Ruimin Zhang identifies three pillars for the ecosystem economy: 1) the necessary condition, 2) the sufficient condition, and 3) the goal of the system, i.e., globalisation.
From the industrial era to the consumer internet era, our economy has evolved from the product economy to the platform economy. Each of these economic models revolved around the self (organisation or platform), and a self-centred economy only creates self-value rather than value for users. The economy for the Internet of Things (IoT) era must be an ecosystem economy. To win in the IoT era of “instant and constant change”, organisations must make the leap from product and platform economies to the ecosystem economy, which is founded on an entirely different set of principles. It is about using ecosystem thinking to create and meet the personalised needs of users while allowing for better provision and iteration of users’ personalised experience. Haier pioneered the innovative RenDanHeYi model, launched the first scenario brand (Three-Winged Bird) and the first ecosystem brand (COSMOPlat), and invented the fourth financial statement for the IoT era (the Win-Win Value-added Statement), which underpins Haier’s leading edge in the ecosystem economy. However, to become a leader in this economy, a systematic approach guided by the RenDanHeYi model must be adopted. I identify three pillars for the ecosystem economy: 1) the necessary condition, 2) the sufficient condition, and 3) the goal of the system, i.e., globalisation.
I. The necessary condition for creating an ecosystem economy: The unlimited evolution of EMC interactions
The ecosystem economy is about creating products that fulfil the needs of each individual user with a personalised offer – something that neither the product economy nor the platform economy have been able to accomplish, as they facilitate transactions without interactions. Only the unlimited evolution of EMC (Ecosystem Micro-Community) interactions can give rise to an ecosystem economy. In Haier’s exploration, this is manifested as the EMC contract. The EMC contract is the management model for the IoT era and is qualitatively different from other traditional management models.
The EMC contract is an example of creative destruction against the old models of the product economy and the platform economy. In the product economy, an organisation focuses on only one product. The platform economy differs by having various products available for sale. Conversely, the ecosystem economy implies scenarios, such as a smart home, where user needs cannot be fulfilled by a single product or a single enterprise. Although the platform economy can aggregate products, it cannot support iteration according to users’ specific needs. Only the EMC contract can provide the necessary condition for the ecosystem economy. Users are the core of the EMC contract and solution EMCs and experience EMCs orbit around users like the yin-yang diagram, interacting with each other in constant motion.
The ecosystem economy is non-equilibrium and non-linear; it is a system in which user experience is created and constantly renewed. This is not possible in the product economy or the platform economy because both are essentially hierarchies. How can Haier lead the way in the ecosystem economy? I would argue that self-disruption is the factor that gives Haier the advantage. Back in 2000, Peter Drucker made a bold prediction: the corporation as we know it, which is now 120 years old, is unlikely to survive the next 25 years. It will be difficult for the hierarchical structure and model of the product economy to survive; in order to progress, the hierarchy and the product economy must be disrupted. More than 20 years later, few companies have evolved along these lines due to a general inertia resulting in a resistance to self-disruption. Drucker had another insight regarding the importance of self-disruption: the most significant aspect of the internet was the elimination of the distance between organisations and users. This provided an important basis for Haier’s development of the RenDanHeYi model.
Additionally, the creative reconstruction of the EMC contract lies in the fact that the EMC contract is a real-world manifestation of the world’s first business ecosystem.
James Moore proposed the business ecosystem theory back in 1992. He has enjoyed visiting Haier. He says that after 30 years, he has finally seen a company that is putting his theory into action, and which can be encapsulated in two simple statements: first, a business ecosystem is defined as an economic community supported by a foundation of interacting organisations and individuals; and second, these organisations and individuals are the organisms of the business world. These ideas may be easy to explain but are somewhat more challenging to accomplish in the real world.
An economic community is an open and boundaryless ecosystem organisation. An isolated organisation cannot join an economic community. In the platform economy, enterprises are not tethered to the platforms, nor do they make up an economic community because they do not share in the benefits. It is already difficult to coordinate horizontally within a traditional organisation, and even more difficult for organisations to interact with individuals. How can organisations in the EMC community interact with Haier when they do not necessarily have any kind of affiliation? It is accomplished through the EMC contract, because at the core of EMCs is the iteration of user experience. All the partners within the EMCs interact with one another around other users (our centre), without such interactions, there can be no value-added sharing.
There are many opportunities in the business world, but only by becoming organisms within the community can organisations and individuals capture opportunities and create value. This poses a difficult question: what exactly is meant by the premise that “organisations and individuals are organisms in the business world”? Organisations must be self-organised, and individuals must be autonomous persons. Prior to the ecosystem economy, all business organisations were hierarchical, within which individuals acted according to decisions made by their superiors. The EMC contract we are now perfecting turns formerly rigid hierarchical organisations into spontaneous self-organisations, and economic persons into autonomous persons.
Second, the EMC contract creates a continuous path of evolution and an upgrade of user experience. The most important nucleus of the EMC contract is the iteration of user experience, i.e., the ecosystem of application scenarios. The ecosystem of application scenarios has no limit, we want users to experience the continuous evolution and upgrade brought about by the EMC contract. As the first step, we deliver a differentiated experience to users. What Haier provides is not a product experience, but the experience of having an EMC contract behind the product to drive constant improvement and satisfaction. For example, we want users to appreciate that the EMC contract behind a product can interact with them and facilitate their needs. As the EMC contract interacts with users, new ideas are generated, which further drive growth and redevelopment. Such authentic interactions characterise the EMC contract, which revolves around users. Without the iteration of user experience driven by the EMC contract, the three-step evolution from a premium brand to scenario brand and then to an ecosystem brand could not happen. Thereby, the value created for users drives “value-added sharing and co-evolution”. Value-sharing under the EMC contract depends on what value, and how much of it, is created for users. Without user value creation, there is no value-added sharing; without value-added sharing, there is no co-evolution. With no value-added sharing or co-evolution the EMC contract cannot be fulfilled.
Finally, limitless evolution, the purpose of ecosystem interactions, is to make everyone a dynamic user value creator. This foundation of the EMC contract was inspired by Jewish rabbis’ “interpretation and reinterpretation” of the Talmud. There is no one-size-fits-all interpretation of the Talmud. Notwithstanding thousands of years of interpretation by the Jewish people, the meaning of the Talmud is still being debated and updated. I believe that this idea of “interpretation and reinterpretation” can be our approach to generating and iterating innovation. Rather than relying on one person’s decision to dictate innovation, everyone can be involved and have an input, this promotes trust, probably the most important asset. The EMC contract requires everyone to participate and to innovate.
The purpose of the EMC contract is for everyone to accept that user value creation is the ultimate measure of an individual’s value and dignity.
II. The sufficient condition for creating an ecosystem economy: Infinite cycles of ecosystem partner value creation
The ecosystem economy requires all ecosystem partners to work together to create value-added experiences for users. After the value-added experience is delivered, if an ecosystem partner receives no value-added return, the partner’s interaction with the ecosystem will cease and the ecosystem economy will be unable to thrive or expand further. As such, in order to have a more dynamic ecosystem economy, we must have infinite cycles of ecosystem partner value creation. In Haier’s exploration, this is manifested in the Win-Win Value-added Statement (WWVS).
First, the WWVS creatively expands the scope of the three traditional financial statements. In the ecosystem economy, all ecosystem partners must receive value-added returns and move with the value cycle. The product economy and platform economy seek the maximisation of self-value, or shareholder value, but the ecosystem economy seeks to maximise the value of user experience – essentially, the maximisation of human value.
The three traditional statements show the value of products and ultimately serve the maximisation of shareholder value. The WWVS shows the value of users and ecosystem partners. Concerning the measurement of the ecosystem economy and ecosystem value, Jeffrey C. Thomson, President of the Institute of Management Accountants (IMA), expressed it well: “The WWVS pioneered by Haier is the fourth statement that all companies will need for the future IoT era.” I also agree with another comment: “The idea of the WWVS is to encourage corporate entrepreneurship, innovation, and user engagement.”
Second, the creative reconstruction of the WWVS has two main elements: 1) it is the source of ecosystem value creation; and 2) it is the driver of infinite cycles of ecosystem value creation.
Let’s start with the source. Three of the six components of the WWVS are user resources, resource providers, and total ecosystem value. User resources are not simply customers, but targets for interaction. Through user interaction, the ecosystem creates the best user experience together with resource providers. Add these two parts together and we arrive at the total ecosystem value created. The added value should be shareable, if it is not, then the value cycle cannot continue. Now let’s look at the driver, which shows in the incremental marginal returns. W. Brian Arthur, the founder of complexity economics, suggests that the law of incremental marginal returns leads to a positive feedback loop. The WWVS sets a process for the creation of just such a positive feedback loop.
The continuous evolution and upgrade of the infinite value cycle needs to be based on two factors: the first is to design a mechanism and operating system for the positive feedback loop. For the incremental marginal returns to feed into the positive feedback loop, one must not think traditionally, but look to the “three selfs” evolution of the EMC contract – self-emerging, self-splitting, and self-evolving. In other words, the premise of incremental marginal returns under the EMC contract is for the personalised experience of the users to self-emerge and then quickly self-split, both in quantity and quality. The spin-out of various personalised experiences can point to some common experience, at which point, the ecosystem partners will mutually self-evolve generating higher incremental marginal returns. The key here is infinite cycles. If the cycle stops, marginal returns will soon diminish. The second is to enable “human value maximisation”. The WWVS must map out the ecosystem cost and ecosystem value of each partner in connection with the total ecosystem value.
Lastly, the infinite cycles of ecosystem partner value creation point to the lifetime value of users. In his book The Management Century, Stuart Crainer argues that every user has a lifetime value, and whether an organisation is able to create lifetime value for all users is the true measure of a company’s succes
III. The goal of creating an ecosystem economy: Infinite splitting of an ever-expanding ecosystem (globalisation)
The ecosystem economy means a new kind of globalisation. Since the ecosystem economy can create experiential value for users and benefit all ecosystem partners, it can certainly self-split to cover the entire world. In Haier’s exploration, this has been manifested in the globalisation of COSMOPlat.
Let us first consider that the infinite splitting of an expanding ecosystem can happen on a worldwide scale because it disrupts the traditional model of organisation-based globalisation. In the product economy, the globalisation of an enterprise happens through a centralised structure, where the headquarters instructs subsidiaries to sell products, increase market share, and extract the most value from customer transactions. This model cannot expand autonomously. However, since we put human value first and allow value creation and dignity for all participants, our expanding ecosystem can split infinitely thanks to the creative destruction of the product and platform economies. GEA is a case in point regarding self-splitting, change wasn’t forced on GEA, yet the company has seen transformative results. What can explain this success? It is a result of their quest to maximise individual value through user value creation. This value proposition can apply to every market.
Second, globalisation creatively reconstructed the operating system and self-driving force of ecosystem expansion. In terms of an operating system, Haier pioneered the model of “EMC contract + quantum mini-store”. Unlike boutique stores in the product economy, or the livestreaming e-commerce stores in the platform economy, quantum mini-stores are important places for new user experiences to emerge continuously within the ecosystem. These stores are the nerve endings and capillaries that touch and collaborate with users on the edge. This system also needs to expand faster and replicate both at home and abroad. On the other hand, the self-driving force allows for autonomous expansion and iteration, and it requires three ingredients, namely the “3E” – ecosystem order, ecosystem revenue, and ecosystem brand. The ecosystem economy creates an ecosystem brand that allows you to “sell more” and “make more”.
As a next step, the infinite splitting of an expanding ecosystem will evolve and upgrade domestically and internationally. Domestically, the infinite splitting of an expanding ecosystem must create differentiated value under increased macroeconomic interventions because an increase in total supply and demand does not warrant a breakthrough if what you offer does not meet users’ need for personalised experience. The test for us is not to compete on products, but on the ecosystem. The infinite splitting of the expanding ecosystem must create new user experience and cover every user need with an EMC. We want to lead the development of international standards, and we want to upgrade and iterate these standards continuously through infinite splitting. The RenDanHeYi standard should be constantly upgraded and iterated on a stand-alone basis and together across the three international standard systems. Why do I suggest upgrading through infinite splitting? The standard we developed was the distillation of the experiences of many microenterprises’ using the methodology of induction. The issue here is that the “theory” distilled by the inductive method needs to be expanded and deepened by incorporating new experiences, and new experiences depend on continuous splitting and the inclusion of additional microenterprises. For us, the standard will come to a screeching halt if there is no steady flow of new experiences. Therefore, the adoption of our standard is just the beginning, not the end.
Lastly, I think the objective of infinite splitting of an ever-expanding ecosystem is to achieve an extended order. Friedrich Hayek introduced the concept of extended order in his final work, The Fatal Conceit. Hayek had previously proposed spontaneous order, an example of which is the invisible hand of the market, it does not need to be organised by anyone – the order forms spontaneously. The extended order is similar to an ecosystem today, which shows how advanced Hayek’s theory was. His expression of the extended order is twofold. First, the extended order fully utilises the knowledge of all members of society. Second, the extended order enables total strangers to cooperate with one another. The cooperation that emerges in this extended order is reciprocity.
This relates to Haier’s definition of an open ecosystem without boundaries. Haier’s EMC contract seeks to fully utilise everyone’s knowledge, reflect everyone’s value, and allow more people to join and shape an open, unbounded ecosystem. Ecosystem partners can cooperate with their respective objectives. It is not about commanding others but mobilising resources to create value for user experience and value-added return that can be shared. Each partner has its objective for value sharing and understands that value creation for user experience must come first – something that is only possible through collaboration. The extended order is all about sharing.
RenDanHeYi can be the beacon for reaching the shore of a Haier-led ecosystem economy, within which the value of each individual person is acknowledged.
See other articles from RenDanHeYi: Pioneering the Quantum Organisation.
- RenDanHeYi:Pioneering the ecosystem economy in the Internet of Things era - September 14, 2022
- Haier’s philosophy: Personal values first - February 3, 2019