The Decentralization Imperative
Finding “Just Right”
Innovation suffers from a Goldilocks problem. Small startups have passionate teams, responsive decision-making structures and are easily adaptable to changing market conditions. As they succeed, though — in large part due to these advantages — they begin to face scaling challenges. The larger a company becomes, the less nimble, reactive and culturally distinct it is, which creates consequences for innovation.
These realities aren’t unique to any one corporation; rather, they represent the inherent tradeoffs between scale and agility that develop with early growth. So how does a company find the right balance? Is there a way to achieve commercial growth while also deliberately cultivating the advantages of a startup? And, perhaps most critically, does COVID-19 create the right conditions for widespread adoption of such a model?
Haier, a Chinese home appliance manufacturer, has arguably gotten closer to achieving that balance than any other organization through the implementation of its Rendanheyi corporate structure. With over 70,000 employees, it’s certainly no startup. Yet Haier benefits from the agility inherent in the startup ecosystem due to its unique business model: one that divides its employees amongst 4,000+ micro-enterprises that are each responsible for their own operations. This creates internal incentives for ownership, competition, and reactivity to localized demand.
The benefits of Haier’s approach were evident prior to the onset of COVID-19, but adoption was relatively limited precisely because of the scale issue described above: breaking a single organization into thousands of micro-enterprises is extremely difficult for large, established corporations that are hamstrung by institutional inertia.
Interestingly enough, COVID-19 has introduced a radical rethinking of innovation models, as corporations recognize that there is, in fact, an unprecedented appetite for experimentation and an exploratory imperative amidst the current crisis; that those who don’t act boldly may not survive. Embracing Haier’s Rendanheyi model is therefore more critical now than ever, particularly as global trends toward decentralization become codified post-COVID-19.
In its most literal sense, Rendanheyi seeks to bring employees closer to the needs of their customer base and more precisely align localized supply with demand. Ren refers to each employee, Dan refers to the needs of each user, and HeYi refers to the connection between each employee and the needs of the end user. Due to their startup-like advantages of agility and responsiveness, micro-enterprises are able to tailor products and services to their specific customer base and adapt to changes in demand — outputs that prove to be extremely valuable during an active pandemic.
Most importantly, employees have ownership over the outcomes of their micro-enterprises; if the micro-enterprise succeeds, they succeed and if it fails, they fail. Rather than positioning employees as mid-level bureaucrats with limited influence on business strategy, Rendanheyi empowers each employee to be an independent intrapreneur within their micro-enterprise. The ability to shutter unsuccessful micro-enterprises and quickly move on to new ones also incentivizes efficiency and prevents the corporate parent from continuing to prop up unprofitable ventures.
Haier CEO Zhang Ruimin likens the Rendanheyi model to a rainforest: a rich, diverse network that builds resilience through its distributed structure. He believes that it takes some time to change internal mindsets and reorient away from the traditional siloed managerial structure — but once it does, the evidence suggests success. After ten years of implementing Rendanheyi, Haier’s stock price doubled in 2016. In 2017, it doubled again.
The Rendanheyi model is gaining traction internationally. In June 2020, Thinkers50 announced a partnership with Haier Model Research Institute to launch the European Rendanheyi Research Centre. The organization will provide a platform for European managers and researchers to learn about Rendanheyi and explore its applications.
The Decentralization Imperative
Many industries remain in freefall, from aviation to hospitality to restaurants, and must drastically alter their operations if they are to survive COVID-19. By adopting a more flexible model like Rendanheyi, struggling corporations can create incentives for competition amongst micro-enterprises and more quickly determine what works in a post-pandemic world and what doesn’t. The truth is that post-pandemic worlds will ask different things of corporations — many of which are not yet known or specified. Instead of making a big bet that will end in either spectacular success or collapse, corporations should transition to a more nimble operating structure now so they can rapidly iterate and adapt later.
COVID-19 has necessitated decentralized models and shifts toward supply chain and product localization; Rendanheyi complements this well by encouraging teams to tailor offerings to their regional customer bases. This also aligns with macro shifts in consumer expectations for product personalization due to advances in enabling technologies like AI/ML. Rendanheyi particularly appeals to young professionals who are drawn to outlets for creative intrapreneurship and startup work environments. By offering this employee segment the stability and influence of a large corporation with the flexibility of a startup environment, Rendanheyi may achieve the “just right” balance that attracts top talent.
Even prior to COVID-19, Rendanheyi provided a solution to a common innovation management problem. Yet there are multiple reasons that it may now be an imperative to experiment with corporate structure, rather than simply a possibility for the most daring leaders. The increasing attention surrounding Rendanheyi in the field of corporate innovation and managerial research underscores that the model is here to stay.