The Haier Road to Growth—Part 2
Customers always come first for this Chinese appliance maker — even as it continually reinvents itself and expands around the world

http://m.strategy-business.com/article/00323

Haier Group is a Chinese multinational consumer electronics and home appliances company headquartered in Qingdao, Shandong province, China. It designs, develops, manufactures and sells products including air conditioners, mobile phones, computers, microwave ovens, washing machines, refrigerators, and televisions. The following blog postings will highlight how this innovative company became a global powerhouse.
This first posting highlights their approach to developing a room air conditioner for the Chinese market. This posting dives a bit deeper into some of their key capabilities.

Customer Service Leadership
….the sharp focus on customer service leadership has given the company consistency even as it propels Haier through dramatic changes… the company should never see itself as just a manufacturer of products, but instead as a provider of solutions to its customers’ problems. In the earliest years, that meant bringing new levels of quality and reliability to Chinese products. Later, it involved increasingly sophisticated forms of customization and new types of services. Through its simplicity and continuity, this principle has given all employees a reliable compass with which to make decisions, even in the face of disruptive market challenges such as new technologies or new competitors. 

The Niche Innovator 

(YOU NEED MORE THAN WORDS TO MAKE THIS HAPPEN)
In the late 1990s, a farmer in the Chinese countryside complained to Haier that his washing machine was full of dirt and was not functioning well. The local distributor sent a technician to the farmer’s house, where he discovered that the farmer had been using the washing machine not to wash clothes but to clean sweet potatoes. At this time, agricultural markets had been permitted to open in China, and cleaner vegetables commanded higher prices. The repair technician reported immediately to Haier’s headquarters about this practice, which was growing increasingly common in the region. Inspired, the company soon released a vegetable washing machine, designed to accommodate the extra grime and soil of the tubers. 

Around the same time, Haier’s researchers observed that unlike Western consumers, many Chinese people hand-washed their underclothes every day at home. They found it more hygienic and socially discreet to wash these separate from other clothes and away from public washing machines. In response to this consumer need, Haier launched a small, low-energy washing machine called the Little Prodigy that could easily fit into a small, crowded urban apartment. The machine became extremely popular, among, for example, families with newborn children. 

These episodes represented the start of the second reinvention at Haier: a new form of customer-responsive innovation. This was timely, because quality was no longer a great differentiator in China; other companies had caught up.(VERY TYPICAL--COMPETITIVE ADVANTAGES ARE TRANSIENT) Zhang (CEO) built upon the company’s hard-won workforce discipline, and the accompanying performance–pay relationship, to link employees directly to customers. To break down the “invisible walls,” as he called them, between functions, Zhang assigned teams made up of members of different functional departments to specific projects. He avoided the conflicts of a matrix structure by introducing “market chains” (based on the value-chain concepts of Michael Porter), in which it was possible for all individuals at Haier, no matter what their role, to trace their actions directly to the marketplace. These market chains replaced functional silos as the key organizational unit. 

This was also the phase in which Zhang began building Haier into a global company. He approached this challenge by adopting Mao Zedong’s strategy of “occupying the rural areas to encircle the city,” gaining strength first with niche products for sectors where there were few competitors. The company took full advantage of its customer-responsive innovation capability to do this. In 1997, recognizing the needs of college students in dormitory rooms, it launched mini-refrigerators in the United States. It followed with wine refrigerators in 2004. And then, during the 2000s, Haier parlayed that success into becoming a mainstream producer of appliances for the U.S. market. Meanwhile, in Pakistan, Haier sold extra-large washing machines designed for heavy robes. 

Intimacy and Entrepreneurship 

In 2005, Zhang recognized that most of Haier’s competitors in China were achieving acceptable levels of service responsiveness and that the company would once again have to reinvent its value proposition. He believed that Haier suffered from unnecessary time delays and guesswork about new product manufacturing volumes, which proved costly when it guessed wrong, and that could be reduced, if not completely avoided, by becoming more intimately aware of customer needs and wants. Employees would now have to get to know the customer better than they knew themselves, or, as Zhang put it, to “create zero distance with the customer.” 

Intimacy is a lot more complicated than responsiveness, and this third reinvention required employees to feel closer to their customers. Haier thus inverted its organizational structure into one based on self-organizing work units called ZZJYTs (an abbreviation for zi zhu jing ying ti, which translates to independent operating unit). Their three most critical functions — marketing, design, and manufacturing — were now supposed to work directly for customers. Instead of directing the employees who did that work, the ZZJYT managers became service providers to them, giving them the resources and guidance they needed to provide for customers. This minimized the decisions made at higher levels in the hierarchy, making the company more responsive to nascent market needs. Zhang went so far as to announce that this shift in organizational model would proceed even if revenues and profits showed signs of flagging, and even if it were necessary to use some of the returns from successful legacy offerings to make it work.
The new structure proved successful, and the ZZJYTs are still the basic organizational unit at Haier. Each comprises a team of 10 to 20 people — sometimes located in one place, other times virtual — who come from various functional roles and are brought together for a specific mission, and who are given profit and loss responsibility and accountability. They have their own independent accounting systems and complete autonomy in hiring and firing employees, setting internal rules about expenses and determining bonus distribution, and making almost any operational decision that typically would be made by an independent functional organization. 

Haier organizes its ZZJYTs in three tiers. First-tier ZZJYTs have the task of directly facing the market, understanding customer needs, and providing customers with the right products. Second-tier ZZJYTs are responsible for supporting the first-tier ones, providing them with the resources and the guidance they need. Third-tier ZZJYT managers are the business division managers or functional managers who set corporate strategies and direction for the whole group. A typical first-tier ZZJYT is composed of sales, R&D, marketing, and finance people. Everyone, whatever their function, is expected to talk to consumers regularly.  (VIEW THE ARTICLE ON THE DETAILS OF THESE TEAMS--WORTH THE READ)