In my last article, I introduced the successes of Haier. I will now focus on how they reached the top and the challenges they faced.
What was the vision for each stage?
I will write about the most relevant topics from the point of view of strategy and organisation development, in the different phases Haier went through in the last 30 years.
What did Haier do?
Haier has gone through a continuous transformation for the last 30 years but five main phases could be considered, with a main vision for each of them. I put together in these five stages with not only the challenges and achievements from a strategic, organisational and cultural point of view but also with some important events and interesting examples.
“If we don’t reinvent the old organisational structure, we won’t be able to implement the new model” Zhang Ruimin
Stage 1, 1984-1990, seven years
- Vision is to create a brand with high-quality products and focused in manufacturing excellence
- The first need is to increase the skills of the employees, equipment and technology. In 1983, Zhang Ruimin as part of the municipality of Quingdao in charge of appliances had established an alliance with high-quality global leader Liebherr Haushaltgeräte (Liebherr), so that the know-how on technology and manufacturing from Liebherr would be transferred to the factory. Quingdao was the first company in China to produce 4 stars fridges (-18 C) in 1985. (Chinese Entrepreneurship: An Austrian economics perspective. By Fu-Lai Tony Yu, Diana S. Kwan)
- However, the technology transfer was not enough to achieve their quality excellence. Corporate culture had to be changed. That was a very difficult point at the beginning, as employees knew by experience, after 10 years of Cultural Revolution, that harder work or better quality didn’t bring better salaries. Zhang Ruimin implemented the Japanese practice “Overall, everything, control and clear” (OEC), that basically controls everything every day, so that employees were challenged in their performance – quantity and quality – and their accountability daily, and salaries were modified daily accordingly. Additional bonuses were awarded to those exceeding the daily targets (this technique would work to improve the inefficient life-contracted civil servants in western countries). He made workers committing errors to confess them publicly in red footprint (what we don’t know is if there was any penalisation for that). According to Ruimin, “this management methodology increases incentive for workers to perform better everyday”.
- In two years, in 1986, the sales had increased by averaged 83% per year. By 2000, sales had increased from 3,5 million Yuan to 40,5, 1100%! In 16 years.
Stage 2, 1991-1998, eight years
- Vision is to diversify the product portfolio
- Haier starts to diversify their products into freezers and air conditioners taking over the Quingdao Air Conditioner Factory and the Quingdao Freezer Factory. Afterwards, it will also enter the markets of washers, microwaves ovens and water heaters.
- Management and operating model (driven by quality) was continuously implemented in the post-merger companies, through the technique “Eat Shock Fish”- Haier unique way of merging, transferring culture and management rules.
- Products coming from the post-merger sections got only the Haier brand after having reached the required quality level. (Implementation of Changes in Chinese Organizations: Groping a Way Through …edited by Ruth Alas)
- Mr Ruimi’s strategy was to search for companies with strong products, facilities, equipment and distribution channels and poor management. He calls them “stunned fish”. He was sure of having a management concept able to transform all those small inefficient organisations. Acquisitions of lots of lossmaking local rivals were done and the brand become omnipresent in China.
- Mid-1990s, China’s home appliance industry was opened to private investors. Government required foreign companies a technology transfer in order to create a joint venture. Leading American brands, Whirlpool and Maytag, European brand Electrolux, and Korean brand, Samsung and LG entered the Chinese market at that time, which made profits fall down. Haier has them all as competitors, additionally to the other three local ones – Rongsheng, Meiling and Xinfei. By 2011, the average profit margin was only 3%.
- In 1992, Haier received the ISO 9001 and started to export
- 1996-1997, production facilities are opened in The Philippines and in Malaysia
- In 1997, Haier applied to the world expo of household electronics that was going to be hold in Germany
- In 1998, Haier entered the black home electrical products market, on top of his white products
- In 1998, Ruimin was invited by Harvard School of Business to lecture about his managerial theory. The international path was accelerated from this point (like giving a super TED speech today!)
Stage 3, 1999-2005, seven years
- Vision is to reengineer the business processes and establish the brand overseas
- Haier, for a period of 7 years, had the target to eliminate the traditional hierarchical structure, redesigning the organisation structure to a matrix structure, and to introduce the market chain model, connecting each employee and organisation unit to the Market (Implementation of Changes in Chinese Organizations: Groping a Way Through …edited by Ruth Alas), with value-adding processes. The connection of each employee with the market chain is known as business process reengineering (BPR). At this point the concept of a Strategic Business Unit (SBU) as individual level is born, that created an individual profit and lost model.
- Efforts were focused in increasing the information transparency (for contract performance, logistics, capital investment, after-sales services, inventory) and reducing operation costs.
- In 1999, Haier arrived to US, opening a plant in South Carolina, becoming the first Chinese company opening a manufacturing plant in US, positioning itself as direct concurrence to General Electric, Whirlpool, Frigidaire and Maytag. Haier wanted to be challenged by the best brands. If they could succeed, then they would be able to succeed in any other country (it is like learning to drive in Rome! After that you can drive everywhere). The goal for Haier was to get a 10% of the market by 2005. According to Euromonitor report in November 2016, Haier had 25% volume share, followed by Whirlpool Corp with 17%.
- In 2000, Zhang Ruimin gave another lecture on Haier’s managerial innovation, this time at IMD in Lausanne
- In 2001, China enters the World Trade Organisation
- In 2002, Haier entered Pakistan. In 2003, Jordan
Stage 4, 2005-2012, eight years
- Vision is “Zero distance to the customer”
- In 2005, Mr Raimin start to introduce the “RenDanHeYi win-win” model and the “individual goal combination” model. On one hand, Ren means employee, Dan means customer and RenDanHeYi means to connect customer with employee. On the other hand, individual refers to the strategic business unit (SBU) and goal to the competitive market goal. There are not strict differences between employees and leaders except for responsibility. Leaders take responsibility for planning strategy, planning projects, building cross-functional teams and motivating teams. For 5 years Haier changed the organisation structure 40 times (Implementation of Changes in Chinese Organizations: Groping a Way Through …edited by Ruth Alas)
- The first thing Zhang Ruimin does, with the target to reach zero distance to customer, is to invert the traditional pyramid structure (employees facing the customer will be in top layer – Tier 1 – and top management will be in the last layer – Tier 3 – and to introduce the autonomous self-managed operation units, ZZJYTs (Zi Zhu Jung Ying Ti). There are three kind of ZZJYT facing the customer: the market, the product and the factory type. In turn, each kind of ZZJYT has 3 layers, with no hierarchy but different responsibilities, that Haier call tiers. Tier 1 faces the customer, understand the customer and provides the right products, comprising sales, R&D, designers, frontline plus additional support needed, with a size between 10-30 people. Tier 2 supports Tier 1 in everything that is needed and allocates all the support functions (HR, Finance, Legal). Tier 3 put together all the management roles responsible for the corporate strategies. People in these ZZJYTs are not permanently assigned. Whenever Management approves a new product, an auction is launched. Anybody in the company can send a business model proposal to it. The selected person will be the leader of the ZZJYT, with full responsibilities as an entrepreneur, in charge of staffing the team with the help of HR in Tier 2, costs, planning, goal setting, penalties, incentives. However, the final decision to belong to the ZZJYT will be bilateral (leader-employee)
- Every employee can create and manage his own ZZJYT to implement a project, and would become the leader. This is the example of Lei Yongfeng, an engineer who listened carefully to a complaint from a customer about the air conditioner blowing too cold air – what seems a quite common complaint and not a really extraordinary one, I would say. Having the empowerment of taking decisions, he formed a self-managed team to solve the issue that resulted in a “corrected” air conditioner model, which mixes the air from the unit and the air, increasing the temperature of the jet of air. That aircon model set a record on one-day sales in China.
- In 2012, most of the middle management disappeared in order to empower self-managed teams, ZZJYT. According to Financial Times, 10.000 middle managers were reduced from 2013 to 2014 reducing the total amount of FTE from 86.000 to 60.000. More than half of the vice-president -level executive positions were also removed
- Contracts are established between the ZZJYTs whenever any kind of activity is needed
- Haier decides to stop offering products and offer services to customers
- The leaders also embrace the open innovation and search for the best collaborations in the world
- Goals are established by the employees, not by the management, with associated incentives or penalization. There are goals as well for the ZZJYT, for the organisation units and for the corporation, and all should be aligned
- The target in recruiting is the selection of best candidates with entrepreneur skills or the transformation of regular employees in entrepreneurs (their own CEOs)
- Competence is omnipresent. The leader of the ZZJYT has a possible candidate to replace him within the team in case he/she fails to reach the goals or the team members chose him the step out. This mechanism of keeping competence alive is called “catfish mechanism” – from an old Norwegian legend.
- Everything that can be prepared in detail in advance should be done in this way. This methodology facilitates to be as fast as possible
- Haier uses a performance model called individual-goal-pay at individual and ZZJYT level, with four pillars: setting goals, assigning the right people to the right job, assessment of execution, establishment of appropriate incentives
- Haier has an internal labour market. They do not offer jobs to its employees but the other way around, the employees should search for a job, following their preferences and skills
Stage 5, 2012 to 2017
- Vision is to build a platform-based business, provide personalised experience and encourage employees to become entrepreneurs
- There is a need to reinvent the model from a subject-object-tool of managers to users-employees model
- In 2015, Haier disrupts itself again with the new model RedDanHeYi 2.0, what Zhang Ruimin presented in the Drucker Froum in 2015 as “building an ecosystem to co-create and win together”. Haier defines itself as user-oriented (versus the customer-oriented). According to Zhang Ruimin the difference is that “customer is a one-time transaction versus user that is a continuous interaction and participation, a best-in-class experience”
- In the new platform ecosystem, there are no hierarchies, only 3 categories of employees in Haier, with no higher or lower rank. Category 1: the platform owner responsible for having the right entrepreneurial teams to achieve growth. This is a servant responsible for watering and fertilizing the ecosystem. Category 2: the micro-entreprise owner, who leads an entrepreneurial team that is growing in the platform. Category 3: the employee-turned-entrepreneur. The target of all these people is to create a best-in-class user experience
- The challenges come from the organisational, marketing and management perspective: “On the organizational front, our challenge is how to transform from the cascade process into an interconnected ecosystem. On the marketing front, the challenge is how to shift from customers of a one-time transaction to users enjoying a best-in-class experience throughout. On the management front, the challenge is how to decentralize and disintermediate, turning command-and-control functional departments into platforms for sharing and motivation, enabling everyone to become a center and be at zero distance from the user.”
- Indirect functions, that were part of ZZJYT Tier 2 in the previous model, are transformed in two platforms: sharing platform, based on information technology instead of people, and the motivation platform. Finance would be within the sharing platform. Here a financial professional gives service to 350 employees. The platforms rely mainly in technology instead of in people. People remaining are those self-managed and taking decisions.
- Haier is no longer giving a salary to the employees. Employees are paid from value created for the users. The platform owner decides when that value is not created anymore and they have to leave the platform.
- Haier provides a platform for more than 2000 micro-entreprises for which Haier is only once of their shareholders. Haier help everyone to collaborate and create the best-in-class user experience.
Why are western companies so obsolete, so stiff? As Jorge Zuazola mentions what Haier has reached has been supported by Ronald Stern for decades, but western companies were not going out of the confort zone and were proud of their hierarchical structures with ego-centric management roles.
These are the main book references. All the web references are provided in embedded links in the text.
- Reinventing Giants, by Bill Fisher, Umberto Lago and Fang Liu, 2013
- Implementation of Changes in Chinese Organizations: Groping a Way Through, by Ruth Alas, 2009
- Chinese Entrepreneurship: An Austrian economics perspective, by Fu-Lai Tony Yu, Diana S. Kwan, 2015
Read in my next articles how Haier reached the top and what we can learn from them – coming soon. You can subscribe to the blog if you want to get automatic publications about organisation of the next level