The
Haier Road to Growth
Customers always come
first for this Chinese appliance maker — even as it continually reinvents
itself and expands around the world.
Start with 30 million
responses on your QZone, Tencent, and other social media platforms — all to a
simple question: “What do you want in air conditioning?” Then pay attention to
the more than 670,000 people who take part in the online conversation that
follows. You’re bound to come up with something cool — or, more precisely,
“cool, not cold.” This concept, drawn from online responses, became the tagline
for the Tianzun (“Heaven”), Haier’s advanced household heater/air
conditioner/air purifier, released in 2014. Many Asian consumers don’t like the
chilling effect of conventional temperature control. They’d much prefer to be
“cool, not cold.” But there’s more to the concept than temperature. Air from
most such devices in China is dry and dusty. The machines themselves are too
noisy, or too likely to spread disease (bacteria live in air conditioning
systems). Moreover, the machines look — well, like air conditioners.
The Tianzun doesn’t
have any of those drawbacks. It is an obelisk-like device with a small wind
tunnel that draws air through it from the room where it is positioned. It has
an Internet connection, so consumers can use their smartphones to warm or cool
the room while on their way home. Some consumers probably knew they wanted that
feature, but they didn’t know that they wanted to see the circle’s light shift
from red to blue as their air quality improved. Once they saw that happening,
they were hooked. The product is targeted directly at a consumer segment that
no other company, in the West or the East, has recognized, and that could end
up being much bigger than a niche.
By building cooling
machines based on this in-depth and multilayered approach to consumer insight,
Haier is following its own core principle: “customer service leadership,” or
the necessity to shape the future by giving customers what they want most (but
may not have yet realized they can ask for). Even the decision to use the
phrase “cool, not cold” in its Chinese advertising campaign reflects this
principle. These are the words that customers use themselves, as opposed to a
slogan dreamed up by a marketing professional.
Just as unconventional
was the cross-functional nature of the appliance’s launch. While the marketing
staff digested the insights gained from Haier’s online customer interactions,
manufacturing was already considering what they would mean for production,
procurement was speaking directly to suppliers about sourcing feasibilities,
and after-sales service was developing plans for follow-through. Because they
worked closely together from the start, managers from all these functions were
moving forward in concert, addressing possible disconnects as they arose. This
allowed products to go to market as soon as they were designed and developed,
instead of waiting for each department to throw its work “over the wall” to the
next one. Meanwhile, representatives of each company function conducted
conversations directly with customers, thereby adding a responsive new
dimension to the company’s consumer insight capabilities.
Haier’s rapid
introduction of the Tianzun air conditioner is typical of the company’s track
record since the late 1990s. The company is known for several distinctive
capabilities: a precise understanding of consumer needs, especially in China
and other emerging markets; the ability to rapidly innovate new types of appliances
that meet those consumer needs; the management of complicated distribution
networks, a skill honed in the complex Chinese market; and a high level of
execution ability, including the automation of factories to deliver products to
consumer specification. (See “Haier's Capabilities System,” below.)
These attributes have served it especially well in China, allowing Haier to
outcompete more experienced appliance companies such as Whirlpool and Maytag in
that country. In fact, Haier’s prowess — and particularly its emphasis on “what
we can do and who we are” rather than on “what we sell and how we make money” —
shows the kind of capabilities needed by companies that were founded in
emerging economies if they are to succeed in the global sphere.
Haier is one of 12 companies that were studied
closely in a Strategy& research project on distinctive capabilities and
coherence.
Value Proposition: Haier’s “way to play” in the market (its
value proposition) has gradually broadened since Zhang Ruimin became CEO in the
mid-1980s. The company first took the role of a category leader, maintaining
top market share because of its reputation for quality in China. Then it became
a customizer (adapting its products to customer demands) and a solutions
provider (helping consumers manage issues like water quality and home design).
Haier now sells not just home appliances but related services, adapted to
consumer demand in China, and, increasingly, other markets. Haier delivers its
way to play by excelling at four differentiating capabilities.
Haier is now the
fastest-growing provider of appliances in the world. Since 2011, it has held
the largest worldwide market share in white goods. With its upscale brands in
China, such as Casarte, and its growing presence in the United States, Europe,
and Japan, this US$38 billion company has moved out of the value-priced and
niche appliance domain to compete directly with top-of-the-line appliances from
more established companies. It has accomplished this by being a consistently
coherent and capable company: staying true to its core identity as a company
dedicated to solving problems for consumers, while continually reinventing
itself with imagination and verve.
Customer Service Leadership
Much of the credit for
Haier’s success accrues directly to Zhang Ruimin,
the company’s CEO since 1984. Throughout the 30 years of his tenure, his sharp
focus on customer service leadership has given the company consistency even as
it propels Haier through dramatic changes. Zhang was the leader who proposed
that Haier should never see itself as just a manufacturer of products, but
instead as a provider of solutions to its customers’ problems. In the earliest
years, that meant bringing new levels of quality and reliability to Chinese
products. Later, it involved increasingly sophisticated forms of customization
and new types of services. Through its simplicity and continuity, this
principle has given all employees a reliable compass with which to make decisions,
even in the face of disruptive market challenges such as new technologies or
new competitors.
To accomplish its
goal, Haier has consistently cultivated and rewarded high-quality talent; the
company has been a magnet for many of China’s most capable engineers and
businesspeople. This approach is especially noteworthy within China’s cultural
and social context. In a country that was just beginning to emerge from a
Maoist mind-set when Zhang took the helm, the idea that success depended on the
entrepreneurial efforts of individuals, recognized for their differences and
rewarded for their achievements, was relatively unfamiliar. Haier has thus
invested a great deal, especially for a Chinese company, in training its
employees and demanding innovative ideas.
Despite the success it
has achieved, and its willingness to stick to one core value proposition (and
one CEO) since the 1980s, the company has never become complacent. Zhang
established early on that changes would be a way of life, not
soon-to-be-completed episodes that must be traversed. “The only thing that we
know is that we know nothing,” he says. “If you don’t overcome yourself, you
will be overcome by others.”
Indeed, Haier has
reinvented itself at least four times. The first reinvention, in the 1980s, was
the decision to differentiate the company by the quality of its products. The
second, in the 1990s, was the adoption of consumer-responsive innovation,
starting with (but not limited to) products for particular customer needs. The
third, which took place in the 2000s, was the reorganization into a bottom-up
structure, in which self-managing teams led decision making. The fourth, going
on today, is the reinvention of Haier as a truly Internet-based company, open
to the world in a way that few other companies have attempted, let alone
realized.
Zhang did not develop
this management approach on his own. From the beginning, he displayed a fervent
curiosity about management and high performance, and he studied the work of
leading scholars and observers, especially eminent management writer Peter
Drucker. He took from Drucker, for example, the idea that the purpose of a
business is not making money, in itself, but attracting and meeting the needs
of customers. If a customer wins by gaining a better product or service, then
everyone else should win as well, including the organization’s shareholders
through increased profits, and the employees through increased income. A visit
to Qingdao with Zhang and his associates can take the form of a management
seminar; visitors are subjected to relentless questioning on management
innovations that might be of interest to Haier. Zhang often takes his own
notes, and he frequently applies the concepts to Haier — first in small
experiments, and then rolled out through the company.
Building a Quality Brand
Haier, founded in the
1930s, was nearing bankruptcy in the early 1980s, when Zhang brought it back to
life. At that time, demand for appliances was slowing down in the West after 35
years of growth. Looking to recoup, Western manufacturers cast covetous eyes on
China’s emerging market. Most Chinese families lacked basic home appliances,
and the offerings from local manufacturers did not meet basic standards for
quality or consumer appeal. With their strong brands and relatively sophisticated
technology (the automatic refrigerator icemaker and microwave oven had recently
been introduced), overseas manufacturers believed that they would have an easy
time in cities like Guangzhou, Beijing, and Shanghai.
But Chinese domestic
firms fiercely defended their home markets by drastically reducing prices. Most
of the foreign competitors, and quite a few of the emerging Chinese
manufacturers as well, could not compete. General Electric chose not to enter
the China market at all because it foresaw the price war. One of the Chinese
companies that won this round was the Qingdao Home Appliance Company, a small
collective enterprise that had made various electronic devices, including
washing machines, but had recently settled on refrigerators. It had changed its
name repeatedly over the years, but had always been located in Qingdao, a port
in the Shandong province of northeastern China, midway between Beijing and
Shanghai.
The appetite for
refrigerators was so strong in China that Haier sold just about everything it
produced. The Chinese consumer in those days expected poor quality and was
prepared to have any new product repaired almost immediately. Nonetheless, the
company was moribund. Its production line delivered only 80 units per month,
including many that didn’t work. The factory was so run-down that workers had
to be told not to relieve themselves on the floor, and they burned parts of the
walls for heat. After three managing directors resigned in rapid succession, a
35-year-old deputy manager in the company named Zhang Ruimin was asked to find
a replacement. He found no acceptable candidates, and reluctantly took up the
challenge himself. But this appointment turned out to be fortuitous. Zhang was
a visionary who saw that a middle class would emerge in China, a public
interested not just in refrigerators, but in high-quality, branded, innovative
products — made in China, but as good as or better than their Western-made
counterparts.
Soon after Zhang took
the role of managing director, a customer wrote a letter to the factory
complaining about a faulty refrigerator. This led Zhang to one of the most
famous episodes of his career. “I called people from quality control down to
the warehouse with me,” Zhang later recalled. “We had just over 400 refrigerators
in the warehouse. We inspected them one by one. If they had any problem
whatsoever, we pulled them out. We ended up pulling out 76 problem fridges. I
had to change the perception [of our quality]: If products left the factory,
they should be first rate.”
Zhang had his
incredulous employees line up those 76 defective refrigerators in the street
outside the factory and publicly smash them to bits with sledgehammers. They
all knew he could have sold them, or given them as political favors to local
officials. But the message was clear. Never again would the Qingdao Home
Appliance Company sell products it could not be proud of. Instead, it would
build appliances that solved problems for its customers — the first problem
being the unreliability and poor quality of refrigerators in China.
Soon after, in 1985,
the company reestablished itself as a joint venture with the German
manufacturing company Liebherr, thus gaining access to advanced technologies.
It changed its name to Qingdao-Liebherr to evoke the prestige and quality of
German manufacturing. In 1992, it solidified this association by renaming
itself Haier, a name the company kept even when the joint venture ended. Haier,
a simplified Chinese transliteration of the second part of the German Liebherr, was
chosen in part because it was easy to remember and euphonic in both Chinese and
English.
As part of the
company’s first reinvention, a number of mutually reinforcing, granular
management choices provided guidelines for day-to-day practice that made change
easier to accept. To improve quality, for example, Zhang set out to foster a
mind-set oriented toward performance and accountability. He borrowed routines
and practices for continuous improvement from the quality movement — which was
then, in the mid-1980s, first becoming visible in industries outside Japan.
Zhang also linked pay to performance in a manner previously unseen in the
Chinese market, through a system called “Overall Every Control and Clear”
(OEC). Every day, workers tracked quality results using paper and pencil, and
their wages were tied directly to the outcomes. This gave the company a simple
means of establishing goals and controlling achievement for “everything,
everyone, and every day,” and a way to encourage employees to constantly challenge
their previous performance.
For the next 30 years,
the operational capability of OEC gave Haier what behavioral experts George
Kohlrieser, Susan Goldsworthy, and Duncan Coombe call a “secure base” on which
to build bold change. For example, the company managed logistics with a
zero-defects focus, resulting in very low inventory, short delivery times, and
low working capital. In the years that followed, as new business models were
introduced, the disciplined mind-set of OEC was never abandoned. Instead, it
was scaled up to meet ever more ambitious goals. Workers grew accustomed to
taking small steps that added up to great results.
The Niche Innovator
In the late 1990s, a
farmer in the Chinese countryside complained to Haier that his washing machine
was full of dirt and was not functioning well. The local distributor sent a
technician to the farmer’s house, where he discovered that the farmer had been
using the washing machine not to wash clothes but to clean sweet potatoes. At
this time, agricultural markets had been permitted to open in China, and
cleaner vegetables commanded higher prices. The repair technician reported
immediately to Haier’s headquarters about this practice, which was growing
increasingly common in the region. Inspired, the company soon released a
vegetable washing machine, designed to accommodate the extra grime and soil of
the tubers.
Around the same time,
Haier’s researchers observed that unlike Western consumers, many Chinese people
hand-washed their underclothes every day at home. They found it more hygienic
and socially discreet to wash these separate from other clothes and away from
public washing machines. In response to this consumer need, Haier launched a
small, low-energy washing machine called the Little Prodigy that could easily
fit into a small, crowded urban apartment. The machine became extremely
popular, among, for example, families with newborn children.
These episodes
represented the start of the second reinvention at Haier: a new form of
customer-responsive innovation. This was timely, because quality was no longer
a great differentiator in China; other companies had caught up. Zhang built
upon the company’s hard-won workforce discipline, and the accompanying
performance–pay relationship, to link employees directly to customers. To break
down the “invisible walls,” as he called them, between functions, Zhang
assigned teams made up of members of different functional departments to
specific projects. He avoided the conflicts of a matrix structure by
introducing “market chains” (based on the value-chain concepts of Michael
Porter), in which it was possible for all individuals at Haier, no matter what
their role, to trace their actions directly to the marketplace. These market
chains replaced functional silos as the key organizational unit.
This was also the
phase in which Zhang began building Haier into a global company. He approached
this challenge by adopting Mao Zedong’s strategy of “occupying the rural areas
to encircle the city,” gaining strength first with niche products for sectors
where there were few competitors. The company took full advantage of its
customer-responsive innovation capability to do this. In 1997, recognizing the
needs of college students in dormitory rooms, it launched mini-refrigerators in
the United States. It followed with wine refrigerators in 2004. And then,
during the 2000s, Haier parlayed that success into becoming a mainstream
producer of appliances for the U.S. market. Meanwhile, in Pakistan, Haier sold
extra-large washing machines designed for heavy robes.
Key to all this growth
was Haier’s behind-the-scenes customer-centric operations system. Rapid
innovation based on consumer demand — as with the Tianzun air conditioners
released in 2014 — has become routine, because all departments work in
parallel. The company’s close collaboration among R&D, marketing, and sales
also works well in the U.S. market. For example, U.S.-based R&D engineers
are required to talk directly to consumers in the design of new products, and
their salary is linked to the sales results of the products they design.
Intimacy and Entrepreneurship
In 2005, Zhang
recognized that most of Haier’s competitors in China were achieving acceptable
levels of service responsiveness and that the company would once again have to
reinvent its value proposition. He believed that Haier suffered from
unnecessary time delays and guesswork about new product manufacturing volumes,
which proved costly when it guessed wrong, and that could be reduced, if not
completely avoided, by becoming more intimately aware of customer needs and
wants. Employees would now have to get to know the customer better than they
knew themselves, or, as Zhang put it, to “create zero distance with the
customer.”
Intimacy is a lot more
complicated than responsiveness, and this third reinvention required employees
to feel closer to their customers. Haier thus inverted its organizational
structure into one based on self-organizing work units called ZZJYTs (an
abbreviation for zi zhu jing ying ti, which translates toindependent
operating unit). Their three most critical functions — marketing, design,
and manufacturing — were now supposed to work directly for customers. Instead
of directing the employees who did that work, the ZZJYT managers became service
providers to them, giving them the resources and guidance they needed to
provide for customers. This minimized the decisions made at higher levels in
the hierarchy, making the company more responsive to nascent market needs.
Zhang went so far as to announce that this shift in organizational model would
proceed even if revenues and profits showed signs of flagging, and even if it
were necessary to use some of the returns from successful legacy offerings to
make it work.
The new structure
proved successful, and the ZZJYTs are still the basic organizational unit at
Haier. Each comprises a team of 10 to 20 people — sometimes located in one
place, other times virtual — who come from various functional roles and are
brought together for a specific mission, and who are given profit and loss
responsibility and accountability. They have their own independent accounting
systems and complete autonomy in hiring and firing employees, setting internal
rules about expenses and determining bonus distribution, and making almost any
operational decision that typically would be made by an independent functional
organization.
Haier organizes its
ZZJYTs in three tiers. First-tier ZZJYTs have the task of directly facing the
market, understanding customer needs, and providing customers with the right
products. Second-tier ZZJYTs are responsible for supporting the first-tier
ones, providing them with the resources and the guidance they need. Third-tier ZZJYT
managers are the business division managers or functional managers who set
corporate strategies and direction for the whole group. A typical first-tier
ZZJYT is composed of sales, R&D, marketing, and finance people. Everyone,
whatever their function, is expected to talk to consumers regularly.
To Zhang and others at
Haier, this organization design represents an explicit effort to avoid being
disrupted by technological change. They wanted to make sure that top management
would heed early warning signals of disruption, especially those that came from
internal staff, and adjust to new realities rapidly and painlessly. Thus, at
Haier, the time of information flow between the customer (the top) and
coordination (the bottom) is minimized. Because R&D and marketing people
work in the same ZZJYTs, they meet frequently, particularly when new products
are considered. Salespeople keep in close touch with customers, so they can
estimate the order numbers with a smaller variance than if they were relying
only upon forecasts. Once the products are ready for shipment, they go first to
the waiting-list clients, and only afterward to retail outlets. This way, Haier
keeps inventories low, which saves storage costs and working capital.
The ZZJYTs are not
permanently assigned to a particular product or role. Instead, they are formed
through internal competition; participants must apply to work on projects that
appeal to them. Winners are chosen on the basis of the quality of their product
or service ideas, the attractiveness of their business model, and the
feasibility of their go-to-market planning. When Haier made the strategic
choice to launch a three-door refrigerator, for example, it invited its
employees to compete for the role of leading this initiative by submitting business
plans and business models explaining how such a product could best succeed. The
company’s $1.5 billion three-door refrigerator business is now led by the
winner of that competition, 38-year-old Pu Xiankai. He was selected, despite
his relative youth, because he described the product in an imaginative way.
Once appointed to this position, it was incumbent upon him to select a team and
to find manufacturers and marketers within Haier to produce and sell his
products. Today, he oversees what Haier calls a “community of interest,” that
is, people throughout the company, and external partners along a value chain,
who have made a commitment to help his team.
The activities of all
the ZZJYTs are linked by internal contracts. For example, if the three-door ZZJYT
needs market research data about a certain region of China, it entertains
proposals from the several marketing ZZJYTs that provide such services, as well
as looking outside Haier. The ZZJYT leaders also know that they cannot develop
all the cutting-edge technologies they need in-house. Therefore, willingly
embracing the concept of open innovation, they collaborate with organizations
everywhere they operate — which is how the company ends up working with the
best universities and research institutes in the world.
To provide talent for
the ZZJYTs, Haier created an internal labor market. Now the right number of
employees with the right skills gravitate to the right organizational positions
at the right time. Instead of offering its employees jobs, the company offers
everyone a continuing series of opportunities to find jobs, considering the
contributions they have already made. “The level of scrutiny takes some getting
used to,” says Fu Haining, the chairman of the LongLongigo group, which
operates Haier retail stores in China. “In the beginning, it can be a little
painful, because the culture of constant challenge can make you feel like what
you’ve done, what you’ve achieved, isn’t recognized. Later, you come to realize
that this is what it takes to stay ahead in an extremely competitive market.”
An Internet-Based Platform
After its first three
reinventions, Haier looked nothing like a conventional modern complex
organization. Its culture — embracing rather than resisting change, while
holding true to its original core principle of customer service leadership — is
the most important asset of the company today.
But Zhang, in recent
years, has questioned the ability of even this level of innovation to succeed.
Inspired by the success of the latest wave of Internet-based companies, he is
currently launching a fourth reinvention, this one involving the Internet. This
is known at Haier as the “networking strategy.” Even the ZZJYTs, the focal
point of the previous wave’s business model, are slated for dramatic change.
Zhang has proposed eliminating the current second-tier ZZJYTs, presently home
to most of Haier’s middle managers. The company would instead become a
collection of platforms, each able to adjust to changes in the consumer market
by drawing on support and collaboration from the others.
This new Haier
approach involves opening up the company to intensive collaboration not just
with customers, but with innovators around the world — including with
competitors. “The platform helps us attract first-class resources,” says Lei
Yongfeng, the R&D director for PAC, Haier’s air conditioning platform. “It
could be R&D resources based at a university or at a technology company. In
the past, our relationship with a supplier like Mitsubishi might have consisted
of us going to them and giving them the specs for a new air conditioning
compressor. Now, they can see for themselves what our customers are asking for.
The direct view they get makes them more responsive, which in turn helps our
innovation efforts.”
Water purification is
another example of the increasing scope of Haier’s collaboration. The company
entered the business through a joint venture with the Strauss Group, an Israeli
technology firm, which provided the technology while Haier focused on
marketing, distribution, and service. But then Haier broadened its platform to
include many other R&D partners; for instance, it shares more than 20 water
purification patents with Dow Chemical.
The result is a new
level of proficiency that goes beyond anything Haier has done before. For
example, the company now uses Internet access to customize every product it
sells in China, whether bought in a store or online. Customers choose the color
combinations, features (such as the number and layout of shelves in the
refrigerator), and ancillary design elements (like the pattern of sparkles on a
high-end appliance). Factories routinely make them to order. The process is not
unlike choosing the accessories on a new car, except that there tend to be more
choices.
The Internet
connection also makes customers more likely to buy a water purifier — which is
sold only by consultation. Haier reps are trained to look up the complex data
on China’s water problems, which vary by neighborhood, and to install the
filters that guard against that neighborhood’s mix of chemicals and pollutants.
On its website, which has an active consumer-to-consumer dialogue, the company
posts water quality information for 220,000 communities in China. “We want
people to be able to find all their water-related answers at Haier,” says Qu
Guinan, the general manager of the Haier water treatment company. Building on
its success to date, the company is now exploring partnerships with local
communities to manage their water purification efforts community-wide.
The Internet has
enabled the company to expand its service diligence; it provides intensive
installation as part of any appliance sale (a rarity in China), and, using
monitoring signals from the appliances, it conducts follow-up calls with
customers when the equipment is not working. The company also keeps in touch
personally just in case the monitoring has missed some cause of
dissatisfaction. The connection to customers has helped Haier migrate many
people from their medium-value line of household appliances (the original
Haier) to the more upscale Casarte brand. The phrase “the information is more
valuable than the product” has already become a slogan throughout Haier.
“We’re providing
information to Chinese households,” says Jiang Hanke, social media director for
the water purification platform, “but we’re also benefiting from these
interactions. They give us a better understanding of users’ needs. Users can
see what the water-quality situation is in their communities and use that
information to select filtration products that suit them best. Although we
didn’t set up the online resource with the direct goal of making sales, it has
had that effect; sales in this still-young business have risen by a factor of
four since we’ve introduced the online resource.”
Zhang recognizes the
high stakes that are involved in changes of such magnitude: “There will be an
earthquake [within our company] if it is not properly handled.” But he also
believes it is the only course of action that will allow such a large company
to succeed in an era when each new triumph leads to new problems. The goal of a
large company, he says, is to “lose control step by step.” In other words,
Zhang believes that Haier isn’t unique. Every major organization will have to
learn how to maintain its identity, the quality of its products and service,
and its customer relationships, while being prepared to give up everything
else. Haier’s role in this new world will be as a pathfinder: It’s already the
first leading global consumer manufacturing company from China. Soon, if Zhang
is once again correct, it will be the first company from anywhere with its
distinctive, innovative form of management.
http://www.strategy-business.com/article/00323?gko=c8c2ahttp://www.strategy-business.com/article/00323?gko=c8c2a
No comments:
Post a Comment