Network Heroes - Zhang Ruimin

An unlikely story of how a working class boy who came of age in Mao’s Culture Revolution is transforming management and business organizations on a global scale

An essential challenge to the manner in which businesses currently organize themselves is coming from an unlikely source. It is a man who was a member of Chairman Mao’s Red Guards (a mass student-led paramilitary social movement) in his youth. Moreover, this provocation of the way businesses should operate is emerging from an unlikely industry: the white goods industry which is traditionally acknowledged as being fairly stable and undynamic.

The business world is beginning to get a glimpse of what the architecture of organizations will look like in the years to come from this improbable source. Zhang Ruimin has introduced rendanheyi to the world. Evolution contends that the fittest will survive. Early indications are that this organizational transformation is fitter than traditional 20th century hierarchical organizational structures and, as a result, are more fitting to the current digital era.

Humble beginnings

Zhang is the son of a working class family. His parents both worked in the garment business in the northern Chinese coastal city of Qingdao – a city known for its beer. The Tsingtao brewery was established in Qingdao in 1903 by German settlers and is the largest exporter of beer in China today.

Zhang at the age of 35 was appointed general manager of the Qingdao Refrigerator Plant In 1984. At the time, the company was on the verge of bankruptcy.

Principle #1: Attention to Quality

Zhang became acutely aware of the lack of quality of his company’s products during an early visit to his partner Liebherr in Germany. Zhang was willing to remedy the situation by employing radical measures. He has continued to show this approach throughout his career.

What did he do? 

He smashed 76 faulty refrigerators in front of his employees and television cameras. Some employees cried. At the time, one refrigerator cost the annual salary of 4 employees. But this action conveyed the message not only to his employees but to his customers as well. This focus on quality led to the introduction of other appliances. Continued success and growth through acquisition followed. the company was renamed Haier in 1991.

Principle # 2: Accountability and Transparency

Early on Zhang introduced a practice in order to further reinforce the importance of quality. Employees who committed an error were required to stand in front of their fellow employees and explain the error. In addition, he ensured that employee remuneration was directly tied to the sales of the products which the employees were producing.

Principle #3: Get as close to the customer as possible

In 1996, a washing machine repairman travelled to Sichuan to repair a broken-down machine. A Chinese farmer had been using the washing machine to wash sweet potatoes, causing the drainpipes to be clogged with mud. The repairman reported to headquarters about this uncommon use of their product. After realizing that there were 87 million residents in Sichuan who cultivated sweet potatoes, Zhang immediately ordered the production of a washing machine for sweet potatoes. Zhang characterized this approach in the following way: 

“Direct interaction with customers is crucial.”

Principle #4: Learning is more important than knowledge

Bill Fischer, a Senior Lecturer at MIT and a long-time acquaintance of Zhang , has written that what differentiates Zhang from most other leaders is his insatiable curiosity. According to Fischer:

“No matter what managerial topic is on the table, it seems as if Mr. Zhang has read more, knows more, is personally familiar with the authors of the ideas being discussed.” Fischer further notes that Zhang has seen his role as “being an exemplar of active learning and experimentation.”

The Seeds of Revolution

All of the above principles can be recognized as indications of a well-led company, but certainly nothing transformational. Zhang’s approach began to truly revolutionize organizational design at the beginning of the internet economy. 

By 2005 he had realized that the internet was completely changing the way business would be done. This change would be a shift from a business world comprised primarily of a chain of command to a world of networks and ecosystems. As a consequence, he introduced the concept of rendanheyi.

Taking a moment to understand what this word means reveals this shift

• “Ren” refers to each employee

• “Dan” refers to the needs of each individual customer

• “HeYi” refers to the connections that tie employees to customer needs

In other words, Rendanheyi is considered a process to connect every employee directly with the needs of the customer. As Zhang is fond of saying, his mission is to make every employee a CEO who can add value directly to the customer.

Entrepreneurial Ecosystem Enabling Organizations

How different is Haier from other companies? 

Haier reorganized its structure in 2012 to allow it to operate as a network. This restructuring brought the logic of rendanheyi to its ultimate conclusion. 

The Haier network is comprised of thousands of independent microenterprises. Each microenterprise is an entrepreneurial self-organized unit which can make its own decisions on issues ranging from investments, resource use, hiring, firing, compensation, etc. The typical size of a microenterprise is about 10 - 15 people. There are no bosses or managers. As a matter of fact, over 12.000 middle management jobs were basically eliminated when Haier shifted to this structure in 2012.

Microenterprises (MEs) are connected to each other through “Ecosystems of Micro-communities” or EMCs. Each EMC is dedicated to a particular user group – for instance “air conditioner customers”. The MEs are incentivized to support each other. Why? Because when one ME is successful, this typically impacts the success of other MEs in the ecosystem.

Graphic from: Simone Cicero An Entrepreneurial Ecosystem Enabling Organization (2019)

The direct connection to the customer is reinforced by the remuneration system. A significant proportion of compensation comes directly from the customer, not the company.

A new name is emerging for this organizational architecture, namely an EEEO or Entrepreneurial Ecosystem Enabling Organization.

And the results speak for themselves.

Haier is the number one company in the white goods industry with over 100.000 employees (actually the appropriate name is entrepreneurs!). Its stock price has soared; it had doubled multiple times since the introduction of rendanheyi in 2005.

Could this model could be applied in other countries? 

General Electric Appliances in the United States which was acquired by Haier in 2015 is an illustrative example. By adopting the rendanheyi model, GE Appliances has transformed itself from a company in decline, to the #1 white goods company in the United States by 2021.

Architect not Captain

Zhang rejects the metaphor of captain of the ship which has been used by so many past and current business leaders. He likes to think of himself as an architect who is constantly redesigning the organization to better fit its environment.

Zhang Ruimin retired from Haier in November of 2021. His retirement caused a lot of anxiety in the financial press. His response was typical of the bravura which had accompanied his entire career: Haier was a company full of leaders or “leaderful” as he often expressed. Haier was built upon a network of distributed leaders who were located in every corner of the organization. Zhang was confident that this leaderful organization is equipped to respond to any future emerging challenge.

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