A man­darin nar­ra­tive

The Smart Manager - - Contents -

What can West­ern lead­ers learn from the way Chi­nese com­pa­nies are or­ga­nized and struc­tured? ask Mark Greeven, Zhe­jiang Univer­sity, and An­to­nio Ni­eto-Ro­driguez, au­thor of The Fo­cused Or­ga­ni­za­tion.

“Un­der­stand­ing the China ef­fect on global in­no­va­tion will be es­sen­tial for com­pa­nies that wish to com­pete in China, take ad­van­tage of China’s in­no­va­tion ca­pac­ity, and adopt Chi­nese ap­proaches to in­no­va­tion to im­prove their own per­for­mance. The over­all ef­fect is that more in­no­va­tion will orig­i­nate in China—from both Chi­nese and global com­pa­nies—and more com­pa­nies would adopt the Chi­nese style of in­no­va­tion.”* What has helped many Chi­nese firms make re­mark­able strides—not just in the realm of in­no­va­tion—is their swift­ness in re­for­mu­lat­ing them­selves, es­chew­ing hi­er­ar­chi­cal struc­tures, and adopt­ing a cus­tomer-cen­tric ap­proach.

In his 1962 book Strat­egy and Struc­ture, Al­fred Chan­dler ar­gues that an or­ga­ni­za­tion’s struc­ture should be driven by its cho­sen strat­egy and, if it is not, in­ef­fi­ciency re­sults. Tak­ing this one step fur­ther, we be­lieve that the de­gree to which project ac­tiv­i­ties are im­por­tant in an or­ga­ni­za­tion de­ter­mines over­all strat­egy im­ple­men­ta­tion suc­cess. When man­agers un­der­es­ti­mate or com­pletely ig­nore this fact, or­ga­ni­za­tions fail to evolve (or adapt) as quickly as busi­ness driv­ers. As a re­sult, a large pro­por­tion of trans­for­ma­tion ini­tia­tives fail.

Most west­ern com­pa­nies have a func­tional/hi­er­ar­chi­cal struc­ture. This was ideal for run­ning the busi­ness ef­fi­ciently in a stable world. De­part­ments are di­vided along a value chain in­flu­enced by Michael Porter’s value chain model. Tra­di­tional com­pa­nies are gen­er­ally run by a CEO, a CFO, and of­ten a COO and a CIO, fol­lowed by the heads of busi­ness units and func­tional de­part­ments. Each has its own bud­get, re­sources, ob­jec­tives, and pri­or­i­ties.

Un­til re­cently, de­part­men­tal suc­cess was mea­sured us­ing key per­for­mance in­di­ca­tors tai­lored to each unit or func­tion. For ex­am­ple, the fi­nance depart­ment’s suc­cess

A strate­gic project, such as dig­i­tal trans­for­ma­tion or ex­pan­sion into another coun­try, re­quires re­sources and in­put from sev­eral busi­ness units and de­part­ments.

was mea­sured by whether it was clos­ing the books and pro­duc­ing the fi­nan­cial state­ments on time, and that of the HR depart­ment by whether it had man­aged to keep good peo­ple on board (low turnover), or had fin­ished em­ployee ap­praisals on time.

This ap­proach cre­ates sig­nif­i­cant in­ter­nal com­pe­ti­tion, of­ten lead­ing to the well-known ‘silo’ men­tal­ity. Some heads of depart­ment build their own lit­tle king­doms, and co­op­er­a­tion with other parts of the busi­ness be­comes dif­fi­cult, some­times im­pos­si­ble. In many cases, the key per­for­mance in­di­ca­tors of one depart­ment are at odds with those of another.

At the same time, the largest and most crit­i­cal projects—the strate­gic ones—are al­most al­ways trans­ver­sal. A strate­gic project, such as dig­i­tal trans­for­ma­tion or ex­pan­sion into another coun­try, re­quires re­sources and in­put from sev­eral busi­ness units and de­part­ments. Fa­cil­ity ex­perts find the lo­ca­tion, lawyers han­dle the le­gal doc­u­ments, HR ex­perts recruit the peo­ple, and sales­peo­ple de­velop a com­mer­cial plan, and so forth. With­out the con­tri­bu­tion of all these de­part­ments, the project will not suc­ceed.

Within the tra­di­tional func­tional or­ga­ni­za­tional struc­ture, quick project ex­e­cu­tion is not pos­si­ble. Man­ag­ing just one project in such a com­plex struc­ture is a chal­lenge, so imag­ine the dif­fi­culty of se­lect­ing and ex­e­cut­ing hun­dreds of projects of vary­ing sizes.

the Chi­nese way

In­ter­est­ingly, faced with a silo men­tal­ity, a lack of agility, at­tach­ment to the sta­tus quo, in­no­va­tion paral­y­sis, and all the down­side of tra­di­tional or­ga­ni­za­tions, Chi­nese com­pa­nies have fre­quently man­aged to suc­cess­fully re­for­mu­late their or­ga­ni­za­tions. Con­sider three suc­cess­ful Chi­nese or­ga­ni­za­tional mod­els:

Xiaomi is a mo­bile in­ter­net com­pany fo­cused on smart hard­ware and elec­tron­ics. It is one of the most valu­able Chi­nese uni­corns with a mar­ket cap­i­tal­iza­tion of $50 bil­lion. It has been in­cluded in MIT Tech­nol­ogy Re­view’s list of the fifty ‘smartest com­pa­nies’, and founder Lei Jun has ap­peared on the cover of Wired, claim­ing “it’s time to copy China”.

The com­pany started life in 2010 and has emerged rapidly. It out­stripped Ap­ple’s smart­phone sales in China within four years. Then, it in­tro­duced new prod­ucts to the mar­ket at break­neck speed, dis­rupt­ing, or at least sur­pris­ing, mar­ket in­cum­bents vir­tu­ally ev­ery time. By 2018, Xiaomi suc­cess­fully in­tro­duced over 40 prod­ucts, rang­ing from smart rice cook­ers and air pu­ri­fiers to ro­bot vac­uum clean­ers and smart run­ning shoes.

Xiaomi has gained a lot of at­ten­tion for its un­usual mar­ket­ing strat­egy that re­lies com­pletely on dig­i­tal tech­nol­ogy. It uses on­line sales chan­nels and so­cial me­dia plat­forms rather than heavy-as­set re­tail shops and dis­trib­u­tors. The re­sult is a low-cost sales chan­nel that meets the de­mands of tar­get cus­tomers. How­ever, the truly in­no­va­tive as­pect of Xiaomi is how its or­ga­ni­za­tional model is driven by projects. Its forty plus prod­ucts in the mar­ket are not or­ga­nized in strate­gic busi­ness units and have not be­come part of the or­ga­ni­za­tional hi­er­ar­chy.

The com­pany has a rel­a­tively flat or­ga­ni­za­tional struc­ture—the seven co-founders are only one line of man­age­ment away from the en­gi­neers and sales. The lat­ter make up the largest part of their em­ployee base. More­over, the co-founders are re­quired to be in­volved with projects and new prod­uct de­vel­op­ment di­rectly. They par­tic­i­pate in user in­ter­ac­tion, such as on Xiaomi’s own plat­form, and keep up to date with prod­ucts. Each Xiaomi em­ployee— in­clud­ing the founder—has con­trac­tual re­spon­si­bil­ity to di­rectly deal with a cer­tain quota of cus­tomer re­quests. A so­phis­ti­cated dig­i­tal prob­lem dis­tri­bu­tion sys­tem al­lo­cates ques­tions to any suit­able em­ployee. Cus­tomer prox­im­ity has not only be­come a per­for­mance as­sess­ment cri­te­rion for em­ploy­ees, but also a driver for cus­tomer-driven

projects. Each new prod­uct de­vel­op­ment is treated as a project that can be achieved by mo­bi­liz­ing re­sources in­side and out­side Xiaomi.

Alibaba Group is the world’s largest and most valu­able re­tailer with op­er­a­tions in over 200 coun­tries. With over 50,000 em­ploy­ees and a mar­ket cap of $520 bil­lion (as of early 2018), it is one of the top ten most valu­able and big­gest com­pa­nies in the world. The suc­cess of Alibaba can be largely at­trib­uted to its new or­ga­ni­za­tional form, a busi­ness ecosys­tem, which has fos­tered the rapid growth and trans­for­ma­tion of its busi­nesses since the com­pany be­gan life in 1999. A busi­ness ecosys­tem refers to ‘a new or­ga­ni­za­tional form where the busi­nesses are in­ter­de­pen­dent through a va­ri­ety of eq­uity re­la­tion­ships com­bin­ing prod­uct and ser­vice of­fer­ings into a cus­tomer cen­tric of­fer­ing’. (Greeven and Wei, 2018)

Alibaba’s busi­ness ecosys­tems con­sist of hun­dreds of com­pa­nies, ven­tures, and projects across at least 20 dif­fer­ent sec­tors. But the ma­jor­ity of these are in­de­pen­dently run op­er­a­tions, nei­ther part of strate­gic busi­ness units, nor sub­ject to re­port­ing struc­tures. In fact, many of the play­ers in Alibaba’s busi­ness ecosys­tem are still fairly small in size.

Alibaba is widely char­ac­ter­ized as dy­namic sys­tems of com­pa­nies, ven­tures, and projects en­abled by dig­i­tal tech­nol­ogy. In­stead of di­rect­ing the de­vel­op­ment of new prod­ucts and im­ple­men­ta­tion of project top down, it func­tions as the grav­ity provider and net­work or­ches­tra­tor (cf. Bonchek and Coudary, 2013). For in­stance, Alibaba’s core is com­prised of four ecom­merce plat­forms (Alibaba. com, 1688.com, Taobao.com, Tmall.com) that are home to 700 mil­lion users. More­over, the in­ter­de­pen­dence be­tween the com­pa­nies, ven­tures, and projects is not only fi­nan­cial and eq­uity based al­though it is a pre­req­ui­site to be part of the busi­ness ecosys­tem. The in­ter­de­pen­dence is found in growth strate­gies, in­vest­ment ap­proaches, and com­ple­men­tar­i­ties be­tween of­fer­ings, busi­ness syn­er­gies, and re­source shar­ing. En­tre­pre­neur­ial projects in this ecosys­tem are al­lowed to fail with­out se­vere consequences for the sus­tain­abil­ity of the whole ecosys­tem, or the ca­reers of top man­age­ment.

Em­ploy­ees in Alibaba’s ecosys­tem are se­lected and man­aged on align­ment of val­ues rather than rules. The key val­ues of Alibaba in­clude cus­tomer first, team work, em­brac­ing change, in­tegrity, pas­sion, and ded­i­ca­tion. The con­se­quence of such a value-driven ap­proach is en­cour­age­ment of tak­ing risks, a strong or­ga­ni­za­tional cul­ture, and com­pe­ti­tion. Em­ploy­ees are as­sessed on a quar­terly ba­sis and rated in terms of per­for­mance and value, both equally im­por­tant. There is no HR guide­book but only a set of strong prin­ci­ples that guide the em­ploy­ees to op­er­ate in a highly dy­namic en­vi­ron­ment. They can ini­ti­ate any project they like with­out re­gard of their cur­rent com­pany or depart­ment. In fact, the ecosys­tem of Alibaba pro­vides a safe mar­ket place of re­sources in which project ini­tia­tors can ex­e­cute with­out the lim­its of cor­po­rate hi­er­ar­chi­cal bound­aries and com­plex ver­ti­cal re­port­ing struc­tures.

Haier Group is to­day the world’s lead­ing brand of ma­jor house­hold ap­pli­ances. It was launched in 1984, and has been the num­ber one white goods sup­plier since 2009 with 10% global mar­ket share and over 78,000 em­ploy­ees (in 2016). The World Brand Lab’s list­ing of the World’s 500 Most In­flu­en­tial Brands ranked Haier on top of the global white ap­pli­ances list. Haier touched a rev­enue of over 200 bil­lion RMB in 2016 and ac­quired GE’s ap­pli­ance di­vi­sion for $5.4 bil­lion USD, a feat unimag­in­able con­sid­er­ing its hum­ble be­gin­nings three decades ago.

Since 1998, Haier has been ex­per­i­ment­ing with new or­ga­ni­za­tional forms to re­duce hi­er­ar­chy and con­trol and in­crease au­ton­omy with self-or­ga­niz­ing work units and in­ter­nal la­bor mar­kets. But it was not un­til 2010 that it put a unique project or­ga­ni­za­tion plat­form in place through­out the com­pany.

The key val­ues of Alibaba in­clude cus­tomer first, team work, em­brac­ing change, in­tegrity, pas­sion, and ded­i­ca­tion.

Haier’s first step to cre­ate a plat­form or­ga­ni­za­tion was to fun­da­men­tally re­or­ga­nize the com­pany’s struc­ture. First, the com­pany elim­i­nated strate­gic busi­ness units and man­age­rial hi­er­ar­chies with the pur­pose of cre­at­ing zero dis­tance to the users of its prod­ucts. The com­pany re­or­ga­nized around projects with spe­cific fo­cus, such as on new prod­uct de­vel­op­ment, mar­ket­ing, and pro­duc­tion. These three work units, or small project or­ga­ni­za­tions, are the core of Haier and clos­est to the user. A sec­ond set, or level, of project or­ga­ni­za­tions is or­ga­nized around cor­po­rate sup­port func­tions like HR, ac­count­ing, and le­gal. The high­est-level work unit is the ex­ec­u­tive team. In­ter­est­ingly, the third-level work unit is the small­est and po­si­tioned at the top of the in­verted pyra­mid. Their role is re­de­fined as a sup­port func­tion for the cus­tomer-fac­ing, self-or­ga­niz­ing project or­ga­ni­za­tions.

Through mea­sures such as de­cen­tral­iza­tion, dis­in­ter­me­di­a­tion, and the elim­i­na­tion of in­ter­nal com­mu­ni­ca­tion bar­ri­ers, Haier has de­creased staff num­bers by 45% but has cre­ated more than 1.6 mil­lion job op­por­tu­ni­ties.

lean, ag­ile, and de­sign think­ing within a project-driven struc­ture

Large or­ga­ni­za­tions with strong top-down lead­er­ship and fast ex­e­cu­tion, Chi­nese com­pa­nies are at the same time highly in­no­va­tive and adap­tive to chang­ing mar­kets through swift project ex­e­cu­tion. The cases of Xiaomi, Alibaba, and Haier il­lus­trate how these Chi­nese com­pa­nies or­ga­nize and ex­pand their busi­nesses by com­bin­ing lean, ag­ile, and de­sign think­ing ap­proaches with project-driven struc­tures.

ag­ile: With the ar­rival of the in­ter­net and sub­se­quent dig­i­tal tech­nol­ogy rev­o­lu­tion, the pi­o­neers have been quick to adapt, to the sur­prise of many in­ter­na­tional en­ter­prises. Not only the dig­i­tal na­tives BAT and Xiaomi, but also tra­di­tional man­u­fac­tur­ers such as Sany and Haier have em­braced dig­i­tal tech­nolo­gies and cre­ated com­pet­i­tive ad­van­tages in the new era. The em­brace of dig­i­tal tech­nolo­gies deeply em­bed­ded in their or­ga­ni­za­tional struc­ture has al­lowed these com­pa­nies to adapt to chang­ing mar­ket con­di­tions by it­er­at­ing prod­uct de­vel­op­ment.

lean: Op­er­at­ing in the com­plex and dy­namic Chi­nese mar­ket, these com­pa­nies have de­signed their or­ga­ni­za­tion as a ‘sys­tem of work’, rather than as a sys­tem of con­trol. The ap­proach fo­cuses on making de­ci­sions by ex­per­i­ment­ing and learn­ing (MVP), and em­pow­er­ing peo­ple who are clos­est to the cus­tomer. Key fea­tures of lean man­u­fac­tur­ing such as zero waste, con­tin­u­ous qual­ity, and process op­ti­miza­tion are found in these novel ways of or­ga­niz­ing. Alibaba’s value-driven rather than con­troldriven man­age­ment and Xiaomi’s it­er­ated de­vel­op­ment and quick up­grad­ing of prod­ucts are based on the logic of ex­per­i­men­ta­tion and quick learn­ing cy­cles.

de­sign think­ing: The ul­ti­mate goal of reach­ing zero dis­tance to the cus­tomer is shared by these Chi­nese suc­cess sto­ries. Be­sides in­creas­ing re­spon­sive­ness, this also al­lows the or­ga­ni­za­tion to deal with am­bi­gu­ity and ex­per­i­ment to ex­plore so­lu­tions that cus­tomers want to buy. In fact, Chi­nese com­pa­nies are ‘by ne­ces­sity’ de­sign thinkers: with a highly dy­namic mar­ket, new cus­tomers emerg­ing con­tin­u­ously as well as the lim­ited loy­alty and ma­tu­rity of the av­er­age cus­tomer, Chi­nese com­pa­nies have to be as close to the cus­tomer as pos­si­ble. Much of the new prod­uct de­vel­op­ment projects, such as Haier’s Crys­tal wash­ing ma­chines and most of Xiaomi’s con­sumer elec­tron­ics prod­ucts, are ex­clu­sively cus­tomer driven, rather than prod­uct or tech­nol­ogy driven.

project-driven struc­tures: The three or­ga­ni­za­tional mod­els of the Chi­nese com­pa­nies Xiaomi, Alibaba and Haier rep­re­sent en­tre­pre­neur­ial busi­ness ecosys­tems

Alibaba’s value-driven rather than con­troldriven man­age­ment and Xiaomi’s it­er­ated de­vel­op­ment and quick up­grad­ing of prod­ucts are based on the logic of ex­per­i­men­ta­tion and quick learn­ing cy­cles.

built around cus­tomers with project-driven struc­tures. They have com­mon at­tributes. First, no strate­gic busi­ness units as the dom­i­nant or­ga­ni­za­tional struc­ture and means of man­age­ment gov­er­nance; sec­ond, en­tre­pre­neur­ial mo­ti­va­tion and ded­i­ca­tion; rel­a­tively sim­ple or­ga­ni­za­tional struc­tures. In par­tic­u­lar, Xiaomi has a project-driven struc­ture based on deep cus­tomer in­ter­ac­tion and prod­uct de­vel­op­ment it­er­a­tion. More­over, Xiaomi lever­ages project re­sources out­side the bound­ary of the com­pany. Alibaba, on the other hand, is or­ga­nized as a busi­ness ecosys­tem where in­ter­nal en­trepreneur­ship is en­cour­aged. More­over, risk-tak­ing and new project ex­e­cu­tion is not lim­ited by the bur­dens of bu­reau­cracy, but gains from re­sources within the or­ga­ni­za­tional frame­work of the busi­ness ecosys­tem. Lastly, Haier has over­hauled the tra­di­tional bu­reau­cracy and re­or­ga­nized into thou­sands of project-driven mi­cro or­ga­ni­za­tions. The cen­ter of Haier is the cus­tomer; fron­tend project or­ga­ni­za­tions are lead­ing the busi­ness and ex­ec­u­tives have a sup­port­ing role in the projects.

or­ga­ni­za­tion 2.0

West­ern cor­po­ra­tions have been or­ga­nized in the same way for the past hun­dred years. Their hi­er­ar­chi­cal struc­tures have be­come one of the ma­jor hin­drances for in­no­va­tion, growth, and suc­cess­ful project ex­e­cu­tion. For many, chang­ing the model has be­come a ne­ces­sity for sur­vival.

In the mean­time, Chi­nese com­pa­nies have ex­per­i­mented and lead the way to mod­ern ways of or­ga­ni­za­tions. The ex­am­ples de­scribed pro­vide three mod­els that could lib­er­ate West­ern com­pa­nies from their ob­so­les­cence. Ad­just­ing the struc­ture, shift­ing power, and break­ing the tra­di­tional man­age­ment mod­els is the only way for­ward. Yet, to achieve it, it re­quires sac­ri­fic­ing the old in­di­vid­ual-driven mind­sets for the com­mon good of the or­ga­ni­za­tion. It also re­quires coura­geous and de­ter­mined lead­ers.

Are you one of them?

about the re­search

Our ar­ti­cle draws on in­sights from a decade-long re­search pro­gram in Zhe­jiang Univer­sity (2007-2017) that in­cluded in­ter­views with hun­dreds of lo­cal Chi­nese en­trepreneurs, in­vestors, as well as ex­ec­u­tives in large Chi­nese firms, fo­cus­ing on the sta­tus and de­vel­op­ment of dy­namic ca­pa­bil­ity by lo­cal Chi­nese firms. Specif­i­cally, re­search on the dig­i­tal ecosys­tems of Alibaba, Baidu, Ten­cent, Xiaomi, and LeEco and a pro­pri­etary data­base on their ex­pan­sion ac­tiv­i­ties is sum­ma­rized in Busi­ness ecosys­tems in China: Alibaba and com­pet­ing Baidu, Ten­cent, Xiaomi, LeEco. Re­search on pi­o­neer­ing Chi­nese com­pa­nies and hid­den cham­pi­ons is sum­ma­rized in the forth­com­ing book China’s Emerg­ing In­no­va­tors: Lessons From Alibaba to Zongmu. Also, the ar­ti­cle draws find­ings about West­ern or­ga­ni­za­tions and their struc­tures from the re­search per­formed for the book

The Fo­cused Or­ga­ni­za­tion. Lastly, our ex­ten­sive pre­sen­ta­tion and dis­cus­sion of the prac­ti­cal im­pli­ca­tions of the re­search with hun­dreds of se­nior ex­ec­u­tives of For­tune 500 com­pa­nies al­lowed us to re­flect on and re­fine our re­search find­ings and cre­ate face va­lid­ity of our find­ings and in­sights.

Ref­er­ences *https://www.mckin­sey.com/~/me­dia/ McKin­sey/ Fea­tured%20In­sights/ In­no­va­tion/Gaug­ing%20the%20strength%20of%20Chi­nese%20in­no­va­tion/ MGI%20China%20Ef­fec­t_Full%20re­port_Oc­to­ber_2015.ashx Boncheck, M. and Coudary, S.P., 2013, Three El­e­ments of a suc­cess­ful plat­form strat­egy, Har­vard Busi­ness Re­view Greeven, M.J., Wei, W. (2018) Busi­ness ecosys­tems in China: Alibaba and com­pet­ing Baidu, Ten­cent, Xiaomi and LeEco, Rout­ledge, Tay­lor & Fran­cis Group. Greeven, M.J., Yip, G.S., Wei, W. (forth­com­ing) China’s Emerg­ing In­no­va­tors: Lessons From Alibaba to Zongmu, MIT Press. Ni­eto-Ro­driguez, A. (2012) The Fo­cused Or­ga­ni­za­tion: How Con­cen­trat­ing on a Few Key Ini­tia­tives Can Dra­mat­i­cally Im­prove Strat­egy Ex­e­cu­tion, Gower, Tay­lor & Fran­cis Group.

Ad­just­ing the struc­ture, shift­ing power, and break­ing the tra­di­tional man­age­ment mod­els is the only way for­ward.



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