Why Haier
Is Reorganizing Itself around the Internet of Things
The world’s largest and fastest-growing home
appliance company has always moved ahead of technological change. Now, as it
enters a world of sensors and artificial intelligence, it is shifting the way
it does business yet again.
I have been aware of the pressure that the
Internet has placed on the business models of large companies since at least
2000. That year, I attended the World Economic Forum’s annual meeting in Davos.
One major topic of discussion was the new economy that the Internet was
creating. Like many others at that time, I sensed that industrial society was
approaching a great turning point — moving toward an Internet-based economy.
Only by changing their way of thinking could business leaders catch up.
Today, the world has, of course, passed that
turning point. No longer do successful companies compete through their brands.
Instead, they compete through platforms — or, put another way, through linkages
among independent enterprises, aligned via their interoperable technologies and
their creative efforts.
Another economy is about to emerge now, with
similarly broad effects. It revolves around the Internet of Things (IoT), made
up of networks of human and technological activity embedded with sensors,
robotics, and artificial intelligence. When the IoT is fully in place,
successful enterprises will compete through ecosystems.
Rendanheyi: An
Internet Strategy
At
Haier, for more than a decade, we have been deliberately changing our company
so we can stay ahead of these global transformations. In 2005, with the
Internet economy in mind, we began making innovations in our business model
that would help us adapt. We called our new model rendanheyi. Renrefers
to the employees, dan means user value, and heyi indicates
unity and an awareness of the whole system. The term rendanheyi suggests
that employees can realize their own value during the process of creating value
for users. This new model was intended to foster co-creation and win-win
solutions for employees and customers.
Rendanheyi has three main attributes:
1. The enterprise is transformed from a
closed system to an open system, a network of self-governing microenterprises
with free-flowing communication among them and mutually creative connections
with outside contributors.
2. Employees are transformed from executors
of top-down directions to self-motivated contributors, in many cases choosing
or electing the leaders and members of their teams.
3. Purchasers of our offerings are
transformed from customers to lifetime users of products and services designed
to solve their problems and increase their satisfaction.
In
effect, implementing the rendanheyimodel meant tearing apart the
walls of our enterprise and changing our structure into a collection of
entrepreneurial ventures. The Haier platform now connects more than 2,000
microenterprises in various locations around the world. The leaders of each
microenterprise have the type of power — power to make decisions, hire staff,
and control distribution — that would ordinarily accrue to the CEO of a
company, not to a division leader. They can also manage the capital, recruiting
external venture capital and conducting follow-up investment. They are, in
effect, partners in their area of the enterprise. Only by this means can new
opportunities be secured quickly; only when microenterprises are booming can a
company the size of Haier maintain the passion and vitality of a pioneer.
The
microenterprises are part of global Haier organizations, which maintain common
functions for research and development, production, and sales. Each Haier
branch is thus grounded in local markets. Rather than trying to compete with
homogeneous products, we design our businesses to respect the differences between
customers in different markets. We try to assimilate into each local culture,
while maintaining a global approach that fosters human dignity and aspiration
(or as we call it, “the realization of self-value fulfillment”). The overall
result is our “salad culture”: It is full of different vegetables, each one
like a different national or regional culture, but the rendanheyi model,
like salad dressing, binds them all together.
We
have deployed this business model not just in our home country, China, but
everywhere else we do business. For example, in 2016, Haier acquired GE
Appliances (GEA). In the beginning, the rendanheyi model was
not understood in GEA, and it was difficult to change the long-standing
bureaucracy and linear management mind-set. But we persevered. GEA first tried
out the rendanheyi model in the water heater department, and
found that this model didn’t dampen the interest of employees, as some had
feared. Instead, it stimulated employees’ enthusiasm and creativity. Every
employee could face the market and respond to user needs more quickly. GEA has
since been split into seven microenterprises representing its seven appliance
groups: stove equipment, refrigerators, laundry machines, dishwashers, water
heaters, packaged terminal air conditioners, and FirstBuild and Giddy (two GEA
platforms for crowdsourced innovation). In 2017, GEA began to select its
microenterprise leaders through open elections, forming a management committee
of three executives elected by their colleagues.
Since this transformation began, GEA’s
overall market competitiveness has been significantly enhanced. During the 10
years before it joined Haier, GEA’s revenue had dropped by 11 percent, but in
2017, it increased by 6 percent. In terms of profit, the average growth rate had
been between 4 and 5 percent for the past few years, but in 2017, profits
increased by more than 20 percent, a first-ever double-digit growth rate. (The
2017 figures are based in part on projections.)
Other companies, including many consumer
products companies, have not fared as well. Their failure doesn’t stem from
poor product quality. On the contrary, they have been so obsessed with products
that they have neglected the increasing importance of personalized user
experience. In addition, many European and U.S. enterprises that had been very
successful in the industrial era were aware of the need to transform, but their
old practices have been too difficult to drop.
From Internet to IoT
Although
many other companies are catching up to the Internet economy, Haier is
preparing for the economy that follows — the economy of the IoT. The term Internet
of Things was coined by Kevin Ashton, cofounder of MIT’s Auto-ID
Center, a research and development group focused on interlinked sensing
technologies. In November 2017, Ashton visited us at Haier’s offices and
devoted a day to helping us think through our strategy.
He
observed that most other enterprises are focusing their research and investment
on the development of product sensors, that is, devices built into every device
or manufactured good that a company sells. Haier, by contrast, has focused on
developing user sensors, or devices that monitor user behavior from a variety
of vantage points, whether incorporated into products or not. This allows us to
respond as a nonlinear system to the data that is gathered about our customers.
For example, in China, we have linked our suppliers together in a mass
customization platform called COSMOPlat, which automates each step of
production — in this case, for our Yunxi Generation II washing machines, which
were introduced in October 2017. (Yunxi means smart and mute.)
Among the suppliers are Dalian Eastern Display Company, Diehl Controls (which
makes the computer-based controller), Rold (which makes the door lock), and
Hangzhou Kambayashi Electronics (which makes the solenoid valve). The single
automated process takes a customer’s order, designs the specifics, calls for
the appropriate components from the suppliers, manufactures the machine as the
parts arrive (there is no warehouse), delivers it to the end-user, and arranges
for monitoring and service when it is in use.
There
is a natural synergy between the rendanheyi business model and
the IoT economy. We believe that all digital technologies should serve and
satisfy the needs of users’ personalized experience. To evaluate performance,
Haier uses a two-dimensional lattice form. The horizontal axis measures
financial performance for each product, a conventional metric. The vertical axis
shows ecosystem value, as depicted by the ratio of performance among
interactive users (customers who engage with the company on the Internet and
customize selection) and performance among lifetime users (those who have been
with the company for some time). We require microenterprises to generate a
model in which ecosystem income is better than product revenue.
The rendanheyi model
changes the way we approach innovation. This has already bolstered our position
in today’s Internet economy, and it will provide still more leverage in the IoT
world. Haier has established an incubation platform called Hai Chuang Hui
(HCH), which invests in startup ventures by Haier employees and others, with a
special interest in social entrepreneurs. Hai means ocean,
signifying our openness to a vast number of entrepreneurs outside the
company; chuang means sharing resources; and hui means
together. Currently, we have HCH bases in nations including China, the United
States, Japan, and Israel. More than 200 entrepreneurial teams have been
attracted, and most have already received a first or second round of financing.
The first of these microenterprises are beginning to release products,
including a popular video-game computer produced by a startup called
Thunderobot and distributed by Haier. The HCH network provides ventures with
brand endorsement, supply chain scale advantages, a common corporate governance
platform, and other resources. Its success rate for new ventures so far is at
50 percent — much higher than the average level of success for new ventures at
companies in general.
These methods are all interrelated. Together,
they have helped us create a distinctive global identity as a company. We have
an overall way of doing business that feels different at first from conventional
methods — but that, in our view, goes a long way toward explaining our success
during the last few years.
Many businesses have blamed external factors,
such as technological disruption or global competition, for their struggles.
But from Haier’s perspective, external factors are not always problematic. If a
company’s business model cannot keep up with the Internet economy, external
factors will speed its failure. If it can shift to an IoT economy, the same
external factors will speed its success
by Zhang Ruimin
https://www.strategy-business.com/article/Why-Haier-Is-Reorganizing-Itself-around-the-Internet-of-Things?gko=895fe&utm_source=itw&utm_medium=20180301&utm_campaign=resp
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