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Harvard Business Review, February 2007
Raising Haier
Twenty-two years ago, the Qingdao Refrigerator Factory was a dump, its workers were unpaid, and its products were shoddy. Today it』s called Haier. The home-appliance giant is China』s best-known global company—and its CEO has proved that he is one of the world』s experts in leading and surviving change.
by Zhang Ruimin
Zhang Ruimin is the chief executive officer of Haier Group, headquartered in Qingdao, China. This article is adapted from the interview with Zhang that appeared in the January 2007 issue of Harvard Business Review China. HBR appreciates the special work of the interviewer, Ke En.
People respect the leadership of an organization for different reasons in different periods. When you start a business, your employees are willing to follow you if you set a good example and bear more hardships than they do. In my early days at Haier, when I went on a business trip, I often had to set out right away. If there was no seat available on the train, I would spend two yuan to rent a small camp stool and sit in the aisle. That was seen and heeded by employees.
Later, it』s conviction that appeals to people. When we started building Haier Industrial Park in the 1990s, people held back, expecting problems to arise. But as it became clear to them that I』d spare no effort to make it a reality, everyone got on board.
Today, I believe, what Haier』s employees need is to be allowed to make decisions for themselves and not to feel that they are following me in their work. The philosopher Lao-tzu said, 「In the highest antiquity, the people did not know that there were rulers.」 I take his meaning to be that a leader whose existence is unknown to his subordinates is really the most brilliant one.
Five Catties of Fish
When I took the job of director of the Qingdao Refrigerator Factory in December 1984, the existence of the company was at stake. Indeed, most people thought its situation was hopeless. The factory』s net debt stood at RMB1.47 million, and I was the fourth director appointed in that single year. The previous three had either left on their own or been kicked out—no one was able to shoulder the responsibility. More than 800 workers were anxiously awaiting pay that was several months in arrears. Not surprisingly, the employee turnover rate was high. An additional 51 workers applied for a transfer to a different company when my appointment was announced.
There was no time for idle talk. The first thing I focused on was the employees』 salaries. When I think back to the first half year of my tenure, that is the challenge I vividly remember, because I had to face it every month. We were not a state-owned enterprise, and given our debt load, the banks were not willing to lend money to us. But luckily, another option materialized. China』s policy of reform and opening to the outside world meant that wealth was accumulating beyond the cities, in the urban-rural junctional areas. I was able to borrow money from the nearby production brigade.
Certainly, employees were very happy simply to get their pay, but I wanted to go further. Soon after my arrival, when the Chinese Lunar New Year came around, I borrowed again to buy each worker a New Year』s gift of five catties of fish. It may seem laughable now, but that gesture had an immediate and positive effect. It put hope into employees』 hearts that our factory had a chance. I then borrowed tens of thousands more yuan to replace the truck that was many employees』 transportation to and from work. The truck made for a terrible ride, especially for those who carried children in their arms, so I went to the added expense of buying a bus. Again, it was a small change by today』s standards, but it had a real impact on morale. How could a factory that was obviously getting better and better be about to fail?
Once I had won some goodwill, I started demanding good work. There was very little discipline in the factory up to that point; people tended to do things as they saw fit. Rules and regulations existed in writing but had never been seriously upheld. I spelled out the terms for people: I would guarantee payment of their salaries every month, but only on the condition that they strictly obeyed the working disciplines I established. Then I set forth my new rules, beginning with 「Urinating or defecating in workshops is prohibited」 and 「Stealing company property is prohibited.」 These were actual habits to be combated.
The government at that time did not allow companies to fire workers. Those who violated factory rules could be given demerits or, much more seriously, be deprived of factory membership (that is, no longer part of the company』s collective ownership) and placed on probation. Once, when we were cleaning a warehouse, some workers were seen carrying away materials. We caught one of them and within an hour posted the consequences on the factory bulletin board: That worker was deprived of factory membership and placed on probation. This punishment came as a huge shock to people.
My main purpose, however, in establishing strict discipline was not to punish those who made mistakes. I knew that the great majority of employees wanted from the bottom of their hearts to be good employees. The problem was that the atmosphere was too bad for them to work well in. Far from frightening employees, stronger discipline in the factory endowed them with confidence and hope. The change in morale was obvious within six months.
Everything Turns for the Better
If you want to build confidence in others, you yourself must be confident. Why did I have faith that the factory would prosper? The straightforward answer is that I knew it was just about to install a new production line that would improve quality and efficiency. I knew this because it was I who had pushed for the new line as a manager at the factory』s governing body, the Qingdao Home Appliance Company. For the same reason, when the third factory director of the year announced his departure, I felt I must take responsibility for the change. I had also spent several months studying the national consumer market. I knew that if we could motivate our employees to work more efficiently and improve manufacturing quality, our products would surely find buyers.
But my confidence also had a deeper basis than the data at hand. I think it is a common phenomenon among the generation that lived through the Cultural Revolution (I was still a high school student when it began) that we learned not to recoil at the sight of difficulties. It isn』t that we became arrogant—or, much less, that we were blinded by optimism. Rather, we gained a different perspective on life and the prospect of failure. The things that happened during that period made us reflect more deeply on human nature and society. We learned that everything can turn for the better and all kinds of challenges can be overcome. There is no crisis that cannot be resolved.
Confidence alone does not make for leadership, but in those early days, it was the closest thing I had to a 「leadership .」 Unlike many young people today, I didn』t have a formal MBA education. But because of the small size of our company, I did know most of the employees by name. I could make a decision in the morning and approach the workers at noon to learn their reaction and check the results. My leadership then was task centered and authoritative—I made the decisions and expected the rank and file to carry them out strictly. Today, this would not be considered a proper way of managing. But at the time, we were a small enterprise in disorder, and there was a very important role for it. Even the workers wanted me to lead in that way.
Now that the company is much larger—we have more than 50,000 full-time employees—that old way of leading would never work. I』ve had to learn over the years how to articulate the advantages of a change I want to bring about, and ensure that the new practice is accepted. A perfect example was when Haier embarked on a major business process-reengineering effort in 1998 and some senior executives openly objected to it. By then, Haier had grown from a small factory into a big company consisting of many plants and business units, and each had its own suppliers, manufacturing assets, sales organization, human resources processes, and so forth. I was in favor of standardizing and consolidating much of this in such a way that the various functions, from procurement to marketing, would be integrated and driven by order information. I knew that would not be easily accomplished; in fact, we set a timeline of ten years for completing the work. But to me, the logic was clear. I thought of the advice of Sun Tzu in The Art of War: One must first 「exhibit the coyness of a maiden」 and 「afterwards emulate the rapidity of a running hare.」 At the outset, I tried to think over every possible circumstance and result. Once I decided to start consolidating, I made a commitment to carry it through to the end.
What I didn』t anticipate was the degree to which some executives would resent what they saw as a loss of power. Their very negative attitudes toward the change showed up in the next half year』s time as our sales fell.
By then I was on a serious campaign to communicate the message, talking with senior executives again and again, outlining the advantages of integrating the processes. I explained, for example, that when each division did procurement for itself, our procurement power was dispersed and it was almost impossible to get the best supplier or the most favorable price. And that when marketers from our refrigerator, air conditioner, and washing machine divisions all showed up separately at the same store to negotiate promotions, the store』s management was being pestered beyond endurance—and we were doing nothing to convey a uniform corporate image. Gradually, everyone saw the power we would all gain through process integration.
Dumplings on a Construction Site
I have never considered myself an outstanding leader, but I think I』m a person who has an indomitable will. Once I set a definite goal, I must succeed. Many other enterprises have pursued the same business as Haier over the years in the same economic environment. The difficulties they met with were our difficulties as well. The difference is that many of them were too willing to give up.
In 1991, for example, I decided to expand the capacity of our factory and build the Haier Industrial Park. We took a large piece of land, laid the foundations, built the underground utility infrastructure—and in the process, spent all the money our company had. At that time China was employing a macrocontrol policy, and the money market was so tight that we couldn』t get loans. The total budget was RMB1.5 billion, but the company had accumulated only RMB80 million, and all of it had already been plowed into the project.
Many people in our company, from management to assembly-line workers, were questioning the necessity of building such a facility. To them, having a product supply that fell short of demand was not such a bad thing; fast sales and high margins brought us a pretty good life. So why throw the money we earned into this industrial park, which wouldn』t produce returns for years? Why not build housing for employees instead? Why not give them higher salaries? Having studied the national economic situation, I was convinced that building the industrial park made sense. Even despite China』s policy, I felt certain the economy would grow at a fast rate so that our capacity would be severely inadequate before long. And in fact, in 1993 China entered a period of overheated economic growth. Many companies in our industry didn』t start their projects until then—at which point they had missed the best opportunity for development.
As I tell the story today, I sound assured, but at the time I feared that I wouldn』t ride out the crisis. I wasn』t alone. The construction company also suspected I』d be unable to make the remaining payments on the project. In that moment of doubt, I drew on my past experience. On the Lunar New Year』s Eve of 1992, I came to the construction site and enjoyed dumplings with the workers. Together we celebrated the New Year and talked about the project, and the confidence of the construction company grew.
The Smallest Company in the World
People often speak of Haier with reference to General Electric, and that great company is certainly one of our benchmarks. To me, the essence of Jack Welch』s accomplishment at GE was that he simultaneously turned his company into the largest one in the world and into the smallest—by making each employee full of vigor.
I want each employee coming to work for Haier to have the sense that he or she can find a place in the company to realize his or her own values as well as creating value for the enterprise. I have no desire to oversupervise employees. Nor is my goal to grow the company to a certain size. The list of the world』s largest 500 companies changes dramatically every decade. Size is no protection against failure if you are not able to fill each employee with vitality. Instead, I want Haier to get to the point where all employees create their own value on a globalized platform. If we are able to accomplish this, we can make Haier a very competitive enterprise.
Size is no protection against failure if you are not able to fill each employee with vitality.
Toward that end, there are three areas that I must think about carefully every day. First, have we provided employees with sufficient room to create value and to achieve self-realization? Do people just passively come to work every day as requested? Or do they actively come here to fulfill their ambitions? Part of making sure it』s the latter is having the right organizational structure—one that is as boundaryless and flat as possible. Many big companies organize themselves around divisions and have very linear, functional structures. But Haier will do better if it has project teams being formed according to market demands, made up of members from multiple divisions. In that kind of setup, the emphasis stays on what will serve the market, not what will please someone further up in the company hierarchy. Employees feel they have a customer to answer to, more so than a superior.
That is not an easy orientation to bring about. One important reason that people tend to focus so much on their bosses is that their pay is determined by those bosses. So the second thing that I am currently very focused on is ensuring that compensation provides an incentive for employees to behave in a market-driven way. We』ve changed things such that Haier employees are rewarded in large part according to the performance of their teams. If a project group is asked to increase the gross profit margin of a certain product from 8% to 10%, it might go about that in any number of ways. It might change the product design, improve the manufacturing processes, figure out a way to pay less for raw materials, or make other changes. Regardless of whether the group does this in the way I or some other member of management would, if the task is accomplished, every member of the team gets a bonus in line with his or her respective contributions. In fact, Haier does not have a position-related compensation system at all. Instead of being paid according to their titles, employees are paid solely for results. It』s no surprise that people who leave the company are often heard complaining about the low salary they received from Haier!
The third thing I think about every day is that fundamental strategic question, how on earth are we different from the competition? If a company has no points of differentiation, it rapidly devolves into a commodity player with no chance for long-term success. Most obviously, differentiation comes from product innovation, which we engage in on multiple levels. What we call 「three-season product innovation」 serves the current market with fast-cycle product improvements. Over a longer horizon, we work on technology developments that will fuel new products three years out. And we are always engaged in basic research that may yield breakthroughs in the long term: a refrigerator, for example, that needs no compressor, or a washing machine that operates without detergent or even without water. Meanwhile, I am trying to build our marketing capability into a point of differentiation. In particular, our recent forays into direct marketing and delivery and our ability to generate positive cash flows are important go-to-market innovations that have eluded many Chinese companies—because they are very hard to achieve.
There is a wide gap between Chinese enterprises and major foreign companies—but it isn』t mainly a technology gap. The key difference is in management talent.
But it』s another kind of differentiation that I am most adamant about achieving. Today, there is a wide gap between Chinese enterprises and major foreign companies—but it isn』t mainly a technology gap. The key difference is in management talent. Therefore, we are making tremendous efforts to improve the quality of human resources. It』s working, I believe, thanks to a difference that already exists at Haier: a corporate culture that embraces constant progress and the belief that victory comes through change.
My Successor』s Brilliance
When you have been at the helm of a company for more than 20 years and seen it grow from a single dilapidated and debt-ridden factory to a global competitor with annual sales in excess of RMB100 billion, questions about succession naturally begin to arise. I tend to deflect those questions, and not only because I personally want to remain focused on enhancing the competitiveness of Haier. My larger hope is that the question of who sits in the CEO』s chair is of less and less importance. Haier should not be a company ruled by one man or woman but, rather, a self-sustaining system of excellent managerial processes. I have always liked what Peter Drucker said about leadership』s having little to do with charisma and other qualities. As he put it, 「Leadership is a means that is mundane, unromantic, and boring. Its essence is performance.」
Today, the biggest problem at Haier lies in the fact that its leaders are still embroiled in operational execution issues. The enterprise will become great when it is able to operate by itself, with employees acting as their own leaders, understanding what to do to satisfy market and customer demand. The future CEO of Haier will then be able to focus wholly on strategic issues and make decisions from a global point of view.
If that sounds like the chief executive will be aloof or disconnected from the rank and file, then I have created the wrong impression. Quite the contrary, it worries me that so many young people join the managerial ranks of companies immediately after graduating university, never having been managed by others. Coming of age in the Cultural Revolution, I of course missed the opportunity to attend university and was thrown abruptly to the bottom of working society. There is no question in my mind that those years exerted a significant influence on how I now go about leading others. When I dine with Haier workers, as I do nearly every day, or when I drop in unannounced at a workplace, I am always looking to renew my understanding of their perspective. Perhaps I have not achieved what Lao-tzu described—a populace unaware of the presence of their ruler. But that brilliance may be within my successor』s reach.
Copyright © 2007 Harvard Business School Publishing Corporation. All rights reserved. |
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