During a keynote address at the Wharton Global Alumni Forum held in Beijing this month, Zhang Ruimin, the 60-year-old CEO and chairman of Haier Group, offered some reflections on his career in corporate management, which has spanned more than 30 years. In keeping with the forum’s theme — “Global Crossroads for the 21st Century” — Zhang spoke about the balancing act required to lead a global company while remaining deeply rooted in China, and he questioned the adaptability of Western management theories to China’s business realities. Despite these differences, however, it’s imperative for Chinese businesses to continuously improve management quality, he said — especially during the current economic crisis, when companies are tempted to focus solely on survival.

Zhang and his team have built Haier Group from its humble roots as a local collective refrigerator factory in Qingdao more than 20 years ago into a multinational powerhouse for white goods that posted US$16.2 billion in revenues last year.

Despite this success, Haier has had its share of serious concerns during the current global downturn. According to a report published by China Business Journal on June 8, just a few days before Zhang’s speech, the company’s first quarter revenues for 2009 dropped 17.43% year-on-year to 6.8 billion yuan, with net profits 39.89% less than last year. At the beginning of the year, Zhang also announced that Haier Group is going to transform itself from a manufacturing organization to a sales and services company. The plan, he said, is to outsource more of its production to further cut costs, provide better service and respond to market trends more swiftly.

Although the foundation for Haier’s success has been its ability to lay down global footprints, the company is also representative of the trouble affecting many of China’s manufacturers, whether global giants or humble sub-suppliers. Increased labor costs, a stronger yuan, heated competition and the recent collapse in demand from Western clients have combined to squeeze profit margins. At the same time, as a corporation with more than 60,000 employees worldwide that has long lived on its manufacturing competitiveness, Haier’s ability to transform itself will be seen as an indicator of the destinies of its Chinese peers.

Zhang’s speech can be divided into three chapters: The first chapter is on his thoughts on how to adapt existing management theories to China’s reality. The second was on how to achieve management innovation in the age of information. Third, he discussed his experiments in business model innovation.

The following are excerpts from Zhang’s forum speech:

How to Practice Management in China

China was once obsessed with MBA education, but the fever has now somewhat abated. The results of hiring MBA graduates have been poorer than expected. The main reason for this, in my view, is that MBA case studies are mainly focused on Western companies. There are very few on Chinese companies. And in China, we don’t have our own management theories yet. The other issue — and I think it’s a big one — is whether MBA graduates can operate well within the Chinese cultural context.

I met Jack Welch in Boston last November, and my first question to him was how, while his company was number one in the world, every single employee could still realize their [individual] value? That’s very difficult to do in China.

His answer was that there is a big difference between Chinese and American corporate cultures. “In the U.S., I can delegate, because the U.S. has a very well established and very complicated financial system, which will help to push the company forward systematically. I encourage my employees to be more innovative because they are bound up in that system. GE also has many divisions in China, but employees in China tend to frequently change tack because well established systems do not exist in China. This is a big difference between the two countries.”

Our own experience also shows that Chinese culture is different from American or Japanese culture. For example, when we built a factory in South Carolina, our people instructed the American workers on how to carry out operations. A few days later, they told them to alter the procedures, and this drew protests from the American workers: “You told me to do it this way two days ago, and now we have to do it that way. Which way is right? You can’t change things just like that.”

This shows a very different perception about “rules.” Chinese workers don’t have a strong concept of “the rules.” If you ask a Japanese worker to clean a table five times a day, he will do it everyday. But if you tell a Chinese to do the same thing, he will clean it five times today, three times tomorrow and maybe zero next time if no one is watching. In other cases, Japanese culture has more respect for team spirit.

So I have been wondering for a while about how to adapt [Western] management theories to fit China’s reality. But with the unfolding global financial crisis, many companies are trying simply to survive, let alone improve their management capabilities.

When Chinese premier Wen Jiabao visited Haier in January, I told him that Haier cannot just be concerned with “surviving the winter.” We should be thinking about “winter swimming.” You cannot simply give up on management quality, even in a crisis — you have to improve it instead.

Take, for example, two major challenges companies face during the financial crisis: high inventories and outstanding accounts receivable. Normally, companies will just cut prices and hope to sell more. But [at Haier], I am thinking about whether we can upgrade our management capabilities so that we can eliminate these two issues. I said to premier Wen that this has to be done through innovation. In Zen Buddhism, there is a saying: “All walls are doors.” By innovating, you can go through the wall standing before you. Without innovation, you can’t even get through the door.

Management Innovation in the Information Age

In the age of the Internet, there is one challenge — speed. Who can win customers faster? Some say agricultural civilization conquered famine, industrial civilization conquered space and the information age conquers time. Peter Drucker once said that the internet eliminates distance. For companies, this means zero distance between you and your customers.

In China, some media reports say that 93% of ERP (Enterprise Resource Planning) projects have failed, or only 7% of companies successfully implement ERP. My view is that there is a big misunderstanding about ERP programs. If your business processes are not built around customers, you can’t simply hope that IT projects will change things. Take an analogy. Many Chinese companies’ business processes are like water, with the IT part floating on top, just like oil on water. The New Testament, in [the book of] Matthew, Chapter 9, says: “Neither do men pour new wine into old wineskins. If they do, the skins will burst, the wine will run out and the wineskins will be ruined. No, they pour new wine into new wineskins, and both are preserved.” That is a very good analogy for the information system.

At Haier, we have learned our lessons and things are now running much better. For example, we have asked for information to be provided in a zero-inventory context, which is a huge challenge. Even though you don’t have any stock, if the customer wants a product you have to be able to deliver it right now. This implies a restructuring of the entire business process. For instance, in R&D, the product you are developing today has to be something the customers will want six months later. The marketing people have to understand what the customers will want in the future.

We are better at this now. According to some data, the average stock turnover time was 64 days for Chinese home appliance companies in 2008. Haier’s was 32 days, half the industry average. Following our business process restructuring, it has now been condensed to three days. We experienced great pains during the restructuring and our sales performance was heavily impacted, too, but we have overcome the pain and stuck with it. So the inventory issue has been resolved. Many Chinese companies are basically selling their inventories, but in contrast we have begun to sell a service, and to produce on demand.

So, our information processes are built on customer demand and there will be zero stock. The next step will be towards becoming an information-based company, which, in my view, makes your firm an effective link in the global value chain and better able to serve customers worldwide. At Haier, we are now trying to transform ourselves from a manufacturer to a service provider.

Chris Anderson wrote in his book, The Long Tail — which gives a neat interpretation of this issue — that in the Internet age, every company should provide goods at a low cost, and make it easy for customers to get their hands on them. I think the trend will be towards large-scale production on demand, which will pose a big challenge for Chinese enterprises.

Meanwhile, customers don’t deal with just one supplier. You have many competitors in this globalized world, which requires your products to be very competitive in a global context. For a Chinese enterprise, transforming in a post-financial crisis era is a huge challenge.

We are now exploring a way of combining virtual power with “real networks.” Virtual networks exist on the Internet; the “real network” is the “last mile,” meaning logistics, sales and service. We have been actively exploring our “real network” in China, especially in rural areas. Rural China has 2,812 counties, 35,000 towns and 640,000 villages, which implies huge domestic opportunities.

Many big overseas logistics companies wish to cooperate with Haier in this “last mile.” We have the biggest market share in China’s recently introduced “Home Appliances for Rural Families” program, because we have built up a huge network in rural China. Many of our competitors have even asked us to be their rural sales agent. Why? They don’t have the capability to serve every county and village.

Meanwhile, rural areas have their own features. The village head has a big impact on the rest of the villagers, for instance, and electricity is expensive. Understanding the market is important. What kind of service are you going to provide? It has to be closely connected with the market.

Haier’s Experiments in Business Model Innovation

One key criterion for a good business model is that it provides value for customers. The success of Toyota’s refined management model and Dell’s direct sales model is derived from the fact that they can fully realize customer value.

First of all, how can every employee be aligned with one target — creating value for customers? A global organization with 60,000 employees, Haier now has “big-company-disease,” or non-cooperative games that stem from the separate interests of different departments and employees. This could turn into a huge problem. So now we are wondering, how can we all work together to create value for customers? How can we create synergy?

Our first step has been to restructure the organization from a triangle pointing upwards to one pointing down. You put the clients at the top, and then the line manager, employees and then the top leaders, who are now obliged to provide resources to the line managers, at the bottom. Every department has to face their own clients, becoming what we call “autonomous units.”

I discussed this issue with Lou Gerstner, the former CEO of IBM, in Florida in April. He said this is a good direction, but he didn’t [implement this model] during his time at IBM because he had two concerns. First, if you ask the line managers to deal with clients directly, they will tend to neglect new opportunities in the market. Second, if the people who back them up can’t provide the necessary resources, [the managers] will have to do so themselves. That will not please customers.

Our way to solve these two problems is to give every team an income sheet, which is a kind of contract describing the team’s internal commitments. We have done some trials and the results are not bad. It then falls to the top leadership to look for new opportunities in the market as their number-one priority.

For example, prior to restructuring, your sales target might have been US$1 million, and that would be the corporation’s asset. Now, it’s your asset, and you have to add value up to US$1.1 million or US$1.2 million more. And if you make more, you get more.

There are three advantages to this method. First is that responding to market demand doesn’t take long. Line managers can make decisions on their own, with no need to wait for feedback from their superiors. Secondly, it solves the internal gaming issues. Everyone has their own market target, and they have to align their own interests with that target to achieve a “win-win” result.

Especially in China, employees are smart and they sometimes waste the company’s money but conserve their own [department’s] money. Now, if I give you full autonomy and you add value, you get more. If you don’t, you don’t gain, either.

Lastly, I would like to share some personal thoughts about being a CEO for more than 30 years. I think the most difficult thing for a business leader is to defeat yourself. You are not God; you must not believe you are always right. You have to assume that you are always wrong. Only in this way can you constantly challenge yourself. As Jim Collins said in [his book] Built to Last, a leader cannot be a time-telling person. You have to be the clock maker. You won’t get every decision right, but you can encourage everyone in your organization to realize and create value for the company and themselves. That way, the company won’t just rely on you. It will be a precise clock, running accurately, and will be able to overcome all its difficulties.

My hope and objective is to build this company into an automated, organized, automatically driven [one], which will be able to respond to all challenges and crises, and is built to last.