To answer that, we can go back to the beginning of everything. Modern economics is largely concerned with the question of the generation and distribution of wealth, but the subject also has its roots in ethics. Its tradition linked to ethics dates back to the Greek philosopher Aristotle, who linked the subject to human ends. According to Aristotle, economic action is necessary for survival and a means of achieving a good life. Therefore, although the subject is concerned with wealth, it is not the good that humans seek but a means to the end. Arguably, the modern economy has lost touch with its ethical roots. As long as businesses are concerned only with profit, the cost of avoiding ethics will inevitably be incurred in the long run.
So the issue may be as simple as companies that have lost sight of the end: people. Profits are undeniably essential to the survival of a business, but businesses are also part of society. They are, after all, the people who build and run an organization and the company that provides its resources for its operations. The question is how to reconcile the seemingly contradictory goal of creating value for shareholders as well as for the general public? It requires a paradigm shift in business management that places people at the center of its operations. The steady growth of the leading home appliance manufacturer, Haier Group, is a testament to the success of this approach.
Haier’s business model, called the Rendanheyi model, follows the principle that “human values come first”. The term “Rendanheyi” is made up of three terms: “Ren” which means employees or people, “Dan” or user needs, and “Heyi” which means integrating the needs of employees and users. The model is seen as people-centered because it places consumers, employees and external partners as the axis on which the company operates and evolves its strategies.
The central idea of the Rendanheyi model is to create a “zero distance” with users in order to better meet their needs. Instead of creating a product and bringing it to market, Haier first aims to understand the needs of users. In the age of the Internet of Things (IoT) where the interconnection between people, between things, and between people and things has resulted in an abundance of data, it can be harnessed to better understand user needs.
The “Ren” or employees play a central role in the Rendanheyi model. Haier achieves its “zero distance” with users through its employees who directly face the users. This is made possible by replacing the linear management model with ecosystem micro-communities (CEMs). An EMC is a community of microenterprises (MEs), which further consist of 7-8 employees who interact with users and respond to their needs. They have the right to make decisions, the right to hire talent, and the right to distribute compensation. Meanwhile, functional departments have merged into a single shared services platform, providing financial, HR, legal and IT services to MEs. In this way, employees become entrepreneurs who create value for users and are paid by users in proportion to the degree of value they are able to create for them. By directly linking employee compensation to the value they create for the user, the Rendanheyi model creates equitable incentive structures to drive efficiency and thus improve employee well-being.
By keeping zero distance from users, MEs were also able to assess how user attention in the IoT age has shifted from isolated products to holistic, experience-based lifestyle solutions. . For example, products like the Amazon Echo or Google Home speakers show how devices like speakers can be reinvented to provide a much broader user experience, and consumers are looking for such products as well. Because a single ME is too small to offer such comprehensive solutions, EMCs bring together MEs from different industries to meet user needs and co-create solutions.
EMCs are a new paradigm in a model that is constantly evolving to align with user needs. As such, EMCs are open and dynamic, and therefore allow external stakeholders to join them to co-create solutions and share value. By orienting business offerings through their myriad of complex needs, users also become co-creators and drive further expansion of EMCs, as varying needs lead to the development of more MEs. Thus, through this ecosystem of users, businesses and other stakeholders, the Rendanheyi model improves user experience, maximizes value for employees as well as external stakeholders who join EMCs, which helps the ecosystem to evolve without leaving anyone behind. In this way, the Rendanheyi model is a game-changer and eliminates the element of the zero-sum game. Instead of getting the biggest slice of the pie, stakeholders within the ecosystem, driven by the interconnected nature of value creation, instead aim to increase value for others.
By keeping people in sight, the Rendanheyi model leverages the abundance of data and interconnection facilitated by IoT to serve a purpose much larger than simply creating shareholder value. Since the goal is to create value for everyone involved, Haier’s business model does not compromise between people and technology, but uses the latter to forge a stronger bond between people. In the future, the Rendanheyi model has the potential to tackle larger societal issues as well. Just as CMEs allow cross-sector collaboration to meet user needs, solving broader social issues related to health, education, etc., also requires similar collaborative efforts. This can open a new chapter in the business ecosystem which has long functioned as an entity external to the company.
Amit Kapoor is President, Institute for Competitiveness, India and Visiting Fellow, Stanford University. Harshula Sinha is a researcher, Institute for Competitiveness, India.