A New View on the Corporate Mission
An Explorer’s Guide to RenDanHeYi 2.0 and Creating a New Growth Engine for the Ecosystem Economy
Zhang Ruimin
Compiled by HMI
Contents
- What should the new corporate mission be?
- Haier seeks a new corporate mission with RenDanHeYi
- Haier’s search for a new corporate mission
Part Three: Caveats
Part IV: Additional Reading
Part One: Executive Summary
Life feeds on negentropy.
1. Why redefine the corporate mission in the Internet of Things era?
The corporate mission is the lifeblood of an enterprise. Rushing without a clear organizational mission will likely result in the “The blind leading the blind” situation. Among the myriad definitions of corporate mission, I believe the most fitting is Peter Drucker's statement that "the purpose of a business is to create and keep a customer". The idea remains relevant even in the Internet of Things (IoT) era, but it is impossible to achieve this by relying on traditional methods from the past era.
This is because the IoT era requires the creation and iteration of personalized experiences through user interactions, whereas the classical model was designed to accommodate only product transactions with customers. For this reason, it is necessary to restructure and create new business models that cultivate lifelong users, such as Haier's RenDanHeYi model, the exploration of which is driven by negentropy.
2. My view on the new corporate mission
2.1 Objective of the new corporate mission: Creating negentropy
Negentropy (entropy reduction) is the process of giving order to a disorderly system through the transfer of energy from the outside. For instance, in the boundaryless ecosystem of the EMC contracts, the continuous energy exchange with the users upgrades user experience, ensuring the orderly and sustainable growth of the business as an ecosystem.
By contrast, positive entropy (an increase in entropy) is a self-contained system, which cannot import energy from the outside. As a result, when entropy increases internally, disorganization worsens. For example, in a classical model, an enterprise cannot achieve zero distance to its users, i.e., it cannot exchange energy with its users in personalizing their experiences, which makes the system disorderly and reduces the lifespan of the enterprise.
2.2 A new statement of the corporate mission: “To evolve into a self-organization with autonomous individuals and lifelong users, in an infinite loop of creating negentropy to counteract the increase in entropy.”
This statement has dual meaning: self-evolution and negentropy flow. Half of the statement is concerned with self-evolution, i.e., “in the process of creating an infinite cycle of negentropy counteracting the increase in entropy”. The changes associated with the IoT era have intensified the increase in entropy, and we must accelerate the creation of negentropy to counteract it. In the RenDanHeYi model, employees are empowered to become autonomous creators, seamlessly integrating with users to form an interactive experience economy. The process may be described as 1) creating user experiences 2) sharing value-added contributions, and 3) iterating experiences, thus progressing into the IoT era in an infinite loop of negentropy opposing entropy increase and keeping advancing with the times.
The other half of the statement deals with negentropy flow, i.e., “to evolve into a self-organization with autonomous members and lifelong users”. Negentropy flow is the continuous feeding of new energy into the operating system to keep it running. It is the win-win evolution of the self-organization, its autonomous people, and lifelong users through the EMC contract that generates sustainable new energy because the EMC contract provides a living community in which each member can autonomously and endlessly generate a negentropy flow.
3. How to adopt a new corporate mission oriented towards creating negentropy and dissipative structures (self-organization).
This paper talks about building factories in the U.S. with a global mindset, the exploration with RenDanHeYi to invent a new model in the IoT era, and RenDanHeYi 2.0 that creates a new growth engine in the IoT era. These explorations have all faced scrutiny, yet fundamentally, they represent two starkly different approaches to dealing with "entropy": to question the status quo and generate negentropy, or to stay complacent until the increases in entropy lead to your demise.
The increase in entropy is inevitable, and our sole purpose is to “create negentropy”, as the Austrian physicist Erwin Schrödinger put it, “Life feeds on negentropy”.
Part Two: Main Text
I. What should the new corporate mission be?
Drucker defined the purpose of business as to create a customer, but in the IoT era, the corporate mission must become the creation of negentropy, i.e., to evolve into a self-organization with autonomous individuals and lifelong users, in an infinite loop of creating negentropy to counteract the increase in entropy.
(I) Why do I focus on the “corporate mission”?
In November 2023, I was invited to the Thinkers50 Awards Gala in London, where I met with Professor Gary Hamel. Professor Hamel proposed the idea of establishing a World Management Lab to promote the RenDanHeYi management model around the world. I believe RenDanHeYi 1.0 (its current form) had been studied and adopted worldwide by many companies, but it was still groundwork. The promotion of RenDanHeYi requires new case studies, and the new case studies should shed light on the new growth engine of the IoT era. This means that the RenDanHeYi model must graduate to its 2.0 iteration, and RenDanHeYi 1.0 is a necessary condition for RenDanHeYi 2.0.
However, neither RenDanHeYi 1.0 nor RenDanHeYi 2.0 is the ultimate end. Since returning from the UK, I have been thinking that the development and evolution of RenDanHeYi concerns an important question: What should the corporate mission be?
(II) Inspiration from Drucker
A common misconception about business purpose or corporate mission is that it is about maximizing long-term profit or shareholder value. This is not the purpose of a business. In my opinion, Drucker’s formulation of business purpose is the clearest. He believed that purpose is the starting point of business management, and that, “there is only one valid definition of business mission: to create a customer.”
Purpose is the starting point from which we define where we are going and how we will get there. Examined from this perspective, many enterprises are starting from the wrong place. On this point, most enterprises today fall into one of two types. One type tends to follow trends blindly. They do whatever is popular in the market, but they generally don’t last. This is reminiscent of the chaotic rush during the early days of the home appliance market, where many Chinese companies followed suit but often without long-term achievements. The other type includes enterprises that can think independently and chart their own path. However, their chosen path often diverges from the needs of the times, making it challenging to stay the course.
True as Drucker’s statement is, it should be adapted to the IoT era.
In the IoT era, we still need to create customers, or more precisely, create users. User creation will never become outdated, but the current business management structure and business philosophy are not conducive to user creation. In e-commerce, for example, there is only transactional traffic, but no iteration of user experience. E-commerce platforms create divides in how companies and their users interact, and these divides harm corporate innovation and even more so, the creation of lifelong users.
(III) Corporate mission in the IoT era
Focusing on “creating negentropy”, the new corporate mission in the IoT era is stated as, “to evolve into a self-organization with autonomous individuals and lifelong users, in an infinite loop of creating negentropy to counteract the increase in entropy”.
The failure of traditional management models and business philosophies to create users is the result of the law of entropy. Entropy will inevitably increase over time, and the faster the development and changes of the external environment, the faster the entropy increases. In the absence of negentropy, enterprises will stagnate or even die. This explains the shortening lifespan of enterprises. The pace of change is accelerating– from the Internet era to mobile internet – moving so fast that there's hardly time to react; as a result, enterprises need the capacity to create negentropy at all times to solve this problem.
The full definition of creating negentropy is “to evolve into a self-organization with autonomous individuals and lifelong users, in an infinite loop of creating negentropy to counteract the increase in entropy.”
This statement focuses on two main ideas. The first idea is self-evolution, which corresponds to the part, “in the process of creating an infinite cycle of negentropy counteracting the increase in entropy.” Changing times bring increases in entropy for enterprises, so negative entropy must be created continuously to counteract the increase. Now in the age of artificial intelligence (AI), the first law of AI is Ashby's law, which states that any effective control system must be as complex as the system it controls.
The second idea is self-generated negentropy flow, which corresponds to the part, “to evolve into a self-organization with autonomous members and lifelong users” – all three can generate a negentropy flow spontaneously.
The law of entropy operates on two conditions, one being an isolated system and the other having no external forces at work. Generating a negentropy flow means bringing in energy from the outside. A self-organization, autonomous individuals, and lifelong users do not require the introduction of energy from the outside; rather, they can create negentropy flow on their own.
I have thought about this question long and hard and have concluded that the contention between negentropy and an increase in entropy also has an underlying law, that entropy reduction in one part of the universe is at the expense of an increase in entropy in another. It is an immovable law. No company should ever believe that it is possible to run a business without change, because entropy will certainly grow.
The relationship between the sun and plants is a case in point. The sun’s energy comes from nuclear fusion, with 70% of the mass and energy being converted to nuclear fusion and the other 30% wasted, i.e., an increase in entropy. However, the sunlight is a negentropy for plants, as it is the basis for photosynthesis. This is an example of an increase in entropy counteracting negentropy, where the entropy reduction of the plants comes at the expense of the increase in entropy of the sun.
Another example is the relationship between plants and humans. The conversion of a plant into a meal is a negentropy for a person. By internalizing this negentropy, this person can have an orderly and functioning system. However, for plants, it signifies entropy increase because they are being consumed, leading to the depletion of energy and matter, as well as the production of waste.
Humanity has continued to improve plant varieties and farming techniques, which in turn, have increased plant yields and returned more food to humanity, thus creating an infinite cycle of generating negentropy that counteracts the increase in entropy.
II. Haier seeks a new corporate mission with RenDanHeYi
Haier is on a journey toward a new corporate mission with RenDanHeYi.
The new corporate mission is, “to evolve into a self-organization with autonomous individuals and lifelong users, in an infinite loop of creating negentropy to counteract the increase in entropy”.
(I) Half of the statement talks about self-evolution, i.e., “in the process of creating an infinite cycle of negentropy counteracting the increase in entropy”.
For example, in the relationship between the CEO and the EMC contract, when the CEO delegates the three decision-making powers (business decisions, people decisions, and compensation decisions) to the EMC contract. The EMC contract can then create personalized experiences that users need. However, for the CEO, delegating these three rights results in entropy increase.
This example can also be explained using Schumpeter’s theory of innovation. Innovation is creative destruction. All innovation is entropy, because you need to disrupt the EMC contracts to create something new, and through this chaos you can create something new. However, the outcome of this disruption is negentropy for the users because they receive new value. Users are willing to pay a higher premium for this new value. The higher premium is negentropy for the EMC contract (the innovator). The premium incentivizes the innovator to innovate again and create new user value. The cycle repeats itself, and this infinite cycle is self-evolution.
(II) The other half of the statement deals with negentropy flow, i.e., “to evolve into a self-organization with autonomous members and lifelong users”.
Unlike traditional hierarchical organizations, employees, and anonymous customers, how can self-organizations, autonomous individuals, and lifelong users all create negentropy on their own?
- Self-organization
The evolution of the self-organization, from the elimination of bureaucracy then to microenterprises and the EMC contract, is an ongoing process of generating negentropy to counteract the increase in entropy. How can the EMC contract, as a self-organization, spontaneously generate negentropy? It is because the self-organization of the EMC contract aligns with Ilya Prigogine's concept of dissipative structures. Dissipative structure = self-organization = EMC contract.
Dissipation is equivalent to negentropy flow. Dissipation refers to the externally-available energy that keeps a system evolving; negentropy flow is the continuous supply of new energy to a functioning system to keep it running. If an organization uses an EMC contract, then it must be a dissipative structure that generates and introduces negentropy spontaneously.
There are three key attributes of Prigogine’s definition of a dissipative structure. First, it is far from equilibrium; second, it is nonlinear; and third, it is an open system. The “Three Selfs” of the EMC contract fit these three attributes.
Self-operating is “far from equilibrium”. The bureaucratic system is an equilibrium state where all commands come from the top, having nothing to do with the input and output of external energy. Far from the equilibrium state, the EMC contract connects and interacts with the users on an ongoing basis. Users’ personalized experiences are iterative. New value is created to meet users’ ever-evolving personalized needs. This requires the EMC contract to have constant input and output of external energy.
Self-splitting speaks to “non-linearity”. Traditional organizations are linear, path dependent, and cannot change on their own. The EMC contract is non-linear in that the nodes, both internal and external, interact non-linearly with one another to constantly spin out new and diverse innovations and give rise to new EMC contracts.
Self-evolving embodies an “open system”. An open system is the ultimate form of self-organization, i.e., a self-evolving organization. Self-evolution means the evolution towards an open system of infinite cycles as Prigogine proposed in Order Out of Chaos, where chaos ➡ order ➡ new chaos ➡ new order. The cycle repeats itself.
This is where the roots of RenDanHeYi 1.0 and 2.0 lie. The transition from chaos to order is RenDanHeYi and the EMC contract 1.0, and the new cycle from chaos to order should produce RenDanHeYi and EMC contract 2.0. The evolution goes on to 3.0 and beyond, infinitely.
Traditional organizations simply cannot possess all three attributes because they are constrained by the law of entropy.
- Autonomous individuals
Autonomous persons drive a self-organization.
The process of transforming from employees to autonomous entrepreneurs to the maximization of individual value is also an infinite cycle of generating negentropy to counteract the increase in entropy. How can autonomous persons generate negentropy spontaneously? The autonomous creator has no traditional superior, or their superior becomes a user. Their value is directly linked to the value they create for users. In order to maximize their own value, they must continuously improve their own qualities.
- Lifelong users
Lifelong users are the driving force behind autonomous individuals.
The process of transforming from a transacting customer to an interacting user and a lifelong user is also an infinite cycle of generating negentropy to counteract an increase in entropy. How can lifelong users generate negentropy spontaneously? Lifelong users engage in infinite interactions with autonomous entrepreneurs, and these users are co-creators of iterations of personalized experiences. They grow through interactions with the autonomous entrepreneurs. As both the lifelong users and autonomous entrepreneurs keep entering the cycle of generating negentropy to counteract the increase in entropy, growth can become sustainable.
III. Haier’s search for a new corporate mission
“Generating negentropy” is a new understanding and objective of the corporate mission. Rather than a theory that is difficult to operationalize, it originates from our past practices. Throughout Haier’s history, we have already practiced the new corporate mission based on dissipative structures. Haier’s experience has proved that the search for the new corporate mission is not abstract, but accessible to every enterprise, as long as they seize the opportunities of the times and keep up with the pace of change.
(I) The practice of globalization
Take the example of Haier’s factory construction in the U.S. The story of building Haier’s factory in the U.S. speaks to negentropy generation to counteract an increase in entropy. Although the plant was built in 1999, in hindsight, it already took on a dissipative structure.
There was an article published called, “A Reminder to Zhang Ruimin”. It was well-intentioned, reminding us not to build factories in the United States as the grass is not always greener on the other side. This is a typical conception of an increase in entropy. Having soup at home is an increase in entropy, and eventually there will be no soup left. But to gnaw on a bone is to generate negentropy to counteract entropy increase.
I clearly remember a profile on me by Fortune magazine. The article led with praise and affirmation but ended with the remark that Haier is after all a big fish in a small pond. The metaphor is that a company operating in a closed space will only thrive to a point when the increase in entropy kills it. So, are you going to generate negentropy to counteract the increase in entropy, or wait till the increase in entropy kills you? The choice is clear.
(II) The practice of RenDanHeYi 1.0
When Haier first began exploring RenDanHeYi, many management scholars disapproved of it, and some even took to the media to pronounce our exploration impossible because RenDanHeYi was not in any classical management textbook. In retrospect, however, in the context of the Internet era, traditional management theories and models increase entropy and they meet the two conditions of the law of entropy increase—being isolated systems and lacking external forces doing work.
RenDanHeYi was precisely set up to pursue dissipative structures, whose biggest difference from traditional structures is the constant ingestion of negentropy to counteract the increase in entropy.
Up till now, our exploration of RenDanHeYi represents version 1.0. RenDanHeYi 1.0 has evolved to include self-organization and autonomous individuals, providing the necessary foundation for the exploration of RenDanHeYi 2.0.
(III) The practice of creating a new growth engine for the IoT era
The new growth engine and RenDanHeYi 2.0 are two sides of the same coin. The successful evolution from RenDanHeYi 1.0 to RenDanHeYi 2.0 will be marked by the creation of a new growth engine for the IoT era.
In a sense, Haier’s practices of globalization and RenDanHeYi 1.0 were very much the result of my personal insistence, despite the resistance.
However, the third practice of RenDanHeYi 2.0 will be different, in that it will rely on the self-evolution of the EMC contract rather than leadership buy-in. The ultimate success of RenDanHeYi 2.0 depends on the success of the “Three Selfs” (self-operating, self-splitting, and self-evolving) of the EMC contract.
Part Three: Caveats
Now that I have more time to think, my reflection on the new corporate mission tells me two things: first, the new corporate mission is ultimately to self-evolve with the times; and second, the law of entropy is inevitable, and no company can escape it.
Caveat 1: A company must advance with the times and stay relevant, or it will become obsolete.
The new corporate mission is to create negentropy, i.e., to evolve into a self-organization with autonomous individuals and lifelong users, in an infinite loop of creating negentropy to counteract the increase in entropy. The goal of this counteraction is to ensure that the company evolves into an ecosystem organization because only an ecosystem organization can advance with the times.
Any company that runs counter to the times will be left behind. Let me quote one Chinese and one foreign thinker to illustrate this point.
- The best exposition of this question from ancient Chinese sage Guan Zhong
Guan Zhong said, “neither admire the past nor dwell in the present; evolve with the times and adapt to local conditions”. These words of wisdom fit perfectly with the definition of the new corporate mission. Not admiring the past tells us not to simply subscribe to conventional wisdom or practices we have inherited. Wang Anshi also warned that, “the laws enacted by our predecessors should not be blindly inherited”. To not dwell in the present tells us not to be complacent with today’s success. To evolve with the times tells us to stay relevant, and to adapt to local conditions is even more important, as not only do we have to keep up with the times, but we must also act under locally-acceptable norms.
- The best exposition of this question from Western thinker Peter Drucker
Drucker explicates from a philosophical perspective, employing the philosophical concept of the "Three Realities" — the Actual (be), the Necessary (should be), and the Desirable (to be). “Be” is the current practice of the enterprise. The “must be” is the inevitable law of the times. And “ought to be” is what the enterprise should transform into according to the law of the times. In other words, enterprises must follow the inevitable law to implement changes that ought to be made in line with the times to adapt their current management practice.
Be, must be, and ought to be also make up an infinite loop. For RenDanHeYi, it is not just a matter of iterating to 2.0, but to 3.0 and beyond.
Caveat 2: The increase in entropy is inevitable, so be realistic and don’t take chances.
Entropy increase is definite and inevitable: it does not yield to anyone's will. Companies must actively strive to create negentropy. Either create negentropy for survival or succumb to entropy.
Nobody can evade this inevitability, be it a small business or a large nation. Chinese dynasties (excluding the Wei, Jin, and Northern and Southern Dynasties and the Five Dynasties and the Ten Kingdoms), have an average lifespan of about 160 years. Even the most prosperous dynasties did not last over 300 years. This reflects the law of entropy. They failed to create an infinite cycle of negentropy counteracting the increase in entropy.
Professor Hu Yong said that the new corporate mission of “generating negentropy” actually transcends the corporate realm; indeed, it is fundamentally a cultural issue. The rise and fall of feudal dynasties were determined by culture. Virtually all feudal dynasties were dominated by Confucian culture whose purpose of maintaining order was entropy-increasing. A couplet captures this idea very well: “The best person is a loyal minister and a filial son, and two important things in life are study and farm.” This makes a clear statement at both the spiritual and practical levels. To become a loyal minister, a scholar must first study and pass the imperial examination, which is based on memorizing classical texts that are not to be questioned, thus imprisoning the minds of scholars. This is an increase in entropy. Those who cannot pass the imperial examination to become loyal ministers can still become filial sons, and filial piety also emphasizes complete obedience, which is also entropy increasing. Of course, loyal ministers are expected to be filial too. Thus, in feudal society, the ruler, the ministers, and the fathers and sons are trapped in a closed system of increasing entropy.
After the Wei, Jin, and Northern and Southern Dynasties, the influence of Confucianism declined, while mysticism and Buddhism flourished among scholars and commoners, respectively. During the Tang Dynasty, Confucianism was officially promoted as the national religion, but internally Daoism was dominant. Later, Neo-Confucianism of the Song and Ming Dynasties attempted to restore and revive the Confucian Way, which was in fact a general metaphysics. This effort started with Zhou Dunyi, the founding father of Neo-Confucianism, who wrote a seminal paper entitled “The Diagram of the Supreme Ultimate Explained” (“Taiji Tushuo”). It opens with the line “The Supreme Polarity (“Taiji”) is Non-Polar (“Wuji”)”, which captures the true essence of the Confucian Way. Non-polar points to the general metaphysics of Confucianism, i.e., chaos. Similar to this ontology is the Lu Jiuyuan-Wang Yangming Philosophy of the Mind, which states that, “the principles of things are not outside one’s heart-mind”. But in the end, it was the Cheng-Zhu School of Confucianism that prevailed, which emphasized “upholding the heavenly law and eliminating human desires”. Chinese feudal society believed in the “unification of politics and rituals”, whereby only the emperor could offer sacrifices to gods, and the emperor’s words represented the “heavenly law”. Long story short, Confucianism failed to find its Way.
In some sense, Buddhist philosophy offers an explanation for the law of entropy. Buddhism sees four stages to people, things, and the universe. To people, the stages are life, aging, disease, and death, which no one can defy. To things, the stages are emergence, stability, evolution, and extinction. The same is true of an enterprise: establishment is emergence, market competition is stability, constant change is evolution, and failure to adapt leads to extinction. To the universe, the stages are formation, existence, destruction, and emptiness.
Clearly, cultures are interconnected. The takeaway is that any person or company, at any level, must consciously generate negentropy to survive, without this, what awaits is ever increasing entropy leading to (the company's) demise .
At Haier, “generating negentropy” is a bedrock of corporate culture.
(Compiled by HMI based on the audio recording of the conversation. The transcript has not been reviewed by Zhang Ruimin himself.)
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