Haier

Why Have We Been Adhering to the Exploration for More Than Nine Years?

Since we introduced the “Win-Win Model of Individual-Goal Combination” in September 2005, we have been exploring the Internet model for more than nine years. Then, why have we been adhering to the exploration for more than nine years? What is Haier up to at present? If combined, these two questions form a relationship between cause and effect, involving the past tense, the present tense and the future tense of Haier Internet model

By “Win-Win Model of Individual-Goal Combination”, we actually refer to “employees” and “users’ needs”. It is very hard to conned employees with users’ needs, because it is already hard for a company to find its users, and it would be still harder for individuals to find their own users.

Why did we introduce “Win-Win Model of Individual-Goal Combination” in September 2005? Because at that time the biggest problem was that our employees found it hard to understand the ongoing changes. Why? For some of them, now that we had developed very well and many companies were learning from Haier, why should we make changes? How could we benefit from changes? Others felt that changes might pose a threat for their vested interests.

However, we could feel that the challenges of the Internet era were approaching. What challenges? The extensive access to information-in the past businesses were in possession of more information than users, but in the Internet era users have access to more information than businesses. What challenges had the extensive access to information brought about? The user personalization was requiring companies to shift from mass manufacturing to mass customization. However, if our employees were not aligned with his customers, mass customization would be out of the question. This was a choice we had to make in the face of the challenges of the Internet era.

At first, Haier employees found it hard to accept these ideas. Why? We were accustomed to the execution culture. When we were founded in 1984, we were just a small street factory of a few hundred employees. We had achieved rapid development and come to the fore mainly because we followed the OEC model, or the Overall Every Control and Clear Model. We never put off till tomorrow what should be done today, and we were constantly improving. We implemented the 1% principle, believing that if every day we improved by 1% than the day before, we could double our output value in 70 days. We had stood out among numerous companies, built our own brand and relatively smoothly achieved diversification and internationalization. The main reason was that although many Chinese companies were trying to learn from foreign management models, their management practices were still extensive and the advanced foreign management models could not be implemented, while we truly implemented the OWC model. Even today, many companies coming to learn from Haier are still not interested in our present transformation but just want us to teach them the OEC model.

Execution is uniform and completely mandatory, which certainly will not work in the Internet era. Therefore, in 2005, we decided to transform ourselves. However, ehile changing our ideas and thinking pattern, it is more important for us to change the management and organization structure, which is very hard to accept. Our exploration has been going on for such a long time because we faltered and wandered in the beginning. Sometimes we took two steps forward and one step back, or even two steps back. It was a trial and error process.

Then why have we been adhering to our exploration? Ti was based on such an idea-“There is no successful enterprise, but the enterprises of the times.” No company can claim it is successful. If you feel you are, it is only because you are keeping pace with the times. The problem is that no enterprise can always keep pace with the times, for the times change too fast to be predicted. We are humans, not gods. We cannot always keep pace with the times, so the only thing we can do is change ourselves rather than the times.

How should we change ourselves? Haier has a very important concept – we always consider ourselves in the wrong instead of in the right. What is right? The era. The users. The only thing we can do is change with the changing users and times. The Innovator’s DNA says, “It is impossible to look in a new direction while locking HARDER in the same direction.” Why are we looking HARDER in the same direction? Because we are self-righteous, believing that we just need to follow this path. In fact, this will not work and we have to take an unbeaten path. According to Clayton Christensen, there are two basic types of innovation, sustaining and disruptive. Sustaining innovation follows the old path, while disruptive innovation, an enterprise either destroys or is destroyed.

In order for Haier to become a destroyer of the old model, we need to build two platforms: an investment-driven platform and a user-paid platform. With the investment-driven platform, an enterprise is converted from a managed organization into an investment platform; all departments and divisions become entrepreneurial teams; the relationship between the enterprise and these teams is that between shareholders and entrepreneurs. The old organizational structure is an equilateral triangle, which Max Weber defines as bureaucracy. The biggest characteristic of a bureaucratic organization is uniformity and the directions are for everyone to execute. The salaries of employees are often linked with their posts and positions, so they are not concerned about the needs of users. However, with user personalization and market fragmentation in the Internet age, uniform organizations are destined to be overthrown. Therefore, Haier has changed the entire organization from an equilateral triangle or a pyramid into a flat structure. In the past, the equilateral triangle was full of hierarchies, which are now replaced by entrepreneurial teams.

Then, what has Haier become? An ecosystem. The superior-subordinate relationship is replaced by a relationship of investors and entrepreneurs. Of course, they are not ordinary investors. On the one hand, they must make sure the strategic direction is correct; on the other hand, a platform must be there to drive employees forward on the right path. The former functional departments such as human resources, finance, strategy, and information constitute a service platform, on which micro entrepreneurial teams can purchase services. Employees used to be paid by the company, but now the superior-subordinate relationship (in the traditional sense) no longer exists. Who is the superior of employees? The users. Therefore, if you have created value for users, you get paid; if not, you do not get paid.

The goal of our transformation is to change from the original accelerator incubating makers. In the past, we strove to expand the scale, increase production, improve productivity and enhance competitiveness, while now we seek to incubate makers. Simply put, companies are changing from product-manufacturers into maker incubators.

Joseph Schumpeter holds that innovation is the recombination of production factors. Compared to the development of new products, it is more important to recombine production factors. Then how should we recombine production factors? The combination of production factors must meet the needs of users and the market. For example, when playing poker, you cannot control what hand you will get, but the result depends on whether you can combine your cards to the best, which involves coordination with your partner as well as judgment of your opponents.

The Investment-Driven Platform

Today, Haier has no hierarchies but three types of people – platform owners, micro-enterprise owners and makers, all circling around users.

Employees used to obey their superiors and now they create value for users. They must become entrepreneurs and makers. The makers set up micro-enterprises, and the micro-enterprise owners jointly create users and the market. However, micro-enterprise owners are not appointed by the enterprise but elected by makers, and micro-enterprise owners can also select makers. After a period of time, if a micro-enterprise owner is considered incompetent by micro-enterprise members, he/she will be removed from the post, which actually often happens in Haier. More importantly, micro-enterprise owners are not limited to Haier employees but can come from external resources as well. The micro-enterprises plus social resources form an ecosystem to jointly create different markets. In the ecosystem are many parallel platforms that are targeted as different markets and different users.

I often quote two sentences by Don Tapscott, author of Wikinomics: “The world is your R&D department” and “Collaborate or die.” On the basis of the first sentence, I would say “The world is your human resources department,” because all human resources in the world can work for us.

For example, several employees learnt on the Internet that some pregnant women wish they could watch TV while lying in bed. Therefore, these guys built a home projector, which is now enjoying good business. They no longer keep their own R&D department: their R&D resources are in Silicon Valley in the United States; the core components are from Texas Instruments; and the production happen in Wuhan Optics Valley. The second sentence represents a big challenge for traditional companies. In the past, they gamed with upstream and downstream companies, and suppliers, marketers and other parties all tried to maximize their interests, but now we have to work together with users to create needs and maximize the interests of all parties.

Why have you devoted so much time to transformation? A big challenge was that tens of thousands of middle management had to become entrepreneurs, or they had to leave. By “middle management”, I am not referring to middle leadership and managers in the traditional sense but the insulated wall between the company and users. These people did not necessarily hold any management positions, but all external resources came to Haier via them.

For example, suppliers could only access Haier via them, which led to a lot of problems. Today, suppliers can access Haier through the Internet. Haier was like a Chinese university following the “strict entry and tolerant exit” system, but now it is like an American university following the “tolerant entry and strict exit” system. Only in this way can the Internet Integrate the best resources.

Our corporate culture should also shift from the execution culture to the entrepreneurial culture. The two cultures have different requirements and standards. The execution culture requires employees to strictly execute instructions. Today’s work must be done today, even if it means you will have to work till late at night. In the past, those strictly executing the instructions of the company were considered as role models. However, the entrepreneurial culture requires us to achieve development through entrepreneurial results, or we should not be there. The greater the entrepreneurial results, the bigger share of benefits we can receive.

Jean Tirole is a French economist and the winner of the 2014 Nobel Prize in Economics. In The theory of Corporate finance, he pointed out that there are two ways to reduce insider risks: one is the incentive mechanism based on manager performance, and the other is supervision by shareholders, which is also important for enterprises. The two add up to the Western principal-agent mechanism: shareholders give agents and managers options, and managers give shareholders profits. However, this mechanism covers just a few people, mostly managers, while Haier enables everyone to become entrepreneurs, and everyone is responsible for their own markets and users. Moreover, the principal-agent mechanism seeks to control operating risks, while we seek to vitalize the company rather than control risks. Only in this way can everyone become their own CEOs, as Drucker said.

Of course, we are also faced with cultural challenges. We must change our concepts and shift from the “listening to the leadership” to “listening to users”, because users are now our leadership/

The changes and challenges in the Internet era are reflected in three aspects: first, zero distance information; second, decentration, i.e. on the Internet everyone is a centre, a publisher and a commentator, and anything that meet the users’ requirements and needs is saleable; third, scattered resources.

Currently, the most important challenge for Haier is decentration: how can we ensure that everyone becomes a centre? How can we shift from a tightly – coupled organization? When you take a handful of sand, the harder you grab, the less you can keep, and an open palm can keep more sand. We need to open the company and build it into an entrepreneurial platform, so that everyone can start a business and Haier can have more. A tightly – coupled structure is like a precision machine. All the gears are running at a high speed, but none of them act on their own volition. Once the outside world changes, the whole structure may collapse. Kodak, the world’s oldest photo film company, collapsed in the digital era because it was a tightly – coupled architecture. It developed the digital camera, but failed to carry on. Suppose it had adopted a loosely – coupled architecture and had made the digital camera business part of its portfolio, it could have been a different story.

What problem can a loosely – coupled architecture solve? The market friction Ronald Coase, the winner of the 1991 Nobel Prize in economics, proposed a famous theory that a market could not exist within an enterprise. Why? The reason is that a very strong market friction exists within an enterprise. Why is it there? An enterprise is a bureaucratic organization, which involves great search costs and coordination costs. Now that we have deconstructed this organization, the market friction can be basically eliminated. In the Internet era, according to The Zero Marginal Cost Society by Jeremy Rifkin, many marginal costs tend to zero, so we can establish a collaborative and sharing economy, in which all of us can collaborate and share as well.

For example, he believe that GDP is likely to decline in the future. Why? I may not need a car, because I can rent one; I may not need toys, because as in the United States, people can put their toys on a toy website for everyone to share, and all you need is a card. Instead of ownership, we just need the rights to access and use in the future, so the national GDP is likely to decline but will be good for everyone. The parallel platform of Haier can achieve such a collaborative and sharing economy, in which all parties are involved, including users. We can maximize the interests of all parties and move forward.

What is our goal? We hope that micro – enterprises become self – organizations and self – evolve into a path to increasing marginal returns. In the past, organizations were never self – organizations but heter – organizations that took orders from others. Self – organizations must meet two conditions: first, a positive feedback loop is achieved, i.e. better people set up higher goals, create greater value, set up still higher goals and attract even better people; second, negative entropy can be introduced to recruit better people. The main goal of such self – organizations is to achieve self – organization, so we should not set up goals for them to follow but let them evolve towards their goals and become the path to increasing marginal revenue. The era of traditional economy featured diminishing returns, while in the Internet era we can achieve increasing marginal returns as long as we do it right. Why? In a close era, resources were limited, so the results were always diminishing marginal returns. In an open era, however, self- organizations can surely achieve increasing marginal returns.

For example, in the past, we were absent from the gaming laptop industry, but now ThundeRobot built by three post – 80s has got ranked second in the industry within a year. How did they do it? They studied 30,000 pieces of user data and found that no gaming laptop could make users satisfied. They sorted out a dozen pain points and were determined to make users satisfied. Through interaction with users, they integrated social resources such as foundries and design resources and secured the venture investment. Of course, they also acted as piggy – back investors themselves and shifted from executors to owners, and now they are considering extending from hardware to software they should go, but the mechanism drove them onto the right path.

Besides makers’ micro – enterprise like ThundeRobot, some micro – enterprises are transformed micro – enterprises. I mean, some industries are already well – developedand there are proven processes in place, such as the refrigerator industry and the washing machine industry. How should we change? What is the biggest change? We need to replace the original series process with the parallel process. Companies used to go from R&D to manufacturing to marketing, but now we need to parallel all resources and face users together. For example, designers used to get paid as per the evaluation from the downstream department. How do they get paid today? They must wait till the product has hit the market and brought in profits, or they have to share the risks. Therefore, they no longer shut themselves in the laboratory but begin to go to the users. This is easier said than done, because the interests of many people are involved. Of course, it is the most important thing to change the product development. The past era featured the cascade product development while the present era requires the iterative product development. Today, we first get users to participate in the product development process and then make constant improvements.

Some people think our practice is against the Coase Theorem: businesses exist in order to reduce transaction costs, In fact, we should think in another way: why are some transaction costs lower than others? The answer is that some people are better. If we make all human resources available, this problem will no longer exist. Indeed, the real problem facing Haier is our tolerance of trial and error. In recent years, the trial – error process has lasted such a long period of time because we need to weigh and consider all related factors. If the tolerance is too high, things may get out of control; if it is too low, the transform will not succeed. It is very hard to draw the line.

As Kevin Kelly said in Out of Control, “the price of evolution is the title of this book”. We must evolution before we can develop, and once we embark on the evolutionary process, it is easy to get out of control.

User – Paid Platform

The investment – driven platform changes the entire enterprise structure. It is people that matter most for an enterprise. Then, what are we going to do with our employees? We need to establish a user – paid platform. Haier used to adopt a wide – band salary system as many of today’s large global companies. The question with such a salary system is that employees are always staring at their ranks rather than users.

Haier uses a two – dimensional lattice in its evaluation of employees. The horizontal axis is “enterprise value”, which measures common indicators such as sales revenue, profits, market share; the vertical axis is “network value”, or “user value”. In the past, if you sold 100,000 products, you would receive a high salary, because the horizontal axis represents high – weigh indicators. Now, if you sell 100,000 products, we will ask how many users have been reached. The relationship between customers and businesses is just a transaction – based relationship, which is over when the transaction is closed. However, the users are already involved before the products are developed, and will talk about their experience and produce an iterative effect after the products hit the market. The network size is measured from two aspects: first, whether there will be more and more network nodes; second, whether there will be more and more connections. We have defined a turning point, beyond which there will be more and more users. If a micro – enterprise cannot reach this tipping point, it should not exist.

The 360 – degree feedback system is actually a closed self – evaluation system. Now, Haier directly solicits users’ evaluation and interacts with them. We used to rely on follow – up calls to obtain users’ evaluation, but so far nearly 1,000 operators have been made redundant for the call centre. The zero – based budgeting (ZBB) approach is much needed in transformation. It used to be hard for a department to lay off 10 percent of its employees. Today, however, the question is not how many people will be laid off, but whether the entire department will be completely eliminated, because there may be no more need for the department to exist. The compensation culture also needs to be changed. We have replaced the enterprise – paid compensation system with the used – paid compensation system, To share profits, you must create value – added for users and receive their positive comments. In addition, you must reach the tipping point. In short, you must share risks before you can share profits. For example, some micro – enterprises well exceeded the enterprise value threshold but failed to create enough user value, so they could not really get paid and micro – enterprise owners had to pay employees out of their own pockets. It certainly is not sustainable. If they cannot earn real salary, they will have to be disbanded.

Hayek once said that the most crucial advantage of the market does not lie in the allocation efficiency but in the free flow of information was certainly impossible because the information was asymmetric. Today, with employees and users closely connected, we first need to solve the problem of information asymmetry, and then we must make sure employees are mutually connected so that they self evolve into providers of the best user experience. According the quantum management theory proposed by the female British scholar Danah Zohar, the world is made up of energy balls. These energy balls collide with each other. After the collision, they will not separate but will join to give birth to mew things. This is completely different from Newton’s theory, because Newton believe that the energy balls would separate after the collision and the world was static. However, the world should be dynamic.

Haier is trying hard to build itself into a business platform, turn employees into makers and achieve user personalization. In this process, the key is whether employees can become makers. When the Toyota management model was popular all over the world, I always wondered what Peter Drucker had to say about it, and I never read any article written by Drucker praising Toyota. Later, I read The Future That Has Already Happened by Drucker, in which he especially explained why he didi not praise Toyota. He believes that the Toyota model fails to reflect the essence of management by objectives and self – control. First, it does not reflect the dignity of individuals. Second, it does not reflect equal opportunities. Whether at work or after work, employees are engaged in technical innovation and technical improvements, but they receive directions from the leadership rather than act spontaneously, so their own value is not reflected. To act spontaneously can make one respected by others. Are they given such an opportunity? No. In addition, they do not go to users and cannot enjoy equal opportunities with the presence of hierarchies.

Haier boasts the best and largest major appliances delivery network. We have 90,000 delivery vehicles, each of which is allocated a driver and a fitter (180,000 employees in total). The call centre used to dispatch theses delivery vehicles and collect information to rate their service. Now, we have removed the intermediate link and have given all the rating rights to users. Take the policy of “full amount cash back on late delivery” for example. If the agreed time is seven o’clock and the delivery is late, the user can keep the goods and have the cash back. Once a user deliberately required the goods to be delivered at one o’clock in the morning, and when the goods arrived he was still sleeping in bed, This is much better than rating service by follow – up calls, because it is hardly possible to rate more than 90,000 vehicles. When users have posted their rating online, the vehicles receiving the highest ratings will receive the most orders. The fewer praises, the fewer orders. Therefore, some delivery micro – enterprise can develop from one vehicle to a dozen or more vehicles, while others may be eliminated and merged. In short, the right to rate employees must be given to users.

Let’s take the water box for another example. At first, we collaborated with Israel in making the water purifier. We were confident about it and testing results were also good. After all, as a water– scarce country, Israel has its unique way of water treatment. However, it did not sell well. It turned out that we failed to interact with users. Then we built a water box and let users test the quality of water at home. Based on the testing results, we provided the solution. Later, the water purifier platform developed rapidly and attracted a lot of venture investment.

Some people are concerned that when each employee fights his own battle, collaboration will be even harder, and they may seek short – term profits at the cost of long – term profits. In the beginning, such problem did exist. However, our two – dimensional lattice solved these problems. In fact, the real problem for us was to help employee adapt to the two – dimensional lattice. So far we have not yet established a sound use – paid compensation system. I personally think that it should be like a balance sheet, and the relationship between an employee’s salary and the value he/she creates should be like the debtor – creditor relationship.

In the book I Ching (The Book of Changes), the lines on the Pihexagram says, “One should remove impediments instead of be removed by impediments.” In other words, we should proactively change the closed situation instead of being changed by the closed situation. This explains why we have been exploring. Kleiner said in The Management Century, “In management there is no final answer, only eternal questioning.” We cannot “remove impediments” once for all. Instead, we need to “remove impediments” constantly as required by the times, and our etemal pursuit is to turn Haier into an enterprise of the times in the true sense.