In January, we introduced our 2023 Strategic Agenda based on in-depth conversations with top CSOs in our Outthinker Strategy Network. We will be expanding on one of these trends every week with the intention of supporting your organization’s strategy for the next year and beyond. This is our third installment.
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For almost a century, GE Appliances was known as an iconic company with a proud track record of innovation. The organization’s history is full of novel inventions: the first fully automatic clothes washer, the first two-door refrigerator and freezer combination, the first room air conditioner…
But after decades, the company’s reliance on a past history of innovation began to interfere with its ability to innovate for the future. By the early 2010s, GE Appliances found itself in a cycle of incremental progress. Major, transformational innovation had flatlined for over 20 years, and the formerly inventive powerhouse had become a run-of-the-mill top-down bureaucracy. It was at that time, in 2016, when General Electric put its small appliances division up for sale, and it was purchased by Chinese appliances giant, Haier, for $5.5 billion.
Kevin Nolan, CTO of the former GE Appliances, was appointed CEO of the acquisition. At first, he was skeptical of his new parent company. In an interview with Outthinker Strategy Network member Kalina Nikolova, SVP of Business Operations & Strategy for Yahoo, Inc., Nolan shared his first impressions that getting to know Haier felt foreign, not because of language or location, but because of its unique management model, known as Rendanheyi.
Haier’s Rendanheyi Model breaks down the traditional structures of bureaucracy by dividing the organization into “microenterprises” (MEs) – small organizational units that are self-directed and place employees at zero distance from the customer.
“I tried to find out where I stood by looking for an org chart,” reflects Nolan. “But it turns out, they don’t have org charts.”
Concerned about placing his historically iconic company in the hands of one that was completely unfamiliar territory, Nolan spent time in Haier’s headquarters in Qingdao to learn how Haier’s model worked and how that work served customers. Once he looked past the lack of organizational hierarchy to orient himself, Nolan realized that Haier’s method of working was purely customer-focused, while most of what he’d known in the past was making decisions based on what upper management wanted:
“It got down to this idea of a company that was purely customer-focused, when I was coming from one that was based on what management wants.”
4 fundamentals of Haier’s Rendanheyi Model
As Nolan studied Haier’s structure, he found that there were four fundamental characteristics of the Rendanheyi Model that would both help employees bring their best selves and passions to their work and make the company extremely agile and responsive to customer needs.
- Set leading goals: Each microenterprise in Haier is required to set a leading goal that challenges expectations and represents success in the future. For GE Appliances, that meant being number one in five years. “We had never talked that way before,” explains Nolan. “People thought I was crazy. They said ‘That’s not who we are or who we’re expected to be.’” Nevertheless, within five years, GE Appliances would be on track to achieve its leading goal.
- Create a culture focused on customers and entrepreneurship: Most organizations say they are customer-focused when in reality, upper management is guiding the decisions and employees are looking upward to find out what to do. Rendanheyi starts with listening to the customer first, dismantling traditional leadership hierarchies, and treating the customer as the CEO.
- Structure the organization to encourage the culture: One of the biggest hurdles to implementing Rendanheyi is that company leaders are unwilling to give up the power they’ve worked hard to obtain. Before the acquisition, GE Appliances was functionally led. Haier changed the power structure of the company by converting the four major product lines to MEs. Each ME’s job is to understand and make decisions based on what the customer wants. The job of each function (marketing, sales, HR, finance, etc.) is to support the MEs. The CEO supports the MEs as well.
- Reward people who exhibit truly customer-focused behaviors: Historically, camaraderie was most important at GE Appliances. All employees won or lost together as a company. But that transitioned to sticking together in mostly tough times. When winning became the organization’s leading goal, with the MEs’ leading goals cascading down, each individual was able to contribute to pushing their ME’s target forward.
Once GE Appliances implemented these characteristics, they started to notice changes immediately. Decisions were being made at market speed. MEs were put in charge of budgets and decision-making and measured on performance to add accountability.
Within five years, GE Appliances hit its leading goal of being number one and ended the year with $11B in revenue. Today, GE Appliances has 14 MEs, but Nolan says the company is still in the beginning stages of transformation and it’s time for a new leading goal.
“Your leading goal always has to push you somewhere new,” he explains. “As the company gets bigger, we have to keep making it smaller. The bigger we get, the faster we get.”
Tony O’Driscoll, professor, research fellow, and academic director at Duke’s Fuqua School of Business, describes further that decentralized models work because they bring sensemaking to the edges of organizations. Large corporations are often insulated from trends and truly listening to their customers. Rendanheyi moves central functions to the edges to co-create with customers.
How can other companies apply the Rendanheyi Model?
After GE Appliances’ initial move from product lines to MEs, Nolan noticed a bigger shift taking place in the organization. Not only did the four MEs work quickly toward their leading goals, but even more MEs began to form. Employees started to see market opportunities and thought they could take action to achieve it. They built new MEs, driven by employees passionate about solving customer problems.
“Before, we had talent reviews and different kinds of career path mapping, and in many ways, we threw that away and decided to err on the side of passion,” explains Nolan. “If we could put passion in front and support it through experiments, we could help those grow in ways that entrepreneurial companies can’t. We have brand, structure, and processes, but those processes exist to support the MEs (not to support themselves).”
Many more organizations are looking toward adopting agile and other decentralized models, but they often find friction with hierarchical approaches and command-and-control leadership models. Nolan recommends the following principles for other companies considering a similar shift in organizational model:
1. Start with a fundamental belief in people
During a transformation, leaders often believe they need to replace the management team or hire different talent. But for GE Appliances, the problem was not the people; it was the limiting system and environment in which they were working.
Nolan recommends that beginning the transition beyond traditional hierarchies starts with a fundamental belief in people. Many employees will embrace decentralized, customer-centric models. It’s often leadership that represents a barrier. As CEO, Nolan has come to identify himself as “just another employee trying to serve customers … If I give up power, I actually achieve more.”
2. Reconsider performance appraisals
In a zero-distance model, performance reviews should be driven by the market. The closer employees get to customers, the more market feedback can move to the individual level. Letting the market, instead of managers, determine performance appraisals can also be a positive shift for diversity, equity, and inclusion.
“It can help you strip away your biases,” says Nolan.
3. Co-create with customers
Producers always want to innovate, but real innovative ideas come from the users. GE Appliances started a program called FirstBuild on the University of Louisville campus, where customers can come to test new ideas. The program only works on what customers want, and even Nolan can’t kill a project if customers ask for it.
“We put company direction, strategy, everything in outside hands and we are seeing more innovation than ever before.”
4. Use simple metrics and get fast feedback
Overall, GE Appliances uses simple, traditional metrics – revenue, cashflow, and EBITDA. The FirstBuild innovation program, on the other hand, foregoes the traditional metrics in favor of two questions:
- Is there a passionate group of customers out there who want this product?
- Are they passionate enough to get involved and help create it?
FirstBuild aims to bring products to market in 2-3 months, and get feedback from customers as soon as possible. Nolan says they’ll even sell items that aren’t 100 percent complete and ask the customers to give recommendations to help fix them, like a pizza oven for home kitchens. Pizza-loving consumers were brought in to provide their preferences on whether they did indeed need the ovens to get up to 1400 degrees to cook their pizzas properly.
GE Appliances’ transformation using Haier’s Rendanheyi Model — from being sold to Haier for $5.5B to achieving $11B revenue in six years — has been nothing short of remarkable. In a relatively short time, the company transitioned from a traditional appliances manufacturer to a technology-driven, customer-focused business that is at the forefront of innovation in the industry. The focus on customer experience, as well as employee passion, has helped to establish GE Appliances as a leader in the market.
Image Credit: FirstBuild