Summary: "The End of Bureaucracy"
Bureaucracy has been called a “villain,” “cancer,” and a “disease” by leaders in businesses. Yet, in a Harvard Business Review survey, about two-thirds said their organizations had become more bureaucratic in recent years.
While bureaucracy works to a certain degree, a lot has changed since the term was coined two centuries ago. In this Harvard Business Review article, authors Gary Hamel and Michele Zanini highlight Haier, the world’s largest appliance maker, as a case study of what can be accomplished when an established company challenges bureaucracy by running its global business with just two layers of management between frontline staff and the CEO.
Led by CEO Zhang Ruimin, who viewed bureaucracy as a competitive liability, at Haier, everyone is directly accountable to customers (“zero distance”), and “employees are energetic entrepreneurs, and an open ecosystem of users, inventors, and partners replaces formal hierarchy.”
Haier’s rendanheyi model (a mash-up of Chinese characters that suggests a coupling of the value created for customers with the value received by employees) highlights seven practices:
1. From Monolithic Businesses to Microenterprises
Haier divided itself into more than 4,000 microenterprises (MEs) with 10 to 15 employees each.
There are three types of MEs: a) “transforming” those that are market-facing and reinventing themselves to be more customer-centric b) “incubating” that are entirely new businesses, and c) “node”, which sell component products and services to Haier’s market-facing MEs.
All MEs are free to form and evolve with little direction but share the same style of target setting, internal contracting, and cross-unit coordination.
2. From Incremental Goals to Leading Targets
Objectives are set “outside in” and MEs are charged with pursuing growth and transformation goals. Market-facing MEs are expected to grow and profit four to 10 times faster than the industry average and are expected to transform from selling products and services to building an ecosystem.
Haier tracks every MEs transformation by capturing detailed metrics such as the degree to which their products offer unique customer value.
3. From Internal Monopolies to Internal Contracting
MEs are given the liberty to choose to buy services or not from other MEs or from external providers if it meets their needs. Senior executives don’t interfere with internal negotiations.
Every market-focused ME reviews performance objectives annually and asks the nodes for bids to meet their goals. This allows discussions and challenges about existing practices and new ideas. A node’s revenue depends on the success of ME customers, every node is invested in the market-facing unit performance and every employee’s pay is linked to market outcomes. The benefits of this compensation model? It discourages mediocrity and unity around creating customer experiences and maximizes flexibility.
4. From Top-Down Coordination to Voluntary Collaboration
At Haier, synchronization or coordination happens by organizing all their MEs into platforms, where the owners help the ME teams identify opportunities for collaboration. This means there is no reporting structure from platform owner to staff or vice versa. Haier is a prime example of achieving coordination without centralization.
5. From Rigid Boundaries to Open Innovation
Haier sees itself as a hub in a large network, not as a company. They develop their products in the open, inviting feedback and input on needs and preferences of their products.
They have a network of 400,000 “solvers” made up of global institutions and technical experts to address their challenges. Haier also uses crowdsourcing to gain feedback on products and defray development costs.
6. From Innovation Phobia to Entrepreneurship at Scale
Three ways to launch a new business at Haier include: a) an internal entrepreneur posting an idea online inviting ideas/input on the business plan, b) a platform leader inviting insiders and outsiders to submit proposals for “exploiting a white space opportunity.” C) would-be entrepreneurs pitching their ideas at a roadshow
7. From Employees to Owners
Haier MEs self-manage and have the freedom to: decide opportunities to pursue, make hiring decisions, set pay rates, and distribute bonuses.
According to Zhang, a complex system emerges through a process of iteration of imagination, experimentation, and learning. He believes that transformation can be accelerated at Haier by running more trials and replicating the successful ones faster.
Read more about Haier’s rendanheyi model in detail.