1 Haier Growth Strategy & Management in the Asian Corporation Week 8.

11

Haier GrowthHaier Growth

Strategy & Management in Strategy & Management in the Asian Corporationthe Asian Corporation

Week 8Week 8

22

The man who made fridges coolThe man who made fridges cool

Haier founded 1984Haier founded 1984When Zhang Ruimin took control of loss-When Zhang Ruimin took control of loss-making refrigerator enterprise QGRFmaking refrigerator enterprise QGRFIncorporated as group company 1991 when Incorporated as group company 1991 when market leader in Chinamarket leader in China– Sales increased 73% pa 1984-2002Sales increased 73% pa 1984-2002– Sales of $9.7 billion in 2003Sales of $9.7 billion in 2003– Has 30% of US market in small fridgesHas 30% of US market in small fridges– 50% market for wine coolers50% market for wine coolers– 10% Europe’s air-conditioner market10% Europe’s air-conditioner market– 4th largest white goods manufacturer after 4th largest white goods manufacturer after

Whirlpool/Electrolux/Bosch-SiemensWhirlpool/Electrolux/Bosch-Siemens

33

Revenue of selected appliance Revenue of selected appliance manufacturers (mySAP case study)manufacturers (mySAP case study)

44

Leading name?Leading name?

Haier is most high profile Chinese Haier is most high profile Chinese companycompany

Promoting global brandPromoting global brand

Strategic internationalisation from 1986Strategic internationalisation from 1986

55

Haier overall strategyHaier overall strategy

Uppsala modelUppsala modelLow-high commitment modes of operationLow-high commitment modes of operationEnter markets with successively greater Enter markets with successively greater psychic distancepsychic distance– no regular export activitiesno regular export activities– export via agentsexport via agents– establish overseas sales subsidiaryestablish overseas sales subsidiary– overseas productionoverseas production

Each in a logically sequential stepEach in a logically sequential stepProvides technology/knowledge for Provides technology/knowledge for incremental buildingincremental building

66

Classic internationalisationClassic internationalisation

Exported to Germany under licenseExported to Germany under licenseDirect export (1992) to IndonesiaDirect export (1992) to IndonesiaJV Indonesia 1996JV Indonesia 1996Philippines & Malaysia 1997Philippines & Malaysia 1997 Production facilityProduction facilityJV Yugoslavia 1997JV Yugoslavia 1997Greenfield in US 2000 (staffed with Philippines trained Greenfield in US 2000 (staffed with Philippines trained managers)managers)Merger Italy 2001 – entry to EU avoiding trade barriersMerger Italy 2001 – entry to EU avoiding trade barriersClassic Uppsala modelClassic Uppsala modelSwitch to Greenfield around time of WTO entrySwitch to Greenfield around time of WTO entryForeign competition making home market less profitableForeign competition making home market less profitableCompetition key in internationalisation driveCompetition key in internationalisation drive

77

Exporting strategyExporting strategy

1 – Defender1 – Defenderlicensing agreement (84-91) brought in imported licensing agreement (84-91) brought in imported production technologyproduction technologybuilding strong brand namebuilding strong brand nameimplementing production techniquesimplementing production techniquesglobalisation pressure weakglobalisation pressure weak2 – Contender2 – Contenderentered developed economies (1992) to obtain entered developed economies (1992) to obtain prestige/establish brandprestige/establish brand3 – Extender3 – Extenderpost 1992 moved easily into other developed marketspost 1992 moved easily into other developed markets4 – “Dodger” strategy in domestic market4 – “Dodger” strategy in domestic markettransferring back internationally competitive productstransferring back internationally competitive products

88

FDI strategyFDI strategy

1 – Defender 1 – Defender customised to home marketcustomised to home marketbegan acquisition of small local companiesbegan acquisition of small local companies2 – Extender2 – Extenderbegan overseas operations 1996began overseas operations 1996increased psychic distanceincreased psychic distanceused competitiveness developed in domestic marketused competitiveness developed in domestic marketextending initially to similar markets reduces riskextending initially to similar markets reduces risk3 – Contender3 – Contender1999 1999 Greenfield developments Greenfield developmentsadaptive – applied local design/local products/local sales adaptive – applied local design/local products/local sales methodsmethods4 - “Dodger” strategy in domestic market4 - “Dodger” strategy in domestic marketdid not compete directlydid not compete directlyformal technological alliances with competitors (Whirlpool/GE)formal technological alliances with competitors (Whirlpool/GE)

99

Basis of strategyBasis of strategy

Strategies based on Strategies based on – Building global brandBuilding global brand

– Following competitionFollowing competition

– Exchanging threatExchanging threat

– Following customersFollowing customers

– Shaping the competitionShaping the competition

1010

Does the light go out when the Does the light go out when the fridge door shuts?fridge door shuts?

Plans or processes?Plans or processes?Chinese firms have an unmanageably complex structureChinese firms have an unmanageably complex structureMeyer & Lu (2002) “Managing Indefinite Boundaries” argueMeyer & Lu (2002) “Managing Indefinite Boundaries” argueChinese firms are a web of relationshipsChinese firms are a web of relationshipsSuch webs are hard to control because it is not clear where Such webs are hard to control because it is not clear where one firm ends and another beginsone firm ends and another beginsIs it therefore possible to have an organised strategy of Is it therefore possible to have an organised strategy of development?development?Chen (2004) suggestsChen (2004) suggests– Most of Haier’s innovation is incremental and carefully guidedMost of Haier’s innovation is incremental and carefully guided– Driver is streamlining sales processes between user & Driver is streamlining sales processes between user &

suppliersupplier– Haier generates technological innovation by seizing business Haier generates technological innovation by seizing business

opportunity and opportunity and heavily segmenting its markets.heavily segmenting its markets.

1111

Emphasis on processEmphasis on process

Supply chain case study on Haier highlightsSupply chain case study on Haier highlightsFrom 1998 globalisation based on appropriate From 1998 globalisation based on appropriate partnering strategies on case-by-case basispartnering strategies on case-by-case basisProviding personalised products to meet each Providing personalised products to meet each customers’ needscustomers’ needs– Implemented JITImplemented JIT– Shifted manufacturing operations from MTS (make-to-stock) Shifted manufacturing operations from MTS (make-to-stock)

to MTO (make-to-order)to MTO (make-to-order)– Introduced lean production processesIntroduced lean production processes– Demand-oriented operationsDemand-oriented operations

But in large scale markets (like US)But in large scale markets (like US)Haier owns and manages full scale operations Haier owns and manages full scale operations encompassing design, manufacturing and encompassing design, manufacturing and distributiondistribution

1212

E-businessE-business

Key role of internal processes stressed by Li & Key role of internal processes stressed by Li & Chang (2004)studied e-business strategy of HaierChang (2004)studied e-business strategy of HaierWhile commending vision in this respectWhile commending vision in this respectNote domestic strategy ill-timed due to insufficient Note domestic strategy ill-timed due to insufficient infrastructureinfrastructurePositives – Positives – Working capital requirements dropped from 36 days Working capital requirements dropped from 36 days in 2000 to 10 days in 2002in 2000 to 10 days in 2002Inventory dropped by 74%Inventory dropped by 74%Warehouse space utilisation improved 100%Warehouse space utilisation improved 100%Working capital in inventory dropped 67%Working capital in inventory dropped 67%

1313

Dodgy businessDodgy business

Negatives – Negatives – Made several wrong choices in e-business strategy Made several wrong choices in e-business strategy contentcontentControversial to focus so much on joining Global Top Controversial to focus so much on joining Global Top 500 Club as its strategic intent and 500 Club as its strategic intent and Achieving revenue volume as its strategic targetAchieving revenue volume as its strategic targetHaier might have expanded too far beyond the scope Haier might have expanded too far beyond the scope of its core competency and managerial controlof its core competency and managerial controlFailed to differentiate core business from non-core Failed to differentiate core business from non-core businessbusinessIs Haier’s strategy misdirected?Is Haier’s strategy misdirected?Is pursuit of prestige and sales volume causing Is pursuit of prestige and sales volume causing company’s fit between strategy and capabilities to company’s fit between strategy and capabilities to dislocate?dislocate?

1414

The Economist’s view The Economist’s view (March 2004)(March 2004)

In domestic & overseas marketsIn domestic & overseas marketsdiversification is driven by opportunism and desperation diversification is driven by opportunism and desperation not good strategynot good strategyProfits are not increasing despite sales growthProfits are not increasing despite sales growthQuotes Zhang RuiminQuotes Zhang RuiminAfter China joined the World Trade Organisation every After China joined the World Trade Organisation every multinational set up in China. Margins are low here. If we multinational set up in China. Margins are low here. If we don't go outside, we cannot survivedon't go outside, we cannot surviveOutside China, Haier has so far concentrated on niches--Outside China, Haier has so far concentrated on niches--mini-fridges (to which it adds a handy fold-down flap for mini-fridges (to which it adds a handy fold-down flap for a laptop) and wine coolers. But to continue to grow a laptop) and wine coolers. But to continue to grow globally it will have to compete with the likes of Whirlpool globally it will have to compete with the likes of Whirlpool in their main markets. Yet Haier lacks such firm's R&D, in their main markets. Yet Haier lacks such firm's R&D, their design skills--it employs just ten researchers in their design skills--it employs just ten researchers in America--their distribution or their service networks.America--their distribution or their service networks.

1515

The Economist’s view The Economist’s view (March 2004)(March 2004)

Nor is Haier being careful to keep costs low. Mr Zhang insists Nor is Haier being careful to keep costs low. Mr Zhang insists that Haier must produce outside China to be responsive to that Haier must produce outside China to be responsive to customers. Yet, at a stroke, customers. Yet, at a stroke, that deprives Haier of its greatest that deprives Haier of its greatest advantage: China's vast pool of low-cost labour. advantage: China's vast pool of low-cost labour. Meanwhile, Haier's attempt to reward creativity--allowing every Meanwhile, Haier's attempt to reward creativity--allowing every engineer the freedom to design and build his own products--has engineer the freedom to design and build his own products--has worked too well, leaving it with a bewildering 96 categories of worked too well, leaving it with a bewildering 96 categories of goods in 15,100 specifications, including a fridge that pickles goods in 15,100 specifications, including a fridge that pickles Korean kimchee cabbage and a washing machine that also Korean kimchee cabbage and a washing machine that also cleans sweet potatoes. Most of these variants add more to cleans sweet potatoes. Most of these variants add more to production costs and complexity than they will ever add to production costs and complexity than they will ever add to sales.sales. Worse, the group has moved beyond white goods into Worse, the group has moved beyond white goods into computers, mobile phones (where sales have badly computers, mobile phones (where sales have badly disappointed), and even interior design and pharmaceuticals. disappointed), and even interior design and pharmaceuticals. All with unlimited potential, insists Mr Zhang. "This is a All with unlimited potential, insists Mr Zhang. "This is a globalised era. No single industry can survive. There is a great globalised era. No single industry can survive. There is a great future in these markets."future in these markets."

1616

Pattern?Pattern?

Technology developmentTechnology development

Uppsala model of internationalisationUppsala model of internationalisation

Founded on domestic competitionFounded on domestic competition

““Illogical” – Illogical” – – unrelated product diversificationunrelated product diversification– over-engineering productover-engineering product– abandonment of domestic industrial base abandonment of domestic industrial base

(& associated cost benefits)(& associated cost benefits)

1717

Is this “typical” Asian strategy?Is this “typical” Asian strategy?

Commonalities:Commonalities:Institutional emphasisInstitutional emphasisShared characteristics of emerging Shared characteristics of emerging economieseconomies– lack of established product/finance/labour lack of established product/finance/labour

marketsmarkets– lack of sufficient laws & regulationslack of sufficient laws & regulations– inconsistent enforcement of contractsinconsistent enforcement of contracts– unrelated diversification may help to generate unrelated diversification may help to generate

institutional supportinstitutional support

Explains “doing it all oneself”Explains “doing it all oneself”

1818

Is this “typical” Asian strategy?Is this “typical” Asian strategy?

Agency theoryAgency theory

– owners and managers have divergent owners and managers have divergent interestsinterests

– Chinese investors don’t have skill to Chinese investors don’t have skill to guide investmentguide investment

– institutionally have little power (who institutionally have little power (who owns company?!)owns company?!)

– asymmetry of informationasymmetry of information

1919

Resource explanationResource explanation

Prahalad & Hamel (1990)Prahalad & Hamel (1990)Core competencies – harmonised and coordinated Core competencies – harmonised and coordinated aggregate of various production skills and multitude aggregate of various production skills and multitude of technologies in diversified firm sharing resources of technologies in diversified firm sharing resources and developed technology and skills between and developed technology and skills between diversified firmsdiversified firmsNeeds uniform resource supportNeeds uniform resource supportClose linkagesClose linkagesAbility to identify & develop core competenciesAbility to identify & develop core competenciesThis pre-supposesThis pre-supposesConsistent allocation of & access to resourcesConsistent allocation of & access to resources

2020

Different situationDifferent situation

In emerging economy as markets are inconsistentIn emerging economy as markets are inconsistentBroader scope (unrelated diversification) may Broader scope (unrelated diversification) may overcomeovercome– institutional behaviour uncertaintyinstitutional behaviour uncertainty– internally competitive marketsinternally competitive markets

Put another way:Put another way:In advanced economiesIn advanced economies– institutional qualityinstitutional quality– consistency in resource accessconsistency in resource access– mature marketsmature markets

permit development of corporate competitiveness & permit development of corporate competitiveness & promotion through related diversificationpromotion through related diversificationThese conditions do not apply in emerging marketsThese conditions do not apply in emerging marketsThis must affect corporate strategyThis must affect corporate strategy

2121

Li & Wong (2003)Li & Wong (2003)

2222

Add in social antecedent dimensionAdd in social antecedent dimension

Keister (2004) studied firm borrowing in China 1980-Keister (2004) studied firm borrowing in China 1980-8989In west as companies become more profitable they In west as companies become more profitable they borrow borrow lesslessIn China as companies become more profitable they In China as companies become more profitable they borrowborrow more moreConsider retained earnings = state assetsConsider retained earnings = state assetsSo undertake external debt in preferenceSo undertake external debt in preferenceOther companies copied strategies of successfulOther companies copied strategies of successfulAs firm grows – needs to access more capitalAs firm grows – needs to access more capitalTherefore drive to internationalise may be more Therefore drive to internationalise may be more resource seeking than result of domestic resource seeking than result of domestic competitioncompetition

2323

I’m sorry, I just can’t help it!I’m sorry, I just can’t help it!

Di Benedetto & Song (2003) analyse Chinese firms Di Benedetto & Song (2003) analyse Chinese firms from perspective of Miles & Snow’s typology of from perspective of Miles & Snow’s typology of strategic typesstrategic types– ProspectorsProspectors– AnalysersAnalysers– Defenders Defenders – ReactorsReactors

Suggest that in Chinese environment firms fit Suggest that in Chinese environment firms fit capabilities to promote strategic type (not vice capabilities to promote strategic type (not vice versa)versa)Zhang’s comments suggest ProspectorZhang’s comments suggest ProspectorCapabilities all aimed at first mover advantage & Capabilities all aimed at first mover advantage & aggressive exploitation of marketsaggressive exploitation of markets

In an emerging market contextIn an emerging market context