Units of Engagement

In 2013, Zhang Ruimin, the CEO of Haier Group, clarified Haier’s business model as being ‘aligning individuals and goals and win-win models’. The model can be described as a combination of real and virtual networks, featuring zero inventory and instant supply as demand arises.  This was a very difficult task to achieve as it was necessary to create a fast network, and also to have accurate information, so it had to be both fast and systematic. In Zhang Ruimin’s words, the company was ‘fighting against the habits of Chinese people’. This fight was not only a fight against the habits of employees, but also a fight against poor corporate culture. ‘Enterprises must maintain transparent personal relationships, as well as equity, efficiency and stability.’

In 2010, in order to rapidly promote organizational change, the concept of ‘independently managed autonomous bodies’, unique in the global business community to Haier, and referred to using the Chinese acronym ‘ZZJYT’ (Zi Zhu JingYing Ti), was created.

ZZJYTs are the smallest internal business units at Haier. They could just be one individual, or a group of people. The essence of the idea was to turn the big company into thousands of small companies. These ZZJYTs are sometimes referred to simply as ‘autonomous bodies’. They are the cells making up Haier’s organization, and they number as many as 2,000. These ZZJYTs are not only able to respond rapidly to external changes, they are also able to discover and create customer demand, while also continually returning to value targets, without losing focus on the ultimate goal of meeting customer needs.

These 2,000 ZZJYTs form a big network directly facing the market. Each ZZJYT is like a node on this network, where each node can become a basic unit of innovation. Since these basic units of innovation are just like a real company, they are given “three powers” by the Group: decision-making, distribution rights and the right to use human resources.

Haier also developed the concepts of ‘benefit sharing bodies’ (known as LGTs) and ‘platforms’. LGTs refer to a community having the same interests. LGTs are, to a degree, an extension of the ZZJYTs, in that ZZJYTs, external suppliers and partners and other stakeholders together form an LGT. Each LGT can come together or separate as required according to the changing conditions so as to bring about their value and create synergies.

In practice, LGTs are often several ZZJYTs joined together, but the leader of an LGT does not play a leadership role, rather, he or she is an initiator. LGTs are like a small platform, and Haier was working towards the idea of moving the entire business onto a large platform.

Platforms are a way to quickly configure resources, while all resources can be deployed through the platform. The goal is for the organization to become self-organized rather than something organized by others. Zhang Ruimin believes that, ‘The organization should never take orders from someone else, but should self-organize and innovate itself.’

The self-organization’s ultimate measure is to be propelled by orders, with better people coming in, producing better results, and obtaining higher profits, then introducing more good people. As Peter Drucker said, the end result is that everyone becomes their own CEO.

This process drives a virtuous cycle following the principle of increasing returns, and was the ultimate goal of pursuing the networked organization. In the industrial economy, success is often self-limiting, as it follows the principle of diminishing returns. However, in the network economy, success is self-reinforcing, and follows the principle of increasing returns.

Changing the direction of the game

Haier has many ways of talking about the ZZJYTs. The most common interpretation for them starts by looking at the ‘three criteria’: end to end, the same goal, forced system. Here, ‘end to end’ refers to the front-line managers starting from the customer, and ending by meeting the needs of the customer, so the process both starts from, and ends with, the client. ‘The same goal’ refers to the situation after goals are set, when they are no longer personal goals, but rather all team members work together to achieve the shared goal of meeting customer needs. The ‘forced system’ refers to the situation in which the user’s requirements are the goal, and this is forced onto all the internal processes of Haier. This is done following the principle of ‘turning over sufficient corporate profits, earning sufficient marketing fees, self financing all ZZJYT activities, and splitting excessive profits after all these are done’. Everyone has their own financial statement, and everyone has calculations applied to them, so now the tens of thousands of workers at the company are effectively running their own finances.

Another way to talk about it is the ‘three-selfs’, self-innovation, self-running, and being self-driven. Again, ZZJYTs are ultimately self-organizing. Self-innovation is used to find a strategy and set the corresponding objectives; being self-driven refers to finding the path to implement the strategy and achieve the goals; ‘self-running’ refers to the construction of independent systems and optimized goals. The three are interconnected and complement each other. Finally, self-organization would be achieved, which means that in the disordered external environment, the self-organizing body can sense changes in the exterior, and respond appropriately.

In order to motivate employees to self-organize, Haier created a special class of AB employees, who are capable of creating, innovating, self-driving, and self-operating without guidance, continually creating AB class products and users. AB products are those which both create value for the user and give the enterprise high added value; class AB users are loyal Haier customers and would recommend the company to others.

Wharton management professor Marshall Meyer conducted a research project at Haier, with a particular focus on the essence of the ZZJYTs. He analyzed the company’s contract system, that is, the way the company is defined as a combination of a series of contracts, in which contracts can occur between the enterprise and the external market, but can also occur internally within the enterprise, with the key relationship being that between the principal and the agent.

Meyer found that ZZJYTs are a kind of method for competitive bidding with the winners being whoever best achieves the objectives and targets. These objectives are then connected to remuneration. He also found that ZZJYT evaluations are not measured by sales, but in terms of market share and earnings, as well as metrics including new product development, customer satisfaction, and so on. His most significant finding was that the contract between Western enterprises and agents is static, and will not change after being signed, whereas in Haier’s ZZJYT management model, the contract is subject to dynamic adjustments. Haier does not have a simple principal-agent relationship with its ZZJYTs.

The traditional principal-agent relationship can be seen as one example of game theory being applied between the principal and the agent. In the first stage, the client provides a mechanism arrangement. The second stage is that the agent decides whether to accept such a mechanism; if he refuses, nothing will happen, if the mechanism is accepted, then they enter the third stage of the game. In the third stage, the agent, under the framework of constraint of the mechanism, selects the most favourable action for themselves. However, this is precisely the gaming Zhang Ruimin wanted to circumvent. If the enterprise applied a non-cooperative ‘policies are implemented from above and counter measures from below’ game, the enterprise could lose, while the employees would win; or the enterprise could win, while the employees lost. But either way, it is impossible to achieve a win-win situation. What ZZJYTs do is to change the game between employees and enterprises into a game of satisfying user requirements, so it becomes a game with oneself.

Zhang Ruimin told Professor Meyer:

Haier’s ZZJYTs are hugely different from the structures used at Western companies. In essence it is the creation of contracts between the enterprise and its users. What must be satisfied is the user’s requirements, rather than the contracts within the enterprise itself while with no users involved. Stated another way, the internal contract is also to meet the requirements of users, and it is a contract between the enterprise and the users. We are a user-oriented enterprise, whereas Western companies are enterprise-centric enterprises.

The idea of the ‘dynamic contracts’ is that all the work of the ZZJYTs is not fulfilling the instructions given by the corporation, but rather, it has to be subject to the user’s requirements.

This is an edited extract from Haier Purpose by Hu Yong and Hao Yazhou now available from Thinkers50 and Infinite ideas.