Crossing the chasm: from linear organizations to living ecosystems

William Malek

Case study after case study reveals that the principles of RDHY (the Haier Business Model) to be a major catalyst for business growth, transforming struggling companies into vibrant and future- fit organizations. But even in today’s weakened economy, with entire industries in trouble and the need for business agility widely acknowledged, few companies have yet to discover the way to implement the RDHY model to address their own needs.

A recent global survey by Fujitsu illustrates the situation in some detail. Selected findings are reproduced here verbatim (note the language):

• The problem is that 58 percent of businesses admit their decision-making is heavily or fairly centralized.
• 51 percent of businesses agree or strongly agree that too much of their data is currently stored in There is, however, an acknowledgment that this has to change.
• Some 64 percent know that it makes business sense to decentralize data and allow employees to access it – either all the time or on a case-by-case basis. Despite this, almost one in four (24 percent) businesses say that access or use of data by employees is deemed too risky.

Fujitsu itself overcame its own hesitation, as well as its roots in a highly traditional business culture, to embrace the tenets of RDHY. Though implementation is still underway, initial progress has been highly encouraging. Indeed, the company has already declared that ‘decentralization is key for keeping pace with change, and makes for a happier, more engaged workforce overall’.

But for every company like Fujitsu, there are dozens that don’t even attempt to make similar adaptations, even when revenues are down and their backs are against the wall. We would do well to understand their reasons for hesitation, and how this reluctance can be overcome.

Old habits die hard

 ‘Bureaucracy was ruling, and no one took real responsibility. As soon as I realized we were facing this issue, I knew we needed to make a big change.’

– Zhang Ruimin, CEO, Haier.

When we look closely at RDHY, we find that its greatest strengths are also a big part of the reason why many businesses find it hard to embrace. Consider:

• It represents a significant change. Friction accompanies every effort to depart from the status quo. A lot of expertise is lost when throwing away old processes and unlearning old Moreover, the reason that most larger transformation projects fail is precisely because the complexity of the change makes the learning curve too steep.
• It flips the organizational pyramid upside-down. People at top levels worked hard to earn their positions, likely concluding that they have little to gain and much to lose from radical reorganization.
• It goes against tradition. People in leadership positions often went to business school and learned more Frederick Taylor-type approaches to business organization structures. This organizational design approach with its deeply seated “control” biases, backed by years of education and experience, can be difficult to unlearn and reframe.
• It leaves the fortunes of the company in the hands of those who potentially haven’t developed a new entrepreneurial competency yet. Workers untrained in decentralized management systems and self-organization would be experiencing new leadership roles and a much higher degree of performance This scenario raises alarm bells for executives whose employees are possibly disengaged and have not bought in to the vision of the business.
• It prescribes hands-off leadership. People commonly over-estimate their own abilities and Managers are particularly vulnerable to this phenomenon, as their self-confidence feeds into the pursuit of power and status. These qualities may have helped them up the corporate ladder, where their present position all but ensures that their high self-esteem will be reinforced. In such a context, deferring to (and learning from) subordinates may feel like a demotion, requiring a level of humility that violates their instincts. This new leadership role is more like ‘eyes on, hands off’.
• It abandons twentieth-century wisdom. Linear growth structures served business well in past Over time, however, any race between the linear and the non-linear ecosystems will see the advantage flip decisively to the latter. To learn from history is to learn from a time before the flip, when linear predictive growth and the so-called scientific management appeared to be the best option.

The upshot is that many leaders who struggle to remain effective tend to assume that their failure is a result of insufficient dedication to the leadership principles and skills they have been taught. Their response is to hold on ever more tightly to these very same outdated methods.

If we are to move in the direction of adopting RDHY principles, we will need to address these concerns directly. We will also need to explain why both internal operating ecosystems and external business ecosystem strategies – key attributes of future-fit organizations – are best served through decentralized initiatives that are highly focused on creating sustained user value and continuous innovation.

All status is provisional

 ‘The market is the superior of everyone.’

—Zhang Ruimin.

Taking the wider view lets us answer, in turn, each of the main objections that business leaders may have regarding RDHY. We begin with the reasonable observation that change causes friction within a business. The solution, however, cannot be to avoid change – but rather to institute a system which makes that change more fluid.

If the COVID-19 pandemic has any lesson to teach to the business world, it is that real permanence is illusory. What looks like solid ground at any given moment is in fact a bubbling sea of potential disruptions from social-cultural shifts, technological advances, business partnership opportunities, competitor strategies, market cycles, and other highly dynamic external conditions.

As outlined in the Strategy Execution FrameworkTM from my Harvard Business book Executing Your Strategy, ‘contingency theory’ is based on the understanding that context is everything when designing an execution strategy. Given these rapidly changing contexts, companies can either stay the course and lose their relevance or push forward by adopting and adapting to these highly variable conditions with new organizational innovations such as RDHY. In other words, everything, especially organizational systems, are idiosyncratic when it comes executing. And, bureaucratic structures that do not enable decision speed, flexibility, and customer-centricity, let alone mass customization strategies at scale, are going to be in a serious competitive decline within the next 5 to 10 years.

Other concerns may be resolved in similar ways. I have discussed elsewhere the role of learning agility to unlocking business success over time. RDHY pushes this concept to its farthest edge – promising continuous innovation-type transformation through emergent learning and radical organizational agility at the edges of the organization. Yet rather than overturning the entire company structure in an instant, Haier’s example shows why that balanced, transformational steps give employees the opportunity to adjust to each change as it is introduced. Each period of adaptation can succeed if those employees understand the bigger picture of what these changes are meant to ultimately achieve, following the core philosophy that underpins resilient living biologic ecosystems.

Indeed, the concept of balance is at the heart of the entire transformation project. RDHY shifts the locus of decision-making away from detached boardrooms and toward front-line workers. This move is brought into balance through a new incentive system where initiative is rewarded based on delivering value and performance accountability is transparent.

RDHY likewise shifts the role of management away from giving direct instructions, but it does so while favoring mentorship and policy guidance instead. Employees – now made up of autonomous agile teams – learn what to do by listening directly to the market and the needs of customers, then identifying and pursuing novel opportunities without any bureaucratic filters or outdated and dysfunctional biases.

At each step of transformation, the initial objections to RDHY fade away even further. Continuous experimental change lowers the learning curve, avoiding the disorientation that dooms other transformational initiatives. Executives retain their value – but as guides and ecosystems designers rather than autocrats. They can also take credit in business circles for running an innovative company, rather than taking the blame when their company falls to competitors.

Tradition may be a casualty of this new business model, but only on the most narrow of interpretations. True leadership has always been, at its core, about helping people realize their potential. When employees are given the right incentives (and genuine ownership of their work), they show far better engagement, initiative, and teamwork. Furthermore, the direct path from performance to success can eliminate the distractions of office politics. Within a RDHY framework, leaders can at last lead rather than manage – a far more satisfying, and successful, arrangement.

Most compelling of all, however, is the relationship between decentralization and operational ecosystems. It is here that the RDHY model plays a dual role which remains unsurpassed in the world of business performance. As Gary Hamel and Michele Zanini explain in Humanocracy: ‘With revenues of more than $38 billion annually, Haier’s been on a tear. Over the past decade, gross profits in Haier’s core appliance business grew by 22 percent per year, while revenues advanced by 20 percent annually. The company also created more than $2 billion in market value from new ventures. Those feats are unmatched by any of Haier’s domestic or global competitors.’

The power of the small

‘Haier believes that it will remain relevant in the future … not because it will be better at predicting likely outcomes, but because it will have placed more bets on possible out- comes than anyone else.’

--Bill Fischer.

A traditional car company sets out to manufacture vehicles that serve an existing market. A more agile company, like Tesla, re-imagines what a vehicle can be – and sends frequent software updates to improve the quality of the cars it has already sold. This type of consumer-centered operating strategy would represent a major step forward for most businesses, but RDHY provides a way to go even further with thousands of small microenterprise teams defining very niched user-based scenarios and integrating ecosystems resources (internally and externally) for more wholistic customer solutions.

By switching its focus from products to business ecosystems, a RDHY-oriented company in this space can work within a vastly expanded scope. Its cars may, for example, know when you’re getting close to home – and ask whether you’d like to turn on your air-conditioner now so that your living space is nice and cool by the time you walk in the door.

User-oriented features like these require commercial partnerships, as the car company may not actually manufacture the home air-conditioner with which it connects. Although such cross-sector partnerships can exist between any two companies, the principles of RDHY are highly adapted in favor of the type of interconnectivity that leads to blossoming ecosystems for the experience economy.

The point becomes clear as soon as we acknowledge that networks require nodes. Most businesses function as single entities whose activities are mediated by some level of bureaucracy and functional silos. RDHY represents a far more nimble alternative, generating collective swarms of autonomous microenterprises which are essentially free to act as they please. These microenterprises are numerous, and entirely unhindered by institutional borders; they form partnerships freely with other businesses both inside and outside their umbrella organization.

A network with more nodes allows for more potential re-combinatorial partnerships, which in turn translates to greater diversity of thought and higher quality ideation. Furthermore, this numerical advantage lets an organization effectively blanket the market for partners. And if your teams ever have trouble finding a suitable partner for one of their purposes, they can create a demand for that partner – which their peers can fill. A crucial benefit of such arrangements is that each partnership allows its participants to leverage each other’s resources, thereby delivering integrated products and services at a lower cost than either could offer alone.

Crucially, the nature of these partnerships favors lifelong value-creating scenarios rather than standalone one-time transactional products. In designing the RDHY concept, Zhang Ruimin emphasized the need to establish a zero distance relationship between microenterprises and the users they serve. As users are primarily concerned with their own general happiness and needs, rather than with product functionalities, their suggestions and feedback can point directly to original service combinations and new business ideas for a more holistic user experience. These ideas can be pursued instantly, by forming new connections with microenterprise teams that can help make them a reality.

In such ways, microenterprises can easily move beyond mechanistic, single-purpose processes and mandates. They instead become adaptive organizations that operate organically within their own entrepreneurial ecosystems, to better serve the evolving ecosystems of the consumer and even B2B markets.

Haier itself provides numerous examples of this philosophy in action. Its hOn smartphone app, which lets people manage their home appliances remotely, recently joined forces with Vivino, an online wine marketplace. Their partnership lets users store wine at the right temperature, and also scan their bottles with a smartphone camera, so that the app can recommend specific dishes to enjoy with each brand of wine. The result is a seamless home experience that neither company could have produced on its own.

Just as these types of synergies can directly help users, they also greatly facilitate operations behind the scenes. Years ago, I proposed that ‘platform-based independent contracting may allow expertise to be shared, as specialists in high-demand occupations can offer temporary services to many employers.’ By facilitating this type of skill sharing, RDHY frees up talent to go where it is needed. Or, as Haier might put it: ‘The whole world is our HR Department.’

Knowing when to step back

 ‘The question at the core of bureaucracy is this: How do we get human beings to better serve the organization? The question at the heart of humanocracy is, what sort of organi- zation will elicit and merit the best that human beings can give?’

--Gary Hamel.

We cross an important threshold when we recognize that quantum organizations are ecosystems in themselves. Because autonomous microenterprise team salaries are paid by users, and team incentives are aligned to produce entrepreneurship at scale, their ultimate success cannot depend on following a top- down business strategy. Quantum organizations realize that all things exist in the present moment with all relationships that are entangled with each other at zero distance to the customer.

In Taoism, the quantum concept of wu wei reminds us that effortless action’ can lead to the best of all outcomes. By continually recognizing and embracing the natural ‘flow’ of events, it becomes possible to benefit from emerging currents of new knowledge and information that arise in the moment, in context, at zero distance, rather than spending energy trying to rationalize that which is already long past and were created from annual strategic planning offsites with a select few at the top.

Applied to business, we see that leaders may guide productively, and set boundaries on permissible activity – but each time they issue orders, or otherwise interfere with their personnel, they reinforce a tendency which is entirely antithetical to the core of RDHY: They teach people to doubt their own instincts and instead wait for the boss’s instruction or permission. It is better, by far, to respect the ‘flow’ that exists at the point of contact between customers and front-line teams.

As Partha Ghosh puts it, the role of leadership ‘is not to combine and control. It is to incubate new Enterprising Centers, create the environment which can create more ECs, and offer coaching and mentoring, so that these companies could succeed and neutralize biases which often seep in from the past’.

The RDHY alternative converts traditional bureaucracy into human-centered organizations that listen directly to customers and follow market incentives. Because each professional partnership is voluntary and organic, the resulting networks represent the opportunity to pursue mutual and cooperative win-win dynamics and most importantly, sustained innovation.

The appeal of such arrangements should not be underestimated within the wider global talent pool. As Zhang Ruimin has pointed out, ‘We want to attract entrepreneurs to be our employees. This is key. Through RDHY, I provide you with an opportunity to be an entrepreneur, not an opportunity to work.’ It is only natural that people who are creative and driven will gravitate towards work environments where these traits are rewarded.

A notable example of this phenomenon comes from the Hyperloop project, organized by SpaceX. Rather than hire engineers to develop advanced vehicles, they invite the public to do it for them. Groups of volunteers, excited to participate, build prototypes to compete against each other each year – at no cost to SpaceX. Most companies would be unable to outsource their labor for free, but SpaceX succeeds here because talented people appreciate a sandbox for interesting and unique work, within boundaries but without oversight.

RDHY leverages these and other advantages, turning lumbering bureaucracies into projectized organizations that motivate – and elevate – their personnel. In the same way that technology has come to connect the world, ecosystems now bring products and services together, zero distance systems link companies with their customers, and long-term user relationships replace one-time transactions.

This is the new world of commerce, where old pyramids are overturned and the user is the real boss. Each change takes some getting used to, and no company’s transformation should be (or could be) instantaneous. Crossing the chasm requires deep, sometimes uncomfortable, adaptation at both a cultural and organizational level. But when the need for change is understood, the role adjustments are explained, and the new incentive structures are shown to benefit everyone involved, solutions like RDHY become not merely logical but inevitable. At that moment, the move from linear organizations to dynamic living ecosystems can truly begin – guided by users, powered by independent teams, and accelerating toward a future of maximized innate human potential. As Zhang Ruimin puts it: ‘There is no such thing as a successful company; there are only companies that move with the times.’

William Malek is Senior Executive Director of the Southeast Asia Innovation Management Research Center in Thailand. He is the former program director for the Stanford Advanced Project Management program at Stanford University and co-author of Executing Your Strategy: How to Break it Down & Get it Done (Harvard Business School Press, 2008).

Resources:

‘Fragile to agile: Withstanding uncertainty as an adaptive organization’, Fujitsu, January 2021; https://www.fujitsu.com/global/ themes/adaptive/.

Steve Andriole, ‘3 Main Reasons Why Big Technology Projects Fail – & Why Many Companies Should Just Never Do Them’, Forbes, March 2021; https://www.forbes.com/sites/steveandriole/2021/03/25/3-main-reasons-why-big-technology- projects-fail---why-many-companies-should-just-never-do-them/?sh=7177286257cc.

‘The Global Applicability of Rendanheyi’, June 2021; https://linazhu.substack.com/p/the-global-applicability-of-rendanheyi. William Malek, ‘The Leader as Apprentice: Emergent Learning for a Fast-Moving World’, Medium, November 2019.

William Malek, ‘The New Rules of Engagement: Why Agility Paves the Path Forward for Your Business’, Medium, July 2019. William Malek, ‘How to Manage an Empty Office: Disruption and the Future of Labor’, Medium, September 2019.

Partha Ghosh, ‘Knowledge Economy in the New Era’, March 2021.

Video of Hyperloop competition (Aug 2018).