Innovating in a VUCA World: The Six Contexts Model
How Haier innovates in an increasingly volatile, uncertain, complex, and ambiguous world
In Management Innovation Made in China — Haier’s Rendanheyi, researchers Jedrzej George Frynas, Michael J. Mol, and Kamel Mellahi make a strong case for Haier’s Rendanheyi as being particularly well-suited to the volatile, uncertain, complex, and ambiguous (VUCA) world we live in today.
As the authors state,
In this article, we show how companies such as Haier create management innovations in a high VUCA context. Management innovation involves the creation of new management practices. Under the leadership of Zhang Ruimin, the Haier Group developed “Rendanheyi” (in Chinese: 人单合一), which can be loosely translated as “integration of people and goals” or “the win-win model of individual-goal combination.” Rendanheyi is a platform made up of a bundle of management practices, rather than a single new practice.
Rendanheyi is intended to be an integrated and all-encompassing management model with the overall goal to create “zero distance to the user” and unleash entrepreneurial autonomy within the organization. Specific elements of the Rendanheyi platform include autonomous micro-enterprises, performance-based compensation, and open online user platforms.
[We have published numerous other posts that detail Rendanheyi, which, technically is a business model and corporate strategy, not a ‘platform’ in the technology sense of the word, such as Hamel and Zanini on The End of Bureaucracy, Evolution of the Platform Organization: 3 Haier, Rendanheyi, and Zhang Ruimin’s Vision, Platform Ecosystems as Innovation Acceleration, and User-Centric Innovation and the Shape of Things to Come, as well as other articles on Haier.]
The authors summarize the history of organizational evolution at Haier starting in 2005 as a ‘conventional hierarchical appliance manufacturer into a highly responsive, diversified online-based entrepreneurial conglomerate organized as entirely autonomous micro-enterprises’. But the thrust of the research paper is a deep dive into the issues — specifically the context in which Haier has been operating — and how that led to creating a highly innovative culture in an era characterized by VUCA.
The term VUCA was originally developed at the US War College during the end of the Cold War, but over the past few decades, it has been more broadly applied as a set of forces impinging on business and leading to many changes in business strategy and operations.
Denise Caron, the president of In Order To Succeed, says it well:
We are moving from a world of problems, which demand speed, analysis, and elimination of uncertainty to solve, to a world of dilemmas, which demand patience, sense-making, and an engagement of uncertainty.
Management Innovation and Context
The authors believe that traditional thinking about the process of innovation sits atop a flaw: such thinking does not take into account context, and they then pose the central question of their research:
How does the environmental and organizational contexts affect management innovating in an emerging market multinational characterized by VUCA? An answer to this question raises the intriguing possibility that the sources of competitive advantage of Chinese and other emerging market multinationals may lie not just in cost advantages, or even the ability to come up with innovative products, but also in innovative management practices.
Our research on Rendanheyi suggests that both the organizational context and the environmental context contributed greatly to management innovating at Haier. Three key factors emerge for each type. In the organizational context, we found that structure, leadership, and resources were all clearly connected to the management innovation process. In the environmental context, we observed the influences of competitive, technological, and institutional aspects of the environment. Eventually, leadership turned out to be the most important of these factors. [The figure below] captures the overall model.
The authors provide a recapitulation of Haier’s history — starting from a single refrigerator factory in Qingdao, the appointment of Zhang Ruimin as plant director of Qingdao General Refrigerator in 1984, the development of higher quality appliances, and Zhang being named CEO of the renamed Haier in 1993. CEO Zhang adopted a model of what the researchers call ‘consistent change’:
Zhang began to focus Haier’s attention around key beliefs that have sustained its management innovating ever since: continuous external environmental change requires continuous internal change; customer service, not existing products, is key to maintaining Haier’s forward motion; price competition is ultimately destructive; Haier needs to offer more, not less, to China’s increasingly sophisticated customers; the secret of what Haier can offer the customer lies in the knowledge of Haier’ s employees; all too often, an existing organization structure constrains, rather than liberates, employee talent; and only by making the “employment agreement” equitable to all who are affected by it (customers, organization, and employees) can a powerful incentive engine be constructed to drive continuous change. Haier’s story is one of consistent change.
Zhang’s mindset, the company’s expansion beyond refrigerators to manufacturing washing machines, televisions, air conditioners, and joint ventures and strategic alliances with foreign companies, like Merloni and Mitsubishi, led to Haier attaining a market share of 30% of the Chinese market for refrigerators, washing machines, and air conditioners.
The authors quote Zhang Ruimin:
First we observe and digest. Then we imitate. In the end, we understand it well enough to design it independently.
The Chinese market was saturated and international competitors were entering China, so while still growing, Haier began to expand internationally, and, as the authors observe:
By the mid-2000s, Haier was an established, successful global brand.
This is the setting for Zhang Ruimin’s introduction of Rendanheyi.
The Evolution of Rendanheyi
Around 2005, Zhang first used the term Rendanheyi, and developed the first phase of an organization evolution. As the researchers explain,
From 2005, Haier went through a ten-year period of intensive experimentation with organizational structure and performance management. During 2005–2009, Haier established strategic business units and implemented new IT solutions and performance measures to connect the organization to customers. In 2009, Haier announced its strategic transformation from being exclusively a manufacturing company to becoming a service-oriented company, meaning that it considers manufacturing as only one means of satisfying customer needs.
The first phase came to a close in 2014, when Zhang wanted to move past the organizational hierarchy that persisted in that generation of Rendanheyi, although the direction had been increasing levels of autonomy for corporate units that were growing smaller and more focused.
The authors characterized the ‘consistent change’ in organizational evolution over the past decades:
The latest iteration of Haier’s management practice has been labeled “Rendanheyi 2.0” and is close to Zhang’s vision of Haier’s organizational form in the twenty-first century. Rendanheyi is, therefore, a platform management innovation, that is, it contains a number of specific, interrelated practices. In a historical perspective, this is a logical third phase in Haier’s development as a management innovator. In the first phase, prior to Rendanheyi, the company primarily copied management practices developed elsewhere (such as Business Process Engineering), with varying degrees of success. In the second phase, Rendanheyi 1.0, the company first created some of its own stand-alone management practices. Now, with Rendanheyi 2.0, Haier is successfully creating a number of inter-linked practices. Haier is likely to continue to create specific new practices under the Rendanheyi platform.
The authors note that the adoption of Rendanheyi in its global subsidiaries has been an issue, and that is likely due to the specifics of the Haier’s context. Note that despite Haier’s success as a global ecosystem brand, its approach has not been widely adopted.
Environmental and Organizational Contexts
As shown in Figure 1, the authors offer up three categories of environmental context, meaning context set by forces outside the business, in the marketplace:
Competitive context — Haier has been facing the headwinds of VUCA for over a decade, with increasing global competition and new entrants to the Chinese market after China joined the World Trade Organization. Overproduction led to a price war in China and led Haier to expand globally, which led to even greater complexity for the company. Rendanheyi 2.0 was a means to create higher productivity across the company doing a time of slowing growth, and market consolidation through mergers and acquisitions in the white goods business. Competition was a major force driving the introduction of Rendanheyi.
Technological context — There is great ambiguity about future consumer demand for niche products, and customized user experience. Zhang foresaw the impact of the internet as instilling ‘zero distance to information’, and the need for Haier to move to mass customization. Note this is also driving Zhang’s current vision of the role of IoT in Haier’s products, and the next phase of his thinking about Rendanheyi (as we have written about in other recent posts on On The Horizon, such as User-Centric Innovation and the Shape of Things to Come). In 2012, Haier announced it was entering ‘the network stage’ of the company’s evolution, and building communication channels to directly interact with customers and communities of users. The myriad activities along those lines in the past seven years act as a counter to the ambiguity introduced by these technological forces.
Institutional context — To face these contextual forces, Zhang believed he had to remake the organization, to make it more entrepreneurial, and for employees to ‘take ownership of the work’, which is a huge break with traditional Chinese management. As the authors state, ‘ Zhang recalled that it was difficult for employees in 2005 to accept that Haier needed “a transformative process not only for our mindset, but more importantly, for our managerial and organizational structure”, and the shakeout that followed included over 20,000 workers leaving since the rollout of Rendanheyi in 2005’. However, the Chinese entrepreneurial culture embraced the ideas underlying Haier’s transition to increased entrepreneurialism, and the move from salaries to performance-based compensation was supported by Chinese government business policies such as layoffs during changes in business methods. Both national and regional governments supported Haier in its evolution to entrepreneurial practices.
The complement of the environmental context is the organizational context, meaning the internal factors with Haier itself:
Structural context — Haier’s ‘reinventions’ have been driven by Zhang’s vision, and driven from his office throughout the organization. As the researchers point out, Zhang is operating out ahead of the changes being considered necessary. Because the company was managed through the lens of his vision, the company’s earlier top-down hierarchical model allowed Zhang to adopt ‘the energetic, visionary leadership to drive changes’. The authors note,
Organizations that thrive in a VUCA environment make experimentation a way of organizational life. Zhang’s stronghold on the company allowed him to keep experimenting and reinventing the company. From the 1980s onward, Zhang took various steps to change the company structure and to mold the organizational culture.
The authors believe that Haier changed organizational structure more than 40 times between 1998 and 2002, and that experience with organizational innovation readied the company for the change involved in transitioning to Rendanheyi.
Leadership context — Confronted by a VUCA world and the growing inflexibility that comes with company size, Zhang believed the company needed to adopt innovative management practices to spread entrepreneurial thinking and an obsession with the user. At first, Zhang looked to Western companies and consultants, but the results were disappointing and did not lead to ‘Zhang’s vision of empowering every employee’. Specifically, he thought that no Western company had cracked the code on a radically different way to run a business like Haier. He responded by weaving together threads from ‘traditional Chinese writings, management gurus such as Peter Drucker, and new concepts such as quantum theory and “maker” culture’. Ultimately Zhang pushed through the various phases of Rendanheyi experimentally, incrementally working toward increasing autonomous operating units (microenterprises, or xiaowei), which make decisions independently, and who are driven by their own entrepreneurial goals.
The authors state that leadership, as manifested principally by Zhang, has been the most important factor in Haier’s transition to this management innovation, Rendanyei.
Resource context — To make the push to a complete rebuild of organization structure, Zhang engineered a new corporate culture grounded in responsiveness and user-centric product and service innovation. The culture emphasizes internal reputation and performance, and increasing autonomy based on productivity and user-orientation. Because Haier’s revenues were exploding at the time he made the shift to Rendanheyi, he had the necessary resources to build necessary IT platforms, consulting fees, and staff training. This was a unique set of circumstances, one that Western companies — driven by Wall Street’s demands for quarterly results — may be unable to contemplate.
Lessons and Conclusions
The authors believe there are four key lessons for management innovation in the Haier story:
- Management innovation, done well, is a good response to the challenges of a VUCA world. This is as true in a traditionally slow-moving, low-profit sector like white goods as it is in Silicon Valley or the biotech sector.
- Haier’s story shows clearly how critical a cycle of experimentation is for management innovation, and as Zhang’s example shows, this is most likely with managers who are capable of learning from the experiments made.
- The six contexts model used in the research is a tool that others can apply to other instances of management innovation, and the complement of environmental and organizational factors is critical. As Zhang said, ‘both matter . . . the first big transformation of Haier was based on external factors, as we knew that the market was going to become much more competitive, but the next transformation was based on a fear that we had, or would, become much too bureaucratic, and so we needed to combat the internal tendency’.
- Managers should seek to incorporate other lessons from other management innovations, ones that are not necessarily carbon copies of Rendanheyi. The models worth emulating are those with a high degree of experimentation — unsurprisingly — and have to be tempered with an understanding of what is possible in their own organizational environment.
Here are a few takeaways from the authors’ conclusions. The most important has already been revealed:
For the creation of Rendanheyi, leadership was the most important contextual factor, and our model extends the literature on the role of leadership in management innovation by providing a detailed description of how strong leadership can drive the development and implementation of management innovation. Yet, we suggest that leadership would not have been enough to drive Rendanheyi through, if the other contextual factors were not aligned and pushed in the same direction. In general terms, strong leadership does not always have to be the most important factor for every single management innovation.
But leadership was the most important context in the Haier case.
The specifics of Haier’s management innovation raises questions about the universality of getting to Rendanheyi in other countries and companies:
Future research will need to further investigate to what extent Rendanheyi and other context-specific management innovations from emerging countries are transferable across national borders and organizational boundaries. There is much evidence that the transfer of organizational innovations across institutional contexts often fails.
Finally, Rendanheyi was brewed for a long, long time, and the Haier culture was exposed for a long time to a culture of experimentation in management innovation and organizational evolution:
Haier’s long experimentation with Rendanheyi may have been an important reason why the practice was successfully implemented within the company, since the practice was molded by the specific experiences of the company, and Haier employees gradually got used to assuming greater management responsibilities. Therefore, the Rendanheyi case suggests that organizations must be cautious before cutting and pasting radically innovative processes and mechanisms to obtain the same goals. Nonetheless, some elements of Rendanheyi could well be emulated by companies around the world, and this case will surely inspire managers and academics working with management innovation.
We owe these researchers a great debt for their six contexts model and the application of that model to the Haier case.