Gary Hamel on Nucor & Haier: Humanocracy in Action

Episode Transcript
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I am delighted to welcome back.
You can see the tome of workon the shelves there, and
that isn't the half of it.
I have gone down so many rabbit holes,reading articles, HBR, all types of
different journals where he features but,.
Today we're focused on the new release,the updated release of his hit book.
Humanocracy.
Welcome back, Gary Hamel.

(00:50):
Yeah, pleasure to be back with you, Aidan.
I mentioned going down the rabbit holes.
I am very fortunate to be doing aseries on your friend and mentor,
Joe Bower, and I've spent somegreat hours with Robert Burgelman.
And Burgelman worked a lot with Intel,as you know, and wrote a lot about
strategy as destiny and how strategy getsstuck and, and comes up from the bottom.

(01:15):
Some great, great conceptscoming from there.
But it reminded me that the firstplace I learned about one of the
companies you feature as a Humanocracycompany in Clayton Christensen
work on disruptive technology.
And this was the mini millsand the company Nucor, which is
where I first learned about this.

(01:36):
So I'd love you to give us abit of an introduction there.
And by the way, Joe Bower says hi to you.
He said he feels likeyou're one of his grandkids.
I, I, I wish it was a grandkid.
Yeah.
May, maybe a nephew.
We'll, we'll see.
But no, happy to, happyto chat through that.
You know, I guess I start by saying, youknow, we've, we've really been kind of

(01:59):
talking Aidan about how our organizationsneed a pretty fundamental reset that,
you know creating an organization thatis up to the challenges that lie ahead
is more than a matter of just, youknow, layering on some new practices.
We kind of got, gotta go back tofirst principles , because, , in
any institution, you reach a pointwhere you can't solve the old

(02:20):
problems with the new principles.
As I've, I've argued.
And that's a pretty daunting thing.
You know, when, when, when you thinkabout kind of DNA level change,
changing an organization kind ofroute and branch you know, there's
good reasons that would be kind ofdaunting for any leader to think about.
And, you know, I've, I've argued thatthere, there are kind of four things
that, that you need to be able todo that you, you need motivation.

(02:42):
You need to believe that reallywe are at a point where more
of the same isn't enough.
You likewise have to believe thatthe changes we need are going
to have to be deep and systemic.
So, you know, you, you have to gotto, you have to get to that point
where you really don't think there's,there's a viable alternative.
And many organizationsare not yet at that point.
They're still, you know, trying to,, change around the edges, take out one

(03:03):
layer here, do some downsizing there.
But the motivation is absolutely critical.
And may maybe we talk justa little bit about that.
Secondly, you need some models.
And, you know, even though I'vekind of, , bemoaned the fact that
in many organizations they, theywon't start to change until it's like
blindingly obvious and somebody isgiving you the whole roadmap to do it.

(03:23):
I'm also sympathetic that it's really hardto convince yourself to doing something
that kind of nobody else has ever done.
Right.
We don't really expect many CEOs to bethe right brothers and, . Say, let's try
something that has never been done before.
So you need some models that give yousome confidence that, you know, you're
not starting down an impossible path.
I think thirdly, you need some prettydeep mindset changes, which I think we'll

(03:45):
talk about, and changes in perspective.
If you don't have that, thisis gonna stall out, I'm sure.
And then finally, you need a migrationpath from kind of here to there.
So even if you have, some very compellingmodels that say Hey, there's a different
way to organize human beings at scale.
You can build a, a much more capableorganization if you start with
a different set of principles.
How you go from here to there, , isa real, a real challenge.

(04:08):
Now, we're gonna talk about a coupleorganizations , in our conversation
today that were not greenfields, right?
These are not companies thatlike got started on this new kind
of posts, bureaucratic DNA, butthey had to make that transition.
I. And maybe we'll, if we have time,we'll talk about more than a couple,
because I'd like to be able to coversome from different industries,
different countries and so on.

(04:29):
But, yeah, so that's really what we'retalking about today is like, you've
grown up in and around an organizationthat fits a particular kind of template,
that old bureaucratic template.
Most leaders have never seen,, anorganization , that is different
fundamentally from that template.
So it's, it's hard, it's hard to imaginethat something might be possible.
But let's look at some examples andsee whether that's the case or not.

(04:51):
When I first read about Nucor, I mentionedthe mini mills and stuff like that, and I
just thought it was such a boring example.
When I read, I struggled actuallywhen I first read the Innovator's
Dilemma and I struggled about eventhinking about these businesses.
Also in Jim Collins.
Good to great.
He talked about Ken Iverson, mayhe rest in peace, the former CEO.

(05:11):
Of Nucor and he talked aboutthis level five leadership.
But there, when I read your work,it really brought it to light.
It actually gave it human,a human sense to me.
And you also talked about,well yeah, that's point.
That's the point here.
If you think about a steel mill,you just think about probably.
The archetype of theindustrial revolution.

(05:34):
Like if you think about this old schooltype of factory heat, sweltering heat,
people in hard hats, raw, raw, hard work,it, there's no place there for thinking.
There's no place there for autonomy,but huge prove that absolutely wrong.
And I thought I'd set this up with aquote from the late Iverson who said most

(05:55):
of today's corporations were conceivedas command and control organization.
We built Nucor under the assumptionthat most of the genius in our
organization would be foundamong the people doing the work.
I just thought that was suchan incredible thing to say in
something like a steel mill.
We both work with organizations,Gary, and one of the things that

(06:16):
often is said is in a manufacturingtype organization, we don't really
need innovation, we need execution.
And Nucorp shows that isabsolutely not the case.
Yeah, no, I, I agree.
And, you know, Nucor has been astandout company for many decades.
So, you know, as you, as youmentioned, many, many people have
written about it and talked about it.

(06:37):
Some have kind of emphasized the, kind ofthe strategic angle, like Clay Christensen
and, you know, the difference betweenthe mini mills and traditional integrated
steel companies and have argued that Nucorcertainly had an economic advantage there,
which I think is true, although they have.
Plenty of competition nowfrom, from other mini mills.
Others have emphasized , thefact that the company's very

(06:58):
good at creating new knowledge.
And all of that's true.
And then, you know, Jim Collinslike level five leadership.
Yeah, except not the usualkind of level five leadership.
In fact, if you look at Collin's model,it's a very stratified model of, this,
at the top of the pyramid, hopefullyyou have these level five leaders.
Well, Nucor is the oppositeof a stratified model.

(07:20):
And Ken Iverson, or CEO Sense, wouldnever claim to be level five leaders.
They would claim to be stewards ofan organizational culture that, that
encourages innovation at the fringes.
But nobody celebrates these CEOs asyou know some kind of extraordinary
prescient you know, leaders.

(07:40):
They simply I. Have aperspective on human beings.
You know, it's, it's interestingtalking to some of their former CEOs.
One thing that came back again and againwas the idea that the company's really
in the business of building people.
And I, may not get this exactly right,but one, one of the CEOs, John Ola, said
we build people, because if you buildpeople, you'll have strong communities.

(08:02):
And if you have strong communities,you'll have strong companies.
And so it's kind of just theopposite of that tendency to look
at, human beings as resources.
And, as we've talked about in our serieshere, , , one of the most unfortunate
legacies of that bureaucratic modelis that kind of caste system where.
The assumption was, you know,the thinkers are at the top and
the doers are at the bottom.
And that's, you know, that'sa, a a legacy of a time when,

(08:25):
that was probably true, right?
Where people on the front lines werenot very well educated and so on.
But that's certainly not the case anymore.
And yet that that prejudicestill, still exists.
So you're also right that, you know,when you think about a steel mill, you
think about, yeah, well you're gonnaneed people who have like brawn and

(08:45):
who are very cognizant of safety and, they're willing to sweat and work hard.
But you wouldn't think that kind ofimagination and analytical skills and
teaming that these are really fundamentalto, to, to running a steel mill.
It's certainly a daunting ifyou've ever been inside room,
it's a very daunting place to be.
You'll have these.

(09:06):
Enormous urns, I'm not sure whatyou call it, containers in which
they melt scrap metal with 175megawatt electroshock treatment.
And, you watch people pouringout streams of molten metal.
But at Nucor, it's definitely theexpertise of those on the front lines

(09:26):
that has made this company what it is.
And let, lemme give you an example that,that is repeated hundreds of times,
maybe thousands of times every year.
This happened at a plant new CORand Blytheville era Arkansas.
Not many of our listeners are viewershave probably ever been to Arkansas, and
there's probably no good reason to go.
But having said that, a lot of nucor'splants are in kind of more rural areas.

(09:50):
And this is the facility that createdthe giant I-beams that undergird
new York's one World Trade Center.
But, a few years back there,there were crew members, not
managers, not engineers and so on.
There's some crew members whorealized they were gonna have
to replace this colossal bowl.
The furnace shower where all this stuffgets melted, the metal gets melted, and

(10:13):
so they got an airplanes again, theseare blue collar frontline team members.
They got an airplanes.
They went out and got bids.
They talked to vendors and I think thecheapest bid was around $30 million.
I thought like, wow, that's too expensive.
And of course at Nucor, your compensation,your bonuses depend on asset productivity.
So if you could do, if you could savesome money and not, you know, spend less

(10:38):
money on capital, that's a good thing.
And blue collar employeesunderstand that, right?
Which most blue collar employeesdon't have that perspective.
They have no idea on capital efficiency.
So anyway, they're going around theworld, they find the lowest bin, they
think, gee, that's too expensive.
So they went back, they hiredtheir own metallurgists.
I mean, consultants designedtheir own cauldron and then went

(10:58):
and found fabricators to make it.
And in the end, it costthe company $3 million.
So, you know, one 10thof the original bid.
And, and if you multiply that kind ofinnovation by a hundred times, a thousand
times a year, you start to understand.
Why these guys have been the mostconsistently most profitable steel.

(11:19):
So that's, that's justlike a little insight.
But I think what's useful isto maybe just unpack a few
bits of their management model.
And I'll try to do this kind ofquickly and just a few headlines.
But first of all, they run around,I guess, around 70 or 80 steel
plants across North America.
Each of these plants isan independent business.
It has its own p and l, it has virtuallyno corporate costs allocated to it.

(11:43):
At the center, you'll find very few ofthe traditional corporate functions.
I don't think you'll findengineering or sales or HR and so on.
All of that is distributeddown to these plans.
So you really feel like.
This is my business.
And a typical plant will have somewherebetween 600 and a thousand employees.
So people feel like they'reworking in something that
feels like it belongs to them.

(12:04):
And, you know, and there,there no approval levels except
for , major capital projects.
The firm can pretty much manageits own budget and everything else.
So you start there as a verylarge company that's basically a
confederation of, relatively mediumsized companies or divisions.
Number one number two, they havea very lean management model.

(12:27):
At the center they have roughly about ahundred people at the corporate center.
And this is for whatever, likea $30 billion corporation.
Within the plants.
The average span of control is one toabout 130, 140 frontline employees.
And overall, if you compare Nucor toits global peers, aor, Midal and so
on, you find it has about a third thenumber of of managers as you typically

(12:53):
find in a company of this, of this size.
So that would be second, I think thirdly.
Is decision rights.
And at nucor the frontline teamsare kind of ridiculously empowered.
They take the lead in setting theproduction targets in allocating tasks,
in dealing with disciplinary issues, inmeeting safety and quality standards.

(13:16):
Any team member can issue apurchase order for up to a
$50,000, which is like unheard of.
And let's say a team memberneeds a new plasma welder.
They find the vendor, they,specify what they need.
They place the order.
And there's a lot of, there'll bea lot of consultation 'cause you
don't wanna make a stupid decision.

(13:36):
But they really trust thefrontline people to make a lot of
very, very important decisions.
Four, they reward new thinking.
They reward innovation.
Frontline teams at Nucor are paidabout 75% of the industry average.
But once a team exceeds a productivitythreshold they start to get a bonus.

(14:01):
And basically if you think about aparticular part of the production
process, there'll be a rated capacitygi given this many people, this many
machines, here's what we expect in tonsper hour or whatever that process may be.
Well, once you get to kind of 80% of rateof capacity, your bonus kicks in and it
keeps going up as you get more productive.

(14:21):
So, every employee has this powerfulincentive to, to sweat the assets.
The bonuses go to teams, not toindividuals, and with bonuses included,
Nucor employees make about 25 or30% more than the industry average.
And that, that pay gap.
It's complete testimony to the abilityof these people to to innovate.

(14:43):
I was talking again to one oftheir excos and I said, this is
the most innovative steel companyin the world year after year.
And I said, like, you must havean amazing r and d department.
He said, yeah, it's 20,000 people strong.
So that, that comes out ofindividuals on the front lines.
Every plant is accountablefor its own growth.
And and that includes theblue collar employees.

(15:05):
If demand slackens, if you lose a bigcustomer for whatever reason, or you're
going through a downward businesscycle and capacity utilization goes
down, that affects everybody's pay.
So again, blue collar employeeswill be on airplanes, they'll
be out talking to customers.
What else can we do do for you?
How do we capture more of your business?
And so, again, everybody here isthinking like a business person.

(15:29):
And that's not by accident.
When, when you get 'em hired by Nucor.
You get a lot of training in kind of basicfinancial literacy and business skills.
You'll go through a simulation where,again, a newly hired blue collar employee,
you'll learn how to run a steel plan.
Where you know you're running upsand downs through the business cycle.
You have to buy energy, you haveto hire people, you have to decide

(15:52):
on pricing on capital investment.
And again, even though these areso-called blue collar employees, every
employee has a personal developmentplan that will outline the next five
to 10 years of their career goals.
And that may mean that you move atsome point into a supervisory role.
It may mean you move into a differentdepartment, you wanna learn new skills,

(16:13):
but you know, they, in a sense, theytreat their employees in the same way.
You know, you look at the plantitself, like how do we just create
better, more capable employees?
But they trust peopleto make these decisions.
Because they've investedin building these skills.
You don't empower people if youdon't believe they have competence.

(16:35):
Now a question I think a lot of peoplemight have is, all right, you have 70, 80
plans running and a very lean head office.
Where does the coordination come from?
How do you capture the benefits ofbeing a very large company despite
being, a fraternity of small companies?
And that happens almost entirelythrough lateral coordination.
So there's all kinds of things they do toconnect these plans together and to make

(17:00):
sure you're learning from one another.
So they every plant gets to see allthe financials of every other plant.
So when you see a plant that's doingbetter, that's kind of in make, you
know, in your product line area anddoing better what often happens is
they create a best marking team.
So that may be, might be drawnfrom several different meals.

(17:21):
You send that team intothis high performing.
Mill and you look at what they're doingdifferently and they codify it, and that
gets spread across the organization.
So the, the elapsed time from somebodyfiguring out something new to that
being shared practice across theorganization is often measured in weeks.
Whereas, if somebody, if somecentral function had to recognize
what was being done differently, hadto codify it, had to train people,

(17:44):
that might take a very long time.
But here, there's no up and down.
It's just like you know a plant to plant.
They spend a lot of money building thoseconnections between people across plants.
So plant managers aregetting together every month.
The layer beneath them will be gettingtogether a couple of times a year.
And people within particular teams andfunctions will meet with sister plans.

(18:06):
So a lot of.
You might think of even overinvestmentin building that social capital across
the organization, but that becomesthe conduit for best practices and
knowledge to move very quickly.
The plans also collaborate onbig new strategic initiatives.
I don't think Nucor has like abig top down strategy, but a plant
may see an opportunity, realizeit doesn't have enough resources.

(18:30):
So you reach out to other plants and yousay, how do we collaborate on this one?
Example, about a decade agosomebody was asking, why aren't we
selling more to the car industry?
Auto industry?
Because most of their steelis, wasn't actually high enough
quality for that application.
Very high quality for constructionand other things, but not, what
you need to build an automobile.

(18:50):
So five plans came together, they divviedup, the task of, of talking to customers,
figuring out what was necessary, buildingtechnical skills, making plan investments.
And that's now about10% in Nucor's business.
And that's happening all the time, right?
They're not waiting for somebody fromthe top to say, here's our strategy.
It's where do we see anopportunity for growth?
If I can't do it on myown, who else can help me?

(19:11):
Every single person in this company,everyone has the incentive to
grow and build a better business.
So that's happening all the time.
Finally to support all of this,they have just built a lot of
trust with their team members.
They have never made a layoff, eventhough there was a couple of times,
I think, during the financial crisiswhen they, in fact, I think only once

(19:34):
have they had an unprofitable year.
And they would've beenprofitable if they laid off.
No investors pushed them to do thisbecause they understand the value
of the continuity and the trustand so on with their employees.
Well, there is a tough time.
Everybody's salary goes down.
The leaders proportionately morerather than what's typical is we just
lay a bunch of frontline people off.

(19:54):
Obviously investing in training,that's a mark of trust.
Sharing every bit of financial informationopenly, that's a mark of trust.
So all the commercial data bids,orders, pricing shipments, return on
assets, like anything that's relevantto running the business gets shared.
So a lot of the folks I talk to, theydescribed this as, as a chain of trust.

(20:17):
Not a chain of command,but a chain of trust.
So, yeah, that's, you know, if, if.
Businesses that, that are small andrelatively small and independent.
Very few layers of management, whichforces people lower down to, to build
their own managerial capabilities.
A lot of, a lot of empowermentdirect rewards for innovation.
When you raise the productivity,that in next week's paycheck.

(20:40):
Everyone, accountability forgrowth, very deep skills.
I mean, all of these things togetherhave just produced a company
that, you know, year after yeardelivers extraordinary results.
They're.
Profit margin tends to be 50 or 60%above, you know, 150% of what their
peers would be their return on capital.
Same thing tends to be from one anda half to two times their peers.

(21:02):
Net income per employee, anyway you measure it you know,
market value per employee.
They just outperformeveryone in the industry.
And the, the interesting thing,Aidan, and you'll see here, as I
said, Nucor's been around a long time.
There's a bank, I dunno if you'vetalked about Svenska Handelsbanken
in Stockholm, which has for 50years been the best performing bank
in Europe among his peer group.

(21:23):
And you look at some of these examplesand be like, okay, these guys have
been winning for 30, 40, 50 years.
Presumably anybody can, andstuff is written about them.
It's not a secret here.
I. So it really becomes interesting,like why haven't these practices been
more widely a adapted, that comesback to mindsets and motivation.
But certainly you see at Nucorthis like super clear model, you

(21:46):
know, for how you unleash theeveryday genius of these people.
You flatten the pyramid, you teachpeople to think like business people.
You give everybody responsibilityfor a p and l, P and l, right?
You create these dense lateral networks.
Not a mystery, but yet notalso a common practice.
Man, great memory and great job recap.

(22:07):
You, you basically wentthrough all my notes,
Okay, well, sorry.
covering that chapter.
No, but there's, there's a couple ofthings I, what, really struck me, right?
So I, had the benefit of, I listened tothe audiobook and I read it, which was
great 'cause it got a double whammy.
And then I took notes, notes and thenI went, you know what's interesting?
When somebody looks at this abusiness, they'll go, , if they know

(22:30):
the literature, they'll go, oh, well,Nucor was a disruptive innovator.
That's what they did.
They came in at the low end of themarket build capability and moved up.
I'd love you to explain that a little bit,but what, what I, what I learned from you
and from our series was more than that.
It's also model or management paradigm

(22:51):
innovaton
where they not only change how they comeat the lower end of the marketplace, but
they change how they actually did things.
And it's those, it's the combinationof those things where people might
just go, oh, they were lucky.
They got in at the lowend of the marketplace.
It's kind of like Toyota coming inat the low end of the marketplace,
but then having a totally differentsystem of how they worked and the,

(23:12):
you know, the whole productivitysystem and kaizen and all that stuff.
It's a combination of those things.
And as you say, the formulais there, go and do it.
Yeah, I think I.
I spent a lot of my life thinking andwriting about strategic innovation.
We talked about, you know, the bookLeading the Revolution and I wrote a

(23:36):
piece called Strategies Revolution,I think that came out before really
almost anybody was talking about this.
So I believe that kind ofinnovations is hugely important.
And but what you have to, what youhave to answer is like, why 40, 50
years later are they still in the lead?
You know, I dunno if we've talkedabout this before, so pardon me if

(23:56):
I have Aidan, but I tend to think ofinnovation as on, on kind of a scale
or different sorts of innovation wherethe bottom you have innovation in,
in, in maybe products and services,the next new iPhone or, you know, some
new financial derivative or whatever.
A level up from that you haveinnovation in operations.
So maybe, you know, 30, 40 years ago,Walmart, like really running, learning how

(24:18):
to use it to run this huge supply chain.
A level up from that you haveinnovation in, in, in strategy.
You know, here's a new businessmodel of disruptive innovation.
And so on a level up from that, youhave innovation in the ecosystems.
So you look at some of the Chinesecompanies like Tencent and so on,

(24:39):
or Alibaba who've built these,these kind of super apps and so on.
Or you look at Apple withall its iOS ecosystem.
But I think at the top you have innovationand management and organizations, and
those are the source of innovation.
I'm, I'm pretty sure, 'cause we looked atthis carefully, these are the source of
innovation that pay the biggest dividends.

(25:00):
And also for the longest becausewhen you, when you change.
If, if, if you think leaders are kindof hostage or loyal to an old business
model, I consider they're a lot moreloyal to an old management model.
So, you know, particularly one where,where, where, where, where, where

(25:22):
they're the ones in charge and, and,and get most of the moens and so on.
So yeah, it, if you look back atthese fundamental shifts in management
model, often it is 30, 40, 50 years.
And if you go back farther into militaryhistory, it often took a century for
other, other armies navies to figureout like what was different here.

(25:42):
So I don't think, you know, you can't,probably many of these stories, you
can't boil it down to like one thing.
Yeah.
There's a lot of you know, in factif you, if you think of Nucor, their
management innovation is what is drivenan enormous pace of strategic innovation,
of operational innovation, of productinnovation, and, because the, the

(26:04):
lemon, so many of these organizations,yeah, you see a company that once they
made a big strategy shift, but what'stheir ability to do it again and again?
Right.
So Nucor, the mini mills startedout, you're using scrap use, lower
quality inputs, and you producekind of, you know, not, not, not
such high, high, high quality steel.
And, and it's a huge, the innovation thatit took for them to end up competing with

(26:28):
the traditional competitors on very highquality steel, you know, that you can put
out in one millimeter sheets and so on.
It was like an enormousamount of innovation.
So a lot of folks, you know, thatinvent new business models, yeah,
they're in the lead for a while.
They never reinvent themselves.
They never reinvent the core.
And sooner or later, you know, they, theyget preempted by, by some new competitors.
So any one of these things ispart of the story, but I think

(26:51):
the deepest part of the story hereis how they look at human beings.
And by the way, when you talk tothem, they'll tell you that, right?
They'll admit, yeah, wehad a great strategy.
You know, we had some certain costadvantages, but we've had also a lot
of imitators through the years and,you know, we've held onto our lead.
In fact, the lead has gotten bigger.
So when they tell the story,that's the story they tell.

(27:11):
And I'll trust them.
That they know it's reallydriving their success.
There was a couple of things yousaid in that chapter as well, and
I highly recommend reading it andthe updated version of the book as
well, which will release this episodejust before it's coming out as well.
There's four things you talk aboutthat are human ocracy traits.
The first was stratification, thenthere's standardization, formalization,

(27:34):
and finally specialization.
And I thought we just mentioned them ata high level from a Nucor lens, so we can
talk about stratification, for example,the formal hierarchy, that type of thing.
Yeah, stratification.
As I said, they're very flat, very fewfew layers, probably two maybe layers
between a frontline employee and the CEO.

(27:56):
So super flat.
And you know, I will tell you the,
I think, you could probablymeasure the effectiveness of
any organization using a ratio.
Or maybe this is how you think about howgood they are at using ca capability.
Take a ratio where you have oneas the numerator and the number

(28:18):
of layers as a denominator.
So eight layers, that's one, eight.
So you're probably using one eightof your human potential, right?
So you gotta shrink that.
And also, you know it, you're not waiting.
In fact, I was talking, thisis like a weird example, Aidan.
So I'm a member, of a golf coursethat recently got acquired by
a big golf course operator.
So I'm not an equity member.

(28:38):
This is just a resortclub in UK and whatever.
But, they just recently got takenover by a very large operator.
And I was asking some of thestaff, like, what's changed?
One of the first things guys says, well,I need a new credit card machine here.
And you know, in the old days we would'vebought that and I'd had it with a week.
Now it's three months of requisitions,approvals, justifications to

(29:00):
get a new credit card reader.
So I think that you know, thatthat flat lack of stratification
makes it clear to people thatyou are gonna drive the success.
It reduces the lagsbetween sense and respond.
It forces people to grow upand really use their skills.
And rather than like delegating up,somebody else will figure this thing out.

(29:22):
So yeah, you see that in spades at Haier.
just on that point,
Yeah.
lady you quote in the book, Mary EmilySlate, former GM of Hickman division.
She says, the greatest thing is you getit done without somebody from the top
saying, this is what you're going to do.
The I and the idea.
Has come from the ground floor, sojust on that point of stratification.
The next was standardization, forcedstandardization, chokes off innovation,

(29:46):
and turns employees into automatons.
Everybody knows this.
They hate when this happens.
Yeah.
Well, again, if you look acrossall these plants at Nucor, there
is no standardization, right?
Every plant gets to, they're alltrying to figure out like what's a
better way to do things and they'renot following some corporate rule book.

(30:09):
But at the same time as wewere talking about, they.
No, whenever somebody has made afundamental improvement and they have
mechanisms for very quickly disseminatingthat, so the system is leveling up,
it's kind of self-leveling up at arate that would be impossible if you
have a whole lot of formal processesand procedures and they only get
changed once in a long while, but isclearly they're no longer working.

(30:33):
So yeah, standardization.
I mean I believe that
in fact, standardization is probablyeven the wrong way to think about it.
The way to think about it is we,whatever we're doing, we wanna do it
in the best possible way and and soI'm gonna find out whoever's doing it,

(30:54):
and we will in a sense, standardizearound, at least for now, right?
We'll standardize, we'll all bedoing whatever collectively we've,
we've discovered is the one best way.
But nobody's setting that up aslike, that's the way you do it.
Hey, that works for now.
It works until somebody findsa better way, which a lot of
people are working on that.
And so, yeah, standardization.
I, I think that's even thewrong way to think about it.

(31:16):
You, you, you need to think aboutcoordination, homogenization learning
from each other and you will coalesce,maybe coalesce is a better word.
You will coalesce around the things thatproduce the best outcomes, but those
things don't get turned into standards.
They don't get turned into rules.
That's just the best way for now.
And yeah.

(31:36):
So standardization.
Yeah, I mean by theway, , lemme say one thing.
I think people gravitate towardsstandardization because there it is.
The fact that in many organizations.
Large, particularly global organizations,you'll find people doing things
around the world in different waysfor no other reason than they haven't.

(31:57):
They've never talked to each other, right?
They haven't learned what thebest practices are across the
organization, or they're justkind of bloody minded and damned.
This is the way, this is the waywe do it in wherever in Country
X. So I don't want differentiationthat is born out of ignorance or
out of bloody mindedness, right?
If somebody's doing it differently, it hasto be, they know what all the options are.

(32:19):
They've looked at them and they thinkthat in this particular country, for
this particular reason, whatever,there's a reason to do it differently.
So I don't want gratuitousdifferentiation, and I don't
want four standardization.
All, both of those arelike really bad choices.
But I think when you look at that problemfrom the top, you're like, wow, people are
doing all these different ways and it'sclear like, these guys are, well, let's

(32:39):
just like make everybody do the same way.
But that's, that's like makingevery guy buy a 40 regular.
You know, like it's notgonna work for most people.
And yeah, these are the thingsyou say that they go against them.
So formalization being the nextone, like every organization needs a
certain amount of structure boundariesthat delineate teams, et cetera.

(33:00):
But Nucor, like humanocracycompanies is not balkanized rather
than using corporate staff groups.
And you, one of the things yousay is the only two corporate
functions are CEO and CFO.
That's it across all those companies.
So maybe you'll say, so formalizationagain is something that they avoid
and they rely instead on networks,like you said, collaboration.

(33:22):
whenever you start to create formalboundaries, and that's really what we're
talking about here between businessesand functions and so on, you end up
with silos and you end up with thingsthat, that kind of, you know, block
learning and worse, people tend to thenbe loyal, within the silo rather than
to actually producing business results.
I mean, they do have divisions.
You can say, , division 1, 2, 3, 4, 5.

(33:42):
But there are no silos.
As I said, they made this enormousinvestment in face-to-face communication.
Also, of course, digital, butface-to-face communication where
people feel like they're a team.
So they simultaneously, and again, this isone of those both, and that you're trying
to get at, they're very proud about theirplan and they're very competitive, right?

(34:03):
Everybody likes to be at the top of theleague table and, you love to be the
one hosting those best marketing visits.
'cause everybody's coming to you andsaying, , you guys figured this out.
This is genius.
So there is that, I don't wanna callit parochialism, but there's a set,
a great sense of pride , in what,you know, these plants are able
to do and in your local facility.
But there's also , a greatsense of collegiality.

(34:23):
That we're part of this amazingcompany called Nucor that it has this
amazing model that, , we get betterat the pace we learn from each other.
So there's both a senseof shared identity, but
also , a sense of local pride.
And I think again, it's easy to have alot of local pride and ignore everybody
else and behave in kind of selfish ways.

(34:46):
So , balancing that between clear units,with clear boundaries, but not impermeable
boundaries where nobody's primary loyaltyis the one function or even the one plan.
Our loyalty is like, how do we continueto make this the best company in the
industry and the best company to work for?

(35:06):
One of the ones that really struckme was you were saying about how
they will adopt the technology reallyquickly 'cause it's in their interest.
And I thought about how, , you thinkof the Everett Rodgers distribution
of technologies curve or distributionof innovations curve, that it can be
very slow and how some organizations, will take on new technologies really

(35:27):
slowly 'cause it's not in theirinterest to actually do it quickly.
I, and I thought that was a hugething about this team was if they're
bonused on it, , the importance ofthe reward systems and if the reward
systems are not just rewarding thepeople at the top, but everybody wins.
they have been one of the fastestcompanies to adopt new technology and

(35:47):
automation , and part of that is becausethey have had a no layoff rule, and they
believe that, you know, there's enoughopportunity in the world, enough few
things they can do that frontline teamsare pushing for the investments and
automation where they see it as raisingreturn on assets or return on investment.
The frontline employees are pushinglike, why aren't we using this?

(36:07):
This can make us more productive.
They, we win more bids.
Right?
And so, unlike many organizationswhere frontline employees are very
skeptical of it or resistant of it,and for good reason frontline employees
are the ones who are driving , theadoption of new technologies.
And like I was thinking about , somany of the cases we talked about even
in military, that, , they wouldn'tchange the structures of, you know,

(36:29):
when you had a musket versus a bowand arrow and you won't change it.
'cause it probably suits yourmanagement style and the status
quo benefits from not all thisinstitutional knowledge in the past,
and you have to convince to makethat change, you have to convince
somebody often three or four orfive or eight levels up and to do

(36:50):
something fundamentally new that isoutside of their experience base of
which they have very little knowledge'cause they can't know everything.
And so the moment you, you force the,the, the, the moment that the top of the
pyramid becomes a, a, a, a rate limitingfactor on your capacity to embrace the
innovation, you're lost because somebody'sgonna figure out how to do it faster.

(37:14):
And yeah, you can't wait forthe CTO or somebody else to say,
Hey, let's go try something new.
One last thing on that, Gary andthe la the last one of course
though, is specialization.
And I, I, I'd love us to share that aswell, but I was working with a financial
institution last week and I was doinga workshop and I was saying about, for

(37:34):
an example, hire, I was saying how.
making is pushed down the organization.
'cause it has to be because of that verypoint that by the time it gets approved
up, the organization and maybe thenwith the central regulator, the bank
or central bank, often the advantagehas been snafued by some upstart.

(37:55):
And the, and, and the, the rethe resistance is always Oh yeah.
But we're, we're highly regulated.
that's a question I always gois like, how do you do that?
And all these examplesshow how you do that.
How you push decision makingdown , when there's no massive cost.
As in of the things you talk about hereis nobody's punished for getting it wrong.

(38:18):
with this, if you get itwrong, there's life's at stake.
for sure.
You know in a steel industryyou're dealing with immensely
dangerous processes.
And so for everybody, safetyis a very, very big thing.
And it's their lives that are at stake.
And so , they have safetypeople on every team.

(38:40):
That is also another network whereyou're sharing, , what are we
learning about keeping people safe?
But, you know, but your point aboutfailing is a very, very important one.
So, for example, at Nucor, if a teamthinks we might have a better process or
something we need to change, they couldactually stop the production process.
They can say, Hey, weneed to run an experiment.
We're gonna take this stuff down andwe're gonna see if, like, typically

(39:01):
that would've been a, very high leveldecision to do that, , because in these
kinds of process intensive businesses,you know, trying something new,
experimenting, at some point you have tolike, take down the process and change
it and try it and see if it works.
So again, John Ferriola one oftheir former cos had a very good
point on this and I'll, I'llgive you as close a direct quote.

(39:22):
He said, you cannot stretch thelimits of your knowledge or your
imagination if you're afraid to fail.
And he said , it's very typicalat Nucor to hear , a supervisor
coaching a new teammate by saying,if you're not failing, you're not
pushing the limits of your abilities.
So if you build an organization wherelike the worst thing that can happen
is something goes wrong, you'renever gonna innovate at this pace.

(39:44):
So even in an organization where humanlives are at stake dealing danger
processes, yes, there's experimentation.
And again, it's not either or.
If, you have frontline people who aresmart about economics, they're smart
about safety, they understand we'regonna try this and, it may have safety
implications, it may have profitability.
Like we gotta weigh thoseand make smart decisions.
But you're not trying to makethose trade offs at the top.

(40:05):
I.
But to that point, you, none ofthese things work in isolation.
So the system needs to change.
So that's one of the things I really wantto get across is when I ask that question,
it's no wonder people get stuck becausethey're like going, I cannot see a way of.
changing how decision making'smade under the current system or

(40:27):
paradigm, maybe you're able to doit in your own team, but for the
organization to change, the systemshave to change in that organization.
Yeah, I think, , and we'll come back tothat maybe when we talk about Roche, but
but I think it's, a super important point.
We might've touched on it before, butthe dilemma is often when we look at
these companies like, like Nucor orHaier or Svenska Handelsbanken and so

(40:49):
on, there's a tendency to glom ontoone interesting thing they're doing.
Like they train frontline employeesto think like business people.
That's great.
Or they have this likeperformance bonus system.
Like, well that's interesting.
And yet as you said Aidan, thesuccess is a system, right?
It's a set of things thatare re mutually reinforcing.
Now those things don't getbilled overnight, right?
You don't design a newsystem at one go, right?

(41:11):
A lot of these things, , if you startfrom the right principle, which in the
case of Nucor you mentioned was how dowe empower people to drive to build the
business and make it better every day?
And you start from there.
The genius is there not at the top.
Then you keep working that out.
Well, how do we make people, morecapable, give 'em more skills?
How do we give them moredecision making freedom?
But if you pick out one thing andyou try to export that to some other

(41:34):
organization, it's not gonna have,it's not gonna have, much of an effect.
Lemme see if I can think of an analogy.
If you're a world class athlete, like,Lindsey Vaughn, the skier, let's say.
Or Mikaela Shiffrin.
Now the most winning skier in historyif you only worked on one muscle set,
you're not gonna be very capable, right?
You're working on everything.

(41:55):
You're working on, on, on, you know,your quads, you're working on core,
you're working on upper body, you'reworking on your respiratory capacity.
And if you said, Hey, I'm justgonna go to the gym and I'm gonna
do squats every day forever, like,like, great, but that's not enough.
So and there's always thattendency to like, Hey, like,
what's this one magic thing theydid that, that we can just import?

(42:17):
And then like, no, it just,it doesn't work that way.
And you also see in all thesecases, Aidan, that the journey
here is one that is ongoing.
It's like, it's not like, okay, nowwe're gonna lock down the system.
We figured out how to like, get thebest outta human beings and whatever.
Like, okay, that's it.
They're constantly experimentingand changing that as well.
And so, you know, you lookat it at a point in time.

(42:40):
What, and there are twothings you don't see.
You don't see the evolutionaryprocess, the building, the
experimentation, the steps that theywent through to get where they are.
But neither do you see the, the kindof fundamental underlying principles
that keeps that thing alive andevergreen and growing into the future.
You just take one staticpractice outta context.
So yeah, that's, that's, that's notthe way to look at these organizations.

(43:04):
and to the guy out there or the girlout there only doing biceps in the gym.
We're talking to you, we'retalking to directly to you.
It'll make you look goodjust when you're wearing that
t-shirt, but not on the beach.
So work on the entire system.
The last one is, is specialization,Gary to avoid over specialization.
And I, I was intrigued by this one.

(43:25):
Recently there was a report aboutswathes of employees being let go.
And companies like Amazon, forexample p and g was also highlighted
and it was because of ai and theywere like, don't hire new jobs.
People that can be trained in the, soAI that can be trained in this skill.
And the other thing they said, which wprobably wouldn't have been as noticed

(43:47):
as much was, and Ja Andy Jassy says this,for example, from AM Amazon, is that
now they're hiring and promoting peoplewho have more range in their skills.
They have more ability to change acrossdifferent roles across the organization,
which we've been saying for years.
But somebody like Nucor actuallyspecifically hires for that, that

(44:10):
people who are broadly skilled, notreally deeply skilled in a role.
So as you said, there are no slots atNucor and thus no artificial limits
on where and how teams can contribute.
Yeah, I think Nucor the primarything they're getting at.
In the, in their hiring processes?
Well, maybe, maybe two things.

(44:30):
One, does this person have drive?
Right?
Are, can you tell they've beendoing things in their life to try
to improve their life, the lifeis of their family and so on.
But, you know, are, are theyinterested in, to have some
kind of aspiration to be better?
And secondly, they'll drill down towhere have you faced a problem or a
conundrum in your life that you, that tookcreative thinking that you had to solve?
So they're looking for drive and foryour problem solving capabilities.

(44:53):
And I think those are, I mean, yes,there's some level of technology you need,
particularly if you're moving directlyinto a, you know, a specialized role.
But in general, those are the thingsthat, you know, are, are probably most
important to look for and to hire for.
I have to say, I'm rather suspicious.
All these claims thatlike AI has suddenly.
You know proved so effective andinvaluable that, you know, we're
laying off thousands of people.

(45:13):
I think it's much morelikely to be a fig leaf.
I mean, if you look at most ofthese companies, they dramatically
overhired during COVID, and nowthe environment's becoming tougher.
And, you know, we're just, we're, youknow, you've been around for a while.
You recognize, you know, anotherround of downsizing for what it is and
don't need like a fancy explanation.
But having said that, I'm sure thatin over time, that's going to be true.

(45:35):
It's interesting though, Al alreadywe understand that AI is not that good
on very specialized things, right?
It is kind of a generic thing.
New papers out from researchers at Appleand so on, showing that, you know a AI
is very hard for it to first recognize anovel problem or solve a novel problem.
In other words, somethingthat's fundamentally new for it.
So very good at, at capturingwhat we already know.

(45:56):
Very good at contextualizing thatfor whatever, you know, your role
is, whatever question you put to it.
I'm very suspicious that it's goingto be able to recognize truly novel
problems and develop novel solutions.
And at least for some time to come anddepending who, who, who you talk to, maybe
for a very long time, those are gonna bestill like, you know, our human advantage.

(46:18):
And so yeah.
But I certainly understand whyorganizations want to hire people who
have generic problem solving skills anda deep sense of drive long term that's
way more valuable than a particularset of, you know, because even without
ai, the rate at which any particularskill set is just becoming, irrelevant.

(46:40):
The rate of progress.
Like, yeah, I mean, what even today if akid in university, whatever they learn.
By the time they show up at an employer, alot of what they've learned is outta date.
So we should probably add a third thing.
Problem solving.
And then just your capacity just to learn.
Right.
And your curiosity and willingness to golike, okay, like there's a better way.
And that's something that's ingrainedat Haier, or, sorry, ingrained in Nucor.

(47:01):
So now from hire, spelled differentlyto Haier H-A-I-E-R and a company
that Gary has had a magnificentrelationship with over time.
I'm also so struck by the humility,the intellectual humility of Zhang
Rumin, who is your friend andcolleague, I suppose, and how you met
him in the early days, Gary, as well.

(47:23):
Maybe you'll give us a littlebit of context to that.
We've mentioned Haier so many times andangriman throughout this entire series.
I'm delighted we're finally hereto talk about them and the great.
Great culture they have and thegreat techniques and systems
that they have in place.
Yeah, a a couple of maybe contextsetting things , as I think

(47:45):
we'll see when we dive in here.
This is maybe the mostcapitalistic organization.
I dunno if in the world,but certainly a video.
I know.
And right now capitalism is, I don'tknow if I would call it a crisis,
but perhaps so because people rightlyaround the world see that it is done
way better for the few than the many.

(48:07):
And so you see across the world,kind of ordinary wages, stagnant
flatlining, and yet you see, stockmarkets have it up and a huge amount
of money going to senior executives,you know, 300, 400 to one ratio between
CEO pay and frontline employees.
And, that's gonna piss peopleoff and and make them suspicious.
I mean, there was a survey, I don'tremember who ran it, but they asked people

(48:28):
around the world, they said, looking atgovernment and looking at business, does
it work better for the few or the many?
And most people said itworks better for the few.
So it's a little bit ironic that youwould find maybe the most capitalistic I.
Company I can find anywhere in China.
And and my answer to the criticsof capitalism is, yeah, a lot

(48:48):
of your critique is right on.
But, the problem is we don'thave enough capitalists, right?
Yeah.
We have some venture capitalists,we have shareholders.
But what I want is an organization inwhich every single individual has a stake
in the success of that organization and ameaningful upside, their chance to create
value that, that, betters their lives.
And if you don't, if you have any employeewho doesn't see that in front of them,

(49:12):
and I don't care whether they're workingfor, McDonald's or Ryanair or whatever
it is, if they can't imagine a way whichthey individually and collectively as
teams, they can't make the business betterand share those rewards, then capitalism
is, ultimately I think not gonna work.
It's just, we're we, and already,if you interview kids in the uk.

(49:32):
A majority of young people in the UKsay they would rather be in a socialist
system than a capitalist system.
Now a lot of that is justignorance, because they've never
lived in a socialist system.
They really don't know what's there.
But yeah, so that's, Ithink, an important context.
The other context in terms of likewhere this idea came from, if you go

(49:52):
back 150 years and so on, most peopleworked in very small organizations
three or four or five employees.
Everybody knew who the customer was.
Everybody could talk to the boss.
Everybody's ideas, at least youcould express them and know that
you were talking to somebodywho could make a decision.
Now, many employees will spend their wholecareer without ever having a one-on-one
with the CEO , or a key decision maker.

(50:14):
So I think a lot of whatZhang wanted to do was.
Go back to that world in which employeesfelt directly accountable to the users.
You and I will both know, and manyof our customer or our encounters as
customers with large organizations,you're not talking to anybody who gives
a crap about you or knows anythingabout you , or has any financial

(50:37):
stake in solving your problem.
And so, Zhang said, no, no,that's not the right way.
We, in a sense, even in our modern economywith these very large institutions,
we need employees to, to earn theirliving directly from their users.
And and so the term they have for theirmodel RenDanHeYi is a kind of a mashup

(50:58):
of Japanese characters, but it meansemployee user shared value, that the
extent to which you succeed as an employeeis going to be measured based on your
capacity, create value for the users.
And that means every employee needsto have an intimate, first person
relationship with their users.
And we'll see how they do that.

(51:18):
But I think those are two veryimportant contextual things.
A company that's basically, filled withmicropreneurs with many capitalists,
and one that is based on rebuilding andtightening the relationship between the
employee and the people they're serving.
one of the things was thisshift, like you were saying.

(51:39):
Making the call, I had this recentlywith an airline and I'm like a
frequent flyer with this airline.
And now I had to change my flight.
And like you're saying, I spend afortune with this airline and I have
loads of points with this airline,and I couldn't get through to
anybody that even recognized that.
And then I had to actually just go throughabsolute pain and it felt like a monolith.

(52:00):
And we know this term frommonolithic to modular a kind of a
it architecture term where maybe youbreak up your teams or you're, you.
IT systems into more controllable pieces.
And what I loved about the highermodel is that that's what's happened.
It's from monolithic to micro enterprise.

(52:22):
And this term me is really importantbecause it, it is the building block
really of the entire autonomousentrepreneurial cells of Haier.
Yeah.
So I think, again, this model gotbuilt over now maybe close to 20 years.
A lot of experiments, you know,things that they tried early on,

(52:42):
and I've, I've been connected tothis for most of that timeframe.
There're things that worked, thethings that didn't work most were,
were probably the middle category wherethey worked, but had to be refined.
But one of the signature things theydid was to break a very large company, I
think at the time, maybe 70,000 employees.
They broke it down into morethan 4,000 micro enterprises.

(53:03):
And these are just, you know, asit names suggests, they're fairly
small businesses, 15 to 20 employees.
And every micro enterprisehas its own p and l.
And so it really does, itruns as its own business.
And every micro enterprise onlysucceeds by serving real customers.
So when they broke the company up thisway, even their internal functions like

(53:26):
HR got broken up into micro enterprises.
I think at one time there were800 people working at corporate
hr, and now they're a dozen.
And, they didn't fire those people.
Most of 'em went to work in teamsfocused on training, focused , on,
on leader development and so onon, on, on hiring and whatever.
But everybody that if you don't findsomebody who's willing to buy your

(53:47):
services, you go out of business.
So there is a deepmarket discipline there.
And I think, we've talked about this,Aidan, one of the fundamental problems
with bureaucracy is over time you havea growing proportion of employees who
do not report to the ultimate customer.
They cannot be fired bythe ultimate customer.
And and so they're in roles thatinsulate themselves from the

(54:12):
realities of the marketplace.
And and it's no wonder thatthose roles have grown far faster
than, administrative roles.
Manager roles have grown farfaster than other roles because
who's really gonna know?
If I'm in training or I'min hr, I'm in compliance.
Like who really knows, whatcontribution I am making myself
to creating value for customers.
So one of the ways they,they make this real.

(54:34):
So all of these micro enterprisesare tied together through, through
an internal contracting system,is based on blockchain technology.
So let's, let's say I'm runninga little business that, that
is designing, making three doorrefrigerators under one of their brands.
And they have multiple brands.
But that's my response.
Three door refrigerator, under theCasar brand, whatever it may be.
So I'm, let's say I need.

(54:56):
To hire some new skills.
I will go to an HR micro enterprise.
We will negotiate a contract.
They're gonna find me three peoplewith this particular set of skills.
And in that contract, there's abonus that only gets paid if my
products succeed in the marketplace.
Similarly, if I want, if I need, Iwant me to build a new sensor in a
refrigerator or something else andI'll go, I want to build new hinges

(55:20):
that make the doors easier to open.
I will go to an r and dunit, an engineering unit.
I will, and, and, and there'llbe several of these that will bid
for, for, for my piece of work.
And we will write a contract.
But the terms of the contractspecify a bonus if that product
succeeds in the marketplace.
So an an individual microenterprise,particularly the, the market facing
ones, and they make, they make adistinction between market facing

(55:43):
microenterprises and what they call nodes.
Which are other microenterprises whoare selling services to the marketplace,
market facing mi micro enterprises.
But a market facing microenterprisewill have a network of nodes,
internal nodes that are serving it.
And everyone as part of that networkis focused on the same result.
This product needs to build marketshare when with the customers

(56:03):
have few returns, few complaints.
And so when, when you run into a problem,because everybody's bonus is dependent
on that, they'll swarm the problem.
It's not like, how's that my problem?
That's an RD problem.
No, no, let's like get togetherand see if we can solve this.
Because everybody's compensation is tiedto making a difference for customers.
And you know, you think about, Imean our viewers or listeners, they

(56:25):
can ask themselves, what percentageof people in your organization have
financial significant financialrewards that are directly attached?
Customer impact, customersatisfaction, and in most
organizations', a super small number.
So, you know, so that's, again,a very, very deep principle.

(56:45):
Everybody is accountable to customer.
And if you, you know, if youdon't sell your products and
services, you go outta business.
I would add to this, everymicro-enterprise also has
very ambitious targets.
They call them leading targets.
And as you know, in, in, in mostorganizations, people negotiate
their targets, businessesnegotiate their targets through

(57:06):
the annual budgeting process.
And you know, mostly it's relativeto like what you did last year.
At hire, they have a team that works from.
Outside in.
So they will look, they'll getdata on every product category
in every geography and look atis that growing or not growing?
How profitable is that segment?

(57:27):
And then you get targets set outside inbased on that data as a micro enterprise.
And, you know, if, if, if, ifhire is in a, in a market where
they have a lot of market share,that target may be a little lower.
If you're in a part, a segmentwhere you're still gaining market
share, that segment may be higheror that target may be higher.
But the target is always, always amultiple of the underlying growth

(57:50):
rate and the underlying profitability.
So, so no one is encouraged to simply,you know, keep up with the industry.
No one is encouraged to be like,same as we did last year, plus or
minus a couple percentage points.
So, and that's all tiedback to compensation.
So they have a baseline target,which is just kind of, you know,
you do as good as the industry andyou're gonna end up with, with kind

(58:13):
of something close to minimum wage.
If, if, if, if that's all you do there'san intermediate target and then the
leading target is probably somethingthat will be you, you, you're growing
at five or six times your segment.
And to do that, you know, the onlyway to outperform the segment, the
marketplace is you have to innovate.
And so this is also that thoseleading targets push people to

(58:34):
think differently, push innovation.
'cause you can't grow twice as fast asyour segment unless you're innovating.
And, and again, compensation,highly variable and tied to
those those leading targets.
Now on more complex, for morecomplex opportunities, they
have what they call ecosystemcommunities or micro communities.

(58:56):
I won't go too deep here.
But again, the question, when youdivide an organization up into
thousands of pieces, it's like,how do you actually work together?
So the the contracting systemis one way of doing that.
And and by the way, Haier hasthat model because they believe
markets are way more efficient thanhierarchies that if you're a consumer
and you change your preferences,you just buy from somebody else.

(59:17):
It's like an instant response tothose changes and preferences.
So they wanted to create a company where,
the connection between different piecesof the company was highly malleable
and based on contracts, not on, well,you can only buy from us and this is,
this is the only HR provider you have.
This is the only IT provider youhave and you're stuck with them?
No, no.
Everybody is subject tothat market discipline.

(59:40):
But where you have a biggeropportunity, for example, , they
recently re-engineered the entire bloodsupply medical blood supply in China.
And starting from, the fact that bloodgets stored, gets refrigerated, but then
how do we collect it in the right way?
How do we get it to the patients whoneed it, when they need it, and so on.
And that took, dozens of micro enterprisesacross the company to figure that out.

(01:00:00):
So these ecosystem micro communities,EMCs, somebody sees an opportunity,
they say, you know what, we coulddo something really interesting
with a blood supply in China.
They post that with an initial sense ofwhat resources are gonna be required.
What's the economic value of thisopportunity and what different
capabilities might be worth?
So I need the refrigeration, Ineed logistics, I need information.

(01:00:23):
And then micro enterprises can bidon being part of that ecosystem.
Yeah, I think we could help you do that.
And that's gonna cost X. So nowthey have more than 400 of these
ecosystem micro communities.
And again, I could go much, much deeperon how they work, but I'll just say
what they figured out how to do itHaier is in an organization that looks
entirely fragmented, they've learnedhow to rapidly reconfigure resources

(01:00:47):
and capabilities as things change.
And so resources very quickly movebehind the most interesting, exciting,
new opportunities and away from thethings that are not anymore exciting.
So you can have autonomy and modularity,as you said, but also immense levels
of coordination, but only where youneed it and only where it adds value.

(01:01:09):
So I would just say maybe two otherthings about hire very quickly.
It's a company that wants everyemployee to feel like an owner.
And not because they own liketwo shares, but an owner in,
in, in two critical senses.
One is your just, your decisions matter.
So in a micro enterprise, youare guaranteed three freedoms.
The freedom to set strategy, thefreedom to hire and fire, and

(01:01:31):
the freedom to share rewards.
So that's the most basic.
A notion of what it meansto be a a, an entrepreneur.
You have freedom to make decisions.
And the second most basic thingis you share in the rewards.
And so at hire, through this bonussystem, you share in the rewards of
your unit they, you can also investin the capital account of your unit.

(01:01:53):
And if you meet those leading targets overa period of months and quarters, you get
a substantial dividend up to a hundredpercent return on the capital investment
you make in your micro enterprise.
So again, that's why I describe this aslike the ultimate capitalist company.
Everybody wakes up every day.
How do we make thisbusiness more successful?
How do we create more wealth?
Knowing that they'll have a share in that.

(01:02:15):
So and you could argue, you it's not acomfortable place for everybody to work.
You know, there's not at, at higher,like, like, like at Nucor, there's
not a tolerance for mediocrity.
There's no, no no places tohide including for leaders.
If, if, if a micro enterprise missesits target for three consecutive months
it triggers a new leadership electionand the teams elect their own leaders.

(01:02:39):
And two thirds vote of the team atany point can depose a leader because,
they're not looking for leaderwho's nice and fund to work with.
They're looking for somebody,looking for somebody who will
help them meet their leadingtargets , and they get their bonuses.
And you could even do hostile takeovers.
So if you see a micro enterprise that'snot doing very well, you can go talk to
the team, say, I think I could do better.

(01:03:01):
And if the team agrees, you're thenew head of that micro enterprise.
So, yeah, it's evolved over a coupleof decades, but it's probably the
most radical management model I thinkmaybe in the world at that scale.
And again, if you look at theirgrowth growing about twice as fast
as peers their profit growth has beenway, way faster than their peers.

(01:03:23):
Three or four times that market valuefor employees, higher shareholder
returns have been spectacularly higher.
So, when you start from the simplepremise that we wanna create an
organization where people are free toachieve and let's help them do that,
like extraordinary things happen.
I.
It strikes me as kind of like, you'resupporting entrepreneurial spirit

(01:03:44):
in people, but giving them a kindof slightly, a bit of a safety net
by giving them systems in place.
It's got, it's kind of like, almostlike a, a v Man's a VC for all these
companies, which is incredible.
But, you know, one of the thingsthat struck me about this, and when
I think back over the series andyour deep research into all these

(01:04:04):
companies, gore for example, therewas always huge accountability.
You had to show up,you had to do the work.
As Angriman said, and you quote 'em inthis chapter, we don't pay employees.
They must earn their salary bycreating value for customers.
So you eat what you kill, soyou have to be delivering,
you have to be doing the work.
But in there that, that sense ofcontribution, I think people may

(01:04:30):
feel allergic to this and certainlythey're, they're not, they're
not types of places to hide.
There's no hiding in
No, but as you say, there'realso, it also, there's a, there's
an enormous amount of support.
So, you know, you have this network ofthe nodes and the service providers, you
know, who, you know, are all super capableand motivated to do the right thing.

(01:04:52):
And Haier's very, very goodat creating new, new ventures.
They've created more, internallygenerated unicorns, gazelles.
IPOs than I think any companyof their size in the world.
And, if you have a new idea inHaier, they'll introduce you
to a venture capital community.
Haier typically only invest if you, if,if a venture capitalist also invest.

(01:05:12):
That's how, you know, likethis isn't a stupid idea.
You'll be able to contractwith those internal nodes.
You know, , one of the problems of alot of incubators in large companies is
, you create an incubator to accelerator.
It's not easy for them to accessall the capability that's sitting
inside of existing businesses.
At Haier, I can go to themanufacturing nodes, to the marketing
nodes, to whatever, and I cancontract to get small amounts of

(01:05:35):
capability to help me build out.
So that's just like a ginormous advantage.
They have an incredible set of nodesthat create customer intelligence.
They have the best customerintelligence, probably of almost
any organization in the world.
Like just millions of data, pointsof sentiment analysis and other
things that are all availablefor these startups to draw from.

(01:05:57):
And you get a big share of thewealth and whatever you create.
One of the most successful which was nota Haier business at all, but somebody
had the idea for creating very, very highpowered gaming net gaming PCs laptops.
It's now a business called Thunder Robot.
It's a unicorn.
And so yeah, so you're exactly right.

(01:06:19):
It, it ought to be possible to be anentrepreneur within a large company.
I mean, why would, why would youever need to leave if you have all
these resources and information andpeople who are willing to support you?
So I think you're right to look at thisas a super VC firm, where it's not only
you get some good coaching and a bit of anetwork, like you have just a compendium

(01:06:40):
of skills and capabilities around you.
And Jang has often described the companyas a platform for entrepreneurship.
And I think, that's what it is, includingin existing businesses because they do
draw a distinction between what theycall transforming microenterprises
and entrepreneurial enterprises.
So an entrepreneurial microenterpriseis one that's getting to an

(01:07:02):
entirely different segment, newthing that hire hasn't done before.
Every market facing microenterprise is considered to
be a transforming enterprise.
You are never, you never sit still.
, And the transformation they've beentrying to engineer across all of their
legacy businesses is going, first ofall, from simply making products for the
supply chain, sending out refrigerators,washing machines and so on to being on

(01:07:25):
demand and to date almost everythingthey can produce within 48 hours from
a customer requirement to turning microenterprises into their own platforms.
And I could give you examples of wherethis happened, but where you are now
a platform hosting other businessesparticipating in that shared value.
And they have very detailed ways ofmeasuring every legacy micro enterprise.

(01:07:48):
How quickly are you moving up that chain?
And there are incentivesto trans transformation.
You know, in most businesses there's no.
Maybe at corporate, you're talking aboutthis big transformation, but if you're
running a business like this, like there'sno pressure to reinvent that thing, right?
Until like you're going belly up.
But that pressure to move up thevalue chain to become a platform

(01:08:10):
company, everybody feels that.
So there, there's entrepreneurshipeverywhere all the time.
And you know what, I've argued for most ofmy career that it was possible to do this.
You know , when I first met Zhang,I wanna say maybe 2010 or something,
he came with a group of his seniorfolks to my office in California.

(01:08:32):
And we had this like, very difficultconversation through translators.
It wasn't easy for me to, andthey had developed all of their
own unique language around this.
Like there was no, the terms,Z-Z-J-Y-T, what does that mean, right?
So you spend an hour understandinglike what that language means
and how they're using it.
But you know, he said, Gary, Iread some of your previous books.

(01:08:54):
I read the Future of Management.
And you talk about buildingan organization that's
entrepreneurial, its core.
You talk about building an organizationthat's more lateral than vertical.
Has anybody ever done this?
And I said, no, not to my knowledge.
It's they're little hints of it, butno, he said, we're gonna go do it.
And so, the courage to do that andalso do it in stepwise way and not blow

(01:09:15):
anything up and not like bet the farm.
But yeah, it was, it was, and I, Imay have mentioned it in our series,
Aidan, but the thing that struck me themost in that first conversation , was
when he said we want everybody to betheir own CEO because people are an
not a means, and I think we've talkedabout that, but that's, both Nucor and

(01:09:36):
Haier and Svenska Handelsbanken andBuurtzorg, all the examples in the book.
That is where they start from.
That human beings are ends, notmeans that what we wanna do is remove
anything in the organization thatis an impediment to achievement.
That we want to fully turn on their,latent imagination, creativity, and so on.

(01:09:58):
And, you look at these things when youstart to look across them, you see a lot
of similar, I mean, if you look at Nucorversus Haier versus the other companies
individually, you can say, oh, that'slike super different way of doing this.
But if you look at them deeply, moredeeply, you see a model that is completely
different from the bureaucratic modelwhere operating units are very small

(01:10:22):
and nimble, where leaders report tothe lead not the other way around.
Where there are very fewmanagement layers , at Haier we
took out 12,000 middle managers.
Most of them stayed.
They're working in other roles, but, that role, we didn't need that anymore.
The frontline teams arelargely self-managing.
Your influence in the system,because there's little hierarchy

(01:10:43):
you don't have influence becauseyou're have a senior position.
You have influence becauseyou have valuable skills.
There's a lot of coordination but itdoesn't achieve by, steering groups
and committees and additional layers.
It occurs by connecting people togetherand by tools like their internal
contracting system that make it very easy, for people to work with one another.

(01:11:05):
Nobody's competing to climb the pyramid.
They're only competing tocreate more value and everyone
thinks and acts like an owner.
So, that's the recipe.
That's what we're layingout in Humanocracy.
Guys.
You have the old model, topdown, powerful staff groups.
Compliance is the most importantthing, lots of middle managers
assigning tasks, assessing performance.

(01:11:26):
Everybody trying to scramble up thegreasy pole of the like, fine like that
might've been like the bleeding edge once.
It sure as hell is notthe bleeding edge now.
there's so much Gary in it that Ilove the serendipity of the show.
And now I'm talking to formerfriends and colleagues of yours
with the Burgelmans and the Bowers.
I was reading a lot about Intel recently,and I'm really interested in Intel.

(01:11:50):
I was reading Strategy as DestinyBob Burgelman's book and reading
elements of the book that heco-authored with Joe Bower.
There's a part where he interviewed aguy called Frank Gill who ran kind of
corporate diversification for Intel.
And, and Andy Grove wasan extremely clever guy.
As you know.

(01:12:10):
His books are great.
He lectured on this stuff.
He knew he was, he was liableto the foibles of humanity,
of the biases we make.
And he still hired this guy to look atdiversification of their portfolio and
the guy, and he says to him, so this isAndy Grove, says to this guy f Frank Gill.
Frank, a billion dollarsin profit per quarter.

(01:12:33):
You make a billion dollars in revenueper year, you are a distraction.
And was thinking deeply about that.
I was like going the Humanocracy, thismodel and the model of Haier, for example,
in particular solves for that valuenetwork problem that Clay Christensen
used to talk about is that if I'm makingall this money, that's a distraction

(01:12:56):
from making that money, what Andy Grovecalled Job one is such a big problem.
But if I'm willing to back stuff andthen I have this team that are looking
at the data and go actually Aidan'sonto something here, it removes all
the human biases from the playingfield and allows me get onto the pitch.

(01:13:17):
No, I, I had the sameexperience with Intel.
I spent a lot of time with them a coupleof decades back and talked to, you know,
to senior teams and at events and so on.
And I have the same conversation.
I don't remember who it wasn't AndyGrove, but some seating person said.
Hey, yeah, we wanna innovate andwe wanna look at new opportunities,
but we don't wanna do any, we don'twanna look at anything that's not at
least a billion dollars in revenue.

(01:13:39):
And I said like, well, how wouldyou know something is a, a, a sure
thing, a billion dollars in revenue?
Only if somebody else hasalready done it, by which point
it may be too late to catch up.
And so I would argue Intel.
And again, I don't wanna represent BobBurgelman's work, I know he did a lot
of research looking at how the companymade the transition from ram, which is

(01:14:00):
becoming a complete commodity, randomaccess memory to microprocessors,
which is a very new thing.
And Intel basicallyinvented the world's first.
You know, microprocessor.
And again, that started relativelylow in the organization.
We've talked about this before.
It wasn't really endorsed by this, bytop team to beginning, but it seemed
to have real promise and througha whole set of happy accidents, it
becomes like, yeah, we should do this.

(01:14:21):
Well, is that what I wanna relyon for the future of my business?
That like, we just happen to have somebodydown there who's thinking about this
thing and happens to make some progressand capture somebody's attention.
And you happen to have a senior leaderwho's like open to that idea and whatever.
Like, that's the most kindof risky and probable.
And so Burgelman rightly describedhow new strategies get built often in

(01:14:43):
companies, which is serendipitously andbottom up and so on, but yeah, okay, fine.
That's how it happens.
That's not how it should happen.
How it should happen is we have asystem like at Haier where we've
incentivized every single person tobe constantly exploring the future.
I think one, one outside observer.
Described Nucor as basically, you know,a good people are swarming the future

(01:15:07):
and you don't know where exactly the,the profit is out there, but you're gonna
find it 'cause you just have like enoughpeople at very low cost who are out there
thinking about where it might be and whohave an incentive to build it and who can,
and who find it very easy, relatively,to most companies, finds it very easy
to get a small amount of funding andsome resources to get something started.
Intel didn't have any of that.
And if you go back andyou look at their history

(01:15:30):
you know, the company right nowis a shadow of its former self.
It's lost more than half of its value.
I, think at the moment, unless I'mwrong is worth less than book value.
They recently had, another CEO changeGeisinger, pat Geisinger was forced out.
Over 20 years, they fumbledevery single industry shift.

(01:15:51):
Every single one.
In 2005, they turned down theopportunity to buy Nvidia for 20 billion.
Right now, one of the mostvaluable companies in the world.
In 2006 seven, they turned down theopportunity to make chips for the
iPhone, which I think we talked about.
And now, these mobile optimizeddevices outsell X 86 chips, 10 to one.

(01:16:14):
And are almost they turn down theopportunity to separate out design and
manufacturing and become A-A-A-A-A-Afoundry that just makes chips for anybody.
'cause they had the best processtechnology in the world, but the
marketing people, they wantedto hold that foundry capability.
Like, no, no.
We're, we're like, don't, don'tgive anybody else that capability.
Well, if you're not producing enough chipsand you lose just the volume to somebody

(01:16:37):
else, you're gonna lose your processleadership, your manufacturing leadership.
So, you know, TSMC, Taiwan onSemiconductor manufacturing
company ends up as.
By far the largest, most productive andis now worth, I'm gonna guess at probably
at least five times what intel is worth.
And you know, if you talk to peoplethat were Intel over those years,
and you talk to some of the boardmembers, they're gonna tell you

(01:17:00):
the blame lies entirely with justinextricable growth of bureaucracy.
And when Andy Grove left, the nextseveral CEOs, Paul Otellini Brian,
I think his name was Krzanich,Bob Swan, these guys were either
marketers or finance people, right?
They were not engineers.
And so you just havethis slow acceleration of

(01:17:22):
bureaucratic toxins over time.
And yeah.
And, the current, I'm tryingto think of who's the guy, lip.
Lip-Bu Tan, who's now I thinkthe CEO, he was on the board now,
maybe acting CEO Direct quote,.
He said the company was overrunby bureaucratic layers of middle
managers who impeded progress.

(01:17:44):
And somebody else called Intelthe largest single-celled
organism in the world, right?
One way of thinking, one wayof doing things and whatever.
And to make matters worse Aidanbetween 2010 and about I dunno, maybe
20 19, 20 20, something in that.
But for more than a decade, the companyspent more on buying back its own

(01:18:07):
shares than it spent on r and d. Andor I say R&D or capital equipment.
It's like unbelievable.
In a world where this opportunityis almost unfathomable.
You're taking most of your 136 billion,whatever it was, of free cash flow
over that period, and you're giving itback to shareholders, like as if you

(01:18:31):
can buy, you know yeah, I mean, yeah.
That's what I love about theseexamples is that if you are even,
you go, ah, whatever about thathumanocracy stuff, that's all fluffy.
You go, it, it solvesfor , the innovator's dilemma.
It solves for the problemof hyper-focused, which
is what Andy Grove did.

(01:18:51):
He hyper-focused and even at thecost of what I talked about Bob
Burgelman was they had an early versionahead of Cisco, teleconferencing,
but it wasn't making money.
They were like going, there's all themoney's to be made in microprocessors.
Let's hyper focus there.
And focus means saying no.
This particularly Haier solvesfor that problem where it's going.

(01:19:14):
We know there's a growth here,there's an opportunity here.
We have these analysts.
They're looking at the data and Iput all these systems together to
go, we are like this unbelievable VCthat can back loads of opportunities.
And kind of like Jeff Bezo talksabout, even if some of them come in,
we're gonna be unicorn business andwe're gonna keep surviving all these

(01:19:34):
shifts in technology, et cetera.
That's what I love about this book.
And for me, it's just the culminationof all the stuff I've read in your work,
and also I can see the progression ofyou having that moment where you're
like going, actually the managementmodel, innovation such a key part
of this that's so often overlooked.
And that's what I love abouthaving done this series with you.

(01:19:57):
Well, yeah, and I think,
you know, I, I have never been a fanof, of the term disruptive innovation.
And at, at the same time, youknow, I've argued for years and
years that it's the newcomers.
Historically we've created alot , of the new market value.
I talk about being anindustry revolutionary.

(01:20:17):
You know, I'm happy to talk aboutcreative destruction and so on.
The problem that I have with disruptivechange is the very term puts you on
the defensive, like disruptive to what?
So it starts the premise is, and Iknow that premise is, is, is true
in, in maybe an empirical way, butit's not the right way to think.
And so we're reinforcing bad thinking.
'cause what you're saying is it'sdisruptive, well disruptive, but

(01:20:39):
what disruptive to the legacy.
Alright, so why is thatwhat you're focused on?
Like, why aren't you opportunity driven?
And the reality is, and I think, I dunnoif anybody's really done this analysis
deeply, but the reality is most of thesenew technologies and not most business
models, they did not kill the old thing.
I mean they, they shrunk it, right?
But the new thing, I mean, what'sthe value of Amazon, of, of

(01:21:01):
Amazon's online book sales, right?
Versus the rest of the industry.
It's was hugely big, hugely valuable.
Look at the value of the companies, youknow, TSMC and Qualcomm and so on, that
were designing chips for mobile devicesworth way more than Intel is worth.
The idea that the real problem isthat, is this is gonna gore the ox

(01:21:21):
you have, bullshit, not right away.
It's gonna take time totransition from film to digital
to quite a long time, decades.
It's not gonna happen right away.
You have plenty of, time to respond.
So the idea of likeinstant cannibalization,
that, that doesn't happen.
The idea that the new thing is gonnabe fundamentally less profitable than
the old thing, not usually the case.
The new thing is usually,why does it take over?

(01:21:43):
Because it's bigger, right?
And what is often the caseis the margins are lower.
So if you build a fad business and you'reused to operating like Intel is 60, 70%
gross margins, and now you have to do 30.
Well, okay, yeah, that's something.
But let's look at the volumeside of it and look at what's
the net profit potential.
So the problem isn't that youhave, you know, that these new

(01:22:04):
things undermine the old thing.
They instantly cannibalize it.
They're gonna be worth less.
Not at all.
So it's not really a disruptive thing.
It's the problem.
And I would even argue the problem is notleaders who are holding onto the past.
The problem is leaders whoare not spending enough time
thinking about the future.
And if you're not doing that, Iuse this analogy, if you don't see
the birds in the bush and all youhave is the bird in the hand and

(01:22:25):
go like, damn it, this is my bird.
It's a lovely bird.
The f the feathers are falling off.
But like, I know this bird it's my bird.
Like, fine.
But, but you know, there, there,there shouldn't be some like
deep dilemma to use that word.
You know, there's not,there's not a dilemma.
There's not a dilemma.
The the new thing is gonnabe bigger, it's gonna be more
profitable, it's gonna be better.
And the only question is like,when do you start building it?

(01:22:47):
Like, do you wait until somebody elsehas done it or do you see it early?
Do you, do you experiment like Haiersacross a broad front and you know, are you
essentially an opportunity driven company?
Yeah, I don't, I don'tsee the dilemma there.
There's a problem there,but there's no dilemma.
I, I, man, I have, I have a terrible mind.
I'm thinking of , the scene fromDumb and Dumber, pretty bird, pretty.

(01:23:11):
Gary, Gary, always,always a great pleasure.
Lovely way to finish.
I'm left with the idea of the bird.
The bird in the hand,that's like half dead.
We talked about it before and you'restill feeding and the things like, or
else it's on life support and you'retrying to keep it alive as well.
Gary, there's a website that goesthrough a humanocracy as well.
There's loads of resources.

(01:23:32):
Gary, let's share wherepeople can reach out and find
Yeah at humanocracy.com you find a bitmore about the book, you can you know,
be in touch with me, garyhamel.com.
And then, you know, please, if you'relistening to this and you have a
question or an observation, sharesomething from your own experience.
If you have like a experience ofbureaucratic insanity with your
own company or something missingthe future, or just a question, you

(01:23:52):
know, reach out to me on LinkedIn.
I try to be quite responsive there.
You can follow me on X as well, but ifyou wanna like, have a conversation or
check in with me on something, LinkedInis maybe the best way to do that.
You're gonna be in inundated withpeople with bureaucracy, Gary.
And we're, we're gonna be back again.
We're gonna do another part.
We're gonna cover Roche in particular,which is a great case of reinvention

(01:24:13):
and bringing these to a traditionallyvery bureaucratic industry in pharma,
so we're gonna talk about Roche,which is be a great case study as
to your point, if somebody's saying,we can't do any of this because
we're a highly regulated industrynonsense, we'll look at Roche.
We'll talk about Roche on Humanocracy,part three, author of Humano, Gary Hamel.
Thank you for joining us.

(01:24:34):
Pleasure as always, Aidan.
Thanks once again to our sponsor Kyndryl.
You can find Ky journal, biannualrelease that features the world's
top thought leaders on policy, onAI, on many technological shifts.
And you can find that atwww.Kyndryl.com/institute

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