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Most large organizations add layers as they grow. Each layer makes sense on its own, a manager to coordinate this team, a department to standardize that process, but together they put distance between the people doing the work and the customers they serve. Haier, the Chinese appliance maker, set out to remove much of that distance on purpose. Its experiment is one of the boldest attempts at organizational redesign by a large manufacturer.
From a Failing Factory to a Global Appliance Maker
The story starts in 1984, when Zhang Ruimin was appointed to run a refrigerator factory in Qingdao. The plant was losing money, its inventory was full of defective products, and its workers showed little interest in quality. Soon after he arrived, Zhang had 76 faulty refrigerators smashed with a sledgehammer in front of the workforce. The message was blunt: defective products would no longer leave the factory.
Over the following decades the factory grew into Haier, a global appliance group. Growth brought a familiar problem. Around 2000, according to accounts of the company's history, Zhang concluded that the growing layers of management were slowing Haier's response to customers and weakening its competitiveness.
In 2005 he introduced a model called rendanheyi. The name combines three ideas: ren, the employee; dan, the value delivered to the user; and heyi, joining the two. In practice it means each employee should be connected as directly as possible to the users they serve, and rewarded according to the value they create for those users rather than according to rank.
How the Microenterprise Model Works
Over the following years Haier gradually replaced functional departments with small, self-managed units it calls microenterprises. As described in published accounts of the company:
- Each microenterprise focuses on a market or a user need and works with users from product development through delivery.
- Haier acts as a platform. It sets the rules and provides resources such as start-up funding, but it does not supervise the units the way a traditional head office would.
- Employees who spot an opportunity can start a unit, with Haier investing alongside them. Successful units can be bought by the group or go public.
- Pay is tied to the success of products in the market rather than to position in a hierarchy.
The scale of the change was large. In a 2017 interview with MIT Sloan Management Review, Zhang was described as having eliminated 10,000 management jobs. By 2018, published accounts counted more than 4,000 microenterprises operating on Haier's platforms, more than 100 of them with annual revenue above $15 million. INSEAD, reporting on a lecture Zhang gave in November 2018, noted that Haier's 2017 revenue was 241.9 billion yuan (US$37.2 billion), with more than 76,000 employees worldwide.
Haier's reach also grew well beyond China. In June 2016 General Electric completed the sale of its appliances business to Haier for $5.6 billion, a figure that included about $200 million more than the price first announced.
The Ideas Behind Rendanheyi
Rendanheyi draws on several ideas that organization scholars have studied for decades. One is the cost of hierarchy: as layers multiply, information takes longer to travel and decisions drift away from the people closest to customers. Another is market-based coordination inside the firm. Instead of a central plan telling each unit what to do, units deal with each other and with outside partners, and user feedback and results guide decisions.
Haier's version adds a strong sense of ownership. Microenterprise leaders behave more like founders than department heads, with freedom to set priorities and share in the gains. The head office shifts from command to platform: providing capital, brand, shared services and the rules of the game.
What the Haier Case Cannot Tell Us
The evidence has limits. Much of what is known about rendanheyi comes from the company itself, from its leader's speeches and from consultants and writers who admire the model. Haier's growth also coincided with decades of rapid expansion in China's consumer market, which makes it hard to separate the effect of the organizational design from the effect of a growing economy. And the model developed under one leader over a very long tenure. Copying the structure without that continuity, and without the trust it took years to build, may not produce the same results.
Borrowing From Rendanheyi Without Copying It
Few organizations will split themselves into thousands of units. But the logic can be tested at a smaller scale:
- Give one customer-facing team real ownership. Let it make decisions on priorities, spending and staffing within clear limits, and hold it accountable for results with users.
- Turn some central functions into service providers. If finance, HR or IT serve internal customers, measure them on service quality and cost, and let teams give structured feedback.
- Make user value visible. Teams cannot be rewarded for value they cannot see. Share customer data, complaints and usage patterns directly with the people who can act on them.
- Redesign pay carefully. Linking rewards to market results motivates people, but it can also discourage cooperation between units. Decide in advance how shared work is credited.
The most common mistake is removing managers before building the mechanisms that replace them: clear rules, transparent data and agreements between units. Without those, a flatter organization simply becomes a more confused one.
Studying Organizations at This Depth
Haier is a favorite case for anyone interested in how structure shapes behavior. Senior leaders who want to research questions like these rigorously can explore the DBA program, where courses such as Advanced Organizational Theory and Business Agility and Resilience examine how organizations are designed, and redesigned, for changing markets.
