Most of the major product lines operate as independent businesses rather than as parts of a larger matrixed organization. The notion of synergies across units has been largely set aside; the focus is on autonomy and accountability. Thus, Midea had nearly twice as many employees per unit of sales, reflecting some of the duplication of effort inherent in its organizational approach. Of course, Chinese companies produce more in-house and pay employees less than their Western counterparts, so Chinese enterprises can afford to employ more people.
And in a country with little business infrastructure such as logistics providers, distributors, and retail chains, companies need a lot of manpower to grow. There are no pure cost centers; even the finance department functions independently, providing financing and advisory services for a fee. Though Western companies believe that multiple reporting lines protect them from risks, such as uneven product standards or hiring practices, while enabling scale efficiencies and learning benefits, most Chinese founder-CEOs eschew this notion. They chase topline growth at any cost and believe in structures that support rapid expansion.
Indeed, improvisation and speed, coupled with low costs driven by economies of scale, create considerable disruption inside and outside China.
International Journal of Chinese Culture and Management
This involves not just adding resources but incubating new business models and launching new brands. In the United States or Europe, the business unit head would normally handle both time frames, but Chinese founders usually appoint two managers, each autonomous and responsible for one time frame and, effectively, competing for resources. Chinese leaders prefer direct conflict to more complex, cooperative management structures that involve all their reports but operate out of their sight.
Most would rather hire more arms and legs than create new cross-organizational roles. Smart Chinese executives make decisions in an ad hoc manner and are micromanagers. The most-sought-after employees are entrepreneurial, ready for the rough-and-tumble, and less likely to be top-of-the-class candidates, who tend to gravitate toward state-owned enterprises. Moreover, most companies have invested little in talent retention and unlike Hai Di Lao are weak when it comes to coaching, feedback, and training.
Most of China is still developing, which means that it is marked by inexperienced customers, undercapitalized companies, no-name brands, and unique local business customs and traditions. The definition of quality, for example, reflects local needs. Construction companies will pay a premium for cement that dries quickly or can be poured in freezing temperatures, since they want to build at maximum speed and operate seven days a week.
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They will not pay a premium for cement that lasts 50 years instead of Localization provides companies a way to capture value—through what they offer customers and partners, and how they go to market. The leasing companies, though small, are well connected, so they compete on their preferential access rather than on durability, and demand financing so that they can keep their capital commitments down. Sany builds low-end machines, has very local distribution systems, sells with little or no down payment, and offers the most service.
It uses more managers who know more people, in more places—a very different way to go to market. Multinational rivals like Komatsu and Caterpillar, in contrast, serve the upscale market, selling higher-end machines to the few better-capitalized construction companies. The speed with which Chinese companies develop new products from existing technologies and ramp up large-scale production is often impressive. Fast-food chains in the country, including KFC China, introduce more new products each year than their U.
The ability to launch new offerings is a by-product of heritage. Lu sent his son-in-law, Ni Pin, to run the American operation. Wanxiang did not have superior production technology or product designs, so it focused on three other levers. One, it brought in cheaper parts from its factories in China to feed the higher-value machining and finishing processes in the United States.
Another company that takes a fast and flexible approach is the Broad Group, based in Changsha. It constructs buildings with remarkable speed and in an environmentally friendly fashion, using factory-built modules.
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The units have all the utilities embedded, are plug-compatible, and are shipped to building sites in foot containers for round-the-clock assembly. As these examples illustrate, the skills Chinese companies rely on are mainly downstream industrial competencies. Nobody is directly responsible to the user. That must change. Another thing that must change is fixed targets. 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. 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.
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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. Major companies as we know them today will disappear along with their bureaucracies.
The future of business is networked organizations. 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. But I have read all his books and I disagree.
He also wrote about the need to effectively integrate employees and users if you hope to maximize value creation. This is very relevant today.
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That insight is still relevant and not just for people in finance. ZR: Coase published his essay on the nature of the firm in 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. So, we take advantage of global resources. 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? 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. 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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