Transform from Bureaucracy to Entrepreneurialism in 3 Simple Steps

I’m just back from my second visit in the last month to Qingdao, China, where I attended an award ceremony conference that 海尔 calls the Zero Distance Awards. In addition to enjoying the beer (also called Qingdao) and seafood the city is known for, I got to marinate in a real front-line, boots-on-the-ground experience of Haier’s unique organizational model I covered here after my first visit.

This Chinese appliance company – which now owns appliance brands around the world, including GE Appliances, and does so much more than manufacture washing machines and refrigerators – calls the approach RenDanHeYi. To be honest, when I first started studying the RenDanHeYi model three years ago, I was skeptical. Is it really that new? Can it really be applied in companies outside of Haier, beyond China, beyond appliances?

My mission in life is to help people love what they do, so the intended purpose of the RenDanHeYi model – to turn all employees into CEOs, to liberate people to pursue possibilities, to unleash human potential – speaks to me. My colleagues at Outthinker and I dug in deeper, and, in 2022, after quite extensive research, we were able to show that four unique elements of the model drive statistically significant advantages for companies that adopt them (read more about it in my Harvard Business Review article here).

If you implement these four things in your organization, they will increase your competitiveness in your ability to attract and retain top talent and in your overall financial performance:

1. Treat people like intrapreneurs, with agency and freedom to act, rather than like employees
2. Implement “micro-enterprises” (MEs) by breaking down your siloed hierarchy into autonomous teams of about 10 people, each with their own profit and loss (P&L) and leader
3. Allow these MEs to be managed through a marketplace rather than a centralized budgeting process
4. Turn support functions (like R&D, manufacturing, finance, IT) similarly into autonomous MEs, each with its own P&L, each having to sell its support services into the other market-facing MEs

Now, number 1 is easier than 2 is easier than 3, and number 4 is most radical of all. But if you do these things, you can expect a two to six times competitive advantage.

One way to think of this model is to consider that, as Tom Malone at MIT suggests, there are five ways in which humans make decisions together: hierarchies, democracies, marketplaces, communities, and ecosystems. What RenDanHeYi does is essentially turn a traditional hierarchy into small hierarchical democracies (the MEs) that compete for resources through a marketplace (each funds itself by selling its products and services) that collaborate in an ecosystem.

Seeing RenDanHeYi in Action

Before my recent visits to China, this idea existed for me as a sort of exciting theory. Until then, my studies had been primarily drawn from late-night Zoom interviews with Haier leaders. But then I got to actually see the model in action.

First, when I visited the Haier factory during my first trip to China, I got to personally interview about 15 of Haier’s leaders from across several lines of business … its IT services division (COSMOPlat), appliance business, automotive services, biomedical devices, and energy division (think solar-energy plants). I spent a good two hours just breaking down specifically how an ME operates. I got to hear the stories of internal entrepreneurs – for example, one saw an opportunity to build specialized mobile refrigerators for transporting vaccines and turned that into a semi-autonomous business that he now leads. I got to see the confused looks on faces when I asked questions like, “Who do you have to ask to get permission to do that?”

This all sounded great. But the question of whether this model could work in other countries and regions tugged on me. Maybe there is something unique about the Chinese context that allows this to work. Could I imagine a company in, say, France or Germany or the US pulling it off?

Then, while attending the Zero Distance Awards ceremony last week during my second trip to China, this doubt started lifting. I met an Indian software firm that “didn’t know about RenDanHeYi at the time” but built its 170-person firm intuitively following the same principles … small teams that form around specific projects, with teammates’ compensation based on the fees of such projects.

I met the CEO of the nursing services company Buurtzorg Nederland (which has now been broadly studied in journals like HBR and strategy+business), who explained that their application of RenDanHeYi results in the entire organization having no mid-level managers at all. Instead, the function of “management” is imbedded into the processes and distributed into independently acting teams of nurses. I met executives from the giant German engineering and technology company, Bosch , that have been on a mission to create a “frictionless” organization by implementing MEs in which teams set their own compensation.

Each company adapted rather than adopted the RenDanHeYi model, taking key elements and localizing them to their markets. One European manufacturer explained that implementing one of the characteristics of the model – shifting compensation from relatively fixed toward being performance-based – runs against traditions and laws on the continent. So, they had to introduce performance-based pay as a bonus on top of salaries, rather than requiring people to reduce their base pay. But after a few years, people start to feel the benefit of earning performance pay and they elect to shift more and more of their salaries from fixed to performance.

Another company explained that for the ME model to work, you need to be able to produce P&Ls for each ME, and their accounting systems were not set up for that. It took them three years to upgrade their accounting systems so, in the meantime, they estimated each ME’s profit by using formulas and basing performance more on revenue (which is easier to track) than profit (as costs are more complicated to allot across lots of MEs).

Three Steps to Embrace Entrepreneurialism

I left with greater clarity of what it would take to begin implementing this less centralized, liberating organizational model. It actually can be remarkably simple. And any size of company – from start-up to conglomerate – can begin the journey by taking three steps:

1. Start forming MEs of about 10 people, each with a reasonably intact team (think about what combination of “hipsters,” “hackers,” and “hustlers” a 10-person, independent start-up would need).
2. Rework your accounting systems so that you can start tracking independent P&L for each ME.
3. Shift compensation toward being performance based. For each person, come up with a set of quantitative and qualitative goals and then allot part of their salary to the achievement of these. Someone who earns 100% salary, for example, might now earn 50% salary plus 25% if they hit qualitative goals (e.g., complete a brand redesign) and 25% if they hit quantitative goals (e.g., increase the ME’s profit by 50%). They could earn more if they exceed these goals. In large traditional companies, executives are usually compensated this way. Now you will apply the model to everyone.

Final Thoughts

Just these three steps can set you on the path of transforming from a band of workers who need to be managed into a team of entrepreneurs with incentives to do what is best for the company. And therein lies the magic of the model. No management is needed. No control is needed.

The reason that companies rarely last longer than a few decades while cities scale for centuries is that the bigger a company gets, the more resources it needs to waste on management control. They eventually fall under their own weight.

If we can design an organization that can scale without requiring additional layers of management, we can build an organization with the potential to scale infinitely. That promise is worth taking the first three steps on the path to RenDanHeYi.