The Organisations Of The Future That Are Going To Eat You for Lunch

If you thought the disruption of the last few years was challenging wait until your industry starts getting eaten by Chinese firms later this decade. Every industry (not protected by the state) is at risk because the Chinese have solved the biggest organisational problem there is — how big organisations can adapt as fast as start ups.

When a start up has a problem its people come together, quickly work out a solution and implement it. But as the organisation grows its operating parts (ex, Production, Finance, IT) start acting like insular silos, more focused on their own tasks and increasingly suspicious of outsiders. This makes coordination difficult, meaning problems take longer to solve and implement.

As organisations becomes too big for a single team to run it a bureaucracy of departments takes over, focused on conserving the way things are done around here. But the bureaucracy acts like a closed system, cutting itself off from new people and ideas that could have been mission-critical. Instead of adapting the bureaucracy atrophies and withers, bringing the organisation down with it.

Rather than seeing the organisation as a mechanical system requiring a complicated mechanism (a bureaucracy) to run it like a “well-oiled machine”, the Chinese see the organisation as a living network of complementary organisms connected in multiple ways. The organisation of the future therefore resembles a Portuguese man o’ war — a network of organisms — that’s coming for you!

The Portuguese man o' war is not a single organism but a colony of organisms with different specialities (ex, for floating, capturing prey, feeding and reproduction) working together to form a deadly predator.

One of the leading pioneers of this new Chinese organisational model is Haier, the world’s largest appliance maker employing over 100,000 people, generating $51billion in revenue and enjoying a 20% average growth rate over the last 30 years(!) Haier today has the resource power of a very large company and the adaptiveness of a start up. It is the biggest competitive threat you’ll face.

Being suspicious of bureaucracy Haier refused to make its employees accountable to a faceless set of processes. Yet they were too too big for a single team to run the organisation so had to find some other guiding principle to manage people’s activity. So Haier chose to make EVERYONE directly accountable to customers — a principle it calls rendanheyi (‘zero distance to customers’).

Haier divided the entire organisation into 4,000 ‘micro-enterprises’ (ME) of 10-15 employees^⁠1 each (though some are bigger). Every ME is a separate legal entity run by its employees, but can form into larger industry groupings if they need to take on bigger opportunities they’ve identified (such as building something new to the world, or mass producing an essential component).

‘Zero distance’ to customers means MEs spot new customer needs^⁠2 (and therefore new opportunities) earlier than rivals. However, instead of then creating a business case requesting resources for a new project, (which must work its way up through the bureaucracy until it reaches someone senior-enough to approve it) new opportunities in Haier take a very different path.

The ME maps out the knowledge, skills and technology they think they need to capture the value in this new opportunity and advertise that for other MEs to bid on. If there’s mutual interest MEs negotiate an ‘agreement’ (rather than a contract, as things will change and they need flexibility so they can adapt) to work together. Haier provides practical guidelines to speed this part up.

However, Haier recognises it isn’t the best judge of every opportunity identified or idea created, therefore it doesn’t invest in ideas early. Instead, MEs are expected to self-fund — from their own pockets, from early sales, or by obtaining outside funding from one of Haier’s company’s venture capital partners (while Haier retains a buy out option using an pre-agreed valuation formula).

Once launched (which can take just hours in Haier) the ME is free to make the critical decisions on strategy, people and compensation themselves. As is typical for a start up, Haier’s guidelines suggest keeping base pay low to keep the ME in the game long enough for them to succeed — and if they do it unlocks potentially huge bonuses. This creates ‘skin in the game’ for everyone.

Haier has developed, through a long process of trial and error, guidelines for coordinating MEs. For example, setting targets isn’t just taking last year’s results and adding x%. Instead, a dedicated research ME collects global data on products and markets all year round and sets realistic growth targets that are up to x10 faster than industry averages (although adjustable if situations change).

Haier also provides guidance for cross-unit coordination, by helping MEs break down those growth targets into quarterly, monthly and even weekly targets for every member of the ME. This quickly reveals who is performing (or not) which MEs find valuable as, due to the potentially huge upside for success, there’s little tolerance for underperforming staff, or even leaders.

Just as an under-performing company on the market can change its CEO, so an underperforming ME can change its leader if targets are consistently not being met. New leaders are chosen from a competitive process as candidates present their ideas and teams challenge them on the details. But its not just employees or leaders that can be changed — entire MEs can also be taken over.

Performance data for all MEs is transparent in Haier, meaning everyone can see who’s doing well and who isn’t. This helps high-performing MEs attract talent to work with them, while under-performing MEs draw attention from other MEs who believe they can show its investors a path to better performance. In this way, the entire organisation is subject to the power of market forces.

In traditional organisations outdated assumptions are only challenged^⁠3 when it’s too late (i.e. when a line of business line has hit a wall). But Haier understands the need to disrupt itself early. But their approach to innovation is a numbers game: “The only way to find that next billion-dollar opportunity is to launch a slew of start-ups and give each one the freedom to chase its dream^⁠4”.

Its MEs are measured by their performance on the market (i.e. revenues versus targets), which encourages everyone to think like an owner. Instead of internal politics all energy is focused on the most important thing — how to satisfy customer needs better than rivals can. This encourages high performance and reduces the need (and cost) for managing and motivating people.

In traditional organisations support service employees (ex, Finance, IT, HR) are usually insulated from customers, but in Haier they can benefit directly if the MEs they support are successful. However, customer-facing MEs are also free to contract with ANY support service providers — they’re NOT obligated to work with internal providers. Haier lets market forces decided everywhere.

Haier’s MEs also work in the open. When developing new products MEs regularly ask potential users for their needs and preferences (even if this means getting millions of responses, which are handled by Marketing MEs). MEs also work with vast networks of external experts and institutions, posting their needs on open platforms and often getting technical solutions in a matter of days.

Today Haier expects every ME to go beyond selling products and services and start building ecosystems as well. The bigger these ecosystems become the more customer data they gather, which helps Haier’s marketing MEs discover new insights about emerging customers needs earlier — this is how Haier, despite being a giant, moves quicker than a start up.

Moving beyond bureaucracy has enabled Haier to avoid the problems large organisations have when competing against smaller, faster moving rivals. They operate like the world’s largest start up factory and have become a formidable predator on the global market, moving into adjacent industries, eating up market share and swallowing giant rivals (like GE Appliances) whole.

So how will your organisation compete against an entity that’s both bigger and faster than you and is coming your way? The answer is to adapt. But you can’t just copy Haier as the Haier we see today has been continually optimising to its environment over decades of trial and error. Your environment (and time) are different so you’re going to need to find your own path forwards.

However, while you can’t simply copy Haier, you can adopt the principles driving their success:

These are eight of the 40 universal principles we’ve been introducing in this series of blogs that are relatively easy to adopt and will accelerate your development into a highly-adaptive organisation — one able to rise to the competitive threat Chinese firms are bringing, which is why the like of Bayer^⁠5 are also moving in this direction now. But time is NOT on your side — you need to start NOW!

Watch this short video^⁠6 to learn how you can start adopting these principles in your organisation.