not coordination. On Haier’s platform, businesses gain access to our sales network, logistics operation, and R&D system. Haier’s platform offers the help to IoT businesses that other platforms or funds cannot.

Today you’re working within a certain construct: the smart home. As you explore the potential of a truly open platform for entrepreneurship, how far will you allow yourselves to stray from this focus?
The smart home is already encompassing and covering many different entrepreneurial ventures. If we cannot succeed in this very broad construct, other goals are undoubtedly out of reach.

What’s most important is our resolute aim to be the enterprise that can truly ignite the whole idea of IoT. And this requires evolving from stand-alone products to products connected to the internet and on to a network of products and services all connected to each other.

So, what has become of the electric refrigerator in this scenario? It has transformed from a single appliance into the hub of a network connected to 400 organic food suppliers that monitor inventory levels and keep the refrigerator stocked. This model — and this level of interconnectedness — is really difficult to achieve in terms of both technology and business. For companies, revenue no longer comes solely from selling refrigerators but also from sales of organic food. These are two different concepts. When you’re taking into account this kind of transformation, a true ignition for IoT becomes very hard to reach.

What facets of the transformation have been enabled by Chinese organizational tradition? And what elements, if any, have been made more challenging by the same tradition?

China doesn’t have any well-established corporate models. When it comes to business, Chinese companies basically replicate Western management. So, it’s not as difficult for us to disrupt the model because it’s not Chinese in the first place.

But I do think Chinese traditional culture can aid this transformation. Western culture mainly focuses on dichotomy and atomism. In a typical Western company, activities are siloed by departments and then further cut up into more detailed tasks.

In China, we tend to look at things from the holistic perspective. Consider the difference between traditional Chinese medicine and Western medicine, which tends to focus on the cellular level of the human body. If something is wrong with your stomach, then something is wrong with your stomach.

So, the West will look more closely: What part of the stomach is wrong? Whereas in Chinese traditional medicine, we will not just look at your stomach. We will consider the connection between your stomach and other organs of your body, and we will look at your body as a whole before providing a cure.

So we are applying this traditional holistic thinking to our management transformation. The internet and IoT require enterprises to see things from the whole and systemic perspectives and to stop dividing everything into tiny parts.

That might suggest that the open platform model could find some challenges in scaling across geographies. Do you think that Western companies will have a hard time following suit?

This is a big challenge for us. We are a global business and must be able to globalize Rendanheyi. We acquired a consumer appliance business from Sanyo Electric Co. of Japan and used this model to transform it. We also acquired Fisher & Paykel Appliances of New Zealand, and they too have gradually accepted Rendanheyi. So it’s working, although at present [it is] applied only in the Asia-Pacific region.

The biggest challenge at the moment is GE Appliances [which Haier bought in 2016]. It’s a very large American company with a standard linear management model, where every action has a basis. In its hierarchy, there are protocols that direct employee behaviors at each step.

Rendanheyi is a nonlinear management model in which employees must be able to answer the question, “What do I do next?” for themselves. There is no one for you to ask — and that’s a challenging transformation.

Since we acquired GE Appliances, we have not sent a single executive over to the U.S. to implement our model. Instead, we have focused on communication and education with the existing executive team to make sure they understand and are willing to accept this philosophy. And they are coming around.

You are a student of Western management and familiar with the idea of corporate culture as an adhesive framework that helps ensure that people are all moving in the same direction. But as we think about an organization that is self-organizing, that is freely incorporating internal and external resources, do we have reason to question whether culture remains a significant factor?

I think an organization’s values are very important. The core value of Haier is self-negation. When most companies achieve success, they tend to fall into states of self-satisfaction and complacence, celebrating and falling in love with their achievements. That is not us. Even when we have a great success, we question where we can improve. Instead of being proud, we realize our own defects and mistakes. We challenge ourselves to reach another height.

This core value was essential in our own transformation from an execution culture to an entrepreneurial culture. Because we have a DNA of self-negation, it is easier for us to disrupt ourselves and to accept the need for change. We keep saying internally to our employees that there’s no such thing as a successful business. There’s only a business that is compatible with the task at hand.

So, if you are doing well right now, don’t be conceited. You’re just doing the right thing at the right time. Things change all the time. The only thing that doesn’t change is time itself. So, if you don’t keep up with changes, you’ll be quickly made obsolete.

I have met with many companies all around the world, but few of them possess this virtue. Usually they are arrogant.

Even as you create a business that aims to transcend traditional management and become self-perpetuating, your personal leadership of Haier demonstrates the value of a strategic visionary. How will the organization survive you? I can’t help but think that you may be Haier’s Steve Jobs.
(Laughing) This question has been raised by many people. I often ask it myself. I’ve been working at Haier for more than 30 years, but even if I can keep working and keep leading the organization, it doesn’t guarantee future success. My task is not to cultivate a replacement but to cultivate many people who are willing to challenge both themselves and the status quo.

That’s the reason why we have installed Rendanheyi. We are developing a multitude of microenterprises and entrepreneurial teams with the goal of dispensing with my authority. Rather than listening to my orders, my instructions — which might turn out to be erroneous — our teams follow the demands of the market and of our users. This will lower the failure of the individual microenterprises and the probability of failure for Haier as a whole.

Nowadays, the management model in many enterprises is “empowerment,” but we are not empowering; we are returning all the power to the employees.

You just mentioned Jobs. There is a book about him titled To Live Is to Change the World. That is the organization we are designing — one meant to keep changing both ourselves and the world.

What is implicit in your answer is that Haier is on this new path permanently. And if it is, then perhaps traditional leadership will not become necessary. Maybe you don’t even need a single CEO or chairman.

Among so many foreigners I have met, you are the only one who truly understands me.

Reproduced from MITSLOAN Management Review

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