Hai Di Lao & the unexpected innovation insights from a hot pot restaurant

Traditional Chinese hot pot

I believe in the power of stories to inspire people to innovate and solve complex problems, and I have experienced first-hand how well researched case studies can give aspiring “innovators” a new sense of possibilities. So part of my work in the innovation space involves scouting for interesting stories, researching them and getting solid data to write the case studies I use in innovation workshops and training sessions.

At the end of 2016 I worked with Greg Bernarda on developing a few case studies to inspire “intrapreneurs” of a global food company during the kick-off of their corporate accelerator programme in China. One of the companies Greg suggested we consider was Hai Di Lao, the surprising success in the world of Chinese hot pot restaurants.

How did Hai Di Lao manage to climb to the very top of such a competitive and crowded market from its humble beginnings as a single shop with solitary chef in the nineties?

This is the question Greg and I were committed to investigating.

PART 1: setting the table

Let’s start by setting the scene. If, like me, you are unfamiliar with hot pot, it is a highly popular style of eating in China that involves dipping fresh meat and vegetables in simmering broth. While tasty, hot pot is also extremely simple, with a straightforward recipe and ingredients. The popularity of this cooking style in many parts of China has led to the presence of many nondescript restaurants competing ferociously for customers. Somehow amid this competition, Hai Di Lao developed a winning value proposition that’s given them enduring customer loyalty.

In this case study, we adopted the 4-action framework from W. Chan Kim and Renée Mauborgne to analyse what differentiates Hai Di Lao from a ‘traditional Hot Pot restaurant’ by scoring both on the typical factors of competition relevant for this market as well as the ones Hai Di Lao had developed. Quickly we could visualize the market opportunity Hai Di Lao had created for themselves, taking a bet on service as a differentiator, and systematically backing their initial bet to evolve their value proposition from ‘great service’ to ‘great services’.

Indeed if great table service is the first thing that comes to mind for customers when they think about Hai Di Lao, great table service is supported by a large variety of other services offered for free, including Wi-Fi, snacks, drinks, access to games, shoe shines, manicures and massages. Their success is visible in a compelling metric shared by few of their competitors: customers are frequently willing to wait for more than two hours for a table.

PART 2: in the kitchen

A great value proposition for customers may be necessary, but is seldom sufficient for a successful enterprise. While their innovation in customer experience is what stands out from afar, Hai Di Lao’s back of house operations are an equally critical part of its winning business model.

If you were to walk past the crowded tables of satisfied customers into the kitchen, you’d be confronted with a scene that looks nothing like most other hot pot restaurants. You would see a much smaller kitchen with very few cooks compared to their competitors. Hai Di Lao has adopted a radical approach to their supply chain based on the principle of food preparation standardisation. Complementing this reduction in kitchen staff is a distinct employee value proposition that attracts and retains the right kind of restaurant service staff, those who thrive with a high level of autonomy towards customer interactions.

Hai Di Lao’s unique customer experience proposition combined with the professional supply chain and the high-level of autonomy given to waiters have led to a radical shift in the centre of power in their restaurants. Traditionally, power in restaurants is held by chefs — they get to call the shots and other staff largely have to follow directives. The Hai Di Lao model largely eliminates this kitchen-centric model and devolves power to the waiters, who have full autonomy to make the decisions required to deliver the quality of experience that continues to pack the house each night.

These innovations in their business model are the real ‘secret sauce’ that has allowed their business to scale while maintaining consistency in food quality and customer experience.

Hai Di Lao has also used their core strength, the restaurant, as a platform to launch other products and services, such as home food delivery and sauces sold in food stores.

PART 3: reinventing the restaurant organisation

One further incursion that this case study enables us to do is in the organisational culture space. Earlier we’ve seen on the canvas how Hai Di Lao’s employee value proposition is a core ingredient of their winning business model.

By now using the organisational and cultural archetypes described by Frederic Laloux in “Reinventing organizations” we can get an understanding of Hai Di Lao’s organisational journey to set itself free from the typical organisation model of a restaurant, best described by the conformist “amber” archetype. As Hai Di Lao scaled its operations, its organisation embraced many attributes of the achievement focused “orange” archetype with focus on true meritocracy, clear accountability and the importance of innovation. Even more surprisingly it developed some of the attributes of the next archetype, the pluralistic “green”, which is visible in the way Hai Di Lao radically empowers frontline employees and creates the type of emotional, family-like connection with employees that goes far beyond the contractual, transactional relationship typical of the achievement-focused archetype.

In the first part of this case study we saw how great table service made Hai Di Lao successful, and if we go back to the nineties for a moment I can guarantee that nobody back then could have predicted that great service would be a successful differentiator in the restaurant industry in China. But it’s not the only surprise Hai Di Lao has for us, I guess no one predicted either that Hai Di Lao would find or apply breakthrough ideas in organisation design as a springboard for its success ever since.

Hai Di Lao is a great case study to illustrate how value proposition design can enable success in highly crowded and seemingly unpromising industries and how the business model required to scale success can challenge orthodoxies and taken for granted power structures (e.g. the role of the chef in a restaurant).

The Hai Di Lao case study was developed by Frederic Etiemble and Greg Bernarda in November 2016 and is part of a series of case studies developed by a collective of innovation coaches on 21st century business models. If you want to know more about this case study, or others we have developed to inspire entrepreneurs, “intrapreneurs” to innovate and solve complex problems, feel free to reach out.