At Haier, the company’s management structure pivots around ZZJYTs (zi zhu jing ying ti, which in English means independent operation units). The ZZJYT model inspires entrepreneurial spirit in workers

Taking customers to a Haier ground to serve them better

Updated: 2013-08-26 06:56

By Cecily Liu in London ( China Daily)Expert sees the innovativehome appliance companyleading the way

Courageous managers who turnemployees into entrepreneurs willhelp China create a knowledgeeconomy, says Bill Fischer,professor of innovationmanagement at Switzerland’s IMDbusiness school.

Fischer, 67, who is also course director of an IMD-Cheung Kong Graduate School of Businessjoint program, says such a corporate structure is key to ensuring responsiveness to customers’needs in big companies.

“As China’s low labor advantage diminishes, it is critical for China to focus on growing itsservice sector, for which flexibility and zero distance from the customer is key to success,” hesays.

A prime example of this is the Chinese home appliances manufacturer Haier, which Fischerstudied with researchers Umberto Lago and Fang Liu for a book published earlier this year.

Reinventing Giants: How Chinese global competitor Haier has changed the way big companiestransform traces Haier’s rise from a low-quality manufacturer to an innovative and service-oriented brand over the past 30 years.

A key innovation of Haier’s management structure is inverting the traditional relationshiptriangle – where managers are at the top, followed by middle management, then a sales teamand finally customers – to one that positions customers at the top.

In the new structure, the customers’ needs are learnt by the sales team and fed back to Haier’stop managers, who make decisions about the company’s strategies based on this information.The role of middle management is taken out of the model.

“Once customers are at the top, why do you need middle management? Is it to manage the topmanagers?” Fischer asks. “No. Many companies in the world say that they put customers firstwithout knowing what it means. But Haier has executed it well.”

At Haier, the company’s management structure pivots around ZZJYTs (zi zhu jing ying ti, whichin English means independent operation units).

Each new project or market opportunity leads to the formation of a ZZJYT, a dedicated smallteam of workers with a separate budget, functioning almost like an independent company.

Fischer and his co-authors studied Haier’s three-door- refrigerator ZZJYT in detail. First aleader is selected who is then responsible for recruiting the team.

The ZZJYT model inspires entrepreneurial spirit in workers, Fischer says. It gives themdecision-making power and motivation to work hard because their salary is directly related tothe performance of the unit.

The key benefit of the ZZJYT arrangement is fast response to customer needs, he says, butsuch a structure requires courage by a company’s top management to implement it.

To truly comprehend Haier’s daring and innovation, one needs to understand the state ofChina’s home appliances industry in 1984, when Haier was founded, Fischer says.

“Back in the early 1980s, there were no refrigerators in China. To store vegetables, you woulddig a hole in the ground and bury them. When you needed your greens, you dug up thecabbages, washed them and cooked them.”

“In 1984, refrigerators started to become available, but they were very hard to get because thesupply was still very scarce. You would get people standing on the roads outside departmentstores with renminbi in their hands bidding to buy refrigerators.”

There was no quality assurance, he says, no such thing as customer service. Those who couldbuy broken refrigerators would consider themselves lucky, because they could fix them.

“But Haier’s CEO Zhang Ruimin knew this would not last. He said, ‘Some day, China will be adeveloped market. We need to be in a position where we have brand differentiation’,” Fischersays.

In 1985, when a customer returned a refrigerator to Haier for quality reasons, Zhang and thecustomer went through an entire inventory of 400 refrigerators looking for a replacement. In theprocess, he discovered that 20 percent of his goods were of unacceptable quality, Fischersays.

Zhang then instructed 76 employees to smash 76 substandard refrigerators in the streetoutside the Haier factory to publicly demonstrate the company’s quest for quality.

“Zhang made a bet that there would be people willing to pay a premium for quality products inthe future, so he worked on introducing a quality product ahead of such market demand,”Fischer says.

Haier went on to introduce a new reward system for employees, where their output is evaluateddaily. Managers attributed each task to a specific person, so mistakes were also quicklyidentified, rectified and penalized.

This model helped Haier to achieve quality for refrigerators, but, several years later, when itscompetitors caught up, it moved ahead again by creating a service-oriented strategy.

“By this time, Zhang said that Haier needed to become more responsive to customer needs. Hedid it by building market chains,” Fischer says.

Each department within the company became the customer of the next department along thesupply chain, the pooled feedback helping the company focus on the needs of the end buyers.

The design department, for instance, would be the customer of the environmental testinglaboratory; the product divisions became customers of the technical facilities department;managers and employees were the customers of Haier’s staff training unit.

This happened in the 1990s, Fischer notes, and come the turn of the century, Haier andZhang’s thinking again had a jump on the market. He proposed the concept of “zero distance tothe customer” so the ZZJYT units were created.

Fischer says the story of Haier fascinates him, and counters the stereotypical view that Chineseproducts are cheap and of low quality.

Now he is researching more Chinese companies to better understand the connection betweeninnovative management techniques and China’s business environment and cultural influences.

Another project that will soon bring him closer to Chinese business leaders is the ChinaStrategy Challenge, a four-day program next month organized by IMD and China’s CheungKong Graduate School of Business.

It will take place at IMD’s campus in Lausanne and be attended by both Chinese and Europeanentrepreneurs, who, it is hoped, will learn lessons from each other through group activities.

Fischer says learning from European counterparts is an important step for Chineseentrepreneurs to turn their companies into global industry leaders. Even Haier has somethingto learn.

“Haier is an industry leader today, but it has to continue to transform itself to become a leadertomorrow,” he says. “Haier’s advantage is its ability to learn new lessons.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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