Article, written by Gary Hamel & Michele Zanini, Harvard Business Review November-December 2018 , p 51-59. A summary of this article, written by Max Herold
Bureaucracy has few fans, however though mindful of its evils, many people believe bureaucracy is unavoidable and a ‘necessary outcome of complex business operating in complex international and regulatory environments.
Indeed, since 1883 the number of managers, supervisors and administrators in the U.S workforce had grown by more than 100% while the number of people in all other occupations has increased by just 44%.
Meanwhile productivity growth has stalled. From 1948 to 2004, U.S. labor productivity among nonfinancial firms grew by an annual average of 2.5% Since then its growth has just averaged just 1.1.%. More than a third of the U.S. workforce works now in firms with more than 5000 employees. – where those on the frontlines are buried under eight levels of management, on average. Bureaucracy seems to be resistant despite the fact that it is not inevitable.
Take Haier, based in Qingdao, China, and currently the world largest appliance maker, with 75000 employees and 27,000 outside China. The gross profits of Haier’s core appliance business have grown by 23% a year with a revenue increase of 18% annually. Haier’s success is the result of a root-and branch overhaul of its once-traditional management mode. Haier’s shorthand for its new practices is ‘Rendanheyi: a company where everyone is direct accountable to customers ( a policy described as “zero distance”), employees as energetic entrepreneurs, and an open ecosystems of users, inventors, and partners replacing formal hierarchy. The model differs from bureaucratic norms in seven critical ways.
From Monolithic Business to Microenterprises (ME’s).
Haier has 4000 microenterprises which come in three varieties: market facing units that have roots in Haier’s legacy business but are reinventing themselves for today’s customer centric, web-enabled world. Second there are 50-plus “incubating” micro enterprise, or entirely new businesses. Finally, there are 3000 “node” micro enterprises.
Micro enterprises as an organizational base mirror the world wide web and makes the organization much more flexible. New leaders are chosen competitively. Typically three or four candidates will present their plans to the ME team. Poorly performing leaders are also vulnerable to a hostile takeover. Anyone at Haier who believes that he or she could better manage a struggling ME can make a pitch to its team. Performance data for all ME’s are transparent across the company, so it’s easy to spot takeover opportunities.
From Incremental Goals to Leading Targets
In most organizations there is little that supports bold thinking and doing. Old assumptions get challenged only once the business has hit a wall. Not so at Haier. Market-facing ME’s fi. are expected to grow revenue and profit four to ten times faster than the industry average. They are also expected to make a transformative leap from selling products and services to building an ecosystem /social platforms.
From Internal Monopolies to Internal Contracting
At Haier every ME is free to buy services, or not, from other ME’(a typical user ME will have agreements with dozens of nodes. If an ME believes that an external provider would better meet its needs, it can go outside for services. This improves the relations with the market facing ME’s because other ME’s are dependent on them meeting their targets. So it improves customer focus and flexibility.
From Top-Down Coordination to Voluntary Coordination
Haier has organized all its ME’s into platforms. Some platforms bring together ME’s operating in a similar category, like washing or audiovisual products. , while others focus on building new capabilities, such as digital marketing and mass customization. A typical platform encompasses more than 50 ME’s. . Critically, no one reports to the platform owner, nor does the platform owner have a staff. However, they do have leading target and are expected to grow their platforms by developing new ME’s. Platform owners are as much entrepreneurs as facilitators. “Integration” nodes, found within every industry platform, help ME’s import technology from across Haier and identify internal partners that can coinvest in new initiatives.
From Rigid Boundaries to Open Innovation
Bureaucracies are insular and make an harp distinction between inside and outside. However, every new product of Haier is developed into the open. Haier has a network of 400,000 ‘solvers” – institutions and technical experts from around the world. – that help the company address challenges in some 1,000 areas. There is also Haier’s crowdfunding to gather feedback and defray development costs.
From Innovation Phobia to Entrepreneurial at Scale
There is a reason why big companies are frequently outmaneuvered by newcomers: Bureaucracies are intrinsically conservative. As Laurence J. Pete, author of The Peter Principle, wryly puts it: “Bureaucracy defends the status quo long past the time the quo has lost its status.”
Haier, by contrast, has turned its entire organization into a start-up factory, Its 50-odd incubating ME’s currently account for more than 10% of Haier’s market cap. There are three ways to lounge anew business at Haier. In the first and most common case, an internal entrepreneur posts an idea online and invites others to help flesh out the nascent business plan. Second a platform leader can invite insiders and outsiders to submit proposals for exploiting a white space opportunity. Third, would-be entrepreneurs can pitch their ideas one of Haier’s monthly road shows across China, which connects local innovators with platform leaders and members of Haier’s investment and innovation platform.
From Employees to Owners
Haier does everything to turn employees into owners. It is here that one finds the deepest explanation for Haier’s track record. In a start-up, people tend to think and act like owner. Often they have equity in the venture, and some will have even risk their own capital in hopes of scoring a big win. Start-ups have also a large degree of autonomy. At Haier’s, ME’s are expected to be self-managing, and their freedoms are formally enshrined in three rights:
The right to decide what opportunities to pursue, to set opportunities, to set priorities, and to form both internal and external partnership.
The right to make hiring decision, align individuals and roles, and define working relationships.
The right to set pay rates and distribute bonuses. These rights come with a commensurate degree of accountability. Targets are broken down into quarterly, monthly and even weekly goals specific to every member of an ME-team.
Compensation is tightly coupled with business performance. Additional compensation is tied to three performance thresholds:
When an ME-tam exceeds quarterly sales and earnings, team members get a bonus proportionate to the amount by which the target was exceeded.
* Value-adjustment mechanism (VAM)
If the ME achieves a midpoint goal between the quarterly baseline and leading targets, the team bonus is doubled. At this level team members are allowed to contribute their own money. To a special investment account. If the team hits the VAM target, that investment (usually about $ 2200,-) produces a 100% dividend.
* VAM annual target.
When an ME team beats its VAM target for four consecutive quarters, it becomes eligible for profit sharing. Twenty percent of the ME’s net profits in excess of the VAM goal are distributed to the team, though 30% will be set aside to fund bonuses the following year.
As CEO Zhang often reminds his colleagues, it’s impossible to engineer a complex system from the top-down. It has to emerge through an iterative process of imagination, experimentation, and learning. When asked how Haier can accelerate its transformation, he has a simple answer:
“Run more trials and replicate the most successful ones faster., because revolutionary goals are best achieved through evolutionary means.”
“We want to encourage employees to become entrepreneurs because people are not a means to an end but an end in themselves. Our goal is to let everyone become their own CEO – to help everyone realize their potential.”
Haier’s empowering model is the product of a relentless quest to free human beings at work from the shackles of bureaucracy.