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.
As Haier’s chief executive, 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), the interconnection
of multiple devices and human activities embedded with sensors, robotics, and
artificial intelligence. When the IoT is fully in place, successful
enterprises will compete in this new way.
Our Earlier Internet Strategy
My colleagues and I have
been thinking about these digital transformations 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. Ren refers 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 rendanheyi model 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 by making 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.
Other companies, including many onsumer 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 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 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 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.
Tomorrow’s Business
Identity
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. This inevitably affects the way we channel our R&D investment. For
example, 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.
Some 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.
Our new business models and 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=20180619&utm_campaign=resp
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