Zhang Ruimin: Management’s next icon

July 15, 2011, 9:00 AM UTC

You’d be hard pressed to find a manager who is more innovative or fearless than the head of Chinese appliance giant Haier Group.

Zhang Ruimin is famous, but not nearly as famous as he should be — or, I suspect, will be. In China he’s a national hero, the man who turned the failing Qingdao Refrigerator Factory into Haier Group, a galloping enterprise with revenue of $20 billion and one of China’s first global brands. But in the West, few other than management specialists know his name. That ought to change. Zhang is innovating radically, maybe more radically than any other manager operating on such a large scale. Even those who think they know him may not realize how far this former Red Guard and municipal bureaucrat is taking capitalism.

Zhang brought me up to date when I sat down with him recently in Beijing. I knew the story of his early breakout from the collectivist mold: how the Qingdao authorities had made him boss of the refrigerator plant in 1984, and he’d quickly found that it produced terrible refrigerators. So he had 76 defective ones pulled out from the rest, gave the staff sledgehammers, and ordered them to destroy every one. The message: Poor quality is no longer tolerated. He expanded into air conditioners, washing machines, and stoves, started exporting, and unlike any other Chinese company, began building a brand. By the late ’90s he was showing up on lists of Asia’s top entrepreneurs, then Asia’s most influential businesspeople, and by 2005 the world’s most respected business leaders.

That’s about where I had left Zhang, not realizing that he was only getting started. He had successfully organized the company for efficient mass production, which made sense in the capital-intensive appliance business. But he believed that success in the big leagues of the 21st century would require a different competency: meeting the demands of retailer customers faster than any competitor. He reorganized the entire company into self-managed units, now 4,100 of them, each devoted to a customer or group of similar customers.

The units include employees at all levels from the usual functions — design, manufacturing, marketing, and so on. Members who work directly with customers make all the decisions; managers are there only to make sure the unit gets what it needs. That is, the managers manage — somebody has to — but Zhang doesn’t want them in charge because they aren’t in direct contact with customers. “If the members of a unit don’t like the way their manager is performing, they can vote him out,” Zhang tells me.

Each unit regards itself, and is evaluated, as an independent business earning a profit or loss. “The usual accounting statements didn’t tell us what we needed,” Zhang says, “so we had to create something new.” Thus, revenue means cash in the till, not orders booked, as in traditional accounting. Costs have to be allocated from manufacturing, sales, and the other functions; units also get hit with a capital charge for inventory, another break from typical accounting. If a unit’s profit exceeds its target, the members can split the extra.

That’s only the beginning. We could hold a seminar on how Haier evaluates employees (daily, with results posted publicly). Many of the innovations are based on principles described in Western management literature, and some are similar to practices at smaller companies like W.L. Gore. But I don’t know of any manager innovating on a larger scale or more broadly or fearlessly than Zhang.

Why, at age 62, after 27 years of running Haier, does he keep pushing? A hint of what drives him sits on his desk: the framed cover of the October 2002 Fortune China, with an illustration of a sinking ship and the headline WHY COMPANIES FAIL. The article, by consultant Ram Charan and former Fortune writer Jerry Useem, concludes that the explanation is almost never uncontrollable outside forces but rather managerial mistakes.

The reason Zhang keeps at it is pretty simple. His energy mirrors the larger forces driving China’s amazing rise and explains why he’ll probably be a global management icon: He’s still hungry.

This article is from the July 25, 2011 issue of Fortune.

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