The Haiers Tao of Innovation: A case Study of the Emerging Total Innovation Management (TIM)

Xinru Liang
Research Center for Innovation & Development, Zhejiang University Hangzhou, China liangxr@zju,edu.cn

Gang Zheng
Research Center for Innovation & Development, Zhejiang University Hangzhou, China Zhgl213@zju.edu.cn

Qingrui Xu
Research Center for Innovation & Development, Zhejiang University Hangzhou, China sbaxuqr@diaI.zju,edu.cn

Abstract This paper explores Haier groups Tao o f innovation mainly by the practice and experience of Haier Group. Based on it, the authors put forward the theoreticalfiamework of the emerging new paradigm of total innovation management (TIM). Case in this leading Chinese enterprise has shown some exciting evidences that implernenting TIM can have positive relations to the value creaf enterprise as well as the accumulation of its tiadadded o core competency. Beginning with the introduction of Haier s development and achievements, this paper explores the Haiers Tao of innovation in detail, which includes the evolution of all the innovation agents such as strategy. management, culture, organization, technology and so on, and analyzes the relations and interactions of them. Based on it, the authors indicate that its the effective and systemic synergy and management of all the innovation agents that contribute to the rapid development of Haier Group.Grasping the marrow of TIM and putting it into practice is one of the crucial approaches at present for Chinese enterprises to reduce the gap with international advanced enterprises as soon as possible.

placed Haier 5th of the world top manufacturers for white electrical appliance producers. Why can Haier keep a steady and rapid growth in the past 18 years? Haier has gradually accumulated and shaped the unique Tao of innovation based on its excellent innovation culture, since 1999. According to our research, its just the interaction and systemic synergy of all the agents mentioned above, plays key roles for Haiers rapid growth. We named the emerging new paradigm as total innovation management (TIM). Haiers performance in recent several years has proved that the new paradigm is very successful, which has greatly improved Haiers core competency and the market competitiveness. The innovation initiative of all the employees is activated, and innovation has becomes the focus of attention and indispensable pan of every ones job. The development of new products has been greatly speeded (Tablel). Its estimated that the direct benefit of implementing process innovation is about 42 million dollars during the period of July 1999 to June 2000. The indirect benefit of implementing TIM is much more than it. The fast growth of sales can provide some positive evidences to certain extent. Table 1. RBD performance and time to market are improved sharply ()
Indicators

Keywords Total innovation Management; Innovation Synergy; Everyone as Innovator

1. INTRODUCTION 18 years ago Haier was a small collective factory named Qingdao Refrigerator Factory (the predecessor of Haier Group) with sales of US $0.42 million only, but with debts of US $ 0.18 million. Due to poor quality of products, the factory was on the verge of collapse. Zhang Ruimin, the CEO of Haier Group, was appointed as the leader of the factory at the end of 1984. Surprisingly, 18 years later, Haier has become the Noldomestic electrical appliance producer in China with total sales of US $ 8.7 billion and an export value of US $ 1 billion in 2002. Haier has witnessed an annual sales increase of 73.8% and made significant achievements in the past 18 years. Haier now produces a wide range of household electrical appliances in 86 categories and 13,000 specifications, and products are exported to more than 160 countries. Domestic market shares of Haier refrigerators, freezers, airconditioners and washing machines are all more than 30%. Statistics of the Euromonitor from a market survey 2002

1 New products

1 1999 I 2000 1 1 253 1 316 \

2001 340

I 2001

I 380 1

NIA

(Source: RCID data collected from Haier Group yearbook and other documents, 2003)
2. RESEARCH METHOD We explore the Tao of Haiers innovation by case study, and the primary research methods are interview, meeting with discussion, literature and documents review etc... Interview. The practice experiments of Haiers staff and top managers are the major sources supporting this research. Research team conducted many interviews to more than 30 persons of Haier with wide diversification, such as

0-7803-8150-5/03/$17.0002003 IEEE

senior executives (as President, CEO, CTO, head of Central Research Institute, SBU(strategy business unit)s, functional departments, etc.), managers, engineers and workers. Trace study. Prof. Qingrui Xu and his colleagues in Research Center for Innovation and Development (RCID) of Zhejiang University have paid continuous attention to Haier Since 1994. In the past 9 years, more than ten members of RCID have frequently visited Haier and made indepth investigations & researches on Haiers innovation management, and many related materials have been collected. Data collection and analysis. Research team collected and examined many companys unpublished documents such as employee handbooks, Haier Newspaper, and other materials and data about Haiers development and economic performance. Some published materials and Haier website c w w is also an important source of the research. Literature review. Members of research team have reviewed a plenty of academic literatures related with innovation management both native and abroad, by which to master the evolution and trends of innovation %m&hese investigations, visits and interviews, several Haier-related cases studies and academic articles have been published recent years.

3. CASE STUDY HAIERS TA0 OF INNOVATION MANAGEMENT 3.1 From OEC to S S T Haiers managerial & institution innovation OEC means 0-Overall, E-Everyone, Everyday and Everything; C-Control and Clear. OEC require: never delay todays work to tomorrow, daily control & clear should leads to daily improvement by at least 1%. Its exciting that if the daily control and clear can improve the performance by I%, the performance will double after 70 days. OEC management pattern is composed of the objective system, daily control & clear system and the incentive mechanism. The essence of OEC is to ensure the persistent improvement by strict and careful management of process. OEC pattern also embodies the thought of people first and high involvement of everyone. Whats more, daily control & clear and the goal of improvement of 1% everyday also indicates the thought of continuous improvement and the need of innovating all of the time, which establish the foundation for the later thought and innovation of everyone as SBU. Based on the OEC management, Haier designed the responsibility chain, by which to link ones job with another, and definite detailed responsibility of every employee toward firms objectives. Obviously, it is not enough to do the things right, it is necessary to do the right things. Haier went to cany out a new revolutionary management, named Market Chain SST is the abbreviation of three Chinese words, namely Suochou (ask for payment), Suopei (ask for compensation)

and Tiaozha (cut the market chain when problem occurs). It means that, the former processes and latter ones are linked up with market chain. Generally, the former (provider) work position will ask payment when they provide latter one with the semi-products, and if there is any delay in the former position, the latter one can ask for compensation. When there is something wrong during the fulfillment of orders, the related third party (often the supervisor) will cut the market chain and solve the problem. OEC pattern was developed and implemented to ensure the fundamental management of daily operation. It can improve the quality remarkably by strict process control which emphasizes rules and orders, especially in the early days of Haiers development. However, OEC might in some degree put workers as a screw of the enteerprise machine, where workers did not directly face to the market and customers. Actually, the essence of Haiers Market Chain is to transfer extemal market pressure to internal market pressure, by which to make every one facing to market directly, and so motivate everyones vigor to satisfy the individualized market demand. No matter do the things right or do the right things, the qualified people are fundamental. By Market Chain management, the relationships among employees are changed from functional to process-based, and from the superiorsubordinate or colleague to market relations. All workers are innovators. By providing every employee with the individualized room for business and innovation to resolve the problem, they will be full of creativity and vigor. The market can play the role of monitor and control as well. The aim of Market Chain is to achieve every one as a S B U , namely every one is boss.

3.2 Haiers people-first based culture innovation:

Everyone is innovator During the evolution of Haiers development, and influenced by Ruimin Zhang, an innovative culture has been shaped and strengthened gradually. Haiers strategy, organization, institution and technology innovations were successfully integrated into a whole system under the unique innovative cultural circumstance. Haiers culture is people-first culture. This cultural circumstance makes everyone in Haier, from managers to every ordinary employee, building up common Haier value, namely everyone should be innovative. The core of people-first culture is that the creativity and the activeness are the instinct of people. A firms capacity comes from not only the activeness of employees, but also the trust of individual value throughout the enterprise. Using the invisible cultural capital to activate the visible shocked fish enterprise, Haier began its diversified development period in early 1990s. The special method helped Haier save much cost of diversified expansion.

3.3 Orderly non-equilibrium structure: Haiers organization innovation Haiers innovation in organization structure can be divided into three stages: Hierarchical and functional structure (1984-1991). Haier spent seven years to build up the famous brand in refrigerators through well-planned TQM (total quality management) system. In this stage, the dominant organizational form was a hierarchical and functional structure.

Business unit structure (1992-1998). With the increasing scale and the complex of management, business unit was launched and dominant during this stage; Flatted and process-based network structure (since 1999). With the aim of building an international famous brand, to compete with world-class enterprises, enabled and accelerated by modem ICTs (Information and Communication Technologies), Haier bas introduced a business process reengineering system linked with market chain since 1999, which is a revolutionary organizational change. By far Haier has changed its organizational form to a flatted and process-based network structure, which focuses not on task but on performance, and the goal of BPR is to realize zero distance with market and customers.
3.4 Creating Markets and Customers: Market Innovation in Haier When Haier went through its development from the brand strategy to the globalization strategy, there came many new thoughts on market innovation. Precise market segmentation Haier focuses heavily on market division. Based on market division, Haier makes pertinent development and marketing to every subsection. For example, the market segmentation of refrigerators takes foumtandards, which are style, estate, location and climate. Employing these four standards, Haier implements its fined market segmentation strategy and have found many new markets. Make new cake Since the beginning, Haier has not accessed to:market by competing for what is existed, but hy making new cake through technology innovation. Winning,the value-added war, but not the price war The key of the price war did not lie in the price, but lied in not catching the users needs, then caused a large amount of stock. The secret of Haier is that never produce for the stock, but according to the valuable market order won by innovating and improving the added value of the products. 3.5 Technology innovation is on the platform of total innovation management As a whole, now Haiers technology innovation is a synergy of each innovation agent on the total innovation platform. Haierhas constructed a fargoing extemal innovation network all over the world that formed powerful support for

Haiers R&D system. At the same time, Haier developed mass innovation and synergized all the achievements of every department and every employee to form the innovative platform of the firm. Analyzing Haiers developing process of strategy innovation, culture innovation, institution innovation, organization innovation, management innovation and market innovation, and combining the idea of technology innovation platform, this paper summarizes and constructs a platform model of Haiers technology innovation and its supporting system (Figure I).

The effective construction of Haiers innovative technology organization gradually finished after continuing indigenous innovation these years. Haier realizes that traditional technology develop pattem in many developing enterprises, such as: introducing - imitating -introducing again - imitating again, only makes the firms technology development in vicious circle, always laggard behind, and the firm will not reach the world-class product forever. During these years, after implementing advanced research instruments, introducing experts, and integrating all innovative resources native and abroad, Haiers capacity of indigenous innovation has been improved significantly. For example, Haier has reached or exceeded the advanced international level in some fields such as car GPS technology, the networked home appliance based on blue-tooth technology, frequency-conversion technology of air conditioner, Freon-free technology of refrigerator, and so on. To foster some promising technologies with wide market potential by which to win sustainable competitive advantage in the future, Haier has chose some strategic fields to do exploring study by its 11 leading-technology institutes and 10 world-class technique labs.
4. OBSERVATION & DISCUSSION 4.1 The formation process of TIM in Haier The launch of TIM in Haier was under the effect of both internal and extemal factors. The intemal factors included strategy, flexibility of innovation process, indigenous management of employees etc. The extemal factors included globalization economy, intemational competitive environment, macroeconomic policy etc.

Main internal factors were as follows. Need of globalization strategy in Haier;

o

Need of improving quality and innovative competence of employees; Need of dealing with the increasing complexity in innovation management; Need of quick response to market and shortening cycle ofR&D.

The external factors were as follows. The trends of globalization andnetwork economy and wave of ICTs based new technology revolution. All these need innovation to he all of the time and throughout the world, and the advanced ICTs such as internet and mobile phone make them realizable; More individualized market demand and shorter time to market;
e

Competition in all aspects, such,as in quality, performance, flexibility, novelty, service, and speed etc, requires innovation in each respect.

The internal factors were main ones to drive Haier to TIM, and the external factors determined external conditions and requirement. The essential causations for Haiers, TIM were five inconsistencies faced with Haier. They were as follows: Inconsistency between supply and need after markets transform vs. satisfying customized needs by TIM; Need of diversified development vs. need of innovation in each respect; Technological and non-technological factors are not integrated vs. TIM based collaboration among all innovations by all factor; How to integrate resources in,China and abroad in international competition vs. global innovation; Innovation speed and ability needed by globalization strategy is poor vs. innovation of all time and innovation of everybody.

4.2 Features of Haiers TIM Innovating by everyone. Since the implementing of TIM, all the employees in Haier are being motivated greatly, and are becoming innovative SBU. And Market Chain give more chance to staff to find the disequilibrium. Globalization of innovation. Oriented by the strategy of globalization, Haier has realized the globalization of all the innovation processes, which includes 15 R&D centers, 6 design branches, and IO S&T information stations that located throughout Europe, North America and Asia-Pacific regions. Instead of the internal and linear development mode, which is low efficient, Haier induces the parallel approach to developing new products by integrating the global technical and intelligent resources. For example, during the developing process of Internet appliance series,

Japanese experts, American technologies, as well as the visual design from France fashion designer, were systemically integrated together. Innovating at anytime. Under the paradigm of TIM, innovation can occur at anytime, that is, to the point where innovation is as natural as breathing. For instance, the R&D of Bluetooth Internet appliance is just such an example. In order to speed the R&D cycle, Haier cooperated with Ericsson and worked in relays to keep a continuous development. When R&D personnel in Haier were coming off work at 9:OO pm, the R&D personnel in Ericsson were just beginning to start work at 2:OO pm. They went on the R&D based on the Haiers achievements. In this way, by the help of internet, they realized the 24-hour continuous R&D, which greatly speeded the developing efficiency. Innovating throughout whole processes. In 1999, Haier Group put the ERP system linked with Market Chain into practice, which was a ICTs-based revolutionary process engineering to face the challenge of Internet economy. The causes and goals of this engineering are 1) preventing Haier from the Sickness of Large Enterprise; 2) transferring Haier from traditional form which is vertical integrated and function-based to horizontal and process-based network form, by which to realize Zero Distance with Customers. The practices in recent years have proved that it optimized the business processes, reduced costs, shorten the time to market, et al. As a result, it grcatly improved Haiers intemational competitiveness; Innovating throughout the whole value chain. Haier has been paying much attention to invite users (or potential users) as co-innovators. Haier brings forward the action of Design the icebox yourself in recent years, and gains more than 1 million customized orders every year. There are more than 9200 basic product models and 20000 basic modules on the e-commerce platform, by which the customms both native and abroad can design their favorable customized products online. Whats more, Haier integrated all the related resources throughout the value chain, such as suppliers, dealers and stockholders, as important part of innovation system. By integrating the resource of users, suppliers and dealers as co-innovators, great benefits have gained. the products are more customized, and R&D cycle is remarkably shortened. Whats more, the innovation cost is shared and reduced largely.
5. CONCLUSIONS a OUTLOOK As we discussed, Haiers 18 years innovation practice has provided us with the interesting experiences, especially Haier innovation and its philosophy. It is gradually forming an effective Tao of innovation and corresponding mechanism of managing total management in practice. We named it as Total Innovation Management (Figure 2).

Market innovation is orientation; Figure2 the

pentagon model of total innovation management
0

Innovation synergy is approach.

(Source:Qingrui Xu,Gang Zheng,et al. Towards Capability-based Total Innovation Management (TIM): The ---Emerging New Case Study of Trend of Innovation Management-A Haier Group, ISMOT&ICMITOZ Proceedings. Zhejiang Univ. Press, 2002.) There are three layers on total Innovation: 1) it involves innovation in all functional area, as innovative key element. Including organizational, cultural, institutional, process, etc., 2) it covers the whole space-time dimension and continuous innovation in every department by, everybody (all as innovators), at anytime to innovate, including the whole value chain innovation; 3) the innovation synergy among innovative elements. The remarkable difference between the traditional management of innovation and total innovation is that it breaks through the past framework of innovation confined only in R&D department. What it the essence and objective of TIM? 0 Aim at winning the sustainable competitive advantage (value added); Focus on accumulating and improving the core competency (as core competency not limited to technological ones). With the proper mechanism and tools, TIM makes innovation pervasive and perpetual throughout the organization, which means that innovate by everyone, at everywhere, on everything, and at any time. The dimensions of TIM inherent elements was as follow: 0 Strategy innovation is the blueprint;
0 0

To sum up, TIM is still a new trend for both native and abroad, and there are a lot of theoretical and practical problems such as the characteristics and operation mecbanism of TIM, et al., to be studied and resolved. This paper only brings forward a preliminary idea and framework of total innovation management, which is hoped to be useful for reference.

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