The Dawn of Management for the Digital Era

The forces of change seem to be gaining momentum and there is a growing number of reports and articles about the need to re-think organizational structures and management. The fast development of technologies, increased focus on climate change, and new perceptions of work are only some of the driving forces behind the need to re-think how to manage the firm.

However, most large companies still operate by a model developed for the old Industrial Age. These companies were designed for predictability and control. At a time with high uncertainty and complexity, their corporate structure, culture, and leadership don’t maximize the organizations’ adaptability, speed, or creativity of the people they employ.?

I have spent much of my time looking for the ‘holy grail’ in the form of the new management model for the digital and sustainable age. The good news is that I believe I have successfully identified the new model, at least its core principles of it.?

The purpose of this new series of blogs is to share my findings with other like-minded people. In this blog, I start by sharing my Eureka moment in 2016, as well as an initial high-level description of one of the most disruptive management models in the present time.

?

A Eureka Moment

After a year of studying Google, I managed in 2016, after adding several more case studies to my list, to finally present the components of a new management model, that originated in Silicon Valley. The conclusion was that all six case companies seemed to apply a very similar model. The result was presented in the book The Silicon Valley Model: Management for Entrepreneurship. A notable quality of all six case companies was their ability to remain entrepreneurial—i.e., fast-moving, innovative, and adaptable—even while growing to sizes far beyond the startup stage.

In the same year, I was made aware of the fast development in China and decided to investigate the management model of some of the most innovative companies there. Interestingly, the companies appeared to be using their own, enhanced versions of the Silicon Valley Model, and in 2018, the result was presented in a follow-up volume Management for the Digital Age: Will China Surpass Silicon Valley?

Some years afterward, I also discovered companies in Europe that also applied a similar model. My conclusion was that the management of the firm truly has evolved into a new 180-degree different form.

?

RenDanHeYi

Haier, one of the case companies in China, is worthwhile studying as it has been transforming itself continually over a period of several decades. The result is the management philosophy RenDanHeYi.

For an approximate translation of the term “RenDanHeYi,” Haier refers to employees (Ren), user value (Dan), and the integration of employees’ value creation and user value realization.?In short, this means that all employees should be focused on creating user value, and they are rewarded according to the user value they create.

The main objectives of this philosophy are to aim for great customer experience, to release and use the entrepreneurial energy of everyone—employees as well as external partners, and to provide a structure for sharing the value created among all involved.?

Haier’s transformation is noteworthy for several reasons:

• The company is not a digital native. It is a market leader in what is usually thought of as an old-economy industry, home appliances.
• Haier is a large, complex organization, with about 100,000 employees and operations worldwide.?
• Despite facing many obstacles to change, Haier has continued evolving and transforming step by step for nearly 40 years, driven by the former CEO Zhang Ruimin’s vision of the optimal organization in an IoT era.
• And most important, Haier has been successful!

This gives the story credibility that is hard for other companies to dismiss because of size, industry, or nearly any other excuse.

What Haier had to do was go beyond vocabulary and begin to change the entrepreneurial nature of the organization, enabling newly minted entrepreneurs to get underway and changing the architecture of the organizational structure to make it easier for all of this to happen.

Central to Haier’s choices, is the effort to get closer to the users, and in that effort the creation of microenterprises. The microenterprises’ mission is to meet users’ needs, and Haier could be viewed as an incubation platform, with the role of supporting, nurturing, and providing resources and technical support to all MEs that identify users’ needs. When they work well, the microenterprise members also succeed as equity owners of the MEs.

Because of the MEs’ small size, they need partners. This has in turn led to a willingness to share revenues derived from partner co-creation in ecosystem communities (EMC), moving the EMC away from operating as traditional value chains.?Traditional value chains are typically run by command-and-control approaches aimed at gaining maximum dependability and efficiency. They are designed to reduce variance at any link in the value chain. Ecosystems, on the other hand, are for inviting relationships that are characterized by value-enlarging activities.?Ecosystems require a fundamentally different approach to engagement than traditional and typically closely managed value chains.

Key principles of RenDanHeYi

Haier’s RenDanHeYi approach has taken the company a long way toward fulfilling Peter Drucker’s admonition that “innovation and entrepreneurship have to become an integral life-sustaining activity in our organizations, our economy and our society.”?(Drucker 1985, p. 255) Haier is one of a very few organizations in the world that have busted bureaucracy, and for that reason is worth studying. As previously said, the company’s philosophy for operating a firm in the IoT age is based on principles that have been a work in progress for nearly four decades. Haier has explicitly called this philosophy “RenDanHeYi” since 2005 and the philosophy is constantly evolving and improving. In its current form, it involves perhaps the most sweeping re-invention of corporate structure and management that has yet been seen.?The RenDanHeYi model operates based on six core principles:?

• Ecosystem as the strategy and brand
• Networked organization
• Employees as entrepreneurs
• Zero distance to users
• Pay-by-user compensation
• Non-linear management

In my next blog, I will share more information about the first principle.?

Menlo Park, April 20, 2023