This organizational structure realizes that Haier's external and internal factors are connected by the networks, forming its business process system. Haier use quality strategy, supply-chain management and customer relationship management reduce the buyer power. According to Fortune magazine, Haier's net profit for the six months ending June 2002, declined by 45% and its sales declined by 3.7% during the same period” (Haier Group's Strategy in the US Market). This paper proposes three different ways through which Haier could improve its business strategies and maintain their supremacy in global market. Sep 29, 2009  1) Haier as a company focus on differentiation as our business strategy. We believe that the essence of globalization is localization. For Haier, this means a “three-in- one” operational framework: complete localization of design, manufacture and marketing.

1. Corporate Level Strategy Definition
2. Corporate Level Strategy For Haier 2
3. Corporate Level Strategy For Haier 3

Start with 30 million responses on your QZone, Tencent, and other social media platforms — all to a simple question: “What do you want in air conditioning?” Then pay attention to the more than 670,000 people who take part in the online conversation that follows. You’re bound to come up with something cool — or, more precisely, “cool, not cold.” This concept, drawn from online responses, became the tagline for the Tianzun (“Heaven”), Haier’s advanced household heater/air conditioner/air purifier, released in 2014. Many Asian consumers don’t like the chilling effect of conventional temperature control. They’d much prefer to be “cool, not cold.” But there’s more to the concept than temperature.

Air from most such devices in China is dry and dusty. The machines themselves are too noisy, or too likely to spread disease (bacteria live in air conditioning systems).

Moreover, the machines look — well, like air conditioners. Headquarters on Haier's main campus in Qingdao, ChinaAll photographs by Wang ZhaoThe Tianzun doesn’t have any of those drawbacks. It is an obelisk-like device with a small wind tunnel that draws air through it from the room where it is positioned. It has an Internet connection, so consumers can use their smartphones to warm or cool the room while on their way home. Some consumers probably knew they wanted that feature, but they didn’t know that they wanted to see the circle’s light shift from red to blue as their air quality improved. Once they saw that happening, they were hooked. The product is targeted directly at a consumer segment that no other company, in the West or the East, has recognized, and that could end up being much bigger than a niche.

Tianzun air conditioner (at left), introduced in 2014By building cooling machines based on this in-depth and multilayered approach to consumer insight, Haier is following its own core principle: “customer service leadership,” or the necessity to shape the future by giving customers what they want most (but may not have yet realized they can ask for). Even the decision to use the phrase “cool, not cold” in its Chinese advertising campaign reflects this principle. These are the words that customers use themselves, as opposed to a slogan dreamed up by a marketing professional.Just as unconventional was the cross-functional nature of the appliance’s launch.

While the marketing staff digested the insights gained from Haier’s online customer interactions, manufacturing was already considering what they would mean for production, procurement was speaking directly to suppliers about sourcing feasibilities, and after-sales service was developing plans for follow-through. Because they worked closely together from the start, managers from all these functions were moving forward in concert, addressing possible disconnects as they arose. This allowed products to go to market as soon as they were designed and developed, instead of waiting for each department to throw its work “over the wall” to the next one. Meanwhile, representatives of each company function conducted conversations directly with customers, thereby adding a responsive new dimension to the company’s consumer insight capabilities.Haier’s rapid introduction of the Tianzun air conditioner is typical of the company’s track record since the late 1990s.

The company is known for several distinctive capabilities: a precise understanding of consumer needs, especially in China and other emerging markets; the ability to rapidly innovate new types of appliances that meet those consumer needs; the management of complicated distribution networks, a skill honed in the complex Chinese market; and a high level of execution ability, including the automation of factories to deliver products to consumer specification. ( See “ Haier's Capabilities System,” below.) These attributes have served it especially well in China, allowing Haier to outcompete more experienced appliance companies such as Whirlpool and Maytag in that country. In fact, Haier’s prowess — and particularly its emphasis on “what we can do and who we are” rather than on “what we sell and how we make money” — shows the kind of capabilities needed by companies that were founded in emerging economies if they are to succeed in the global sphere. Haier’s Capabilities SystemHaier is one of 12 companies that were studied closely in a Strategy& research project on distinctive capabilities and coherence.Value Proposition: Haier’s “way to play” in the market (its value proposition) has gradually broadened since Zhang Ruimin became CEO in the mid-1980s.

The company first took the role of a category leader, maintaining top market share because of its reputation for quality in China. Then it became a customizer (adapting its products to customer demands) and a solutions provider (helping consumers manage issues like water quality and home design). Haier now sells not just home appliances but related services, adapted to consumer demand in China, and, increasingly, other markets. Haier delivers its way to play by excelling at four differentiating capabilities.Source: Strategy That Delivers, by Paul Leinwand and Cesare Mainardi with Art Kleiner (forthcoming from Harvard Business Press, 2016)Haier is now the fastest-growing provider of appliances in the world. Since 2011, it has held the largest worldwide market share in white goods. With its upscale brands in China, such as Casarte, and its growing presence in the United States, Europe, and Japan, this US$38 billion company has moved out of the value-priced and niche appliance domain to compete directly with top-of-the-line appliances from more established companies. It has accomplished this by being a consistently coherent and capable company: staying true to its core identity as a company dedicated to solving problems for consumers, while continually reinventing itself with imagination and verve.

Customer Service LeadershipMuch of the credit for Haier’s success accrues directly to, the company’s CEO since 1984. Throughout the 30 years of his tenure, his sharp focus on customer service leadership has given the company consistency even as it propels Haier through dramatic changes. Zhang was the leader who proposed that Haier should never see itself as just a manufacturer of products, but instead as a provider of solutions to its customers’ problems.

In the earliest years, that meant bringing new levels of quality and reliability to Chinese products. Later, it involved increasingly sophisticated forms of customization and new types of services. Through its simplicity and continuity, this principle has given all employees a reliable compass with which to make decisions, even in the face of disruptive market challenges such as new technologies or new competitors.

Zhang Ruimin, CEO and chairman of HaierTo accomplish its goal, Haier has consistently cultivated and rewarded high-quality talent; the company has been a magnet for many of China’s most capable engineers and businesspeople. This approach is especially noteworthy within China’s cultural and social context. In a country that was just beginning to emerge from a Maoist mind-set when Zhang took the helm, the idea that success depended on the entrepreneurial efforts of individuals, recognized for their differences and rewarded for their achievements, was relatively unfamiliar. Haier has thus invested a great deal, especially for a Chinese company, in training its employees and demanding innovative ideas.Despite the success it has achieved, and its willingness to stick to one core value proposition (and one CEO) since the 1980s, the company has never become complacent.

Zhang established early on that changes would be a way of life, not soon-to-be-completed episodes that must be traversed. “The only thing that we know is that we know nothing,” he says. “If you don’t overcome yourself, you will be overcome by others.”Indeed, Haier has reinvented itself at least four times. The first reinvention, in the 1980s, was the decision to differentiate the company by the quality of its products. The second, in the 1990s, was the adoption of consumer-responsive innovation, starting with (but not limited to) products for particular customer needs.

The third, which took place in the 2000s, was the reorganization into a bottom-up structure, in which self-managing teams led decision making. The fourth, going on today, is the reinvention of Haier as a truly Internet-based company, open to the world in a way that few other companies have attempted, let alone realized. Haier is reinventing itself as a truly Internet-based company.Zhang did not develop this management approach on his own. From the beginning, he displayed a fervent curiosity about management and high performance, and he studied the work of leading scholars and observers, especially eminent management writer Peter Drucker.

He took from Drucker, for example, the idea that the purpose of a business is not making money, in itself, but attracting and meeting the needs of customers. If a customer wins by gaining a better product or service, then everyone else should win as well, including the organization’s shareholders through increased profits, and the employees through increased income. A visit to Qingdao with Zhang and his associates can take the form of a management seminar; visitors are subjected to relentless questioning on management innovations that might be of interest to Haier. Zhang often takes his own notes, and he frequently applies the concepts to Haier — first in small experiments, and then rolled out through the company. Building a Quality BrandHaier, founded in the 1930s, was nearing bankruptcy in the early 1980s, when Zhang brought it back to life. At that time, demand for appliances was slowing down in the West after 35 years of growth.

Corporate Level Strategy Definition

Looking to recoup, Western manufacturers cast covetous eyes on China’s emerging market. Most Chinese families lacked basic home appliances, and the offerings from local manufacturers did not meet basic standards for quality or consumer appeal. With their strong brands and relatively sophisticated technology (the automatic refrigerator icemaker and microwave oven had recently been introduced), overseas manufacturers believed that they would have an easy time in cities like Guangzhou, Beijing, and Shanghai.But Chinese domestic firms fiercely defended their home markets by drastically reducing prices.

Most of the foreign competitors, and quite a few of the emerging Chinese manufacturers as well, could not compete. General Electric chose not to enter the China market at all because it foresaw the price war.

One of the Chinese companies that won this round was the Qingdao Home Appliance Company, a small collective enterprise that had made various electronic devices, including washing machines, but had recently settled on refrigerators. It had changed its name repeatedly over the years, but had always been located in Qingdao, a port in the Shandong province of northeastern China, midway between Beijing and Shanghai. A refrigerator from the early 1980s, when Zhang became managing directorThe appetite for refrigerators was so strong in China that Haier sold just about everything it produced. The Chinese consumer in those days expected poor quality and was prepared to have any new product repaired almost immediately.

Nonetheless, the company was moribund. Its production line delivered only 80 units per month, including many that didn’t work.

The factory was so run-down that workers had to be told not to relieve themselves on the floor, and they burned parts of the walls for heat. After three managing directors resigned in rapid succession, a 35-year-old deputy manager in the company named Zhang Ruimin was asked to find a replacement. He found no acceptable candidates, and reluctantly took up the challenge himself. But this appointment turned out to be fortuitous. Zhang was a visionary who saw that a middle class would emerge in China, a public interested not just in refrigerators, but in high-quality, branded, innovative products — made in China, but as good as or better than their Western-made counterparts.Soon after Zhang took the role of managing director, a customer wrote a letter to the factory complaining about a faulty refrigerator.

This led Zhang to one of the most famous episodes of his career. “I called people from quality control down to the warehouse with me,” Zhang later recalled.

“We had just over 400 refrigerators in the warehouse. We inspected them one by one. If they had any problem whatsoever, we pulled them out. We ended up pulling out 76 problem fridges. I had to change the perception of our quality: If products left the factory, they should be first rate.”Zhang had his incredulous employees line up those 76 defective refrigerators in the street outside the factory and publicly smash them to bits with sledgehammers.

They all knew he could have sold them, or given them as political favors to local officials. But the message was clear. Never again would the Qingdao Home Appliance Company sell products it could not be proud of. Instead, it would build appliances that solved problems for its customers — the first problem being the unreliability and poor quality of refrigerators in China.

Soon after, in 1985, the company reestablished itself as a joint venture with the German manufacturing company Liebherr, thus gaining access to advanced technologies. It changed its name to Qingdao-Liebherr to evoke the prestige and quality of German manufacturing.

In 1992, it solidified this association by renaming itself Haier, a name the company kept even when the joint venture ended. Haier, a simplified Chinese transliteration of the second part of the German Liebherr, was chosen in part because it was easy to remember and euphonic in both Chinese and English.As part of the company’s first reinvention, a number of mutually reinforcing, granular management choices provided guidelines for day-to-day practice that made change easier to accept. To improve quality, for example, Zhang set out to foster a mind-set oriented toward performance and accountability. He borrowed routines and practices for continuous improvement from the quality movement — which was then, in the mid-1980s, first becoming visible in industries outside Japan. Zhang also linked pay to performance in a manner previously unseen in the Chinese market, through a system called “Overall Every Control and Clear” (OEC).

Every day, workers tracked quality results using paper and pencil, and their wages were tied directly to the outcomes. This gave the company a simple means of establishing goals and controlling achievement for “everything, everyone, and every day,” and a way to encourage employees to constantly challenge their previous performance.For the next 30 years, the operational capability of OEC gave Haier what behavioral experts George Kohlrieser, Susan Goldsworthy, and Duncan Coombe call a “secure base” on which to build bold change. For example, the company managed logistics with a zero-defects focus, resulting in very low inventory, short delivery times, and low working capital.

In the years that followed, as new business models were introduced, the disciplined mind-set of OEC was never abandoned. Instead, it was scaled up to meet ever more ambitious goals. Workers grew accustomed to taking small steps that added up to great results.The Niche InnovatorIn the late 1990s, a farmer in the Chinese countryside complained to Haier that his washing machine was full of dirt and was not functioning well. The local distributor sent a technician to the farmer’s house, where he discovered that the farmer had been using the washing machine not to wash clothes but to clean sweet potatoes. At this time, agricultural markets had been permitted to open in China, and cleaner vegetables commanded higher prices. The repair technician reported immediately to Haier’s headquarters about this practice, which was growing increasingly common in the region. Inspired, the company soon released a vegetable washing machine, designed to accommodate the extra grime and soil of the tubers.Around the same time, Haier’s researchers observed that unlike Western consumers, many Chinese people hand-washed their underclothes every day at home.

They found it more hygienic and socially discreet to wash these separate from other clothes and away from public washing machines. In response to this consumer need, Haier launched a small, low-energy washing machine called the Little Prodigy that could easily fit into a small, crowded urban apartment. The machine became extremely popular, among, for example, families with newborn children.These episodes represented the start of the second reinvention at Haier: a new form of customer-responsive innovation. This was timely, because quality was no longer a great differentiator in China; other companies had caught up. Zhang built upon the company’s hard-won workforce discipline, and the accompanying performance–pay relationship, to link employees directly to customers. To break down the “invisible walls,” as he called them, between functions, Zhang assigned teams made up of members of different functional departments to specific projects. He avoided the conflicts of a matrix structure by introducing “market chains” (based on the value-chain concepts of Michael Porter), in which it was possible for all individuals at Haier, no matter what their role, to trace their actions directly to the marketplace.

These market chains replaced functional silos as the key organizational unit.This was also the phase in which Zhang began building Haier into a global company. He approached this challenge by adopting Mao Zedong’s strategy of “occupying the rural areas to encircle the city,” gaining strength first with niche products for sectors where there were few competitors. The company took full advantage of its customer-responsive innovation capability to do this. In 1997, recognizing the needs of college students in dormitory rooms, it launched mini-refrigerators in the United States. It followed with wine refrigerators in 2004. And then, during the 2000s, Haier parlayed that success into becoming a mainstream producer of appliances for the U.S. Meanwhile, in Pakistan, Haier sold extra-large washing machines designed for heavy robes.

Key to all this growth was Haier’s behind-the-scenes customer-centric operations system. Rapid innovation based on consumer demand — as with the Tianzun air conditioners released in 2014 — has become routine, because all departments work in parallel. The company’s close collaboration among R&D, marketing, and sales also works well in the U.S. For example, U.S.-based R&D engineers are required to talk directly to consumers in the design of new products, and their salary is linked to the sales results of the products they design.Intimacy and EntrepreneurshipIn 2005, Zhang recognized that most of Haier’s competitors in China were achieving acceptable levels of service responsiveness and that the company would once again have to reinvent its value proposition. He believed that Haier suffered from unnecessary time delays and guesswork about new product manufacturing volumes, which proved costly when it guessed wrong, and that could be reduced, if not completely avoided, by becoming more intimately aware of customer needs and wants. Employees would now have to get to know the customer better than they knew themselves, or, as Zhang put it, to “create zero distance with the customer.”Intimacy is a lot more complicated than responsiveness, and this third reinvention required employees to feel closer to their customers.

Haier thus inverted its organizational structure into one based on self-organizing work units called ZZJYTs (an abbreviation for zi zhu jing ying ti, which translates to independent operating unit). Their three most critical functions — marketing, design, and manufacturing — were now supposed to work directly for customers. Instead of directing the employees who did that work, the ZZJYT managers became service providers to them, giving them the resources and guidance they needed to provide for customers. This minimized the decisions made at higher levels in the hierarchy, making the company more responsive to nascent market needs. Zhang went so far as to announce that this shift in organizational model would proceed even if revenues and profits showed signs of flagging, and even if it were necessary to use some of the returns from successful legacy offerings to make it work.The new structure proved successful, and the ZZJYTs are still the basic organizational unit at Haier. Each comprises a team of 10 to 20 people — sometimes located in one place, other times virtual — who come from various functional roles and are brought together for a specific mission, and who are given profit and loss responsibility and accountability. They have their own independent accounting systems and complete autonomy in hiring and firing employees, setting internal rules about expenses and determining bonus distribution, and making almost any operational decision that typically would be made by an independent functional organization.Haier organizes its ZZJYTs in three tiers.

First-tier ZZJYTs have the task of directly facing the market, understanding customer needs, and providing customers with the right products. Second-tier ZZJYTs are responsible for supporting the first-tier ones, providing them with the resources and the guidance they need. Third-tier ZZJYT managers are the business division managers or functional managers who set corporate strategies and direction for the whole group.

A typical first-tier ZZJYT is composed of sales, R&D, marketing, and finance people. Everyone, whatever their function, is expected to talk to consumers regularly.To Zhang and others at Haier, this organization design represents an explicit effort to avoid being disrupted by technological change.

They wanted to make sure that top management would heed early warning signals of disruption, especially those that came from internal staff, and adjust to new realities rapidly and painlessly. Thus, at Haier, the time of information flow between the customer (the top) and coordination (the bottom) is minimized. Because R&D and marketing people work in the same ZZJYTs, they meet frequently, particularly when new products are considered. Salespeople keep in close touch with customers, so they can estimate the order numbers with a smaller variance than if they were relying only upon forecasts. Once the products are ready for shipment, they go first to the waiting-list clients, and only afterward to retail outlets. This way, Haier keeps inventories low, which saves storage costs and working capital.The ZZJYTs are not permanently assigned to a particular product or role. Instead, they are formed through internal competition; participants must apply to work on projects that appeal to them.

Winners are chosen on the basis of the quality of their product or service ideas, the attractiveness of their business model, and the feasibility of their go-to-market planning. When Haier made the strategic choice to launch a three-door refrigerator, for example, it invited its employees to compete for the role of leading this initiative by submitting business plans and business models explaining how such a product could best succeed. The company’s $1.5 billion three-door refrigerator business is now led by the winner of that competition, 38-year-old Pu Xiankai.

He was selected, despite his relative youth, because he described the product in an imaginative way. Once appointed to this position, it was incumbent upon him to select a team and to find manufacturers and marketers within Haier to produce and sell his products. Today, he oversees what Haier calls a “community of interest,” that is, people throughout the company, and external partners along a value chain, who have made a commitment to help his team. The activities of all the ZZJYTs are linked by internal contracts. For example, if the three-door ZZJYT needs market research data about a certain region of China, it entertains proposals from the several marketing ZZJYTs that provide such services, as well as looking outside Haier.

The ZZJYT leaders also know that they cannot develop all the cutting-edge technologies they need in-house. Therefore, willingly embracing the concept of open innovation, they collaborate with organizations everywhere they operate — which is how the company ends up working with the best universities and research institutes in the world.To provide talent for the ZZJYTs, Haier created an internal labor market. Now the right number of employees with the right skills gravitate to the right organizational positions at the right time.

Instead of offering its employees jobs, the company offers everyone a continuing series of opportunities to find jobs, considering the contributions they have already made. “The level of scrutiny takes some getting used to,” says Fu Haining, the chairman of the LongLongigo group, which operates Haier retail stores in China.

“In the beginning, it can be a little painful, because the culture of constant challenge can make you feel like what you’ve done, what you’ve achieved, isn’t recognized. Later, you come to realize that this is what it takes to stay ahead in an extremely competitive market.”An Internet-Based PlatformAfter its first three reinventions, Haier looked nothing like a conventional modern complex organization. Its culture — embracing rather than resisting change, while holding true to its original core principle of customer service leadership — is the most important asset of the company today.But Zhang, in recent years, has questioned the ability of even this level of innovation to succeed. Inspired by the success of the latest wave of Internet-based companies, he is currently launching a fourth reinvention, this one involving the Internet.

This is known at Haier as the “networking strategy.” Even the ZZJYTs, the focal point of the previous wave’s business model, are slated for dramatic change. Zhang has proposed eliminating the current second-tier ZZJYTs, presently home to most of Haier’s middle managers. The company would instead become a collection of platforms, each able to adjust to changes in the consumer market by drawing on support and collaboration from the others.This new Haier approach involves opening up the company to intensive collaboration not just with customers, but with innovators around the world — including with competitors. “The platform helps us attract first-class resources,” says Lei Yongfeng, the R&D director for PAC, Haier’s air conditioning platform.

“It could be R&D resources based at a university or at a technology company. In the past, our relationship with a supplier like Mitsubishi might have consisted of us going to them and giving them the specs for a new air conditioning compressor. Now, they can see for themselves what our customers are asking for. The direct view they get makes them more responsive, which in turn helps our innovation efforts.”. Lei Yongfeng, director of R&D for the Tianzen (Heaven) air conditionerWater purification is another example of the increasing scope of Haier’s collaboration.

The company entered the business through a joint venture with the Strauss Group, an Israeli technology firm, which provided the technology while Haier focused on marketing, distribution, and service. But then Haier broadened its platform to include many other R&D partners; for instance, it shares more than 20 water purification patents with Dow Chemical.The result is a new level of proficiency that goes beyond anything Haier has done before. For example, the company now uses Internet access to customize every product it sells in China, whether bought in a store or online. Customers choose the color combinations, features (such as the number and layout of shelves in the refrigerator), and ancillary design elements (like the pattern of sparkles on a high-end appliance). Factories routinely make them to order.

The process is not unlike choosing the accessories on a new car, except that there tend to be more choices. The Internet connection also makes customers more likely to buy a water purifier — which is sold only by consultation.

Haier reps are trained to look up the complex data on China’s water problems, which vary by neighborhood, and to install the filters that guard against that neighborhood’s mix of chemicals and pollutants. On its website, which has an active consumer-to-consumer dialogue, the company posts water quality information for 220,000 communities in China. “We want people to be able to find all their water-related answers at Haier,” says Qu Guinan, the general manager of the Haier water treatment company. Building on its success to date, the company is now exploring partnerships with local communities to manage their water purification efforts community-wide.

Qu Guinan (left) and Jiang Hanke, two executives from the water purification programThe Internet has enabled the company to expand its service diligence; it provides intensive installation as part of any appliance sale (a rarity in China), and, using monitoring signals from the appliances, it conducts follow-up calls with customers when the equipment is not working. The company also keeps in touch personally just in case the monitoring has missed some cause of dissatisfaction. The connection to customers has helped Haier migrate many people from their medium-value line of household appliances (the original Haier) to the more upscale Casarte brand. The phrase “the information is more valuable than the product” has already become a slogan throughout Haier.“We’re providing information to Chinese households,” says Jiang Hanke, social media director for the water purification platform, “but we’re also benefiting from these interactions. They give us a better understanding of users’ needs. Users can see what the water-quality situation is in their communities and use that information to select filtration products that suit them best. Although we didn’t set up the online resource with the direct goal of making sales, it has had that effect; sales in this still-young business have risen by a factor of four since we’ve introduced the online resource.”Zhang recognizes the high stakes that are involved in changes of such magnitude: “There will be an earthquake within our company if it is not properly handled.” But he also believes it is the only course of action that will allow such a large company to succeed in an era when each new triumph leads to new problems.

The goal of a large company, he says, is to “lose control step by step.” In other words, Zhang believes that Haier isn’t unique. Every major organization will have to learn how to maintain its identity, the quality of its products and service, and its customer relationships, while being prepared to give up everything else. Haier’s role in this new world will be as a pathfinder: It’s already the first leading global consumer manufacturing company from China. Soon, if Zhang is once again correct, it will be the first company from anywhere with its distinctive, innovative form of management.

Author Profiles:.is a professor of innovation management at IMD in Lausanne, Switzerland. Previously, he was the executive president and dean of the China–Europe International Business School in Shanghai. Articles published in strategy+business do not necessarily represent the views of the member firms of the PwC network. Reviews and mentions of publications, products, or services do not constitute endorsement or recommendation for purchase.strategy+business is published by certain member firms of the PwC network.© PwC.

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Zhang Ruimin, chairman and CEO of the Haier Group, took charge of a struggling refrigerator factory in the 1980s and turned it into a global powerhouse of consumer electronics and home appliances. Zhang believes that the company’s Rendanheyi model — a concept that encourages entrepreneurship and empowers every department to operate like a micro-enterprise — is a key pillar of its success. Rendanheyi, he says, allows every employee to connect with the end users, understand their needs and create value for them.In a recent conversation with Knowledge@Wharton in New York City, Zhang spoke about his early days at Haier, the transformation through Rendanheyi and the new challenges of the Internet of Things (IoT) era.An edited transcript of the conversation follows. Knowledge@Wharton: If you think back to the beginning of your leadership journey, who were your earliest role models? What lessons did you learn from them that have stood the test of time?Zhang Ruimin: In the past, Chinese businesses weren’t very mature in terms of management methods. We learned a lot from Panasonic and its president, Konosuke Matsushita’s method of effective management.

I read a lot of books by Peter Drucker. That was a time when his books were not yet available in Chinese translation.

I had to get a copy from Taiwan. One book that I remember very clearly was titled The Effective Executive, where Drucker talked about what kinds of things an executive should do to make his work effective and what are the ineffective things that should not be done. I remember, in particular, he wrote that in a well-managed company there shouldn’t be anything too exciting happening because the routine and rules have been established. Whereas, back in China at that time, people thought there should be a lot of exciting things happening, there should be a lot of activity going on. So that struck me as a very distinctive idea. I admire Drucker and his ideas. He approached management not just as different management models, but focused on people.

We think we should focus internally on our employees and externally on our customers and users.One lesson I learned from Peter Drucker is that managing, or being a manager, is not about how many people you are managing or how large your team is, but about the results and value that you can create. You can be very highly skilled.

You can have very high-ranking positions in the company, but if you do not produce any real results, it is still ineffective.I have used his idea in our Rendanheyi model, where we encourage members of our team to become entrepreneurial and start their own micro-enterprises. In this process, we eliminated 10,000 middle-level managers who didn’t create value for the users. The micro-enterprises are not about having power or having a high position. They are about creating value for the user. I think this is the most important thing.Knowledge@Wharton: When you spoke at Wharton in 2001, you told this story about how you took over a struggling refrigerator factory at the age of 35. What were the biggest challenges you faced at that time, and how did you overcome them?Zhang: The challenges were two-fold. First, there were financial challenges.

Our products didn’t sell very well in the beginning and I had to borrow money for the first six months to pay our workers’ salaries. We were a collectively owned enterprise and not a state-owned enterprise.

Banks were unwilling to lend to us and I had to find other means to borrow that money. The second set of challenges was even more important: We lacked highly skilled and high-caliber talent. This was a problem that was widespread in the Chinese corporate world. Even large, state-owned enterprises had this problem.

When we tried to import advanced technologies, there was a gap between the people who could operate them and the technology that we could get. We took a long time to solve this problem.Knowledge@Wharton: How did you solve this problem, and what are the lessons you learned from this experience?Zhang: Many large companies, especially state-owned companies, could turn to the government to ask for more college graduates or highly skilled technicians to help them. That was one way to solve the problem. But we turned inward.

We turned to our own people and we tried to help them grow and train them — especially to help them change their mindset, their attitude towards working. Drucker has said that a mindset change does not change the fact itself. It changes the perspective that you have towards the fact. An important aspect of the mindset is having the spirit of teamwork. Back then, we started what we called “autonomous groups,” which are smaller teams of workers who help each other work more effectively.

That’s an earlier version of our micro-enterprises that are running today. This is how we solved this problem. By helping our people grow and helping them change their mindset.“We believe innovation is about how to use new ways to create value for the user.”Knowledge@Wharton: What is the origin of the concept of Rendanheyi and why was this developed as a philosophy at Haier?Zhang: When our company was still small, we were a very energetic team. But as we scaled, we witnessed a lot more problems, such as silos between different departments.

They become self-centered instead of working together. We got this so-called “big enterprise disease.” That’s why we thought it was important to change our business model and to develop this new model of management.Knowledge@Wharton: What has been the impact of this new model on Haier’s performance in terms of different aspects like revenue growth, profitability, employee engagement and agility in decision-making?Zhang: We first proposed the Rendanheyi model in September 2005. For the first few years, our performance didn’t really pick up. We had two listed companies in China and our stock price did not grow significantly. Some of the shareholders expressed concerns.

In our shareholders meetings we explained that this is the model that we believe will lead to success, especially in this changing world where we were entering the Internet era. However, we still faced a lot of pressure and questioning. Our performance started picking up in 2016. Our stock price doubled that year. In 2017, our stock price doubled again.

This pick-up in performance was no coincidence. It was the accumulated effect of many years of working in the micro-enterprise model.There are two key elements to the micro-enterprise model. The first is that the micro-enterprises are not connected in a traditional cascading way.

They are connected in a parallel way and are interconnected so that they can work together to create value for the user. The second point is that these micro-enterprises are user-oriented. They have to create value for their users to get paid. The greater value they create, the better they are paid.

They don’t have to rely on decisions from the top; they can take their own decisions to solve customer pain points and to develop their own products. So our organization has become much less hierarchical.

These micro-enterprise teams have been empowered with three very important powers: they can make their own business decisions; they can make their own hiring decisions; and they can allocate their resources as well as decide about compensation.Knowledge@Wharton: What were some of the challenges in the early years when the Rendanheyi model did not succeed? What changed in 2016 and in 2017 that led to such significant growth?Zhang: It took a very long time for this model to succeed because it takes time to change people’s mindsets. Previously, execution was the most important thing in our organization. We had a very strong culture of execution.

To change that to an entrepreneurial mindset took time.Previously, people worked in siloed departments. They didn’t know who their users were and they didn’t know how to engage with them. As they transitioned to the micro-enterprise model, they needed to take time to think about their end-user and how to engage them. This is not a process that can be completed overnight, especially when we let go more than 10,000 middle level managers. We had to start small, with small pilots, and then replicate those pilots after they showed some success. In 2016, over a decade after we first proposed the model, we saw some great changes in performance.

But it was not the result of a single effect or a sudden change.We believed, at that time, that it was important to start working on connected appliances so that we could directly engage with our users rather than relying on traditional distribution channels. We have our own network and we rely on that network to engage directly with the users through connected appliances.Knowledge@Wharton: One of the things I find interesting is how this entrepreneurial way of thinking has led to innovation. What has been the impact on innovation within the company?

What lessons can other companies learn from Haier’s experience? Zhang: Innovation, according to Joseph Schumpeter’s definition, is “creative destruction.” It means creating a new ability that did not exist before or that others cannot replicate. By creating connected appliances, we are creating an ecosystem to connect and engage with our users.

We’re no longer selling them products but making them a lifetime user of our products and services. This is especially important for the 21st century. Ecosystem is how we create value for users. Many other companies believe innovation is in new products or new technologies, but we believe innovation is about developing new ways to create value for the user.And it’s not at the company level. It’s at every individual employee or entrepreneur’s level. In each micro-enterprise, every member should be able to connect to the user and create value for them. This is a model that is not easily replicated in other companies.

I have talked with management scholar Gary Hamel and he said that our model is not seen anywhere in American companies, especially not in very large corporations. In Silicon Valley, too, it is not easily seen.

This individual-level innovation, I think, is quite unique.Knowledge@Wharton: Could you share some examples of connected appliances? I know that Haier has developed a networked refrigerator which has connections with 400 suppliers.

I’ve read that it even provides low-glucose products for diabetics. Can you explain how this strategy of connected appliances came about and what are some of the advantages and some of the risks of that strategy? For example, is there a risk of privacy of information when you depend on network products that are not stand-alone products, but are part of a node in a network?“By having connected appliances, we are creating a network of touchpoints to reach out to customers directly.”Zhang: By having connected appliances, we are creating a network of touchpoints to reach out to customers directly. This is something that traditional companies cannot do. They just sell products, and it’s very transactional.

Even e-commerce is just a trading platform for selling online.At Haier, we have integrated offline brick-and-mortar stores with online stores, as well as with social selling platforms such as our online store associated to WeChat. We have combined all of these three channels into one and have touchpoints all around it. That has enabled us to reach out to every customer.The second advantage is that it helps us to develop new products through iterative enhancement. We can develop newer and better generations of products based on feedback from the users. And it’s not just about the products. It’s also about the services, such as, for example, the connected refrigerator. The suppliers and the whole ecosystem are also updated and improved and optimized in this process.

I believe these two advantages are unique to our model.Security is indeed a very big issue. We think about it all the time. What if someone breaks into a smart home system and turns on the gas stove, for example? I think companies around the world are thinking and developing solutions to increase security. However, we are using a different approach.

Most connected devices have sensors, but those are product-based sensors. What we are trying to sense is user engagement and user feedback, so that we can directly understand what they need and how they would like the products to be improved.Knowledge@Wharton: A number of companies are using artificial intelligence (AI) to identify security problems and fraud and so on. Is Haier looking at those kinds of technologies to solve some of the security issues that you mentioned?Zhang: AI is, indeed, growing very quickly. It serves as the foundation of the transition from the mobile Internet era to the Internet of Things era. That’s undeniable and undoubtedly true.

However, I also believe that in the foreseeable future, AI cannot acquire human emotions or human awareness. AlphaGo can defeat the world chess champion; however, it cannot experience the joy of victory.

Algorithms can solve a lot of problems but they cannot reach out to people at an emotional or human level. We believe community and the sharing economy are critical for this day and age.

We need to reach out and interact with our users and to have every stakeholder in the community economy to have their benefits and interests maximized. So, I believe AI is a necessary condition, and indeed a foundation for our world today. But if you bet everything on AI, you probably will not develop a very competitive business model.Knowledge@Wharton: Coming back to the point of micro-enterprises within Haier, what sets the winners apart from those that don’t succeed?Zhang: Successful micro-enterprises have three characteristics.

First, they are very entrepreneurial and very good at identifying, developing and seizing new market opportunities, so that they can develop those markets and seize the opportunities. Secondly, they are very well self-organized. They are also very open to inviting people from outside their organization to join them in their research and development. We believe the entire world can serve as your HR pool. When you have an idea that’s attractive enough, you can invite the most brilliant minds to join you. The third characteristic is that these successful micro-enterprises are self-driven and very motivated. They are always looking for the next opportunity to grow.This is something that we call the “second curve.” They may already have reached the peak of the first curve, but in order to grow even further, they have to find the next curve.

These three characteristics are interconnected. If a micro-enterprise can have all of these they will be able to create a virtual cycle. If a micro-enterprise is not doing well in any one of these aspects, then they will have to be taken off if they are not successful enough.Knowledge@Wharton: Can you give examples of micro-enterprises that have embodied these three qualities? What can other micro-enterprises learn from their experience?Zhang: Thunderobot is a very good example that embodies these three characteristics.

Corporate Level Strategy For Haier 2

It is a micro-enterprise that produces gaming laptops and high-performance laptops for gamers. This is a very niche market. Thunderobot identified many user pain points — as many as 30,000 complaints online — and realized their existing products were unsatisfactory. So they developed their own products and engaged external manufacturers to produce them. After a couple of years, they were able to rise through the industry and have now achieved IPO. They are very good at identifying new markets.

In order to grow further, in order to find that next curve, they are now into the gaming business itself. The founders of this micro-enterprise are very young — born in the 1980s.Knowledge@Wharton: As Haier continues to grow globally, you have bought companies in Western countries. For example, in 2016, Haier bought GE Appliances. Has Haier tried to extend the micro-enterprise model to these new acquisitions which have had traditional management structures? What have been some of the cultural barriers that Haier has faced in trying to extend this model, and how has the company dealt with it?“If you bet everything on AI, you probably will not develop a very competitive business model.”Zhang: GE Appliances used a very traditional linear management model.

They had rules regarding every aspect of the business. However, in today’s nonlinear world, in order to reach out to users effectively, that model is no longer relevant. To change the GE model from a traditional cascading model that starts from R&D to manufacturing and into distribution, to a parallel interconnected model, we have broken up the original R&D department, which consisted of 600 people, into smaller teams that focus on different categories of products. For example, washing machines and refrigerators. This allows them to be flexible. They can also get external resources if they need extra R&D help. This has helped them to become much more motivated.

Corporate Level Strategy For Haier 3

We wanted to start with one pilot, but now there are seven micro-enterprises already in GE Appliances. One of the best performing micro-enterprises last year made $12 million in profit, in contrast to losing $3 million the year before.The other thing that has been changed at GE Appliances is the compensation structure. Previously, only the very top executives got stock option incentives.

But that’s a very small part of the workforce. Today, in the micro-enterprise model, everybody can share the profit. When they get this extra bonus, it’s not just monetary.

It’s something that can encourage people at a personal level.Knowledge@Wharton: Did Haier face any cultural resistance within GE, or any of the other companies that were acquired, in bringing about these changes? Organizational transformation is extremely difficult. How was that cultural resistance overcome?Zhang: One of the cultural shifts that needed to take place at GE Appliances was the mindset.

The original mindset was shareholder first. But now, the mindset should be employee or people first. This has been a very big cultural issue and very hard to change, especially with the senior executives. Another issue is around changing the mindset of the employees. It’s hard to build a team with a strong team spirit in a micro-enterprise. We believe the effective way to address this is to understand that it is a universal desire to win respect through hard work and to realize personal potential and personal value in a team. When everybody helps one another, when they can create value for the user and get rewarded, and become a truly effective team.Knowledge@Wharton: What do you see as the biggest risks of this model and how has the company tried to mitigate these risks?

For example, how do you manage the balance between competition and cooperation when you have such a large number of micro-enterprises and you are managing an ecosystem?Zhang: Balancing competition and cooperation isn’t the biggest problem, because everything that our micro-enterprises do is towards creating a smart home. This is the guiding principle of all micro-enterprises. When micro-enterprises grow big, they can be separated into smaller teams — into two or more micro-enterprises.

I don’t see many clashes or imbalances in this process. The real challenge, the real risk, is one of self-complacency. When these micro-enterprises grow big and some of them get venture capital and achieve IPO, they become less and less open, and they become much more inward-looking. They stop looking for better talent externally to help them improve further.

This is a risk that is very difficult to quantify. Oftentimes, when you discover such a problem, it’s already too late to correct it.Knowledge@Wharton: What are you doing to correct it?Zhang: Micro-enterprises should self-assess how they are performing. First, by looking at their user feedback. Are their users expressing dissatisfaction and turning to other products? Secondly, we require all micro-enterprises to attract external funding or venture capitalist funding. If they cannot do that successfully, it shows that their products are not very promising.Knowledge@Wharton: Technologies like Internet of Things (IoT), robotics and artificial intelligence are bringing about some fundamental changes. How will the Rendanheyi model have to change in response to some of these changes?Zhang: New technologies are emerging every day.

Big data has now become as important as electrical power was to the 20th century. But we should be aware that it’s important not only to look at the big data but also look at personalized data on the user level, which we call “small data.” In the IoT era, small data is more important than big data. Big data brings you user traffic in the mobile Internet era. But in the Internet of Things era, the real opportunity lies in the individualized understanding of each user. Of course, we should not reject new technologies.

We should follow their trends, but it is very necessary to understand that everything should still start from the individual needs of the users, rather than from new technologies.Knowledge@Wharton: What are the leadership implications of this change? What kinds of new leadership skills will be required at different levels of the organization, as this shift happens?Zhang: In today’s new era, the key to leadership is to transform your employees or workers into entrepreneurs. How to make your employees more entrepreneurial is more important than being entrepreneurial yourself. In this new IoT era, everything is different. So the way we measure leadership should also be different.“The real challenge, the real risk, is one of self-complacency.”Things have been turned upside down when it comes to management as well. To give you an analogy, the previous way of management was all about shooting a fixed target.

Now, you have a moving target. If you use the traditional model, you can never shoot the moving target.

You will fail.Knowledge@Wharton: If you think back on your life, what do you believe to be your most important successes and your most instructive failures?Zhang: In terms of most important successes, I think it’s all about timing. I believe the most successful thing is to do the right thing at the right time.

To give you a few examples from the history of Haier — when we first started the company back in the 1980s, it was a shortage economy. People had a high demand for high-quality products.

It was very hard for them to find quality products. That is why the Japanese home appliances, Japanese products, were very popular among consumers, because they were high quality. We were one of the few appliance manufacturers that successfully solved the problem of quality. That was why we had initial successes in the 1980s.Another milestone of our so-called “success,” namely doing the right thing at the right time, happened in 1998, when we first built our factory here in the United States. Back then, it was on the brink of China’s accession to the WTO. Everyone was talking about U.S.

And back in China, nobody thought that could also be a factor here in the U.S. But we believed it was the right move. That was the start of our internationalization strategy, which turned out to be correct, against the WTO accession and the globalization process.The next important move was this micro-enterprise model back in 2005. We believe it has proved to be the correct move at the right moment. The current challenge is what we should do to deal with this upcoming IoT era. We have done a lot, but we don’t know whether it will prove to be correct. Everything is evolving so fast.

There are so many unknown quantities. We don’t know whether we are on the right track.Knowledge@Wharton: What are some of the biggest failures that have been most instructive?Zhang: In terms of day-to-day decisions, there can be many so-called “mistakes” or “failures.” But those are less important. In terms of strategic failures, I think the most astounding one would be the e-commerce opportunity which we failed to seize. Other companies saw the opportunity and became e-commerce giants.Knowledge@Wharton: What is the most important leadership lesson that you would like other companies to learn from Haier’s experience?Zhang: We had more than 10,000 companies that visited here last year alone to try to understand and replicate our model. They spoke highly of our model. Yet, they all complained that it was very hard to replicate.Knowledge@Wharton: How do you define “success?”Zhang: There is a saying we often use within our company: “There is no such thing as a successful company. There are only failed companies.” So in terms of the definition of “success,” I would say, again, doing the right thing at the right moment.

To do that, you have to be correct in every step of the way in predicting the future. But the future is unpredictable, and no one can always predict the future correctly. We should create the future by challenging ourselves. For Personal use:Please use the following citations to quote for personal use:MLA'For Haier’s Zhang Ruimin, Success Means Creating the Future.' The Wharton School, University of Pennsylvania,20 April, 2018. 24 June, 2019 APAFor Haier’s Zhang Ruimin, Success Means Creating the Future.Knowledge@Wharton(2018, April 20).Retrieved from Haier’s Zhang Ruimin, Success Means Creating the Future'Knowledge@Wharton, April 20, 2018,accessed June 24, 2019.Educational/Business use:Please contact us for repurposing articles, podcasts, or videos using our. Additional Reading.

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