As companies get larger, one of the big challenges that they face is how to balance scale with agility. In order to leverage the benefits of scale, companies introduce systems, processes and additional layers of management. Unfortunately, this can make companies distant from customers, less innovative and more bureaucratic. Over time, big companies risk becoming like a centrally planned economy and not adaptable to the age of digital and the Internet. 

The China-based Haier Group, the world’s largest home appliance manufacturer, has been pioneering a radical management approach over the past decade. “Rendanheyi”, as the model is called, has sparked intense interest in corporate circles, especially since Haier took over GE Appliances in 2016 and reversed its decade-long slump. The successful application of Rendanheyi in a Western company has demonstrated that it can work across cultures and ecosystems.

This week, my message focuses on the Rendanheyi model, which offers an alternative to traditional bureaucracy. What are its key characteristics, and does it mark the beginning of a new age of management?

The word “Rendanheyi” captures the crux of the approach: “Ren” refers to each employee, “Dan” refers to the needs of each user, and “Heyi” refers to the connection between each employee and the needs of each user. The idea is to shrink the distance between employees and users, creating win-win scenarios through co-creation and collaboration.

The Rendanheyi approach was developed and implemented at Haier under the leadership of its CEO, Zhang Ruimin. From a conventional pyramid, the company has transitioned to a flat, parallel structure. It now consists of more than 4,000 microenterprises, which act as separate and self-organised entities. The closed, formal hierarchy has been replaced by an open, free-flowing network of innovators, partners and users. 

Each micro-business resembles a start-up: employees have ownership and are empowered to make their own decisions. The game-changing model puts users – rather than higher-level management – at the heart of operations. With a “zero distance” policy and a customer-paid salary, employees are accountable directly to users.

According to Zhang, this approach has allowed Haier to thrive in the new digital age. As far back as 2005, he and his team started thinking of how they could keep pace with the far-reaching changes brought about by the Internet. Hence, Rendanheyi was born. With its focus on connectedness and customisation, Zhang believes that this approach will hold strong as the economy transforms yet again, driven by the Internet of Things. As he puts it:

With the Rendanheyi model we move away from being like an empire (with a traditional, closed pyramid) to be more like a rain forest (with an open networked platform). Every empire will eventually collapse. A rain forest, on the other hand, can be sustained.

The ABC of Rendanheyi

Like many large corporations across the globe, we too are dealing with some crucial questions right now. How can we trim bureaucracy to become more agile and stay ahead of the game? What can we do to boost creativity and seize new opportunities? How can we connect more deeply with consumers in a rapidly changing digital age? As we decide how to move forward, it’s worth considering these five key aspects of the Rendanheyi model, as found at Haier.

1. A network of microenterprises

Haier’s 4,000+ microenterprises are divided into three broad categories:

• Transforming: focused on reinventing the company’s core appliance business
• Incubating: brand-new businesses
• Node: providers of component products and services to market-facing units

The microenterprise structure creates agility and the ability to take risks. In their Harvard Business Review article, The End of Bureaucracy, Gary Hamel and Michele Zanini explain that this is what truly makes Rendanheyi a model for the Internet era:

Microenterprises are key to Zhang’s goal of building the world’s first company for the internet age. That entails more than developing web-enabled products. It means creating an organizational model that mimics the architecture of the internet: “small pieces, loosely joined,” as the Harvard technologist David Weinberger famously put it. The web is incredibly diverse and yet still coherent. While it has spawned countless innovations, it’s held together by common technical standards that make cyberspace navigable and allow sites to swap resources like data.

Haier’s modular structure is similarly flexible but coherent. MEs are free to form and evolve with little central direction, but they all share the same approach to target setting, internal contracting, and cross-unit coordination.

2. Autonomous units

A typical microenterprise at Haier has 10-15 employees and governs itself. Instead of simply implementing instructions from above, the team makes its own decisions around strategy, people and distribution. As Zhang explains:

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.

Ownership doesn’t just mean increased authority; it also translates to increased rewards and risks. Compensation is closely linked with performance. Doing well results in bonuses, dividends and profit-sharing – just like a start-up. Conversely, underperformance can trigger an automatic leadership change or a hostile takeover by another, more ambitious microenterprise.

3. Internal agreements

Within a traditional company, certain departments function independently of external pressures and market performance. These include manufacturing, finance, HR, IT, etc. Business units have no choice but to use their services, whether they want to or not.

Under Rendanheyi, Haier has dismantled these internal monopolies and put a new system in place. Market-facing microenterprises can choose to buy services from among various nodes. Agreements are made on an annual basis, with nodes bidding for jobs through a competitive process. Nodes that don’t deliver end up losing business. In fact, Haier uses the term “agreements” instead of “contracts” because terms can be renegotiated over the course of the year. Microenterprises are also free to buy services from external vendors, if they prefer.

The node’s revenues are closely tied to the success of the market-facing microenterprise. In other words, the compensation of node employees depends largely on the end user’s response. Hence, nodes are highly invested in market outcomes.

4. Collaborative platforms

One of the main reasons bureaucracy exists in a large company is to enable coordination. In the article mentioned above, Hamel and Zanini elaborate:

In a start-up, coordination happens spontaneously. When there’s a problem people simply huddle and hash things out. As a company grows and operating units become more siloed, coordination becomes increasingly difficult. The typical solution involves more layers, mandates, and corporate-level functions.

So, how does coordination happen across thousands of self-governing microenterprises? At Haier, the units are grouped into industry platforms – either by category (like refrigeration), or capability (like mass customisation). Each industry platform brings together a number of microenterprises, identifying cross-business insights and facilitating collaboration. The marketing platform, for example, collates and analyses data from across the company to help microenterprises better respond to customer needs.

Participation is largely voluntary; microenterprises aren’t forced to join or report to industry platforms. The idea is to foster coordination that adds value, without issuing commands from a centralised entity.

5. Open ecosystem

Bureaucratic structures are typically marked by secrecy and rigidity, which stifles knowledge-sharing and creativity. Under Rendanheyi, however, innovation is an open and free-flowing process – starting from inception itself. As Hamel and Zanini explain:

While many executives view their businesses as linear value chains, beginning with R&D and ending with sales and support, Haier sees them as value networks in which all parties collaborate at every stage.

Crowdsourcing is an integral part of the innovation toolkit. When developing a new air conditioner, for example, Haier turned to social media to ask for suggestions. With 30 million responses from potential users, they realised that most people preferred cool and silent, rather than cold and noisy. Based on this insight, they were able to create a product that genuinely matched customer needs.

According to Zhang, this kind of open ecosystem enables mass personalisation of products and services, thereby creating immense value for purchasers and turning them into “lifetime users”. The company also relies on an online group of 400,000 experts across the globe, who come up with potential solutions for questions and challenges posted by microenterprises.

Do you find value in the Rendanheyi model? Are there any characteristics you would like to see in our own organisation?

I look forward to your thoughts.