A case study featured in a recent Harvard Business Review (HBR) article on the end of bureaucracy sheds new light on organizational change in the digital age. According to HBR, bureaucracy has been on the rise for years. In fact, the number of people in management roles in the U.S. workforce has grown by more than 100 percent since 1983, while the number of people in all other roles increased by only 44 percent. During the same period, worker productivity slowed down.

“It’s not a coincidence,” according to the article.

Now, bureaucracy has some proponents, and it has served larger, more complex organizations well for years with greater oversight and management. However, in the age of digital transformation where organizations value open collaboration and innovation, is this more traditional top-heavy organizational structure the right choice?  

Researchers Gary Hamel and Michele Zanini from the Management Review set out to answer this question by seeking out some alternatives. They found an interesting example in Chinese company Haier, which purchased GE’s appliance business in 2016 and today is the world’s largest appliance maker, competing with the likes of Whirlpool and LG.

Haier CEO Zhang Ruimin has been on a mission to end bureaucracy for years at the company. Ruimin strives to instill an entrepreneurial spirit among its employees by forging a direct link between what they do and customer value, which he refers to as enabling “zero distance.”

To reach his goal, Ruimin is leading an evolution of how Haier operates and how its employees work, innovate, and collaborate. This includes among themselves, as well as with partners and its ecosystem. Here’s a quick look at where Ruimin is taking the company in his efforts to end bureaucracy:

  1. From Monolithic Businesses to Microenterprises

With 75,000 employees, you would expect Haier to have some pretty massive departments. Not the case. Haier has set up more than 4,000 “microenterprises” within the company, many of which have only 10-15 employees. The goal is to keep employees and teams focused on specific business and customer sets, while allowing them to adapt and change with very little direction required.

2. From Incremental Goals to Leading Targets

Haier takes a unique approach to setting metrics. Rather than using the last period’s results as a starting point, the company takes a data-driven approach to determining objectives. By collecting product-by-product data and market growth rates from around the world, Haier establishes specific targets for each microenterprise with the ultimate goal of building a business ecosystem.

3. From Internal Monopolies to Internal Contracting

Haier believes that internally-facing departments like HR, Finance, and IT should operate as internal businesses, offering valuable services at a cost. In turn, Haier’s microenterprises are free to obtain external services if needed or if more beneficial to their business. Since internal departments rely on each microenterprise’s success to operate, they have a vested interest in helping them perform the best that they can.

4. From Top-Down Coordination to Voluntary Collaboration

With 4,000 microenterprises that make up the company, Haier must ensure that its people work together when it makes business sense. The company does this by enabling “platforms” where microenterprises in common businesses or categories can coordinate opportunities and collaborate on new processes and ideas.

5. From Rigid Boundaries to Open Innovation

Haier takes ecosystems and open innovation to a whole new level. In fact, the company thinks of itself as the “hub” of a much bigger network of collaborators, partners, and customers. For example, when new products are developed they involve customers in the process, actively asking them about needs and preferences. Haier also uses crowdsourcing to gather feedback and has built a network of 400,000 “solvers” that help fix business problems from around the world.

6. From Innovation Phobia to Entrepreneurship at Scale

Rather than setting up operations in innovation centers like the Silicon Valley or looking outside for new ideas, Haier set out to make the entire company a “start-up factory” with its employees driving innovation and new business models. The company encourages internal entrepreneurs and microenterprises to propose new ideas and launch new businesses.

7. From Employees to Owners

Finally, Haier is committed to making employees feel like owners. This goes beyond the usual incentives like bonuses and pay raises to include more autonomy and profit-sharing. In turn, Haier’s microenterprises are rigorously measured with poor performers being subject to removal, or even hostile takeover from internal parties that think they can do a better job.

In the end, the HBR piece contends that while the term bureaucracy was coined 200 years ago, much has changed since then and businesses need to evolve. According to HBR, “Today’s employees are skilled, not illiterate; competitive advantage comes from innovation, not sheer size; communication is instantaneous, not tortuous; and the pace of change is hypersonic, not glacial.”