Relationships > assets: haier’s ecosystem revolution

Bill Fischer

Few ideas are attracting as much attention as that of ecosystems. Casually described as ‘constellations of partners’ or ‘networks of networks’, these metaphors can blind us to the intricacy of the details that undergird the workings of such revolutionary organizational forms. The Haier Group, with its early participation in ecosystem relationships, and wide range of ecosystem examples, offers an unparalleled insight into the key elements of ecosystem dynamics. While most ecosystems become complex, very quickly, there is no reason why simple ecosystems cannot serve as more easily observable microcosms of their larger brethren. In fact, a senior executive at the Haier-owned General Electric Appliances (GEA) characterized looking at Haier from afar as an experience in fractals, where each level observed -- Haier headquarters in Qingdao, the microenterprises which comprise it, and the employees themselves -- all work in essentially the same fashion, to achieve the same general principles. One way of thinking about Haier’s success in repeatedly transforming itself over nearly four decades is that its corporate DNA runs deep by replicating itself at each organizational fractal.

With this in mind, we will start with a very simple ecosystem designed around a new business model innovation for what was originally a single-offering microenterprise, the vaccine cabinet market, and use this to establish some of Haier’s ecosystem basics. We will then move into far more complex ecosystems, which are literally changing the very definition of the industries they are a part of, while remaining faithful to the same ecosystem basics that we have seen in the vaccine example.

Smart Vaccine

For years, Haier has been a leader in small refrigerators for the home and dormitory. In its search for adjacent markets, it recognized the opportunity to adapt these refrigerators for hospital usage. China’s 52,000 vaccination stations represent a major market opportunity.

Mr. Gong Yi is in his early forties with two young children and, as a result, is a frequent visitor to one of these vaccination stations, where 100 million young children are inoculated each year against childhood diseases. He also was the R&D Director of a microenterprise within Haier that made the large majority of refrigerator cabinets in which these vaccines were kept prior to their administration. On one visit, as his children waited their turn for inoculation, he suddenly realized, as he watched the staff go about their work, that, because of the large number of patients being served, the single door on the very fridge that he had produced was never closed; he understood instinctively there was no way under such conditions that the vaccines could be kept at their desired temperature.

Gong Yi’s story provides an insight into how being close to a customer a new way of working is arising that could change the nature of organizations. Gong Yi was determined to fix the problem that he had identified. So he recruited another two colleagues and petitioned the biomedical platform on which their present classical vaccine cabinet was hosted, for permission to launch an entirely new microenterprise that would offer a different business model into the same marketplace as they had been dealing with previously. Initially, the new value-proposition involved just changing the vaccine cabinet door; creating an eight-door refrigerator, which meant that when any door was open only 12.5 percent of the vaccines would be at risk of being warmed. The platform’s approval, if given, would mean that Haier would have two microenterprises, in parallel, offering two different versions of what was essentially the same product, a one-door, and an eight-door vaccine refrigerator. Approval was quickly given by the platform, which had decided that it would allow the market to judge which of these versions was preferable.

Once in business, however, Gong Yi and his colleagues had a different, greatly expanded view of the customer experience. They hated the queuing and confusion associated with bringing their children to the vaccination station without being able to make reservations. They were repelled by the drab and often unwelcoming ambiance of these stations. They thought that the entire experience was enervating and felt that the refrigerator was merely one part of the problem. They then expanded their business model to offer turn-key renovations of the entire vaccination customer experience and built an ecosystem to support their microenterprise in delivering this turn-key renovation.

There is a standardized process used in all 52,000 vaccination stations in China involving four different steps that Gong set out to improve:

  1. Getting an appointment: The traditional process begins by arriving at the station early and queuing in an unruly crowd to gain a priority Gong’s new approach accomplishes this via a WeChat SmartPhone app that can be done from home and that another Haier microenterprise was contracted to design, so that queuing is no longer necessary.
  2. Registration: The entire check-in process, including registering the physician’s prescription for the inoculation, is also conducted via a special WeChat account designed for registration, again by a contracted software microenterprise operating within the Haier organization.
  3. The vaccination itself is now administered at a custom-constructed ergonomic desk which makes life easier for the staff who may be delivering as many as 300 inoculations a day, and involves a larger eight door cabinet which has the capacity to hold 700 boxes of vaccine. They also now monitor the entire factory-to-station cold chain for vaccine safety. In the past, injections were only given in the morning, while the paperwork and inventory control took up the entire These improvements were contracted-out to external carpenters, as well as internal microenterprises within Haier experienced in supply chain activities within hospital environments. Today, thanks to Mr. Gong’s improvements, the clinics are open for vaccinations all day long.
  4. The last stage in the process is a required 30-minute observation period, which takes place within refreshed and attractive facilities, well-stocked with toys and safe furniture, and featuring colorful and local cultural themes so that waiting is both enjoyable and a source of additional The smart-phone-operated rocking horse, for example, generates per-ride revenues that are shared between the vaccination station, the rocking-horse provider and Haier.

It is no exaggeration to say that the Smart Vaccine microenterprise has changed both the vaccine customer experience throughout China and the industry structure of which they are a part. Haier continues to make the traditional one-door, unconnected, vaccine refrigerator, but Mr. Gong says that ‘we are not really competing against each other, this is more like iPhone 5 vs. iPhone 10. In addition, we are the publisher of new customer experience needs, so that the other microenterprise partners, both inside and outside of Haier can respond.’ They now sell an integrated offering that opens up opportunities for new business and they also then share the marginal revenues resulting from the exploitation of these new opportunities. What Mr. Gong is really doing, on a small scale, is building an ecosystem to change the entire nature of the customer experience.

Haier’s Smart Vaccine project contains, in a microcosm, all of the essential elements of the new ecosystem revolution that is taking place there. It began with intimate observation of the customer’s situation (literally zero-distance with the customer in this instance); it was easy to get a microenterprise started (three colleagues and a simple proposal to the platform); very quickly the vision expanded greatly to addressing and stretching an entire customer experience, rather than merely replacing a refrigerator door; the microenterprise was too small to do this by itself, so it needed to enlist partners from other expertise domains (very quickly, within a few months of starting, they had thirty different categories of ecosystem partners, such as carpenters for the desks, and software creators for the apps); the microenterprise sold an integrated package and shared the value-created among its ecosystem partners; each customer engagement led to more opportunities for the entire ecosystem. The smart vaccine cabinet microenterprise grew out of the refrigerator product line of Haier’s traditional business, but the present offering of the smart vaccine microenterprise is different from simply being an extension or even an adjacency of the original product line. In this way, Haier is rapidly moving into new markets that it had never dreamt about in the past.

The internets of food and Clothing

Not surprisingly, as we all move closer to the smart home of the future and the impact of the hyperconnectivity of the Internet of Things on our daily lives, Haier’s long-time refrigerator and washing machine product lines become natural incubators for all sorts of radical experiments, most on a larger scale than smart vaccines, but essentially following the same logic and approach. Once again, this is driven by profound shifts in the customer experience.

For more than three decades, from the original founding of the Qingdao Refrigerator company to Haier’s achievement of being the world’s largest home appliance manufacturer, the customer journey that Haier experienced was, on average, only one or two engagements every fifteen years for any particular offering. Today, with the fast-growing introduction of interconnected home appliances, customers are radically changing their purchase behavior and the customer journey. Home appliances are no longer purchased piece by piece, but are being bought as an ensemble, resulting in as much as a ten-fold increase in average customer spend, because they are buying all of their interconnected appliances at the same time; and expecting them to work together, at the same time, immediately upon delivery.

Haier is also now engaging with clients multiple times a day, as they search for recipes, serving suggestions, wine-pairings, the tracking of provenance and freshness for purchased produce, cooking lessons, entertainment and many more conversations than Haier had ever before. As Haier has moved from what CEO Zhang Ruimin has portrayed as being a ‘provider of solutions’, to being a ‘confederation of ecosystem partners, where from time to time different partners coalesce to address a specific customer experience’, he believes that ‘what matters is not what you do, but what you can empower others to do’. The challenge here, of course, is no longer trying to capture the customers’ attention, as they are actually coming to you of their own free will, but to have something to say to them, and this is where Haier has turned to ecosystem partners to participate in these conversations.

An example of such partnering is seen when the washing machine people at Haier found themselves facing questions about the laundering of exotic materials (designer silk scarves and leather bags) that they couldn’t answer. In response they formed an ecosystem around such challenges, involving fabric makers, detergent producers and Haier’s washing machine experts. Led by Mr. Feng Xu, who was hired in from a fabric producer, a community of interested parties was assembled, who might otherwise never have had a connection with Haier, or with each other.

One early partner, a well-known Hangzhou textile manufacturer, Wensli Silk, had customers who were complaining that their silk garments were too fragile to be cleaned by conventional methods. Haier’s Internet of Clothing provided washing machines with what was called AirWash technology: a method that uses a very small amount of water, and a different type of detergent that is easily vaporized. When put into Wensli’s stores, the silk washing problem was solved. There are no longer broken fibers due to washing, and so the silk retains its brightness and feel. One tangible result was a 30 percent increase in Wenli’s revenues in the first month after the AirWash washing machine was placed in these stores. A more durable result, however, was the ecosystem relationships that co-created AirWash, including detergent partners, that, in turn, led to the establishment of a detergent microenterprise that is now also on the Internet of Clothing platform. In a very short time, a better customer experience was co-created through partnering and an ecosystem was born.

Similarly, an ecosystem emerged around labeling technology that could provide washing machine- readable laundering information on clothing tags, so that Haier’s smart machines could read the tags and treat the clothes appropriately. Clothing tag makers were interested because for them this was a path out of what had been a factory-only business; now they were serving an entirely different market of B2C producers and the new opportunities were immense.

One of the tag producers, Xiaoyi, has, as a result, expanded the scope of their product portfolio from exclusively industrial to include household use, and has seen their market valuation rise from RMB 100 million to 400 million, as a result. In fact, the IoC platform owner at Haier, Mr. Li Yang, believes that his platform has gradually shifted from being Haier-focused to being platform-focused, and now to being ecosystem-focused. He believes that with increased experience, ‘we can be a better collaborator with one another and open up opportunities for all. Previously, 80 percent of our business was our core product (washing machines). Now that core business is only 20 percent of our revenue, and 80 percent is new business. One example is a partnership with Yeehoo, a high-end retailer of infant clothing, where we have placed our AirWash washing machines into Yeehoo stores. These are washing machines with AirWash capabilities for use with fur, wool and silk. Yeehoo offers them as an additional service for high-end customers who have such specialized cleaning needs.’

Ms. Zhang Meling, a Yeehoo store manager, explained that ‘because we are a high-end brand for infant clothing, we attract a clientele who have cleaning issues with exotic fabrics. We now address these needs as well as their infant clothing needs in our same store. We have developed a patented product and technology for making infant cotton clothes with green and organic materials, suitable for sensitive baby skin, and Haier’s AirWash is perfect for cleaning these garments. We have also added the scanning of RFID tags to identify the materials and the products we sell. This is important because such specialized products can command a 50 percent premium price’.

When ecosystem partnerships result in new revenues, such as AirWash cleaning in Yeehoo and Wensli stores, or increased use of Xiaoyi’s RFID tags, or recipes used in Haier’s smart kitchens, the additional value created is distributed among the co-creating partners according to a pre-negotiated formula. This ensures that value is not only captured, but shared. Value sharing is an explicit part of all ecosystem co-creation relationships, as we also saw with the smart vaccine project partnerships.

Similar explorations are occurring in the Internet of Food ecosystem, where the Australian wine distributor, Swan, discovered through IoT generated data from the customers’ smart kitchens that they had greatly misjudged the taste preferences of Shanghai’s cosmopolitan wine consumers, who preferred cabernet sauvignon to the merlot favored by Zhejiang’s high-end consumer. In Beijing, which had long been a hostage to limited produce variety in the Winter, China’s largest organic farmer, Tony’s, is replacing the ubiquitous cabbage with a wide variety of new greens and experimenting daily using the IoT generated data direct from consumer refrigerators. Being part of the ecosystem is much more than merely scaling up new offerings.

Haier recognizes that it needs to sell both solutions and customer experience as part of the same offering; Haier is offering a smart home, not just intelligent appliances. Not surprisingly, this has led to major organizational changes at Haier, such as increasing the number of their sales people who formerly were interior decorators so that they can have a different conversation with customers. Haier’s customer exhibit centers are now offering cooking lessons for more curious customers, and Tony’s is even welcoming customer’s children on ‘farm tours’.

Microenterprises, platforms and ecosystems

When Haier’s leaders reconsidered their organizational structure in the early-2000s, home appliances were still regarded as stand-alone devices. A refrigerator was a machine that kept food cold; a washing machine spun clothes, detergent and water together. Haier was a consummate solutions provider. Its machines provided high value, but they only addressed a small slice of what was going on in the kitchen or laundry room as hyperconnectivity became a norm, and there was no integrating force that spoke for the customers’ ultimate dreams.

For Haier, adjusting to this new world of the smart home meant restructuring the company into a new type of organization with three interrelated architectural components: microenterprises, platforms, and ecosystems:

Microenterprises, the first Haier microenterprises appeared in 2016 and were initially extensions and then adjacencies of Haier’s traditional appliance lines. Today, they are the basic structural element of Haier, and have sufficient autonomy to quickly address challenges, solutions and partnerships that they deem worthy of attention. They succeed or fail on their ability to move fast, make good decisions and deliver measurable and sharable value to the partners that they work with. One way to think of them is as small bets being placed on a future that their members see intimately because of their zero-distance with the customer.

Microenterprises also get employees to act and think like owners, as they own equity in their microenterprise. Often, when successful, they fragment into new microenterprises which address new and different customer experiences: the smart vaccine project growing out of a prior vaccine cabinet microenterprise, or the detergent microenterprise growing out of the exotic materials microenterprises are examples of this. They appear always to be in a state of change.

Frequently, several microenterprises coordinate to deliver a better customer experience through what is called an Ecosystem Micro Community. These are temporary arrangements arising when coordination between solution microenterprises (hardware) and experience microenterprises (shipping and logistics, for example, in the case of interconnected units) are required.

Platforms typically grow out of successful microenterprises. They are larger organizational entities that can more easily coordinate microenterprise growth and behavior within a common application focus: food, clothing, biomedical activities, etc. Platforms are vehicles which can initiate efforts to make big moves; they are not layers, but interconnects. Because they share common customers or institutional settings, platforms are also excellent vehicles for scalable learning. Platforms interpret the relationships between outside-in, and the inside- out. They dampen the frictions that undoubtedly arise.

Ecosystems are different from platforms because they have no formal structures. They are customer- experience-oriented, boundaryless networks of stakeholders – within and outside Haier – committed to a shared outcome, or, as a member of Haier’s biomedical ecosystem platform put it, they are ‘communities of common destiny’.

Participants in an ecosystem are willing to co-create and share value, and to share and synthesize data, in ways that would otherwise be beyond the capability of any one organizational entity. While any ecosystem member can invite others to join, Haier has a centralizing advantage. Its products are naturally the source of entry portals, touch-points and data collection. Its intention, however, is not to over-influence any ecosystem, and direct member-to-member transactions can occur within an ecosystem, without involving Haier.

The Internet of Clothing with its 2000 members and the smart vaccine microenterprise with thirty categories of partners, differ greatly in terms of complexity and scale, but are following the same general principles of organizing, or unorganizing, that characterize all of what Haier is doing today. This fractal nature of Haier is a source of its strength, an alignment based on similarity of behaviors and attitudes at every level of the organization in the way that relationships are engaged. As a result, it is entirely possible that Haier’s future lies more with its ecosystem relationships than it does with its heritage business lines. In many ways, CEO Zhang might consider that a victory, as he has long called on every employee to be an entrepreneur, to be a CEO. The ecosystems, and the microenterprises, that they spawn make that outcome far more likely than any alternative organizing approach.

Bill fischer is a Senior Lecturer at MIT’s Sloan School of Management and a Professor Emeritus of IMD. His books include: Reinventing Giants: How Chinese Global Competitor Haier has Changed the Way that Big Companies Transform (with Umberto Lago & Fang Liu, 2013), The Idea Hunter (with Andy Boynton, 2011), and Virtuoso Teams (with Andy Boynton, 2005). He is a member of the Thinkers50 Hall of Fame.