16th Jun. '13

Reinventing Management – How one Chinese company revolutionized they way they work

A post by Sabrina (No Fear community coordinator)

Our contributing author Bill Fischer is Professor of Innovation Management at IMD, in Lausanne, Switzerland. He is what in past times might’ve been called an “old China hand”, since he has worked various assignments in the country since 1980. His most recent book, ” Reinventing Giants” [co-authored with Umberto Lago and Fang Liu] deals with Chinese home appliances manufacturer Haier Group’s innovative approach to management.

It may well turn out to be one of the most significant books written about management in recent years. So we took this opportunity to conduct an interview with our esteemed co-author on the key factors he discusses in his new book.

Haier Group is a Chinese multinational consumer electronics and home appliances company. In 2011 the Haier brand’s market share in white goods was 7.8. percent, the largest in the world. The company’s roots reach back to a refrigerator factory founded in the 1920s. The current CEO Zhang Ruimin was appointed to run and turn around the then struggling enterprise in 1984.

Interview with Dr Bill Fischer:
conducted by Arttu Tolonen

AT: Why was writing this book necessary?

BF: There are a couple of reasons. The primary one is that this is the story of an organization that believes enough in the talent of its people to really build its entire business model and corporate culture around the talent that it has. The entire time they’ve been in business, it’s been about taking full advantage, in a positive sense, of the talented people that they have. My belief is that that is a most admirable belief to build a business upon…

But, in addition, this is an 80,000 person business – not some impractical Silicon Valley razzamatazz start-up, and it’s a Chinese company, to boot, which is interesting because so much of what we hear about in terms of globalization is from a Western perspective, that it’s almost as if Western multinationals are alone in building globalization. There’s far too little written about companies in emerging markets. We tend to think of China as a low wage/cheap price economy, but here we have a Chinese organization that’s trying to compete on the basis of knowledge rather cheap labor.  And, of course, it’s a huge success story.

AT: We also tend to think of China as having a very hierarchical, top down management culture, politically and otherwise.

BF– Exactly. So this company not only did all of the things that Pekka talked about in his Digital Cowboys book [No Fear], but they’re doing it in a way that breaks all the stereotypes that we have about China. What was going on at Haier was far too interesting to not pay attention to. To be fair, Haier is an exceptional company. Most Chinese companies will, in fact, live up to the old stereotypes we have about them, as do many companies around the world, but Haier has never conformed to the typical ways of doing business, and it’s a world market leader as a result.

Another interesting thing about Haier is that it’s an old economy, low-tech company. So many of these stories about giving talented people autonomy come out of hi-tech companies, places like Finland and Silicon Valley – Angry Birds and Google. It’s actually a very small set of geographies where we tend to think people are capable of doing that.

Our book is a low-tech, emerging market story about a company that is doing something truly breathtaking and showing a real willingness to take chances and place bets on their people.

AT: So they’re breaking stereotypes on a number of levels.

BF: Right. Exactly!

Lessons to be learned

AT: What are in your view the most valuable lessons to be learned in Haier Group’s success and the way they’ve achieved it?

BF: I’d start with the observation that every time they’ve changed their business model they did it before they had to. In other words, there was never a “burning platform”.  Sure, there were calls to action, but they never waited until they were in a high-risk situation before they changed. In fact, they were almost always doing well when they reinvented themselves. And, not only did they change their business model, but they made very interesting, profound and detailed changes in the way in which they work — their corporate culture, to support the new business model.

2nd, this is a story of continuity; for over thirty years they have had essentially two objectives: 1. To better serve the customer; and 2. To unleash the talent in their employees to accomplish this better customer service.

AT: Why do you think they instigated these changes before it was absolutely vital to do so? Obviously, many companies don’t.

BF: The fact is, it’s easier to do it before it’s absolutely necessary, right? When you are doing well, you have the resources and the confidence to take some risks and make some changes. So many companies do it too late, so they don’t have the resources and everyone’s afraid.

I believe the reason Haier is able to do this is attributable to visionary leadership. They’ve been fortunate to have a group of leaders at the top for the entire 30-some odd years they’ve been active and these leaders are quite curious people: they’re smart, they’re well-informed about management literature, and they’re wiling to reinvent themselves, in a sense. They’ve read everything there is to read about the art of management. This is something you don’t often find at the top in Western companies, and  yet here we are finding it in a Chinese company. They can talk to you about Gary Hamel, Peter Drucker or anyone else you want to talk about.  I think they’re an exceptional leadership team. Very professional!

AT: So it’ll be interesting when they start to change generations?

BF:  I think they are concerned about that. One of the things they are talking about for the future is what they call “management without bosses”, which is designed to say to people that “you don’t need a top management superstructure to do what you’re already doing. You need to be confident enough in what you’re dong so that you can make important decisions without relying on a boss to do it for you.”

AT: Once again, it’s just letting people get on with their jobs.

BF: Exactly! And that has always been matched by an absolute focus on the customer. Every company that I know talks about being customer-centric, but all too often it’s all talk and no action. Haier is really doing customer-centricity. They take it very seriously. They’ve changed the entire way they work, more than once, to achieve it.

Lessons implemented

AT:How did they change the way they work?

BF: For example, there was a recent incarnation of the company’s vision which concerned creating  “zero distance with the customer”. In order to do that, they turned their organizational pyramid upside down and began to deconstruct boundaries that existed between the organization and its customers. In some cases they have invested in joint ventures between their employees and their customers’ employees in order to break down the boundaries that traditionally exist within a value chain.  But more profound to my mind is the question that once you turn the pyramid upside down, why do you need middle management?

In a regular organizational pyramid, middle management has always existed to explain top management’s views to the people below, and make sure that they are executed upon. If you turn the pyramid upside down, are you explaining the bottom’s ideas to the top management? Not likely. So, Haier asked very hard questions about what should be the role of middle management in such a new environment and eventually decided to take that middle management slice out of the hierarchy.

AT: In the No Fear book there was a lot of talk about turning middle management into something that provides real support for the people working in the frontline… Is this what is happening at Haier?

BF: Here’s what I would say… They’ve reinvented themselves three or four times, and if you look at how they did it in their third incarnation, that’s exactly what happened. They turned senior management into a support function.

Now, they are heading into their fourth incarnation and thinking, “If we have management without bosses, why do we need the support function?” It’s no longer necessary. So, they are now trying to do away with middle management entirely and the way they are doing it is to recognize middle managers as people with particular types of functional expertise that can be integrated directly into the self-organizing work units which essentially characterize how Haier is presently structured.

In other words, they’ve moved from a vertically structured functional organization to one consisting of self-organizing work groups, where all workers competitively bid for projects.

AT: I love the fact that you use ‘incarnation’ for the changes the company goes through. It’s very evocative.

BF: I think the metaphor of incarnation works well because everything at Haier is built-up through accretion of past experiences. If you think of any organization’s  present positioning, it’s all about an organization’s existing markets and existing competencies. Moving into the future involves some combination of new markets and new competencies. What Haier has never done is move from existing markets and existing competencies directly into new ones. Instead its growth path was always new competencies in old markets or old competencies in new markets.  So, it’s very much like reincarnation, where the past should count for something. I’m not really a believer in reincarnation in the spiritual sense of the word, but I think it applies here. At Haier what they know today is a prerequisite for what comes next.

I don’t think Haier would ever do what Sony did, for example, when they  attempted to go directly from hardware into entertainment. Haier’s always building on what they have learned from the past.

AT: If we look at their incarnations, what are the lessons a hi-tech company could learn from the things they did?

BF: In the first incarnation, the goal was make product quality perfect in order to gain brand recognition, at a time when China had relatively low brand awareness or differentiation.

In the second incarnation they recognized that everyone was eventually going to have good quality, so they were going to become a service company and be more responsive.

In the third incarnation, where the goal became having zero distance to customer, they were trying to anticipate customer needs rather than respond to them; from mere responsiveness to customer intimacy.

I believe that somewhere in the second incarnation they started thinking about service provision as a component of what they were selling, instead of just hardware. So, while in the first incarnation, they were selling better brand attributes, by the second, they were starting to sell outcomes.

Outcomes are an interesting way of thinking about service organizations, right? We’ve seen in many service offerings, like telecommunications, airlines, hotels and trucking, that they’ve moved from being responsive to trying to be smarter, in the big data sense of the word. In every case, what these companies are doing is trying to do it to anticipate what’s happening in order to serve the customers’ needs more effectively.  I think Haier’s doing that as well. And I think the lessons are quite applicable to other sectors.

AT: From what you’re saying, it sounds like they’re almost acting like a startup.

BF: Oh absolutely. Let me give you an example – about two or three years ago they decided they needed a three-door refrigerator model. After the decision was made to go with that, they put the project out for bids inside the company and anybody could bid for that responsibility. A young guy, probably around 36 at the time, came in with the best business proposition. They gave him the opportunity to start that business and run it.  Literally start the whole thing up.

He had to form a team, get designers, go out and get manufacturing groups within Haier to bid on the work. Two or three years later, he’s running a $1.5 billion business. It’s very much a startup.

AT: That’s the sort of exciting stuff you generally don’t get to do in a company that size.

BF: You normally don’t get to do it in most businesses that I see; you definitely don’t get to do it in old economy businesses, and you particularly don’t get to do it in emerging markets. All of these stereotypes seem to falling apart as we talk.

AT: I assume this sort of thing is the key to why Haier manages to attract the sort of talent, digital cowboys, that usually shy away from big, established companies?

BF: Yes, I believe they have an advantage in the market because they’re seen as a company that gives people chances to dream bigger.

Communication across hierarchies

AT: In your view, how did the Haier Group manage to get to the point where they can have people in different hierarchical levels communicate with each other as equals? That is pretty tough for many companies regardless of where they’re from…

BF: Today, Haier has three levels of hierarchy and they will soon be down to two. The first level is the people who run the ZZJYTs, the customer-facing, self-organizing autonomous workgroups. The second level, which is soon to disappear, are the so-called support functions. They are seen more as consultants than directors. The third consists of a very small group of senior managers at the very top.

Your question is a good one and here’s what I think is happening:

They’ve already attacked the reporting mechanism, so there is no longer anything resembling traditional reporting up and down a siloed, functional line – in some ways, that actually started thirty years ago.  Today, everything, including your income, is performance based. It’s all driven by pre-set contracts that you enter into at the beginning of the year. You’re no longer defined by your functional specialty, as much as by the ZZJYT you work in.

The three-door refrigeration ZZJYT, for example, enters into contracts with the manufacturing ZZJYTs they work with, and their contracts stipulate how much it’s going to cost to produce the unit. They enter into contracts with the marketing groups [ZZJYT] about how many units they’re going to sell. Their performance is determined by whether they live up to their contracts or not rather than how somebody in the hierarchy thinks they’re doing.

One additional characteristic of work at Haier that I’d like to mention is that every team is able to decide quarterly whether they still have confidence in their leaders. If the leadership is beginning to do something that is incorrect, wrong or foolish, their teams, who are very much driven by their own performance-based incentives, will vote them out and bring in a new team of leaders.

What happens as a result of all of this is that the only thing that matters is how well I perform and thus the hierarchy becomes irrelevant, since I’m no longer asking for permission or acceptance or evaluation. All that’s taken care of in the pre-established contracts against which my performance is compared.

This all started 30 years ago, when Zhang Ruimin, the CEO, decided he was going to break down the hierarchy and make performance the key. Part of the way he’s done that is measure performance every day. And he’s done that every day. It’s the consistency in initiatives at Haier that is a big part of their story.

AT: So it’s a very simple idea, but quite radical.

BF: Exactly.

AT: And it does away with a lot of politics. Hopefully.

BF: Yes, incredible, right? It also lets everybody know where they stand on a day-to-day basis. There’s no guessing or interpretation involved. The simplicity is really important.There’s 80,000 people involved, so it’s essential to have a very simple approach.

AT: If you place this book in a larger context, like the next phase of globalization and the slowing growth of the West, which will obviously result in multinationals from emerging economies becoming global market leaders, do you think we will see this sort of radical management thinking gaining a foothold in traditional lo-tech companies in the West?

BF:  There have been very similar examples in the West, generally much smaller companies with just a couple of thousand employees. Gary Hamel recently wrote about a tomato canning company called Morningstar, the Swedish-Swiss giant ABB tried something similar in the 1990s-early 2000s… There are these and a  few other examples, but I tend to think that these ideas are so radical and they require leadership that is so self-confident that they’ve never caught on.

My guess would be that this’ll be true in China, as well. Most leaders are afraid. Fear is ubiquitous in modern management. The idea of giving-up control and trusting people to get on with it is still such a stretch, that I don’t see this happening for a long time, but our hope is that people will see how this is done and think if these guys can do it while making washing machines and refrigerators, just think what could be done with something like a mobile phone!

AT: Or games.

BF:  Yes! I see our book as applying No Fear to the least likely industry of all, and the fact that it’s a Chinese company doing it makes it even more surprising.

Customer-centricity and air cover

AT:So what can we really boil this Haier Group case down to?

BF: All of this is driven by two beliefs. One is that the customer is the ultimate determinant of success or failure, so you’re always trying to anticipate how the customer is evolving, and evolve with them –before, not after!  So customer-centricity and close interaction with the customer are key.

The second is the belief that the people you’ve hired are probably really good, but only if you give them a chance. So as a leader you need to eliminate all barriers that repress contribution. It’s very competitive and very tough. It’s not gentle at all, but if you can do that then you have an internal marketplace for both ideas and people. Great agility plus great knowledge; not a bad combination!

AT: So there’s a lot of mobility inside the group?

BF: Yes. Huge mobility. For most of the people in the organization, their first home is a labor pool and then they get picked up by self-organizing business units that need them, but inevitably they’ll return to the labor pool, which gives you continuous agility. There’s an acceptable temporary nature to all of this. Usually we shy away from temporary types of organizational construct, but Haier is built on it.

AT: And in addition to courageous leadership, this system requires brave workers, too. No room for the stereotypical and staid Organization Man.

BF: That’s right. I took a group of European managers who were all in their mid- to late-30s to Haier a few months ago. They really struggled with what they were being told, because they take boundaries and bosses for granted. For them what Haier was doing was heresy.

AT: They were probably scared. Do you think the results would be different if you took a younger group with you?

BF: Yes, but they would have to be much younger. In their 20s. And, incidentally, that wouldn’t be enough to make it workable. You can’t jus take a bunch of 20-year olds and let them loose. You need an older person who’s self-confident and experienced enough and has enough tacit knowledge to know how the world works to let them go. And then you need somebody in a suit, above them all, to protect them – to provide “air-cover.”

AT: So some very exceptional older people are needed, too.

BF: Yes. I wrote something on Forbes.com about a year ago about air cover. I’ve looked at a lot of great examples – from the iPod to the Nespresso pod —  and there’s often been someone in the background who’s senior, and sort of invisible, but who is in a political position to be able to protect people dreaming big dreams.

AT: I bet this has been the way it’s worked ever since we started living in caves.

BF: Well, I just went back as far as Henry Hudson who failed repeatedly to explore the Dutch possessions in the New World, but he had high-level supporters who believed in him and kept investing in him until he succeeded.

To hear more about Dr Fischer’s insights on China and leading Digital Cowboys watch his NF community executive interview here:
Find Dr Fischer’s full bio here: http://www.imd.org/about/facultystaff/fischer.cfm




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