Management Theory 2.0: Made (and Innovated) in China

For more than a few companies, surviving the coming tidal waves of disruption will take more than a few tweaks to how business is currently done. According to Peter Weill, Chair of the Center for Information Systems Research (CISR) at the MIT Sloan School of Management, and Stephanie Woerner, a CISR research scientist, managing the near future will be especially challenging for large enterprises, which “are particular targets of digital disruption because of their large customer base, juicy profits, and sometimes patchy customer experience.” In the MIT Sloan Management Review article “Why Companies Need a New Playbook to Succeed in the Digital Age,” Weill and Woerner argue that the corporate world needs to move beyond Michael Porter’s idea of controlled value chains, where companies focus on doing one thing well. And to do this, new command structures are needed.

The Age of Disruption, of course, threatens more than just traditional leadership models. In the Ivey Business Journal article “Topple Your Monolith Before It Crumbles,” A.T. Kearney’s Suketu Gandhi argues that the corporation’s raison d’être no longer makes sense, at least not as it was defined by Ronald Harry Coase during the airship era. In 1937, Coase crossed America’s industrial heartland asking business leaders of the day why they did what they did. The Nobel Prize-winning economist then penned an influential essay entitled “The Nature of the Firm,” which concluded that companies exist to manage transaction costs by doing things in-house, where functions can be efficiently performed within boundaries. As Gandhi sees it, the “manage within” mindset that Coase spawned now keeps companies walled off, preventing them from forming more productive digital-age relationships with external partners, not to mention customers. Monolithic corporations, he concludes, can “continue to lose ground and eventually watch their business crumble, or they can take charge of their own future by embracing the new way of integrating functions and becoming an ecosystem organization.”

Talking about the need to transform walled enterprises with top-down management structures into decentralized open networks or corporate ecosystems is all the rage these days. But implementing revolutionary change at the enterprise level is easier said than done, especially for folks who live and breathe traditional management theory.

Enter Zhang Ruimin, China’s corporate philosopher king.

The Western world has long looked down on Chinese innovation. While on the campaign trail in 2016, former Hewlett-Packard CEO Carly Fiorina, a U.S. presidential hopeful at the time, issued the following blatant generalization: “The Chinese can take a test, but what they can’t do is innovate. They’re not terribly imaginative. They’re not entrepreneurial. They don’t innovate. That’s why they’re stealing our intellectual property.” But as IE Business School Professor Michael C. Wenderoth recently pointed out in Forbes, Westerners can blindly maintain an outdated view of Chinese products—insisting they are still mostly cheap, low-quality copies—but that doesn’t change the fact that the Asian nation now has “more than its share of world-class companies that are increasingly rising in rankings on size, growth—and most significantly, innovation.” Indeed, as Wired contributor Christina Larson observes, copy-cat China now co-exists with a “new entrepreneur-driven China that is poised to reshape at least some facets of our common global technology future—with growing strength in fields ranging from artificial intelligence to genomics to drones.”

For the record, it is not just Chinese tech plays and medical ventures driving the need for an upgraded Western opinion of Chinese capitalism. Indeed, one of the most revolutionary innovations coming out of China today is a corporate playbook designed for the Digital Age that has factory-floor roots dating back to when the world’s second-largest economy opened its door to foreign trade and investment in 1984. That same year in the port city of Qingdao, another game-changing event took place when a younger version of Ruimin took charge of a struggling appliance factory that he grew into the Chinese multinational known today as the Haier Group.

In an article entitled “Musk, Trump and the perils of disruption,” Globe and Mail columnist Ian McGugan points out the irony of many top-down approaches to change management in the digital era, noting that high-profile leaders with disruptive agendas tend to have disruptive characters, not to mention Twitter accounts. “Both voters and investors have become infatuated with strong personalities who claim they have a magic plan to overthrow existing elites and make the world better in the process. To a disrupter’s fans, aggression and confrontation aren’t flaws. They’re virtues.”

Ruimin’s approach to leadership is different. Although it’s not on display, Haier’s founder probably has an ego matching his reputation as one of the world’s most successful CEOs and top management thinkers. As a kid, he dreamed of being a journalist or professor. But thanks to China’s Cultural Revolution, he became a factory worker instead. At 35, after years of working his way up to management, he was put in charge of the Qingdao Refrigerator Company, which was an unmitigated disaster at the time. With books deep in the red, there was no money to pay salaries. General maintenance was neglected, so broken windows and toilets went unfixed. Employees urinated on the floor. They burned walls for heat. When refrigerators were assembled, nobody cared to ensure they worked. But after homeschooling himself an MBA by studying the likes of Peter Drucker and Frederick Taylor, Ruimin literally turned things around with the force of a sledgehammer. 

According to Drucker, when a company is run well, nothing exciting should happen in management. Turning that maxim on its head, Ruimin had his factory’s workers line up outside and ordered them to destroy the defective fruits of their inefficient labour. That simple act helped employees (who could not be fired) understand the importance of quality, not to mention the need for Ruimin’s new list of workplace rules, which if broken triggered two years of face-losing probation.

Rule One: Don’t piss on the floor.

Long story short, following Western management theory and lessons learned from Japanese and American firms, Haier’s chairman took a failing factory with 600 unproductive workers and transformed it into a global appliance giant with more than 50,000 employees. He started by focusing on improving quality, then turned his mind to product diversification and globalization. More than a few outsiders scoffed when Haier decided to invest in a new industrial park to expand its product offerings in 1991. Negative Nellies scoffed again at the company’s global brand ambitions, predicting failure when it built its first U.S. factory in South Carolina in 1999. Since then, the Haier Group—which posted US$38 billion in revenue last year—has remained on an impressive growth trajectory, acquiring U.S.-based GE Appliances, Japan’s Sanyo, and New Zealand’s Fisher & Paykel along the way.

Ruimin is unquestionably one of the most influential business leaders in China, where he has also served as an alternative member of the Central Committee of the Chinese Communist Party. And yet, instead of consolidating his power to drive his disruptive agenda, he has been systematically giving it away to front-line workers while culling Haier’s ranks of middle management because he believes the Internet of Things (IoT) will prove to be the final nail in the coffin for traditional management theory.

The IoT revolution has been a long time coming with its potential for increased customer engagement overshadowed in recent years by advances in big data analysis, artificial intelligence, and crypto-economics. Back in 1999, a Baltimore Sun headline suggested connected appliances will soon “help you live like the Jetsons.” The world is still waiting. But according to some estimates, IoT connections already surpass the world’s active mobile devices. Global IoT spending is projected by IDC to top US$1 trillion by 2020, when Statista sees the IoT world growing to more than 75 billion connections. Market analysts at Intel predict the number of connected smart objects out there will soon reach 200 billion—or about 26 for every human on the planet. And smart homes with refrigerators that recommend recipes based on what they have in stock, and then communicate cooking instructions to a wired oven, are just part of what Haier has in mind for the near future.

The security concerns related to increased connectivity are obvious. In the recently released thriller The President Is Missing, reportedly coauthored by Bill Clinton and James Patterson, a computer virus threatens to bring back the Dark Ages by disabling every connected device and erasing all digital data. The book is fiction, but its premise isn’t pure fantasy. As former Canadian Imperial Bank of Commerce CEO Gerry McCaughey warned at an Ivey Business School-sponsored conference on the future of banking last year (when the corporate world was being targeted by ransomware attacks at a rate of at least one attack every 40 seconds), it isn’t likely that we will see financial systems shut down by hacker attacks aimed at corrupting banking data—but it is probably possible.

The bigger-picture challenges posed by increased connectivity are less obvious. But a visit to the “One Hand Clapping” exhibit currently on show at the Guggenheim Museum in New York can open your eyes to the unknowns, feeding both concern and hope for humanity. An animated video entitled “Dear, Can I Give You a Hand?” by Hong Kong native Wong Ping, for example, leaves the impression that human existence will soon be as obsolete as pornographic video tapes. Meanwhile, China’s Cao Fei serves up a fantastical film installation called “Asia One.” Examining the potential societal side effects of factory automation, it suggests that workers of the world have nothing to gain as digital-age capitalists move to thrive off growing middle-class demand for immediate consumer satisfaction. And yet, hope can be found in a VR simulation by another Chinese artist, Lin Yilin, who lets you experience life as a basketball to drive home the possibility that technology might just allow people to better understand other perspectives.

The latter idea forms the basis of Ruimin’s new playbook for digital-age corporate leadership, which isn’t about managing others at all—it’s about enabling them to act on intimate knowledge of consumer needs and desires to develop and implement strategies of their own. Haier is no stranger to automation. One drum washing machine production line in Qingdao that has seen its workforce cut from 93 to one is known as a no-light-required operation because its robots are vision agnostic. But in Ruimin’s vision of digital-age capitalism—which is influenced by Confucius, Taoism, and Sun Tzu, in addition to Western thinkers—CEOs and middle managers as we know them will eventually disappear along with traditional corporations and the so-called factory wage slaves of the world.

Haier’s founder has long believed in fighting big-enterprise disease with self-managed teams. Since the dawn of e-commerce, he has been honing a business model known as Rendanheyi, which aims to leverage front-line employee insights to foster innovation in an entrepreneurial environment unconstrained by company policy, boundaries, or middle managers. In 2005, Haier started transforming itself from a closed enterprise into an open network of self-governing microenterprises run by risk takers motivated by profit stakes. Ever since, this network has steadily cut middle management while increasing the autonomy of its value creators and opening itself up to external suppliers and entrepreneurs to attract talent and spur competition. Simply put, Haier is working toward an entrepreneurial ecosystem that sustains itself by sprouting success more often than failure without top-down direction. As things stand, the network includes more than 2,000 independently managed businesses, ranging from support services to start up ventures, each reportedly in total control of everything from hiring to distribution so long as agreed upon targets are met.

If all goes as planned, the company will ignite the IoT revolution using its network model as a steroid for innovation, product customization, and end-user engagement. Hoping to empower its network of entrepreneurs to develop services surrounding IoT products while meeting changing individual expectations in real time, the company has invested heavily in developing both physical and online customer touchpoints as well as mass customization capabilities that integrate users in the manufacturing process. An online air conditioner factory in Henan has 11 stable modules and four changeable modules that can be combined into more than 200 consumer-customized configurations. China’s first online production line in Shenyang churns out Haier refrigerators offering more than 500 types of large-scale customization. The end game is enabling all customers to order customized appliances via smart-phone apps, which allow them to track (and post reviews about) production and delivery like an Uber Eats order.

Whether or not this model can sustain itself over the long haul, or even be successfully exported, remains an open question. But pointing to positive signs at GE Appliances, Ruimin compares his evolving Rendanheyi model to “a salad dressing that can be applied to various types of salads,” meaning across sectors and corporate cultures. During the 10 years before being acquired by Haier, GEA saw its revenue drop 11 per cent. Last year, GEA’s revenue and profit increased by 6 per cent and 20 per cent respectively, after being split into seven separate microenterprises representing former appliance groups and new platforms for crowdsourced innovation (leaders at these ventures were selected by election).

Some outsiders wonder whether all the talk of autonomy at Haier is more hype than reality, but others clearly see potential. As Forbes contributor Peter Hinssen put it last year, “The beauty of Haier’s competitive and networked innovation approach, is that only a certain type of ‘gutsy’ and entrepreneurial type of employee will be drawn to the company, which will even more reinforce its innovation culture. It’s a perfect circle.”

Back in China, Ruimin challenges skeptics to come for a look. He freely admits he is rolling the dice by taking a sledgehammer to long-held management traditions. Then again, back in the 1980s, there were established management theories that could help him meet the challenges he faced. And Ruimin no longer thinks that is the case. He has long watched as the Internet and new technologies put top-down business models under ever increasing pressure—and he sees IoT connectivity as the tipping point. Like everything else in the Digital Age, he says, management theory must constantly adapt. So, while Haier’s founder is willing to risk failure by combining Western and Eastern thought to mash up a new model for success, he is not willing to watch the empire he built fail due to a lack of courage to try something revolutionary.

On a recent visit to Haier HQ in Qingdao, Ivey Business Journal Editor-in-chief Thomas Watson sat down with Ruimin to discuss Haier’s evolution. Following is an edited version of that conversation.

Ivey Business Journal: Chairman Ruimin, you have spent most of your adult life in management. What did you want to do as a kid?

Zhang Ruimin: China didn’t have a market economy when I was young, so the whole idea of a management career never entered my mind. My initial dream was to get a university education and learn journalism because as a journalist you can visit all kinds of places, meet different people, and learn all kinds of knowledge. That seemed like a good profession. But I am from the Cultural Revolution generation, and the opportunity for me to attend college was abolished before I graduated high school. As a result, I went straight to the factory. I started as a trainee, learning from a senior worker. My pay was very low, something like $4 a month. I then served as a regular worker and worked my way up to factory manager. Along the way, I observed all the bad decisions and mistakes that managers can make when they forget or ignore the needs and input of the workers. That was really a great education, and it planted the seeds of Haier’s Rendanheyi model—which we developed after growth led to the development of big-enterprise disease.

IBJ: You built Haier deploying Western management philosophy to organize the company into silos, divisions, and strategic business units. You now essentially argue that traditional management ideas can no longer meet consumer demands, or at least not effectively enough to lead the market in the digital age. Is that right?

ZR: Yes. At the core of Rendanheyi is a belief in small autonomous teams. We have been moving to free everybody in our organization to explore their entrepreneurial potential, giving them an opportunity to be a creator of value instead of just serving as a salaried worker working for managers who rarely see the front lines. This allows people closest to product users to seize the opportunities that they see everyday to improve a product or service or develop new ventures that create new demand.

IBJ: When was your first exposure to management theory?

ZR: Back when I was put in charge of the failing factory that became Haier, you could not get translated copies of Western thinkers in China. But in 1985, I managed to obtain a Taiwanese translation of Peter Drucker’s The Effective Executive, which talks about what kinds of things an executive should and shouldn’t do. He noted a well-managed company shouldn’t be too exciting internally because it has established effective routines and rules. That stuck with me because most people in China at the time thought there should be a lot of exciting things happening with management.

IBJ: So, did you decide to have employees destroy company refrigerators to dramatically point out the factory was not well run?

ZR: At the time, the immediate challenges I faced were financial. I didn’t even have money to pay our workers. We were a collectively owned enterprise, not state-owned, so it was not easy to borrow money from the banks. Our bigger-picture issue was skills. Like other Chinese businesses at the time, we lacked talent. If we imported technology, finding people to use it was a problem. We turned to our own people. The problem was one of employee engagement. Nobody cared about product quality. After reading Drucker, I set out to inspire cultural change by making it clear that nobody was doing their job well and emphasized that point with the force of a hammer.

IBJ: In other words, you believed that a company that doesn’t run well calls for non-boring action?

ZR: Yes, when we laid out those refrigerators and took a sledgehammer to them, each one had a note describing the quality problem involved and who was responsible. That didn’t improve our quality overnight, but it instantly changed people’s mindset. In the past, the workers thought quality was someone else’s responsibility. That required a very dramatic move.

IBJ: How do you control quality in a decentralized system?

ZR: I think the definition of product quality has changed. In the past, quality was about meeting design metrics and industry standards. You must now also produce products that exceed user expectations, which constantly evolve. When Haier launches a product in the market today, we get constant feedback from our users that we use to iterate our product in the second generation, then third generation, etc. We don’t take years to do this because you can’t take years to create a new-generation product when consumers have already told you what they want. In the past, Japanese companies were known to have the highest standard for quality. But that reputation is fading because they don’t understand that products today must be instantly responsive to the user’s cycle of needs if you want to develop lifelong customer relationships—which are key to competitiveness in the digital age. We aim to produce quality products by understanding user needs in real time. With our growing number of connected appliances, we are creating a network of customer touchpoints, something traditional transactional companies cannot do. We have also integrated offline brick-and-mortar stores and online stores with social platforms to reach out to every customer. This isn’t just about iterative enhancement of products. It’s about creating an ecosystem of services around connected products that improve the lives of users.

“In the past, Japanese companies were known to have the highest standard for quality. But that reputation is fading because they don’t understand that products today must be instantly responsive to the user’s cycle of needs.”

IBJ: I once worked as a venture capital executive. But when employed by a major telecommunications company with media assets, nobody was interested when I approached senior managers with an idea to incorporate blood monitors and mobile phones. As a diabetic, I knew we could make life easier for a huge and growing number of consumers. But in this large company, I was employed as a journalist, not a product developer, so I never even got a chance to pitch my idea. This is the sort of thing that you think today’s companies need to avoid at all costs, right?

ZR: Yes. Your experience is a good example of why large organizations with traditional management structures are a bad mechanism for fostering innovation and meeting the changing needs of users. As I mentioned earlier, as a factory worker, I often noticed middle managers shutting down great ideas from front-line workers simply because following up on ideas takes time and adds responsibilities. Managers tend to see extra work as trouble, even when it represents new organizational opportunities.

IBJ: And that is a bigger issue today than ever before because of connectivity, right?

ZR: Absolutely.

IBJ: Why?

ZR: We used to have new product discussion meetings twice a year. The process was long, complicated, and expensive because it involved numerous departments and corporate layers. Haier managed to grow this way, but our product success rate was very low, about 10 per cent, because middle management exists in isolation and serves as a brick wall between product innovation and front-line workers, making large organizations unresponsive to the market. When a product failed, nobody was accountable because everybody did their job. This process is no longer sustainable. In the disruptive digital age, product innovation can no longer take place competitively in isolation from front-line workers and product users. In the past, entrepreneurs could focus on building a company based on one big creative destruction. Creative destruction now needs to feed further creative destruction. That’s why Haier moved to break down the brick wall that middle management represents by evolving into a decentralized entrepreneurial network. In the past, people in R&D, marketing, and manufacturing were paid regardless of how well a product was received in the market, but now compensation is based directly on market response. Everyone now has a stake in the game and everybody is accountable to the market. And the entrepreneurial network that we have created is not just for people in Haier. It’s an open network because an open system can better sustain itself with new businesses that replace ventures that lose momentum or fail.

IBJ: What is the current success rate of your entrepreneurial platforms?

ZR: In China, start-up companies generally have a success rate of around 10 per cent. But the success rate of our entrepreneurial platforms is nearly 50 per cent. That’s a good result. But my job is to make it even better and I plan to do this by helping people take advantage of the opportunities being created by the IoT era.

IBJ: You often distinguish the opportunities offered by mining small data that has been obtained from consumer interactions with connected devices from the opportunities that can be gained by analyzing big data. Do you think too many companies fail to realize that small data isn’t something that traditional organizations will be able to utilize fast enough in the not-too-distant future?

ZR: Small data is individualized data, and it is constantly changing, so you need entrepreneurial creativity, speed, and flexibility to take advantage of it. At Haier, our goal—and it is a very ambitious goal—is to ignite the IoT era and be the first organization set up to thrive on the customer service revolution that it will deliver. We have seen the relatively fast development of disruptive technologies such as big data, AI, and blockchain. The IoT explosion has taken its time, but the disruption it will deliver should not be underestimated. Traditional companies with big data technology will not lead the IoT era. Traditional IT companies will not even lead the way. The leaders will be companies that are able to instantly obtain information directly from product users and quickly act upon it to satisfy existing and emerging consumer needs. At this, Haier has a great advantage thanks to its huge network of products and users. In the IoT era, our customers will serve as our market sensors and there will be zero distance between them and our product innovators.

IBJ: To succeed at your goal, you are transforming salaried employees into entrepreneurs responsible for their own success or failure. Part of this transfer of power to employees offers real hard benefits to the company in that payroll and benefits costs are reduced as workers take on personal risk for the freedom of being their own bosses. Over the last few days, I have been able to meet some people in charge of micro-enterprises. Despite how difficult the challenges of being an entrepreneur can be, not to mention the stress that it can put on family, the people I met are clearly enthusiastic about giving up wage security to eat what they kill. That said, the transition from salaried person to entrepreneur is often much harder than people imagine. Is there anything specific being done within the company to help people manage this transition?

ZR: We proposed the idea of turning Haier upside down in 2005. We started by inverting decision making in the corporate triangle to put employees on top and leaders on the bottom while cutting the ranks of middle management. Then we began to gradually turn this inverted corporate triangle into a platform for breeding micro-enterprises, or MEs. Eventually, the old Haier will be reduced to a glue that exists to support the platform and hold it together. It is indeed very difficult for some people to complete the transformation from employee to self-employed, so the evolution of Haier into an entrepreneurial ecosystem has been done gradually. Over the past 12 years, we have slowly expanded the number of independent businesses on the platform. We have moved slowly by design.

IBJ: How does compensation work?

ZR: This is very complicated because there are different layers of entrepreneurs within the network. Basically, compensation for Haier employees that have become entrepreneurs shifts from the traditional paid-by-enterprise model to a paid-by-user model. Some individuals own platforms that breed micro-enterprises that are expected to breed other enterprises. They each have different KPIs (key performance indicators). In the case of home appliances, for example, the platform goal is to drive revenue growth by creating products that generate more revenue as connected devices than they do as unit sales. One of our micro-enterprises in China is Community Laundry, which generates more money from its growing ecosystem of user services than selling connected washing machines. This was achieved in six months. So how well we transform the appliance business into a platform with IoT ecosystems that outperform unit sales is a KPI for the platform owner. ME owners are free to set their own pay levels if they meet targets. Compensation for service and product production people is based upon meeting specific targets set by platform or ME owners. For senior people in network-supporting roles, compensation is based upon performance, meaning how well individuals meet expectations and handle responsibilities, and how this performance contributes to overall network growth.

IBJ: How has this transformation impacted your responsibilities, required skillset, and daily challenges?

ZR: Like traditional CEOs, my job in the past was to make management decisions and then find ways to effectively implement them. My new role is very much as a servant. I now exist to help others make decisions and explore their potential in an ecosystem of entrepreneurial divisions and platforms. In other words, I tend the Haier rainforest, helping all the elements exist together in a way that makes the whole better. My focus is on maintaining a network that will create more and more successful MEs.

IBJ: So, your strategy to seize opportunities in the IoT era isn’t really a management strategy, at least not in the traditional sense?

ZR: It is a holistic and non-linear management theory designed in China for digital-age organizational networks. Think about the traditional job description for senior management. If you look at the classic definition by Drucker, it’s really all about managing people who follow a strategy set at the top of the traditional corporate triangle. What we have created is a management theory that defines the role of senior people in a non-traditional organization designed to thrive in the digital age. In terms of organization, Haier has been transforming itself from a closed enterprise with a top-down bureaucracy into an open network structure. During this process, employees change from being executors of strategy set by senior management to entrepreneurs and network partners. Meanwhile, senior executives change from being managers of people to enablers of value creation by numerous independent but intertwined enterprises with their own individual strategies. My vision is to create a Haier that doesn’t need anyone to set a strategic direction to sustain growth. At the group level, senior people will focus on ensuring that our micro-enterprises have the resources required to execute their own business models, create value for users, and spawn other businesses. And so, if anyone at the group management level leaves, the group should still be fine because our goal is a very robust network of ecosystems that doesn’t rely on a top-down bureaucracy.

IBJ: Before visiting your HQ, I asked businesspeople what they thought about Haier’s decentralized management structure. To be blunt, some North American management experts simply find it hard to believe that your organization really runs the way company propaganda describes. What do you say to these skeptics?

ZR: The Haier model speaks for itself, so come for a visit. We have a lot of people from around the world come to see how Haier conducts business. We also have lots of people who visit us specifically hoping to learn how they can do business the Haier way. The training sessions are so popular that there is a waiting list.

TW: Can your model really be copied?

ZR: It’s very difficult to replicate simply because the leadership mindset must change before you can even try to do anything like Haier. When people ask about our system, the one question they don’t really ask is how we let go of management power. To reorganize like Haier, you must give employees control over strategic decision making, human resources, and compensation rights. This isn’t easy for traditional managers because these things are what give them power and they want to maintain power. So, before you can try to learn from us, you must be willing to serve a system instead of running it.

IBJ: What about Haier’s goal to replicate the model in other markets with other traditions and cultures, not to mention labour unions?

ZR: You can’t force change, but you can change organizational structures to free employees from management control and give them an opportunity to be creators of value. So, think of Haier’s upgraded Rendanheyi model as a unique salad dressing that can be applied to different salads, which will then all share a core element. In other words, I think building an organization based on the desire of most people to have control over their work life is universally applicable. As things stand, most major employers around the world put stockholders first. But stockholders don’t create value, so I think employees everywhere can accept our philosophy.

IBJ: If a North American CEO came to you and asked for advice on how to apply the Haier salad dressing to their organization, what advice would you offer?

ZR: I think we have learned some things from our experience with GE Appliances. The first thing you must do is make sure you set up a system that does not produce orphan products. In a traditional company, you have R&D, you have manufacturing, you have sales. And once products are sold, nobody is responsible for that product’s future, so they don’t really care about user feedback. Nobody is directly responsible to the user. They don’t even know where they live or who they are. That must change. Another thing that must change is fixed targets. To be competitive today, you must serve user needs and beat user expectations, which are constantly changing—so your target mindset must be like   shooting a flying plate.

IBJ: If Haier leadership now exists simply to tend to the garden and serve as the glue that holds everything in the ecosystem together, how do you prevent the glue from building up into a layer of middle management that feeds off the system instead of contributing to it?

ZR: We do two things to prevent this. The first thing is our performance evaluation system. In the past, performance was evaluated by employee supervisors or leaders. Now performance is evaluated by the ecosystem and market. If you are not delivering what customers want in the form of some product or service with growth potential, you’re done, whether anyone likes it or not. We have a lot of products being developed by our current micro-enterprises, but while some will become igniting products that create new markets and iterate new generations, others will underperform, and we will cut them relatively quickly even if they turn a small profit. This is a system decision, not a management call. The second method of keeping middle management from growing is breaking up micro-enterprises that have become very successful. Once a great opportunity to expand a product or service line emerges within an ME, we spin off a new business unit to keep operations nimble. We have one gaming venture that quickly became a very big ME. It is now three separate MEs.

“I think it is time to stop thinking about why firms existed in the past. Major companies as we know them today will disappear along with their bureaucracies. The future of business is networked organizations.”

IBJ: You have long been considered one of the world’s leading management strategists. So, what do you think about the great works of management theory that you effectively used to save and build Haier into a dominant global player? Are they still relevant today?

ZR: I think it depends. Western management philosophy helped me organize the old Haier into silos, divisions, and strategic business units. But times have changed and traditional management theory as it has been applied in the past can no longer be relied upon to satisfy user needs. Taylor’s concept of scientific management, for example, was very suitable for the change from small workshops to line production, but we now need to think about how and when we use it in the digital world, if at all. I know many people argue that Drucker’s work should now be filed in the history section of any business book library. But I have read all his books and I disagree. Drucker’s definition of top-down management structure is dated. But his focus wasn’t just on how to manage a company’s internal assets. He also wrote about the need to effectively integrate employees and users if you hope to maximize value creation. This is very relevant today. In a speech at a global CEO conference, Drucker also pointed out that the person who least understands a company’s strategic needs is the chief financial officer because CFOs think about the future by focusing on past performance. That insight is still relevant and not just for people in finance.

IBJ: What about Ronald Coase’s concept that firms and their boundaries exist to do things in-house when the transaction cost of going to market can be reduced or eliminated?

ZR: Coase published his essay on the nature of the firm in 1937. He was right back then, but you can easily obtain resources from the market today without needing to establish a traditional company to control transaction costs. Traditional corporate boundaries are also no longer required. At Haier today, our evolving ecosystem of networked ventures and suppliers makes internal and external transactions every day. So, I think it is time to stop thinking about why firms existed in the past. Major companies as we know them today will disappear along with their bureaucracies. The future of business is networked organizations.

IBJ: OK, so how do large organizations seeking to evolve into a networked organization like Haier ensure that R&D needs are met as individual units of the company become more and more autonomous while constantly being broken up to keep them small? Wouldn’t smaller units tend to focus on meeting immediate consumer demands, rather than investing in longer-term or big-picture R&D?

ZR: That’s actually a very important question, which we have thought about for a long time. We have an R&D team that exists on its own platform. But we fully understand that we cannot do R&D strategically in the digital age on our own. So, we take advantage of global resources. Our R&D team partners with universities and research institutes around the world. We are just a very simple node on an R&D network that allows us to access resources from around the world. That’s why we say, “The world is our R&D department.”

IBJ: Following the financial crisis in North America, a lot of discussion about leadership character has taken place thanks largely to research done at the business school that publishes Ivey Business Journal. The general idea is that good leadership requires more than drive, commitment, and management skills, meaning it also requires a specific set of character traits like courage and temperance that balance each other and limit overly risky behaviour. Do you see a need for leadership character development in a decentralized organization like Haier?

ZR: You are asking if there’s a need for a networked entrepreneurial organization to develop the personality or character of its entrepreneurial partners. And I don’t think so because at the senior organizational level, the role of leadership is to serve the system, not manage its participants or risk. In fact, traditional leadership—balanced or not—might even be harmful to a decentralized entrepreneurial ecosystem because it aims to influence decision making, instead of just facilitating it.

IBJ: If you were approached by a young new founder of a micro-enterprise who asked for three pieces of advice, what would they be?

ZR: First, be prepared to fail and go bankrupt. Second, don’t let fear of failure hold you back because you must be brave enough to take risks to meet our significant growth expectations. Third, assuming you become successful at an early stage, make sure you are ready to keep challenging yourself to understand evolving user needs because that is what maintaining success requires.

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