Research on organizational innovation of manufacturing enterprises: case study of innovation model of Midea Group

Huang Xiaoyan1
1 RUDN University, Россия, Москва

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Креативная экономика (РИНЦ, ВАК)
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Том 16, Номер 2 (Февраль 2022)

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Huang Xiaoyan Research on organizational innovation of manufacturing enterprises: case study of innovation model of Midea Group // Креативная экономика. – 2022. – Том 16. – № 2. – С. 574-590. – doi: 10.18334/ce.16.2.114236.

Эта статья проиндексирована РИНЦ, см. https://elibrary.ru/item.asp?id=48201599

Аннотация:
The purpose of this paper is to explore the mechanism for manufacturing enterprises to achieve organizational innovation. The existing research few further in-depth studies can be done in combination with cases and lack of mechanisms and models to explore the integrated organization innovation of manufacturing enterprises. Based on innovation management theory and theoretical research on organizational management, organizational design and organizational change models, this article takes Midea Group as study subjects, to analyze the current situation, existing problems of Midea Group from the angle of organizational innovation. Through the in-depth case analysis of Midea Group’s organizational innovation, this research has the following main findings: The organizational innovation of Midea Group is a systematic project. Organizational cultural innovation, information technology innovation, process innovation, and organizational structure innovation are closely related, and together form an indivisible and unified whole. The organizational culture innovation of Midea Group makes a significant contribution to the entire organizational innovation. The process innovation based on the \"T+3 model, the organizational structure innovation of the \"789 Project\", and the information technology innovation by means of digital transformation have improved Midea Group\'s competence to respond quickly to customers and the market. The organizational culture innovation based on equity incentives unifies the goals and visions of the company and employees, and firmly binds core technical personnel and mid- to high-end management personnel. This research can provide concrete case study for entrepreneurs to realize the stable development of manufacturing enterprises.

Ключевые слова: innovation management, organizational innovation, culture innovation, structure innovation, information technology innovation

Финансирование:
This paper has been supported by the RUDN University Strategic Academic Leadership Program.

JEL-классификация: M11, M21, O31, O33



Introduction

In today's increasingly globalized world, the complex, dynamic and uncertain external environment is one of the important challenges that innovative manufacturing companies need to face. From 2020 to the present, the significant external environments that affect the innovative manufacturing enterprises include:

1. The epidemic promotes innovation in the manufacturing industry;

2. Environmental changes in the era of information technology and big data require manufacturing companies to conduct organizational innovation.

Different from traditional manufacturing enterprises, innovative manufacturing enterprises must face high market volatility and technological volatility [1] (Xu Qiudong, 2013), and at the same time take into account organizational innovation in order to respond quickly to user needs.

Innovation is not a single-factor phenomenon. Regarding the analysis of the factors of organizational innovation, each scholar has adopted different factors according to the content of the research. For example, Damanpour understands the content of innovation from the factors of management and technology, and points out that innovation is not only a method of change within the organization, but also a method of responding to environmental changes [2] (Damanpour, Aravind, 2012).

Li He believed that organizational innovation is to promote organizational learning and continuously improve innovations in organizational strategy, organizational process, organizational culture and organizational structure on the premise of continuous improvement of the enterprise's own behavior [3] (Li He, 2009). Liu Xuanhua pointed out that organizational innovation should be the collaborative innovation of the internal culture, process, technology, strategy and structure of the organization [4] (Anzola-Romn, Bayona-Sez, Garca-Marco, 2019).

Zhang Meili put forward that organizational innovation includes seven factors: corporate strategy, business process, organizational structure, organizational culture, information technology strategy, foundation and process, personnel and their roles. Each scholar has its own classification method [5] (Zhang Meili, 2015).

The study of organizational innovation has produced a wide range of applications in the fields of organizational learning, cultural innovation and organizational structure [6, 7, 23] (Raisch, Birkinshaw, 2008; Patky, 2020; Arshad, Haider, Rehman, Chik, Loh, 2020). However, on the one hand, the existing research still stays at the theoretical level, and few further in-depth studies can be done in combination with cases [8] (Asfaw Belachew, 2021); on the other hand, there is a lack of mechanisms and models to explore the integrated organization innovation of manufacturing enterprises. Most studies only investigate the impact of organizational culture, information technology, process, and organizational structure on organizational performance in isolation and statically. This paper firstly sorts out innovation management theory and theoretical research on organizational management, organizational design and organizational change models, and on this basis, combined with the innovation model of Midea Group, explores the mechanism for innovative manufacturing enterprises to achieve organizational innovation.

Theoretical framework

Innovation management theory

The theory of innovation management can be traced back to Schumpeter. According to Schumpeter’s classic definition, innovation refers to a new combination of factors of production that has never been introduced into the production system [9] (Unterfrauner, Voigt, 2017). Limited to historical conditions, Schumpeter did not specifically study the issue of organizational innovation, nor did he specifically analyze the various possible combinations of various innovations; moreover, judging from the content of the innovation model given by Schumpeter in his early days, Schumpeter's main concern is innovation related to technology, and organizational innovation is not the core content of his innovation theory. The quality of Japanese home appliances is still the best in the world, but many Japanese companies have fallen because they are too far away from users. Technology cannot be effective without the support of organizational transformation.

Theoretical research on organizational management, organizational design and organizational change models

Hard Leavitt puts forward the system model of the whole enterprise transformation. He pointed out that the content of organizational change includes four aspects, namely: tasks, personnel, technology and organizational structure [10] (Leavitt, 1965).

This paper believes that Leavitt’s early views are based on system thinking – interdependence and one part of it affects the other three parts—but not based on the development system theory. This model only introduces the production or conversion process, and does not explain the input and output. Many current models are based on Hard Leavit's early ideas. His diamond-shaped organizational system model helped lay the foundation for the idea of organization as an interdependent multi-system.

Scott-Morton (1991) proposed an organization management model. This model focuses on five aspects: corporate strategy, management process, organizational structure, technology, personal role, and corporate culture [11] (Duxbury, 1993). Galbraith (1995) proposed the star model of organizational design. This model consists of five parts: strategy and objectives, organizational structure, process, performance evaluation and compensation, and human resources [12] (Galbraith, 2014).

Gaubinger and Rabl (2015) proposed Holistic Front End of Innovation Model. They pointed out that core tasks and elements of innovation management include the following [13] (Gaubinger, Rabl, Swan, Werani, 2015):

• Defining innovation goals and strategies;

• Planning, steering and controlling innovation processes;

• Building and maintaining an information system serving as the basis for goal oriented innovation control;

• Building an organization structure conducive to innovation;

• Building and maintaining an innovation-friendly company culture.

Based on the Falletta model, Jiang Huabiao, Lei Xiaoling, Tao Qigang (2019) believe that the organizational intelligence model is based on the existing organizational form that can initially adapt to the production and operation of enterprises. And on its original basis, the process of continuous learning, evolution and improvement mainly includes six aspects: data information, personnel, structure, knowledge and culture, learning and product technology [14] (Jiang Huabiao, Lei Xiaoling, Tao Qigang, 2019).

This paper believes that organizational intelligence is established and changed with the internal and external environments. Organizations are facing different environments and require different forms of organizational intelligence.

Based on the innovation management theory and theoretical research on organizational management, organizational design and organizational change models, this article proposes the basic framework of organizational innovation management of manufacturing enterprise in the turbulent environment.

The organizational system of a manufacturing enterprise in an turbulent environment consists of six dimensions of interaction and interdependence: Enterprise overall strategy, organizational culture, information technology (including big data analysis), organizational process, organizational structure, individuals. And the entire organization system is an open system that interacts with the dynamic environment.

Because individuals are always embedded in the other five dimensions; at the same time, to a large extent organizational culture, information technology (including big data analysis), process and organizational structure reflect the overall strategy of the company. Therefore, organizational culture, information technology (including big data analysis), organizational processes, and organizational structure are the basic elements of an enterprise organizational system.

Figure 1 shows the basic framework of organizational innovation management of manufacturing enterprises in dynamic environment. It is coupled by three parts of interaction and interdependence: corporate overall strategy, innovation elements and organizational performance, and interacts with the external turbulent environment. Among them, the basic innovation factors are: organizational culture innovation, information technology innovation (including big data analysis), process innovation, and organizational structure innovation. There is a dynamic and non-linear interaction between these four innovation elements.

Figure 1. The basic framework of organizational innovation management of manufacturer enterprise in turbulent environment

Source: compiled by the author.

Methodology

The case study method is very suitable for exploring the "how" and "why" questions. Single case study is the preferred research method for constructing and validating theory, which helps to capture and track new phenomena and new problems emerging in management practice, and enables more in-depth case research and analysis. This paper adopts a single-case research method and examines the questions raised in the research framework through in-depth analysis of a single case. Midea Group is a well-known large-scale household appliance manufacturer in China. The reasons for choosing Midea Group as a research case are as follows:

1. Founded in 1968, Midea Group is one of the largest home appliance companies in the Chinese market; as of January 31, 2020, Midea Group has filed a total of 92,759 patent applications, including 37,852 invention patents, 42,704 utility model patents, and The total number of authorizations was 67,179, ranking first in the home appliance industry [21]. The continuous development of Midea Group shows its excellent innovation ability. It can be seen that, as a first-class innovative enterprise in China, Midea Group is very suitable as the research object of this paper.

2. The research problem of this paper is aimed at the organizational innovation of manufacturing enterprises. Since its establishment, Midea Group has been committed to organizational innovation. The first stage of Midea's organizational innovation was limited to the adjustment of organizational structure and the simplification of scale, lacking systemacity and neglecting information technology innovation, organizational culture innovation and process innovation. On the contrary, in the second stage, Midea Group systematically implemented organizational Innovation, emphasizing the organic integration of organizational cultural innovation, information technology innovation, process innovation, and organizational structure innovation. Therefore, the innovation model of Midea Group is consistent with the research question of this paper.

3. In the process of data collection and research, this research has been actively helped and cooperated by the middle and senior management of Midea Group. The obtained data are highly authentic and effective, which can ensure the persuasiveness of the research conclusions.

Data collection

The research data of this paper mainly comes from two aspects: internal interviews and data collection. First, after determining the purpose and outline of the interview, the researchers conducted 1–2 hour interviews with five middle and senior managers in the technology R&D department of Midea Group. Secondly, through the collection and arrangement of secondary data through internal archives and various websites, news reports, journal articles and other materials. According to the framework obtained by theoretical analysis, the research strictly categorizes and organizes the data collected from various channels and through repeated comparisons between the data, as much as possible to ensure the detailed information and the reliability and validity of the research conclusions.

Case analysis

Case background

For any country, no matter how prosperous the real estate and stock market are, the importance of manufacturing cannot be ignored. According to the "2021 China Top 500 Manufacturing Companies List", Midea Group ranks 27th [15] (Ding Chunyan, 2021). The main reasons that triggered Midea Group’s organizational innovation are:

1. The recent significant decline in organizational performance;

2. The external competitive environment has undergone significant changes.

In 2012, Midea gradually fell into a series of difficulties.

From an internal perspective, these dilemmas are mainly manifested in the following aspects:

First, the inertia of organizational culture. Since its establishment in 2012, Midea has been growing in good times, and organizational cultural inertia began to emerge. When the government's support policy ended, Midea faced sudden changes in the external environment, and a successful culture that had been cultivated became a major obstacle to Midea's organizational innovation.

Second, in 2012, regional sales companies began to experience losses one after another, and losses continued to spread. After the market slowed down, Midea Group's marketing staff with more than 10,000 people became a heavy cost burden.

Third, slow response. The huge organizational structure leads to communication difficulties, slow information transmission, information distortion and bureaucracy. As a result, the entire organization is slow in action, inefficient in decision-making, and slow in responding to the external environment.

From the external environment, there are three reasons:

First, the end of the stimulus policy. On June 30, 2011, the “Energy Saving and Benefiting Subsidies” policy for the home appliance industry ended. Policies such as home appliances to the countryside and trade-in for new ones also ended on December 31, 2011 [16] (Jin Yingqi, 2012).

Second, the arrival of real estate regulation. The government has strictly regulated the real estate industry. This caused real estate transactions to drop by more than 40% year-on-year.

Third, the decline in export demand. Overseas orders have also been gradually declining due to the impact of the European and American debt crisis. Gree, Midea and Haier, the top three exporters, had their exports in November 2011 down by more than 50% year-on-year [17] (Li Shengjiang, 2012).

Midea's organizational innovation is divided into two stages. In the early stage of the company's development from 1968 to 1997, the product was single, the department structure was simple, and the highly centralized organizational structure was highly compatible with the company. However, when the company's product line is gradually enriched and the organizational hierarchy increases, this organizational structure will lead to a significant drop in efficiency. During business unit system period (1997–2012), the company focuses on products and is divided into five business units: household appliances, motors, air conditioners, kitchenware, and compressors. Each division has five functions: finance, manufacturing, sales, research and development, and planning. Organizational innovation at this stage is limited to adjusting the organizational structure and lacks systemacity and thoroughness. As a result, Midea suffered its biggest huge loss since its establishment in 2012.

As a result, Midea began to carry out breakthrough organizational innovations in 2012. The organizational innovation this time is a more systematic and revolutionary type. Its content includes four aspects:

The first one is to carry out process innovation in the “T+3” model.

The second one is to adopt the division 2.0-"789 project"-to carry out organizational structure innovation.

The third one is to use equity incentive plans to innovate organizational culture.

The fourth one is to carry out information technology innovation by means of digital transformation.

In 2012, when the global manufacturing industry encountered difficulties, Midea Group put forward the overall strategy of "cost efficiency control" and "efficiency drive". Systemically promote Midea’s changes and innovations in organization, mechanism and management. To review the current situation by recreating new cost advantages, there is no best, only better management concepts enable Midea Group to continuously move to a new level in the application of cost-leading strategy.

Organizational process innovation

The "T+3" model has transformed from "sales based on production" to "production based on sales". The traditional "sales based on production" model adopted by the company has obvious disadvantages:

· The logistics of each business unit of the group are operated independently, with low standardization.

· The level of dealers is many, and the inventory turnover efficiency is low due to the high cost of payment and the suppression of goods.

· The warehouse information across the country is opaque and lagging, and has not formed the effect of connecting warehouses and networks.

Figure 2. Comparison between traditional model and T+3 model

Source: compiled by the author.

The “T+3” model was first implemented on a pilot basis at Little Swan, a subsidiary of Midea Group, around 2012. After the implementation, Little Swan’s inventory turnover rate and fixed asset turnover rate increased significantly. Since 2014, Midea Group has adopted the “T+3” model to promote process innovation. The "T+3" model is to receive customer orders, stock raw materials, factory production, delivery and sales in four cycles (T). Through the advantages of the entire industry chain, the manufacturing process is optimized, the manufacturing equipment and processes are upgraded, and the production, supply and marketing linkage is further compressed, and the cycle time per cycle is reduced from 7 days to 3 days or even shorter (as shown in the Figure 2).

The "T+3" model can quickly and effectively respond to changes in market demand from the perspective of the overall business process. After the change, the original storage-based production has become customer-ordered production, which can more effectively respond to changes in market demand.

At the same time, the inventory turnover rate has been accelerated. The shortening of the “T+3” process time promotes the development of standardization and high-quality products, and further strengthens the advantages of large-scale production.

Organizational structure innovation

Business Unit 2.0 – "Project 789" Period (2012 – present): With the changes in market demand and external environment, Midea’s original business unit format cannot quickly and efficiently respond to market demand, and at the same time, the product structure needs to be upgraded. Therefore, the company has upgraded the business unit 2.0, launched the "789 Project", established 7 platforms, 8 functions, and 9 major business units. Under the business unit are various combat units, and the headquarters has been transformed into a platform that empowers front-line combat units.

In 2018, it was further upgraded to a three-tier organizational structure including business units, collaboration platforms, and functional departments. With the business unit as the main body, it is responsible for product research and development, design, production, marketing and promotion, etc., to complete the group KPI. The collaboration platform provides assistance to the business department, and the functional department is responsible for logistical support [18].

Figure 3. Business Unit 2.0 – "Project 789"

Source: compiled by the author.

The 798 project (according to Figure 3) seems to just take back some of the powers of the business department and divide the business unit into smaller units. In fact, the entire organizational structure has undergone earth-shaking changes. The original business department was a top-down hierarchical management, and now it has become a bottom-up employee self-management. The headquarters has changed from a command center to an enabling platform to support operations, and the front-line productivity units can also exchange information with the headquarters in a timely manner, giving play to greater room for creativity.

This change has significantly improved the efficiency of information exchange between the headquarters and subordinates, and made the company's operating mechanism more flexible.

Information Technology Innovation

In 2012, Midea was a new group unified by dispersed secondary industry groups, with a high degree of internal decentralization, and each business unit was self-contained. There were as many as 100 sets of IT systems, resulting in a high degree of dispersion of all Midea's information systems. At the critical moment, Fang Hongbo and other Midea executives reached an agreement to directly overthrow and rebuild the digital system that had been established for many years and run stably. It took three years to reconstruct all Midea processes, IT systems, and data standards, and Midea’s digital transformation officially entered stage 1.0.

In 2015, "Internet + will overturn traditional industries" became popular in the market. Midea took advantage of the trend to propose a "dual wisdom" strategy. Midea introduced "Internet +" into Midea from two aspects of smart products and smart manufacturing, and completed smart manufacturing factories, big data platforms, and system mobility.

In 2016, Midea began to upgrade from digital 1.0 to 2.0, and its business changed from layered distribution and production-based sales to sales-based production, which means that it has to face many fragmented orders. Therefore, through system upgrades, Midea has transformed from a mode of supporting large-scale order supply to a fragmented order supply mode, thereby enhancing its flexible supply competence against uncertainty. Currently, Midea has achieved big data-driven research, production and sales. For example, people have bought something online; and based on the buyer's comments, they can know the characteristics and deficiencies of the product that the buyer is concerned about. Through big data analysis, the analysis results are delivered to the research and development department, quality department, and process department for improvement, thereby, improving the product praise rate and customer satisfaction.

In 2018, the Internet of Things technology gradually matured, and Midea began to build an ecological chain of home appliances.

From 2019 to 2020, Midea has upgraded its IT system from the industrial Internet, cloud platform, smart factory, etc., to realize data-driven business operations.

Since 2012, with the advancement of digital transformation and upgrading, Midea’s revenue has increased from more than 100 billion to about 280 billion, and its profit has increased from 3.3 billion to 24 billion. Midea has not only occupied more market segments and owned more innovative products, the market cycle has also been shortened by 45%, and the cost has been reduced by 85% [19] (Tang Jun, 2021).

On August 30, 2020, Gree and Midea also released the first half of the financial report. In the first half of the epidemic, Gree's net profit was 6.362 billion Yuan, a decrease of 53.73% from the first half of last year. Midea’s net profit was 13.928 billion Yuan, a drop of only 8.29% from the first half of last year [20]. Midea and Gree have been in the stage of catching up for a long time. Due to the early advancement of digital transformation and upgrading, Midea has achieved revenue and profit margins during the epidemic period, which are nearly twice as high as Gree.

Organizational culture innovation

If we want to build an excellent company, it is necessary to cultivate a distinctive innovation culture. Midea adopts a leadership approach that focuses on support and coordination, giving employees room for free play and allowing employees to independently decide how to complete tasks. Midea Group uses equity incentive plans to unify the goals and visions of the company and its employees.

Since 2014, Midea Group has successively implemented four equity incentive plans to fully cover the core staff, including:

1. The stock option plan for technical backbones has a total of seven phases since February 2014.

2. The restricted stock plan for departmental business managers has four phases since May 2017.

3. The "Global Partner Plan" in the core management team shareholding plan for the president and vice presidents and other core team members has a total of six phases starting in March 2015.

4. There are three phases of the "Business Partner Plan" for other core team members from March 2018 up to now.

Midea Group's incentive system is complete and comprehensive, deeply binding the core technology and management team. The high proportion of equity incentives for core technology research and development personnel is conducive to shaping the team's cultural values of continuous innovation. In addition, the cultural innovation of mergers and acquisitions is an important measure to ensure the expansion of Midea, and Midea has formulated a series of corporate cultural integration plans.

Conclusion

Through the in-depth analysis of Midea Group’s organizational innovation cases, this research has the following main findings.

First of all, the process innovation based on the "T+3 model, the organizational structure innovation of the "789 Project", and the information technology innovation by means of digital transformation have improved Midea Group's competence to respond quickly to customers and the market. The organizational culture innovation based on equity incentives unifies the goals and visions of the company and employees, and firmly binds core technical personnel and mid to high-end management personnel.

Secondly, the organizational innovation of Midea Group is a systematic project. Organizational cultural innovation, information technology innovation, process innovation, and organizational structure innovation are closely related, and together form an indivisible and unified whole. The first stage of Midea's organizational innovation was limited to the adjustment of organizational structure and the simplification of scale, lacking systemacity and neglecting information technology innovation, organizational culture innovation and process innovation. As a result, the innovation performance of the entire organization declined in 2012.

On the contrary, in the second stage, Midea Group systematically implemented organizational innovation, emphasizing the organic integration of organizational cultural innovation, information technology innovation, process innovation, and organizational structure innovation. Therefore, the innovation performance of the entire organization is very significant, which greatly improves the organization's competence to respond quickly to the external environment, and enhances the company's sustainable competitive advantage.

Midea Group attaches great importance to information technology innovation, and has accumulated strong information technology competence and big data application competence, thereby effectively promoting its own process innovation and organizational structure innovation. If there is no equity-based organizational culture innovation, the core technical personnel and management have vital interests to commit to the company's operation; otherwise the result of authorization may lead to the fate of each business unit. If there is no "Project 789" organizational structure, when the "T+3 model" process is implemented, as long as each regional business unit encounters a little difficulty in supplying parts, it will rely on the headquarters to solve it. However, under the organizational structure of the "789 Project", regional business units must have the competence to operate independently, so that they can build autonomous competence.

Thirdly, the organizational culture innovation of Midea Group makes a significant contribution to the entire organizational innovation, and is the forerunner, foundation and guarantee of the entire organizational innovation. Organizational innovation is finally implemented in everyone's actions. To promote individuals in the organization to reach a consensus on the organizational innovation vision, it is necessary to innovate the existing personal values and the entire organizational culture [22] (Hock, Clauss, Schulz, 2015). Existing personal values and organizational culture are inherently inert, and they may hinder organizational innovation. Therefore, in the pre-launch stage of organizational innovation, focus on organizational cultural innovation to meet the goals of organizational innovation.

There are still some limitations in this study. First of all, as a single case study, the research conclusions of this paper lack comparative demonstration, and the generalization and applicability of the research results still need further verification; Second, organizational performance is affected by many factors, such as internal knowledge management and industry factors. Due to the difficulty of data collection, this paper fails to comprehensively consider various influencing factors in the research. In the future research, we can improve this problem through large-scale empirical research, and deeply explore the impact mechanism of organizational innovation of manufacturing enterprises on organizational performance.


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