Chinas Philosopher-CEO

Zhang Ruimin
Haiers leader describes how he built a winning global company by continually reframing
his management philosophy.
by Art Kleiner

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Photograph by Wang Zhao

Each year, the Academy of Management recognizes one of the worlds most
influential chief executives by inviting that person to keynote its annual meeting.
When Zhang Ruimin gave the address in 2013, it was a signal that China had
produced its first philosopherCEO. Like Jack Welch and A.G. Lafley, Zhang is
recognized not just for leading a high-performing and truly entrepreneurial
global business, but also for organizing that company around a conceptual

framework that has guided its development for yearsin Haiers case, practically
since its founding. The Haier Group is the worlds fastest-growing appliance
maker, and the company with the largest market share in white goods
worldwideabout 14 percent of a market with at least seven other major
competitors. It is also a world leader in business innovation and one of the largest
non-state-owned enterprises in China. Thats not bad for a company that was
once in such desperate straits that the CEO had to borrow money to pay workers
salaries, and many of the products it was selling needed to be repaired before
they could be used for the first time.
But Zhang has never accepted limitationsincluding the definition of Haier as
just a manufacturing firmas permanent. Today, the company is repositioning
itself as a provider of solutions to consumers problems, selling not just
home appliances (refrigerators, washers and dryers, entertainment electronics,
and air and water conditioners are among its major lines) but also services
including water safety information and other guidance designed to improve the
quality of life for consumers in China and other emerging economies. To
maintain that identity, Zhang has steadily initiated shifts in the companys
structure, moving consistently toward participative management, decentralized
decision making, and autonomous but accountable work teams and platforms.
Haiers prowess in business innovation has yielded a continuous stream of
products and services that serve distinctive consumer needs. For example, it
makes large washing machines for Pakistani robes, small ones for Chinese
delicates, and durable ones with large hoses for washing vegetables on Chinese
farms. Its product line is also increasingly tailored to customer specifications, and
its water purifiers are designed to remove the specific pollutants in each of
220,000 communities across China. (Haier jointly holds more than 20 water
purification patents with Dow Chemical.) Every appliance that Haier sells today
is custom-crafted; each individual purchaser specifies colors and features that are
sent directly from the Internet to the factory floor.

Zhang took the helm of Haier in 1984, when he was 25. At that time, it was a
troubled company partly owned by the city of Qing-dao, one of Chinas first
enterprise zones. Zhang was an assistant city manager, instructed to find a
managing director who could turn the company around; he found no one willing
to tackle the job, so he took it himself. He quickly educated himself in business
management, and used his new insights to establish Haier as one of Chinas
preeminent producers of quality goodsfirst for that countrys burgeoning
consumer population, and then for the rest of the world.
As Haier becomes a platform-based business, every part of the organization has
its own P&L, makes autonomous decisions (including which other parts of Haier
to work with), and can reach out independently to customers, potential
employees, and collaborators. R&D projects now often reach beyond Haiers walls
to include academics, independent designers, and even competitors. Zhang sees
this as a natural evolution for all major companies, particularly those focused on
business innovation in the Internet age. He is determined to make Haier one of
the first to bring this type of management to fruition, even if people inside the
company (and, for that matter, everywhere else) still feel uncertain about how to
implement it day-to-day.
Zhang Ruimin sat down with strategy+business at Haiers headquarters in
Qingdao as part of a broader inquiry into how companies compete with their
distinctive capabilities (see Haiers Capabilities System). The conversation,
which was conducted in Mandarin and English through interpreters, shows how
the thinking of a gifted CEO can lead a company to greater innovation and global
influence.
S+B: When we ask people to name companies that consistently
succeed, year after year, through their distinctive capabilities, Haier
is often mentioned. How have you been able to do this?
ZHANG: Over time, some companies perform relatively better than others. You
could say these are outstanding enterprises, highly capable companies. But most

of these companies todayand this includes many big international firmswill

have an extremely hard time maintaining their outstanding position indefinitely.
At Haier, we have a saying: Successful companies move with the times. There
are two reasons we believe this. First, from an external perspective, times change
quickly and its extremely difficult to stay abreast of them. Second, from an
internal perspective, companies lose their entrepreneurial spirit. As soon as a
company grows large, its employees learn to work in accordance with the
companys rules. As regulations multiply and companies control their employees
more tightly, everyone becomes really good at following orders. Their sensitivity
to the market decreases accordingly.
The top leaders of any major company are also susceptible to this loss of
entrepreneurial spirit. Jim Collins and Jerry Porras wrote in Built to Last:
Successful Habits of Visionary Companies [HarperCollins, 1994] that many great
chief executives are time tellers. They create great products and services, but
their value lasts only as long as they are personally present. Senior executives
should be more like clock builders: focused on making a great companya
company where people think as entrepreneurially as the leaders do, even after
those leaders are gone. An enterprise must evolve into a system that stands on its
own, and does not depend on the whim and fancy of its current leader.
Lack of entrepreneurial spirit is a major reason for the decreasing
competitivenessand even the eventual collapseof big enterprises. It is an
extremely difficult problem for Chinese companies in particular. In the past,
business leaders in China would tell workers that they should love the factory and
treat the company as they would their home. Thats how the relationship was
framed. Today, a successful enterprise must be less of a home and more of an
entrepreneurial platform: a base for pioneering work where employees can
realize their personal value. This shift is difficult for many workers to accept.
An Entrepreneurial Spirit

S+B: Havent you maintained an entrepreneurial platform since the

company was founded?
ZHANG: Not to the extent we do today. To be sure, we have felt a sense of
urgency at Haier ever since we began to rebuild the company in 1984.
Haiers previous incarnation was an enterprise on the brink of collapse. At that
time, the overall quality of the staff was extremely lowthe entire factory had
only about two college graduates. From the start, weve felt like there was an
extremely large gap between us and more established international companies, a
gap we would have to overcome. The only way to survive was to pursue a path of
constant self-improvement.
After we got on our feet and started making money, we looked up and noticed
that many companies around ussome that performed even better than we did
were shutting down. That just reinforced our sense of urgency. We saw that we
werent facing just a one- or two-day challenge. To survive and be competitive
would always be a company-wide, long-term challenge for us. Thats why we have
a culture of self-questioning. Everyone is always challenging their own ideas and
continuously surpassing themselves.
In 1999, we ventured overseas, opening factories in places like the United States.
At that time, we used GE as our yardstick. Its as if the industry were a boxing
ring, and we were some barely known upstart taking on Mike Tyson. Of course,
by conventional standards, we didnt stand a chance. But in the company we have
another saying: When looking for a chess partner, find a grandmaster.
S+B: What have you specifically done to foster an entrepreneurial
spirit at Haier?
ZHANG: Most recently, we reorganized. We used to have a pyramid-style
structure for our sales in China. The people in charge of sales had to manage
business at the national, provincial, and city level.

After the arrival of the Internet age, we realized that under this triangular
hierarchical structure, people had a difficult time adapting to the requirements of
the times. So we reorganized ourselves as an entrepreneurial platform. We
flattened everything out, taking out all the middle management. We
decentralized the structure to one with more than 2,800 counties. Each county
organization has seven people or fewer.
This transition has been extremely challenging. As part of this change, in an
instant, more than 4,000 employees who worked for the company were
unemployed. [Many of them were quickly invited to reapply, but this time for
entrepreneurial positions where they could build businesses under the Haier
brand.] We know of no other Chinese company of our size that has done this.
Cultivating Consumer Insight
S+B: How has Haiers flattened structure affected the people inside
the company?
ZHANG: Whenever you pursue reform, there are always a significant number of
employees who are unhappy because youve begun messing with their interests.
Some may not be able to adapt, but if they leave and go somewhere else, they may
not be able to find a decent job, so of course they complain. This is a really
difficult nut to crack. The only thing we can do is provide employees with a level
playing field, where they can compete on an equal footing for opportunities
within the company. In reality, however, even this isnt good enough; many
employees just dont have the necessary skills. So what do we do? This is an issue
we have yet to fully resolve.
Another major challenge has to do with making the enterprise truly borderless.
We are using digital technology to connect everyone. In your question, you said
inside the company, but in fact, we believe that there is no inside the
company versus outside anymore. As a Haier executive, my goal is no longer to
be a maker of home appliances, but to be an agent of interaction and networking
among people who might be anywhere. I want to turn the company into an

Internet-based company, a company unrestricted by borders. Whoever is

capable, come and work with us.
We now have a lot of entrepreneurs at Haier who dont work inside the company.
Some arent interested in joining, preferring to stay outside in society, partner
with the company, and use our platform for pioneering work. Those inside the
company are also free to leave at any time, and still use the Haier platform for
their work, though they would no longer actually work for the company. In the
long run, there wont be any company employees to speak ofonly the Haier
platform.
We involve customers in a similar way. In the past, users would hear through
advertising which Haier products were good, then theyd go buy those products.
Now we bring in users to participate in the whole process of product
development. Its not like in the past where we designed things behind closed
doors. For example, the Air Box [a smartphone-controlled intelligent device
introduced by Haier in 2014 for monitoring and managing the climate inside a
building by connecting to other heating, filtering, and air conditioning devices] is
the result of a significant amount of user input. This guided us on issues like
whether the AC unit should be able to test the cleanliness of the air and be
controlled intelligently. We then brought in Samsung and Apple to help us meet
users requirements. The resulting product is different from those of the past. The
Air Box can control any companys AC unit, not just Haier products. This is
completely a result of interaction and cooperation.
All of our products are integrated with the Internet. If a home appliance cant
communicate with the Internet, it shouldnt exist. And to make that happen, we
need to facilitate a relationship of constant interaction with the appliance itself
and with our customers. [See A Strategists Guide to the Internet of Things, by
Frank Burkitt.]

If a home appliance cant communicate with

the Internet, it shouldnt exist.

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S+B: Why does building the company around platforms give Haier an
advantage?
ZHANG: The idea of the platform represents a stark contrast from how we used
to manage the enterprise in the past. First, it should allow us to bring in and
integrate greater quantities of resourcesall contributors will be able to enter
unhindered. Before, there were always borders and barriers. Second, all who join
the platform as a resource should see their returns maximized. Before,
maximizing the benefits for the company took precedence. This limited us in
what we were able to accomplish.
Now that we operate in this fashion, we at Haier are no longer the ones directing
things. We are the glue binding everything together. Being the glue is a difficult
task; we have to come up with myriad ways of managing resources.
For example, we have an interactive platform devoted to solutions for water
quality and treatment. Instead of inventing everything we sell in this domain
ourselves, we are now like a binding agent, incorporating insights and efforts
from water treatment companies around the globe, if possible, into this one

platform. We also want to learn about and resolve users needs through direct
interaction with them. Our team tasked with the water solution interactive
platform now has to do all of this.
S+B: How did you develop your high level of customer insight?
ZHANG: Around 2010, we realized that we had a lot of products for which we
had put forth great effort in order to understand and meet the demands of users
but which seemed to be giving only half the returns for double the work. In the
Internet age, when people continually identify new needs and demands, the rapid
evolution of user preferences represents a huge source of pressure. We had
products we thought were ready to go, flawlessly researched and developed.
When they hit the market, however, results were lackluster.
That got us thinking: How can we make the transition from the past, when we
learned about users needs via questionnaires and telephone calls, to the present
age, when we can interact with users more directly?
So we put forward some new concepts. For some appliances, we designed a group
of various modules and invited users to select, for example, the colors and
designs they wanted. In one day, we sold more than 10,000 television sets online.
This made us realize that our old ways of thinking and conducting business
needed an overhaul.
Many employees, especially those in management, had a hard time accepting this
approach. When we started requiring that products be developed in cooperation
with users participating in the front-end design, employees felt like they didnt
know how to go about it. Some flatly refused, whereas others were [passively]
unwilling. As an entry point, we started with the Dizun and Tianzun air
conditioner series. [These products include temperature precision, smartphonebased controls, and, in the case of Tianzun, lights that change color with the air
quality in the room.]

In the beginning, we told our employees in these groups that it wasnt a big deal if
they failed, that it was meant to be a process of trial and error. The employees
accomplished it successfully. As a result, we now require that all products be
developed in this way, with users as interactive partners. At that point, we told all
of our traditional advertising partners that we werent doing direct ads anymore.
A lot of advertising firms were extremely unhappy about this, complaining that if
we didnt do ads they wouldnt be able to earn a living. But it was far better to
change, and meet consumers directly online.
Differentiation through Ideas
S+B: How do you decide which aspects of the company should be
open, with an entrepreneurial spirit, and which elementscore
elements of the companys identityshould remain unchanged?
ZHANG: Thats an extremely difficult question, and we are still working out the
answer. [We have decided] that many areas that were previously closed off and
untouchable now must be opened up. For example, when dealing with patents in
the past, new technologies and products were kept strictly confidential until the
day when the new products were unveiled. Nowadays, we make users part of the
R&D process. Even after the product is successful, we go back for constant
revisions, in which we also invite users to participate, and competitors as well.
For example, in the research and development of the Haier cordless home
appliance, we invited industry competitors from across the globe to participate.
This was very hard to adapt to at first. It means we dont keep absolute secrets
like we did in the past. One can only succeed, even temporarily, if all parties
perceive they will benefit. That wasnt completely true in the past; but this is how
things are today. [See The Sharing Company, by Robert Vaughan.]
S+B: What do you see as the primary differences between Haier and
other companies?
ZHANG: One of the biggest differences is our ability to remake and overhaul
ourselves. Many companies ways of thinking and operating have ossified and
become hard to change, especially their organizational structures. At Chinese

companies, its exceptionally hard to remove an executive who is not performing

well, especially if theyre in the mid to high levels of management. At Haier,
however, we can make fast changes. We have responded to the changing
environment by eliminating or adjusting more than half of the vice-presidentlevel executive positions.
The main factor enabling this difference is our culture. Those inside Haier,
especially managers, understand that its crucial that we adapt to the evolving
needs of users and the changing market environment. A few people who have
gone from Haier to work for other companies have written to me telling me that
the biggest difference between Haier and their new company is Haiers
transparent interpersonal relations. They say that this is unheard of at other
companies.
S+B: What differences do customers and users perceive?
ZHANG: Before we embraced the Internet age, the biggest difference between us
and other companies was our commitment to honesty. We had an advertising
slogan, Forever honest. Users may have felt that other companies werent
paying enough attention to some of their needs, but that Haier was able to
address those needs immediately. Especially in the area of after-sales services,
there was a widespread feeling among users that this was the biggest difference
between Haier and other companies. This has been an important reason that
Haier has been able to grow so quickly and for such an extended period of time.
Today, we hope that users enjoy an outstanding experience from beginning to
end. Were still working on this concept. Customers still dont feel that its
anything extraordinarily special. We know they are relatively happy with our
distribution. We have a guarantee, for example, that if goods dont arrive within
24 hours in China, they are free. No other company has been bold enough to
make this kind of promise. On the same note, Haier is the only producer of large
appliances that has been able to synchronize delivery and installation. This is one
of the reasons for our cooperation with [the e-commerce site] Alibaba. These

examples are all possible because of our back-end platforms. In the front-end
area of information exchange, we still need to pick up the pace.
S+B: You are known for personally paying close attention to trends in
management theory. What theories or ideas have most influenced the
direction youre taking the company?
ZHANG: For me personally, the most influential person in management theory
has been Peter Drucker. A lot of what he said can be summarized with two major
focal points. First, the only correct and effective way to increase the value of a
company is the creation of customers. Second, employees should not be
implementers; they should be individuals able to realize their value by making
decisions. Throughout our companys history, roles have been organized
according to Druckers theories.
With the advent of the Internet age, the people with the most influence on us
have been American experts such as Chris Anderson with his theories of the long
tail and maker culture [related to digital fabrication], and Clay Shirky with his
book Here Comes Everybody: The Power of Organizing without
Organizations [Penguin Press, 2008]. There have been many ideas coming out of
the U.S. regarding the Internet that have had a huge influence on our reforms.
We try to implant these concepts into everyones thinking. For example, every
Saturday, when we hold our weekly management meeting, we disseminate these
ideas and encourage people to change how they think about things. We also try to
put these concepts into practice. To avoid big mistakes, we always implement a
small pilot test at first. Only after the pilot has been shown to be successful will
we initiate things on a larger scale.
S+B: In this context, how do you think about the growth and
development of your employees?
ZHANG: In the past, we had a large-scale select-and-train approach to
recruiting employees, like many Western companies. This cookie-cutter method
of training employees led us to cultivate people who identified with the culture

and whose implementation abilities were incredibly strongbut who lacked

creativity. The recruits werent required to have any skill with innovation, which
was a major problem.
Employees today should be encouraged to think for themselves. They should be
cultivated to have an entrepreneurial, innovative spirit, and not just to implement
orders. From now on, enterprises such as Haier will be like ecosystems. You
might find yourself working together with a group of people you didnt know
yesterday, and after tomorrow youll all go your separate ways. People come
together for specific projects, after which they disperse. Its become a very fluid,
dynamic type of arrangement.
S+B: Will this wave of innovation take you as far as you need to go?
ZHANG: Thats the eternal question. Ill say just one simple thing: Never follow
only a single road. [In his 1939 book Business Cycles: A Theoretical, Historical,
and Statistical Analysis of the Capitalist Process (McGraw-Hill)] Joseph
Schumpeter defined innovation as the reorganization of the factors of production.
You and your rivals have access to virtually all the same resources. Only by
constantly thinking of new ways to reorganize these factors can you differentiate
yourself. Its like poker. Everyone has the same number of cards. Its how you
play your hand that matters.

Haiers Capabilities System

Haier is one of 12 companies that were studied closely in a Strategy& research project on distinctive
capabilities and coherence.
Value Proposition: Haiers way to play in the market (its value proposition) has gradually broadened
since Zhang Ruimin became CEO in the mid-1980s. The company first took the role of a category leader,
maintaining top market share because of its reputation for quality in China. Then it became a
customizer (adapting its products to customer demands) and a solutions provider (helping consumers
manage issues like water quality and home design). Haier now sells not just home appliances but
related services, adapted to consumer demand in China, and, increasingly, other markets. Haier
delivers its way to play by excelling at four differentiating capabilities.

Source: The Strategy& Capable Company research project; The Essential Advantage: How to
Win with a Capabilities-Driven Strategy, by Paul Leinwand and Cesare Mainardi, Harvard Business
Review Press, 2011