Gary Hamel and Michele Zanini wrote an article for Harvard Business Review titled The End of Bureaucracy: How a Chinese appliance maker is reinventing management for the digital age (November–December 2018). The article is about the extreme decentralization and accountability at Haier, which bought GE’s appliance business in 2016.
« While most business leaders recognize that bureaucracy squashes initiative, risk taking, and creativity, it continues to thrive. »
« [Haier] has been divided into 4,000 self-managing microenterprises. About 250 are market facing (“users”), and the rest (“nodes”) supply them with components and services like IT and HR support. Users can hire and fire nodes—or contract with outside providers—as they see fit, and nodes’ revenues are tied to their users’ success. Ultimately, everyone is accountable to the company’s customers. »
« Having long viewed bureaucracy as a competitive liability, Zhang Ruimin, Haier’s renegade CEO, has for a decade led an effort to build a company where everyone is directly accountable to customers (a policy he describes as “zero distance”), employees are energetic entrepreneurs, and an open ecosystem of users, inventors, and partners replaces formal hierarchy. »
« From Internal Monopolies to Internal Contracting. In most organizations, a significant percentage of employees are insulated from market forces. They work in functions that are, in essence, internal monopolies, such as human resources, research and development, manufacturing, finance, information technology, and legal affairs… At Haier every ME is free to buy services, or not, from other MEs. (A typical user ME will have agreements with dozens of nodes.) If an ME believes that an external provider would better meet its needs, it can go outside for services. Senior executives virtually never interfere with internal negotiations. »
« A substantial part of a node’s revenue depends on the success of its ME customers. When a customer unit fails to meet its leading targets, the node takes a hit. Every node is thus invested in the performance of the market-facing units, and every employee’s pay is linked to market outcomes. Zhang is only slightly exaggerating when he says, “At Haier we are no longer paying our employees. Instead, they are paid by customers.” »
« This compensation model has three benefits. First, it discourages mediocrity. Nodes that don’t deliver high levels of service lose their internal customers. Second, it unites everyone around the goal of creating great customer experiences. When a user ME seems in danger of missing its targets, representatives of all its supplier nodes quickly come together to resolve the problem. Third, it maximizes flexibility: Market-facing MEs are free to reconfigure their network of service providers as new opportunities emerge. »
« Haier is made up of thousands of microenterprises (MEs), which are grouped into platforms… It’s the job of the platform owner to get ME teams together and help them identify opportunities for collaboration, such as developing expertise in the internet of things. Critically, no one reports to the platform owner, nor does the platform owner have a staff. »
« “Integration” nodes, found within every industry platform, help MEs import technology from across Haier and identify internal partners that can coinvest in new initiatives. Like platform owners, integration nodes encourage collaboration rather than exert control. »
« MEs also rely on the expertise of competence-focused platforms. Two of the most important are smart manufacturing and marketing, each of which employs fewer than 100 individuals…The primary role of the marketing platform is supplying customer information. »
« As Laurence J. Peter, author of The Peter Principle, wryly put it: “Bureaucracy defends the status quo long past the time the quo has lost its status.” »
« Explaining Haier’s penchant for entrepreneurship, one VC said, “Microenterprises are like a reconnaissance unit—they scan the battlefield and identify the most promising opportunities. It’s like a giant search function.” Haier understands that innovation is always a numbers game. The only way to find that next billion-dollar opportunity is to launch a slew of start-ups and give each one the freedom to chase its dream. »
« From Employees to Owners. A study of 780 U.S. companies published by the National Bureau of Economic Research explored the connection between gain sharing, autonomy, and voluntary turnover rates, which the authors used as a proxy for employee engagement. Turns out, neither gain sharing nor autonomy on its own had a significant impact on turnover. But in companies that offered employees both, voluntary turnover was less than half the rate observed when one or none of those two conditions were present.
This makes sense. If you increase employees’ authority without increasing their upside, the additional responsibility may well be seen as a burden. Conversely, if you grant people stock without increasing their authority, they’ll still feel like minions. »
« This combination of bonuses, dividends, and profit sharing gives employees the opportunity for hefty payouts. With so much at stake, it’s hardly surprising that ME team members have little tolerance for incompetent leaders. If an ME fails to hit its baseline targets for three months in a row, a leadership change is automatically triggered. If the ME is meeting its baseline targets but failing to reach its VAM targets, a two-thirds vote of ME members can oust the existing leader. New leaders are chosen competitively. Typically, three or four candidates will present their plans to the ME team… Poorly performing leaders are also vulnerable to a hostile takeover. Anyone at Haier who believes that he or she could better manage a struggling ME can make a pitch to its team. Performance data for all MEs is transparent across the company, so it’s easy to spot takeover opportunities… It’s simply an analogue of the market approach to corporate control. If a company consistently underperforms, its board will eject the CEO—or the business may be bought by a competitor who believes it can manage the assets more effectively. »
« As Zhang often reminds his colleagues, it’s impossible to engineer a complex system from the top down. It has to emerge through an iterative process of imagination, experimentation, and learning. When asked how Haier can accelerate its transformation, he has a simple answer: Run more trials and replicate the most successful ones faster, because revolutionary goals are best achieved through evolutionary means. »
« For decades, most companies have worked diligently to optimize their operations. More recently, they’ve raced to digitize their business models. Important as this is, Haier has done something even more consequential: It has humanized its management model… Haier’s empowering, energizing management model is the product of a relentless quest to free human beings at work from the shackles of bureaucracy. »
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