We’re familiar enough with product and process innovation – the ‘how’ of management – but, as many business writers have noted, innovation in management and organisation itself is frustratingly rare. I would argue that this is largely due to the tramlines of shareholder value, which lock in command and control and lead undeviatingly to the straitjacket of budgeting, targets and performance management.
But even within those guidelines, innovation is possible – although it probably helps to start from (and in) a different place, and in ignorance of the accepted rules. Take the Chinese white goods manufacturer Haier, which beginning with relatively conventional tactics in the 1980s, has made business model and management innovation its central differentiator. As the academic Bill Fischer, professor of innovation management at business school IMD, tells it, Haier has gone through four incarnations, each more radical than the last.
Back in the 1980s, as Deng Xiaoping opened up China to the outside world, one of the first objects of Chinese consumer desire was the refrigerator. Consumer goods were scarce – Fischer remembers seeing would-be purchasers besieging delivery trucks with bundles of renminbi before they even reached the stores. Quality was even scarcer. Fischer also recalls the day when the CEO of a small manufacturing cooperative grabbed headlines by publicly lining up 76 defective fridges – nearly a month’s production – outside the factory and setting his workers loose to smash them up with sledgehammers.
The CEO was Zhang Ruimin and the company Haier. Zhang was a young town official and Haier a near-bankrupt municipal enterprise that he ended up running because he couldn’t refuse. Faced with an emergency rescue, Zhang decided that the only way the company could survive against worldly global rivals was to build brand and quality, both nearly non-existent in China at the time.
After trashing faulty fridges to show what he thought of them, Zhang’s first step was to instill basic discipline through a tough performance management regime (sample directions: ‘Urinating or defecating in workshops is prohibited’, ‘Stealing company property is prohibited’). That set in train a period of rising quality and work discipline, on the back of which in the 1990s he reengineered the company to privilege customer-responsiveness and innovation, which moved it into services as well as products. The front line took more responsibility, disciplined by an internal market that rewarded the best ideas and performers.
The third phase took a further step in the same direction. In an effort to get closer to customers Haier literally turned itself upside down, adopting demand ‘pull’ as its market facing mode and splitting itself up into 200 or more self-managing, customer-facing teams supported by management from below – the so-called ‘Rendanheyi’, or ‘win-win’ model. Under Rendanheyi, new-product development times and costs were slashed by orders of magnitude. Between 2005, when the model took shape, and 2014 group profits jumped twelvefold.
Haier’s latest move – dubbed Rendanheyi 2.0 – is the most startling, however. Testing uncharted waters, Haier is remaking itself as a platform organisation, opening itself up to an internet-enabled world in a way few companies have ever imagined, let alone executed.
Yet the change is anything but arbitrary, according to Fischer. The key to understanding Haier’s successive transformations, he says is that each is a fresh structural expression of Zhang’s commitment to two core principles: serving customers and making best use of the talent of employees.
On the customer side, the internet had made customers better informed and faster to react than ever before. But now, as Zhang saw it, the Internet of Things (IoT) was about to take connectivity, speed of reaction and service to a new dimension. The future would be different. A smart fridge connected to wearables was just the start of it. But while Haier was by now managerially experienced and savvy enough to make a sideways move into adjacent product areas, there was no way it could envisage the dramatic oblique shifts into otherwise unrelated domains that the internet was opening up. To be able to do that, everything about the business – business model, supply chain, organisation and the way to manage it – would have to change all over again.
In this new world, it wasn’t enough for customers to be close: they had to be inside.
Zhang’s model for Haier’s next structural makeover was an unlikely one: the iPad. Here was a standardised hardware product, turned out in millions by a consumer products company, that had altered the way people used computing devices and viewed content – and also the company that created it. But the secret of the iPad wasn’t a conventional killer app for users. The killer app was Apple’s when it opened the device to developers who could turn a standard platform into anything anyone wanted it to be.
What if, Zhang mused, Haier could become an organisational iPad, a spine or skeleton on which anyone could graft any kind of commercial operation, inside or outside Haier’s traditional spheres of activity? That would change what a company could be used for, just as the iPad had changed the scope of computing. Instead of being a closed system, an ‘iPad company’ would dissolve boundaries and act as a ‘co-creation platform’ for a myriad of micro-enterprises (more than 2000 at last count) in which Haier would take an equity stake. It anticipated that some start-ups would be in fields very different from its usual beat. One new Haier micro-enterprise is using fintech to reengineer the Chinese egg industry and aiming to do the same with pigs; another is tearing apart conventional household appliances and reengineering them as smart connected devices.
Launching Rendanheyi 2.0 in 2015, Zhang noted: ‘The traditional mission for companies is to pocket profits in the long term. Our mission following the transformation is to become a shareholder in our micro-enterprises’. At the same time the initiative turns Haier employees into entrepreneurs. He added: ‘Under Rendanheyi 2.0 all of our employees can become entrepreneurs with decision-making authority, able to distribute benefits and optimally unleash talent. Haier as a company is no longer providing jobs to employees; we are instead offering a platform to become an entrepreneur’.
This might seem like a leap into the unknown. For many managers in established businesses it is scary and incomprehensible. But Fischer takes a different view. It’s certainly true that the changes Haier is currently making seem way more radical than those of a decade ago. It’s also the case that in a company that always seems to be in motion, some of Haier’s moves have been more successful than others. But taking the rough with the smooth, they have worked: otherwise Haier, having taken over GE's appliances arm in 2015, wouldn't be the biggest white-goods purveyor in the world. But this move, says Fischer, may be less risky than meets the eye. ‘I think Zhang Ruimin would say that today’s radical changes are all of a piece with, and in some ways an inevitable consequence of, many smaller changes made in the past, which have all been in the direction of pushing P&L responsibility down the organisation,’ he says. Making workers entrepreneurs and leaders in micro-enterprises is just a further step in devolving that accountability.
As well, it begins to make sense of an apparent paradox. As Zhang acknowleges, Haier in its present radically devolved shape is largely his creation. So how will it fare without a great leader to guide it?
Rendanheyi 2.0, says Fischer, modifies Zhang’s job too. ‘One of the attributes of great leadership is creating a safe base from which employees can do unusual things without feeling exposed’, he notes. That’s what the reforms have been designed to do. Now the task is to convince Haier’s people that coming through the transformations has changed them as much as the company. They are already entrepreneurs with success stories to tell. What’s more, while the future is unknown, as leaders of nimble, customer-oriented enterprises on Haier’s platform they are already further into it and may be better placed to seize its opportunities than their equivalents in almost any other large company in the world. Western rivals would be unwise to bet against it.