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Dynamic Capabilities and Rendanheyi
1. Dynamic Capabilities and
Rendanheyi
David J.Teece
Tusher Professor, Institute for Business Innovation,
Haas School of Business, University of California, Berkeley
Chairman andCEO, Berkeley Research Group (“BRG”)
Presentation at 2nd Annual Haier Rendanheyi Model Forum
September 20, 2018
2. Table of Contents
I. Summary of Rendanheyi
II. Rendanheyi and Dynamic Capabilities
III. Some Rendanheyi-like US Companies
IV.Conclusions
2
4. Rendanheyi – Core Elements
• Customer Focused Micro Enterprise Structure
• Every Production Line is a Micro Enterprise
• Shallow (Inverted?) Hierarchy – 200+ entrepreneurial teams,
thousands of micro-enterprises
• Pay for Performance
• Employee Equity Program
• No Silos
• Strong Lateral Connections to Related Micro Enterprise Units
• Thin Middle Management
• Co-creation of New Products with Customers
4
Based, in part, on Paul Michelman’s, “Leading to Become Obsolete,” interview
with Zhang Ruimin, June 19, 2017, MIT Sloan Management Review
5. Rendanheyi – Core Performance Attributes
• Customer Focus
• HighAgility
• StrongTeam Effort
• Entrepreneurial Style
• Strong Growth and Financial Performance
5
Haier:Very Agile and Highly Decentralized,
Without Sacrificing Economies of Scale
6. The Logic of Common Platform
Micro Enterprises
• Facilitates customer engagement and growth
• Delivers platform based scale economics without
suffocating individual initiative
• Enables Haier to address both niche markets and mass
markets
• Consistent with a distributed and “open innovation”
R&D model
6
7. Zhang Ruimin’s Organizing Logic:
“The micro-enterprises are not connected in a typical cascading
way.They are connected in a parallel way and are
interconnected so they can work together to create
value for the user.”1 (emphasis added)
• Relentless customer focus (much like Jeff Bezos at Amazon)
• Demolished traditional hierarchy.
1Interview with Zhang Ruimin, June 19, 2017, MIT Sloan
Management Review with Paul Michelman, p. 4
7
8. Haier’s Integration of Online and “Bricks
and Mortar” Business Models
• Robust ecosystem embracing customers/users.
• New products developed through iterative client
engagement.
8
This is unusual, but not unprecedented.
9. Assessment
Haier and its management have developed very strong
dynamic capabilities by designing a unique decentralized
organizational structure which allows customer focused
entrepreneurial action by empowering micro unit teams.
9
Zhang Ruimin’s entrepreneurship, vision, and
organization innovation is the foundation of
Haier’s success.
11. Dynamic Capabilities Defined
The ability of an organization and its management to
integrate, build, and reconfigure internal and
external competencies to address rapidly changing
environments.1
11
1Teece, Pisano and Shuen, Strategic Management Journal, 1997
12. Growing Dispersion inTop and Bottom Profit Margins
12
0
0.05
0.1
0.15
0.2
0.25
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
75th Percentile
25th Percentile
Source: Compustat
Notes:
• Profit margin is defined as EBIT divided by revenue
• The sample was restricted to firms with $100 million
in revenues in at least one of the years between
1965 and 2014
• Revenue field was considered missing whenever it
was zero or negative
• Industries were defined using manual grouping by
the 2-digit SIC code. Quartiles were calculated
across all industries
• Only years with the minimum number of 20
companies were considered
• Industries included: Multiple
13. 13
Keyne’s “Animal Spirits” Foreshadowed
“Dynamic Capabilities”
• The Keynesian concept of “animal spirits” is very
consistent with the bold decisions required by dynamic
capabilities.
• Weaker firms and management teams are devoid of
dynamic capabilities, indecisive, and usually wait too
long for uncertainty to be resolved – by which time it is
often too late.
14. Dynamic Capabilities Can BeThought of as
Falling inThree Categories1:
14
Sensing
Identification of
opportunities &
threats at home
and abroad
Transforming
Continuous renewal
and periodic major
strategic shifts
Seizing
Mobilization of
resources to
deliver value and
shape markets
1See David J.Teece, “Explicating DynamicCapabilities:The Nature and
Microfoundations of (Sustainable) Enterprise Performance,”
Strategic ManagementJournal
15. Sensing is the ability to see
around corners
15
The ability to foresee future
opportunities and threats… what Jack
Welsh (CEO of GE) once referred to as
the ability to “see around the
corners.”
JackWelsh
Kenneth Boulding
The future is bound to surprise us, but
we don’t have to be dumbfounded.
– Kenneth Boulding
16. Seizing/Asset Orchestration is also core to
dynamic capabilities
16
“Apple still has strong growth opportunities
because of its ability to work simultaneously
on hardware, software and services… Apple
has the ability to innovate in all three of these
spheres and create magic… This isn’t
something you can just write a check for.
This is something you build over decades.”
-Tim Cook, Apple CEO (Taipei Times, February 2013)
17. Transformation
• It is often harder to repurpose an organization than to
repurpose a technology.
• The latter is often little more than writing a check; the
former requires organizational reengineering and cultural
change.
17
18. • Haier has gone through multiple transformations
• At it’s core, Haier has transformed
from “an executive culture to an entrepreneurial culture.”
1Interview with Zhang Ruimin, June 19, 2017, MIT Sloan
Management Review with Paul Michelman 18
Haier’sTransformation
Phase 1
The inception of
Ren Dan He Yi
Phase 2
Turned structure of
the organization into
that of an inverted
pyramid
Phase 3
Featured the
transformation into
a self-organized
enterprise
Phase 5
Turned the
organization into a
community-based
ecosystem
Phase 4
Broke the
organization into
microenterprises.
RenDanHeYi 1.0/ RenDanHeYiWin-Win Model RenDanHeYi 2.0
19. Micro-Foundations of
Rendanheyi
• Sensing
• Engagement with customers allows acute sensing
• Little prodigy clothes mini washing machine
• Vegetable washing machine
• Seizing
• Aided by agile micro enterprise structure and Zhang Ruimin’s
entrepreneurial leadership
• Transforming/Shifting
• Four reinventions since founding (see previous slide)
19
Rendanheyi is the enabler of Haier’s
dynamic capabilities.
20. Rendanheyi is an enabler of Haier’s
dynamic capabilities
1Interview with Zhang Ruimin, June 19, 2017, MIT Sloan
Management Review with Paul Michelman, p.7
“The micro-enterprises … are very entrepreneurial and
very good at identifying, developing and seizing new
market opportunities…they are very self organized.”1
20
The above quote from Zhang Ruimin encapsulates the
essence of dynamic capabilities.
21. DynamicVs. Ordinary Dynamic Capabilities
21
• Strategic “fit” over the long run
(evolutionary fitness)
• Sensing, seizing, shaping and
transforming
• Difficult ; inimitable
• Technical efficiency in basic
business functions
• Operational, administrative, and
governance
• Relatively easy; imitable
Ordinary
Capabilities
Dynamic
Capabilities
Doing things “right” Doing the “right” things
Purpose
Tripartite
schemes
Imitability
Purpose
22. The prioritization of ordinary capabilities
can weaken dynamic capabilities
& vice-versa
Benner andTushman (2003) stated the tradeoff/risk
as follows:
“Activities focused on measurable efficiency and variance
reduction drive out variance-increasing activities and, thus,
affect an organization's ability to innovate and adapt outside of
existing trajectories ... Core capabilities may become core
rigidities” (Benner andTushman, 2003: 242)
22
23. Dynamic capabilities are
about a special kind of agility
• Dynamically capable firms are agile.
• Too often, though, agility is defined as the ability to do
commonplace things faster and cheaper.
• When agility is used to refer to a reduction in the time required
to reach best practices, it is simply an incantation for Six
Sigma,Value Engineering, or other efficiency initiatives.
• Those may be necessary for the organization to become more
efficient; but they are only secondarily related to conferring
evolutionary fitness.
23
The agility that matters is associated with
management’s ability to redeploy physical, financial and
human assets into new and better commercial avenues.
24. Agility/Efficiency Choices at Pepsi
“I had a choice. I could have gone pedal to the metal, stripped out costs, delivered
strong profit for a few years, and then said adios. But that wouldn’t have yielded
long term success. So I articulated a strategy to the board focusing on the
portfolio we needed to build, the muscles we needed to strengthen, the
capabilities to develop…we started to implement that strategy, and we have
achieved great shareholder value while strengthening the company for the long
term.”
Indra Nooyi and Adi Ignatius, “How Indra NooyiTurned DesignThinking Into Strategy: An Interview
with PepsiCo's CEO,” Harvard Business Review (September 2015).
24
25. Rendanheyi and dynamic capabilities
both adopt a holistic perspective
1Interview with Zhang Ruimin, June 19, 2017, MIT Sloan
Management Review with Paul Michelman
“We tend to look at things from a holistic
perspective…so we are applying traditional
holistic thinking to our management.”1
25
26. Dynamic Capabilities as a Workable
SystemsTheory1
Note: A dashed border indicates elements that are external to
the firm. Arrows represent major influence.VRIN =Value, Rare,
Imperfectly Imitable, and Non-Substitutable.
26
1“DynamicCapabilities as (Workable) Management SystemsTheory,”
Journal of Management and Organization (2017)
28. Some Rendanheyi-like US Companies
• Alphabet Google
• 3M
• W.L. Gore and Associates
• Berkeley Research Group
28
29. Alphabet Model
● Alphabet is the parent company forGoogle and many
other Google subsidiaries
● The restructuring of Google to Alphabet has allowed
greater autonomy to the companies that operate
outside of internet services
● Alphabet rigorously manages capital allocation to each
subsidiary and services each business to make sure they
execute well
● Allows each unit to focus on opportunities within each
industry and scale more easily
29
31. W.L. Gore –The Boss-less Organization
• No bosses – all employees are
associates and sponsors
• Teams organize around
opportunities
• Associates have freedom to commit
to projects that match their skills.
• W.L. Gore consistently
commercializes innovative products
and is ranked as one of Fortune’s
“Best Companies toWork For.”
31
32. 3M’s Highly Decentralized
Organizational Structure
• Locus of decisions at
laboratory level
• Divisions have
autonomy to respond to
customer needs
• Strategy of growth
through addressing new
niches, rather than
“me-too” competition
32
33. Berkeley Research Group (BRG)
Statistics
• Expert (Professional)
Services Company
• 10 years old
• US $500M
• 1,200+ employees
• 40+ offices on five
continents
• 175 total microenterprises
(“gross profit” or “pass
through” compensation
structures)
33
34. BRG
• Individual experts run their own microenterprises
within BRG
• Find customers, source projects, implement
strategy but build their teams with BRG’s
resources (e.g. junior staff) or BRG’s
infrastructure.
• Experts have considerable autonomy
• BRG’s literati and numerati do not need to be
managed in the traditional sense.
• External motivation is provided through BRG’s
unique pay for performance metrics driven
compensation structure
• Experts have their reputations at stake, as well
as the company’s brand. Allows for creativity,
independence, and entrepreneurship. 34
35. BRG Structure … Mirrors Haier’s
Expert
Expert
David
Teece
(Expert)
Expert
(Group)
Expert
(Group)
BRG Platform
David J.Teece,
Chairman & CEO
Consultants/Associates
Office and IT
Infrastructure
Finance and
Accounting Support
35
36. • High density of top talent
• Flat organization with great agility, certainly at the
project level
• Management committed to coordinating, aligning,
and integrating individual talent
• An enterprise committed to remaining
entrepreneurial, agile, and maintaining its
“disruptor” status
BRG Has Applied Many Elements of the
SiliconValley Management Approach to
Professional Services
Long-term growth, value accretion, and
stewardship orientation
36
39. BRG as an Organizational
Innovator?
39
*Adj. Prof. Martin Mendele
Rotterdam School of Management, Erasmus University
Former CEO, Arthur D Little Europe
“Conceivably the most
successful professional
organization of this
century.”*
