What Would You Do?

Haier Headquarters, Qingdao, Sandong province, China

It all began with the purchase of Qingdao General Refrigerator, an almost-bankrupt refrigerator manufacturer in Qingdao, China, a coastal city of 9 million people halfway between the capital city of Beijing to the north and Chinas financial center, Shanghai, to the south. As the fourth plant manager (the first three walked out after seeing the factory), you invested in new manufacturing equipment and earned employees goodwill by replacing the dilapidated trucks that transported them to and from work with new, much more comfortable buses. After first raising money to pay workers wages (because no one was being paid), you guaranteed salaries as long as employees followed 13 rules designed to address rampant disorganization and chaos, including Rule #10, Urinating or defecating in workshops is prohibited.

Part way through your first year, a customer came to the plant to return a bad refrigerator. As you walked the production line to find a replacement, the two of you went through a dozen refrigerators before finding one without scratches, blemishes, dents, or other imperfections. After he left, you found that 76 of the 400 finished refrigerators in the factory were deficient. At a meeting with the plant workers, it was eventually decided that whoever was responsible for poor quality on a particular refrigerator would write the problems and their names on the front, including their bosses and you, the plant manager. Then, if your name was on the refrigerator, you took turns destroying it with a sledgehammer. Why? Not to punish the workers (only the managers paid financial penalties for the deficiencies), but to emphasize that defective refrigerators (which at the time cost two years salary for the average person in China) were no longer acceptable.

With improved quality over the next seven years, Haier refrigerators became known as a reliable brand in China. That newly earned reputation for quality, along with financial stability, gave Haier the chance to expand. Following a classic brand extension strategy, Haier bought 18 companies. As it did with Qingdao General Refrigerators, it changed how the factories were managed and run, improved quality, and then rolled out Haier-branded freezers, washing machines, air conditioners, and TVs.

Despite achieving 30 percent market share in China for refrigerators, washing machines, and air conditioners, Haier anticipated slower growth and lower prices in China because of more Chinese competitors and an influx of foreign companies hoping to capitalize on the growing wealth of Chinas massive middle class. These market forces created two strategic needs for change, pivoting from cost and quality to innovation, and looking beyond China to foreign market opportunities. But how to do that? Haier was no longer a small company. Instead of one factory and one product, there were multiple factories, dozens of product lines, hundreds of products, and tens of thousands of employees. Changing Haier is not as easy as it once was. Also, Haier is largely an unknown brand outside of China. European customers or American customers might buy a small desk-sized Haier refrigerator for their office or dorm room, but why would they take the risk of buying more expensive appliances from a company they know nothing about?

Your hunch is that Haier needs foundational changes to meet these challenges, and that means redesigning the organizational structure from the ground up. As Haier grew, it lost flexibility and responsiveness, communication became siloed within departments, and decision-making became risk averse rather than risk seeking. So how do you regain those attributes in a large organization that seeks to become even larger and enter multiple foreign markets against multinational competitors?

The place to start is restructuring the organization. But what structure should a global version of Haier adopt? Should it be a functional (based on departments like marketing or accounting), customer (consumers or businesses), product (washing machines, air conditioners, etc.), geographic (by region or country), or a matrix structure (some combination of the other organization structures)? And what structure would reinforce the importance of innovation and keep all parts of the company squarely focused on the needs of the people who buy and use our products?

Organizational structures are concerned with fundamental questions such as, Who reports to whom? and Who does what? and Where is the work done? If Haier needs to drive innovation in global markets into its DNA, then the answers to those three questions need to change. Instead of a centralized chain of command where higher-ups give the commands and make the decisions, how could Haier become permanently decentralized? How could it fully empower employees and managers at lower levels, closer to customers and foreign markets?

Finally, we also need to change intraorganizational processes, meaning the way various parts of the company work together internally to transform inputs into outputs. How can we reengineer how the various parts of the company work with each other? We need a fundamental rethinking and radical redesign of business processes to achieve dramatic improvements. How can we do that while strengthening our focus on innovation and global markets?

If you were Haiers CEO, what would you do?