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    Haier Strategy Essay (2946 words)

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    Haier: A Global Brand Executive Summary Haier, under the leadership of CEO Zhang Ruimin, grew from a single model refrigerator firm to the #5 white goods producer in a matter of two decades. Throughout the expansion process Haier entered over 100 countries through multiple entry modes and into other industries. The 2005 financial results gave Haier reason to pause and reassess its mission and strategic intent. The primary issue was whether to continue its expansion strategy or slow down operations and engage in a stabilization strategy.

    After careful analysis and debate the team recommends the latter based on underutilized facilities, operational inefficiencies, and the risk involved with increasing debt. The stabilization strategy would include continued pursuit of exports and non-equity alliances; however further significant financial investments would not be pursued. A shift from a multidomestic strategy to a transnational strategy is recommended in order to centralize operations to ensure efficiency and learning, and increases accountability based on product instead of by geographical area. Background & History

    Haier has a rich and exemplary history, one that is studied by many business experts and business schools worldwide. Haier managed to break out of the “China mold” and become a leader in the appliance industry. Haier progressed through three stages of growth and was embarking on its fourth stage of “Global Brand Building” as of 2006. The stages provide insight to Haier’s history and culture. During the “brand strategy” stage (1984-1991), Zhang Ruimin transformed the bankrupt Qingdao Refrigerator Factory from a single model refrigerator manufacturer into the number one refrigerator brand in China with sales of US$125M in 1991.

    The culture of the collective-owned enterprise allowed for a highly unmotivated work force. Zhang changed the culture through historical events such as destroying 76 defective refrigerators with a sledgehammer and forcing errant workers to confess failures while standing on red footprints. These symbolic actions are still acknowledged today. Strict controls on quality, productivity, and after-sales service gave Haier a competitive advantage over Chinese competitors, catapulting it to the first place position. The “diversification strategy” stage (1991-1998) was a period of intense competition.

    Haier faced intense domestic competition as competitors emulated Haier’s approach to quality and productivity. Additionally, some foreign competitors entered the market. Haier sought an advantage through an emphasis on after-sales service and diversification into other products. It also recognized the need to export products overseas. Haier’s “activating shock fish” efforts, in which it acquired poorly managed firms with good tangible assets and made them profitable, allowed it to diversify within the white goods industry and enter the brown goods industry (televisions).

    In fact it did this with 14 such companies. Haier emerged as the #1 white goods producer in China by 1998 with dozens of product lines. Global efforts resulted in 1/3 of sales coming from abroad and total sales of $US1. 38B in 1997. During the “internationalization strategy” stage (1998–2005) Haier aggressively pursued global efforts to create a global brand name. By 2005 Haier was the #5 white goods producer worldwide with 95% of its products branded as “Haier”. Unlike many Chinese OEMs it did not rely on low-cost labor and sell to foreign brands.

    Haier basically followed the “internationalization process” entering markets by exporting and graduating to non-equity alliances followed by joint ventures. Haier also created foreign subsidiaries with industrial parks in South Carolina and Pakistan. It tended to gain a foothold through niche markets, such as mini-refrigerators and wine cellars in the U. S. It tackled the tougher markets first and sold under the “Haier” name. Haier accrued a wealth of “globalization” knowledge over a few short years. Zhang believed that globalization required a high level of localization and that (intellectual property) was necessary for survival.

    To this end, the firm pursued a multidomestic strategy thereby creating autonomous operations in major markets, as well as founding 12+ R&D centers and 18 trading companies. The strategy proved sound with sales of US$13. 1B for 2005 (US$4B from overseas). The first three stages of growth culminated in a corporate culture that simultaneously pushed for increased quality, productivity, and innovation. Entering the fourth stage, “Global Brand Building”, Haier aspired to strengthen its global presence through its existing culture and further expansion into foreign markets.

    Zhang had his sights on creating a truly global brand name and becoming the #1 white goods provider. Haier’s record was impeccable until the 2005 financial data proved otherwise. The 35% drop in net profits prompted experts to debate whether Haier truly had the potential to become a global brand. The following section speculates on the current underlying issues related to the case. Issue Identification The symptoms that surface during this case are as follows: * 35% drop in net profits between 2004 and 2005 China market: profits and margins down since 2001, operating costs up since 2000 * Overseas sales = 1/3 of total sales; however overseas sales < 1/3 of profit * Significant losses due to mobile phone business * Some facilities are underutilized (Zhang stated “we don’t need more production capability… we need higher design level and a bigger sales network) * Lost bid for Maytag to global giant Whirlpool * Some experts claim Haier did not achieve global brand status and doubted its ability to do so The facts in the case lead us to surmise the following underlying issues.

    Diversification: In line with Chinese culture, Haier believes in the philosophy that “bigger is better”. This certainly has some validity. There are gains with respect to economies of scale and synergy with other products. Additionally, as more goods display the “Haier” name, brand recognition increases. Also, unrelated ventures may prove profitable. The risk is that Haier is jeopardizing its core competency of white goods by utilizing resources elsewhere (spreading itself thin). The goal is to achieve appropriate balance, the concern is that Haier has overextended itself.

    Localization: Zhang believes globalization equals localization, which also has its merits. Speed to market and understanding the local culture and customer preferences is important. However, one could argue that speed to market is not as important for appliances since longevity (durability) is desirable. Some electronics products Haier offers requires quick turnaround, such as cell phones, however these are not the focus of expansion efforts. The other argument is that “the world is flat”, meaning customer preferences are converging as people are increasingly exposed to the rest of the world.

    It may be unnecessary to invest in so many autonomous units. Again, a proper balance must be achieved. Mission/Strategy/Goals: The mission of Haier is somewhat unclear. Pursuing a global brand name does not equal #1 in white goods, or vice versa. Certainly one may be a byproduct of the other. There are two concerns with pursuit of global brand name. First, there is less emphasis on profit and managers may be more focused on getting the name on products in as many countries as possible, which will likely lead to unprofitable products and less focus on the core competency. Second it is difficult to define achievement of “global brand name”.

    Although surveys are done on the subject, such as World Brand Lab, there is no expert that anoints such a title. Haier needs to define for itself what “global brand” means. Defining success based on industry analysts is not advisable. Pursuit of #1 white goods is more reasonable; however the spirit of the endeavor must be carefully communicated. Specifically, a single focus on market share may compromise profitability. Additionally, the organizational structure may not align with the mission/strategic intent of the firm. Haier might be better served by a “transnational strategy” over a “multidomestic strategy”.

    One could argue that a “global strategy” might be appropriate; however we assume the need for local responsiveness is currently great enough to justify a “transnational” approach. Long term the company might consider “global” approach. In summary, Haier’s honorable yet lofty ambitions may have resulted in an inefficient overall organization. The company does not need more production capability, insinuating underutilization. There may also be more R&D and design centers than necessary. The current mission, structure, and incentive system may encourage poor decisions.

    For example, Haier Electronics 2005 annual report indicates that its “mobile handset business” incurred losses of HK$322 million, attributed to over capacity in the industry, price cutting by foreign manufacturers, and a flood of illegal handsets in the PRC. Entering the cell phone business may have been a misguided decision, the life cycle is much shorter than Haier’s typical products. The decision may have been motivated by the desire to get the Haier name out. The inability to foresee market problems is an indication that the business is not adequately monitored and controlled, possibly due to lack of focus or lack of knowledge.

    Haier’s inability to buy Maytag, while probably a blessing in disguise, questions its financial strength. We should recognize that Haier is to be commended. It is difficult to find faults or weaknesses. It is possible that the best recommendation we can make is to clarify the mission, accept long term investment as a short term burden, and emphasize exporting to “pay for” all the expansion investments. Management is looking at long term sustainability, agreeing with Porter’s assertion that sustainability hinges on a firm’s ability to constantly upgrade and innovate.

    The following section provides an analysis of the country, industry, and firm. Situation Analysis Country: Overall the Chinese market changed significantly in the past three decades and the appliance industry followed suit. In the 1980s China was a fairly closed economy but began to open throughout the 1990s. It was eventually recognized as an “open market” in the early 2000s with the hallmark entry into the World Trade Organization. China allowed some foreign investment through partnership with local firms during the 1990s and started to encourage foreign investment after the turn of the century.

    The Chinese government plays a key role in business. Many firms are stated-owned enterprises or collective-owned enterprises. As a collective-owned enterprise, Haier received no financial assistance from the government or banks, instead borrowing money from rural co-operatives (farmers pooling money). This self-reliance strengthened Haier and forced the firm to enact strict controls as a matter of survival. The intensifying domestic market with savvy customers, evolving domestic firms (presumably some state funded), and presence of foreign MNCs pressures Haier to continuously improve, diversify and look overseas.

    As China seeks to improve economic conditions through freer trade, labor costs are rising and MNCs scan the global for cheaper labor. This creates pressure on Haier to innovate and build brand awareness in order to survive. Industry: Haier competes in an industry where cost, quality, and differentiation are all key decision-making factors for customers. “Overall value” is the goal and Haier has relentlessly worked toward this end. Haier creates a core competency by striking the right balance overall and within product lines. Utilizing Porter’s Diamond provides insight to Haier’s situation. Factor Conditions: China’s low-cost labor is still an advantage, although starting to wane. Porter states that firms who rely on resources such as natural resources, plentiful labor, and government subsidies are bound to stagnate and eventually perish. Firms must continually upgrade and innovate in order to survive. Haier learned this lesson early on. Although it had the traditional competitive advantage of low-cost labor, it did not have government funding. Haier was able to avoid the trap of low-cost labor and was strengthened by financial self-reliance. Its focus on upgrading and innovation has become its competitive advantage. Demand Conditions: China’s large and diverse customer base prepares Haier for global ventures. China possesses a large base of customers in the wealthy, middle-class, and lower-class brackets. Seeking market share in all brackets and accommodating varying needs causes Haier to innovate and focus on cost. Additionally, there is a presence of savvy Chinese customers who desire high-end products. Appliances are seen as a status symbol in the Chinese culture. With a domestic market the reflects the global market at large, Haier is well prepared to take on global challenges. Firm Strategy, Structure, and Rivalry: Rivalry in the domestic market is intense due to local competitors emulating Haier and a flood of foreign competitors due to an open market. Haier has modified and strengthened its strategy to compete. It has bolstered its R&D, design, and service operations. A constant strategy of brand building facilitates growth overseas. * Related and Supporting Industries: A large concentration of highly competitive electronics manufacturers exist throughout China providing an advantage in innovation and technology, as well as low cost and quality high.

    It is presumed that Haier engages in supply chain management. Firm: Haier needs to reassess its mission and strategic intent. The “Strategic Management Process”, which includes a SWOT analysis, provides this framework (Appendix A). As stated earlier, achieving a “global brand name” is not an optimal mission due to promotion of unprofitable activities. The firm needs to reassess whether it should continue with expansion efforts at this point. Allowing the process to “catch-up” might be in order. The current structure of the firm may not allow for proper evaluation systems.

    Underutilized facilities suggests Haier needs to increase exports in order to achieve economies of scale. Adjustments to the degree of localization may also be in order thereby increasing efficiency. Finally, the company needs to address the failing cell phone business (divest) and should leverage its ability to turn around failing firms. Alternatives Alternative #1 – Growth Strategy (Status Quo) Haier continues pursuits of growth through significant investment with the intent of achieving a “global brand” status. Haier continues the current path of head offices in “ten target markets” and “20 factories by 2010”.

    Australia, South America, and Russia should be considered as well. This allows for localization of products and capitalizes on emerging markets. However, this requires significant investment and compromises economies of scale (significant operations in so many countries may not be warranted). Haier’s financial capability is questionable and increasing debt increases risk. Alternative #2 – Stability Strategy Haier stabilizes operations and focuses on becoming a leader in the home appliance industry through innovation, quality, and efficiency.

    Continuation of the brown goods operations allows for revenue and brand awareness. Haier alters some of its current goals, to be revisited later. Once the firm has current operations under control it may determine that 10 head offices and 20 factories is not optimal. Haier will continue pursuing other markets for exporting and non-equity alliances only. Alternative #3 – Retrenchment Strategy into White Goods Industry Haier pursues its core competency with the intent of becoming a global leader in the appliance industry. Haier divests brown goods based on the state of market and divests all unrelated assets (i. . , tourism) creating capital to invest in appliances and fund global efforts. Haier should focus on global ranking instead of “global brand”, and evaluate operations for efficiency gains. The downside is a loss of profitable products that help spread the brand name. This option is not recommended. Alternative #4 – Retrenchment into Brown Goods Industry Haier pursues the potentially higher profit margin industry, with the intent of becoming a leader in the electronics industry. Selling the white goods and other unrelated operations will provide financial capital.

    Haier has some experience in electronics; however the cell phone disaster demonstrates its lack of expertise. Although Haier claims a quick-to-market philosophy, electronics is much more intense than appliances. Haier would need to hire expert industry leaders to lead this effort, and it would need to modify its culture. The main concerns are that Haier is giving up its core competency of white goods, unlikely to achieve “global brand” status, may not get full value for divested operations, and most importantly it may be the eventual demise of the firm.

    This option is not recommended. Recommendations After careful debate between expansion and stabilization the team recommends stabilization at this point in time. It does not want to overextend itself financially and it needs to reevaluate current operations, which is difficult to do during expansion. It is assumed that the current organization lacks the ability to adequately monitor and control operations on a high level. The company has underutilized facilities which need to be addressed. There is no immediate threat or out of the ordinary opportunity.

    Note exporting to new markets is considered normal business and would continue. The reduced effort on expansion reduces early-mover advantage; however the risk of unprofitability takes precedence. Our recommendation includes shifting from a “Multi-Domestic” strategy to a “Transnational” strategy. Centralizing operations ensures efficiency and learning, and increases accountability based on product or function instead of by geographical area. Goals and Supporting Objectives 1. Global leader in white goods industry 1. 1 white goods ranking worldwide by market share by the end of 2010 2. Reorganize organization to achieve economies of scale and scope (synergy) 2. Transform to a matrix structure with center of expertise by the end 2008 3. Ensure company goals are properly pursued 3. Design appropriate incentive system that rewards teamwork by the end of 2008 4. Product groups create strategies/goals that align with overall mission by the end of 2007 4. Improve financial standing 5. Divest unprofitable products (i. . , mobile cell phones) by end of 2007 6. Expand direct selling approach in main markets by the end of 2008 7. Hire electronics experts by the end of 2007 8. Create a separate group for “turn around acquisitions” by the end of 2007 Appendix A Fundamentals of Management, Robbins/DeCenzo, 6th edition, 2008 References * Fundamentals of Management, Robbins/DeCenzo, 6th edition, 2008, pages 80 – 88 * “The Internationalization Process of the Firm” paper by Johanson and Vahlne * http://dept. lamar. du/industrial/underdown/org_mana/org_structure_george. htm * Cavusgil, S. Tamer. International business: strategy, management, and the new realities/S. Tamer Cavusgil, Gary Knight, John R. Riesenberger * International Business – Competing in the Global Marketplace, 5th Ed, McGraw-Hill, 2005 * “The Competitive Advantage of Nations” paper by Michael Porter, 1990, Harvard Business Review 1990 * http://www. haier. com/index. htm * http://www. businessweek. com/1999/99_24/b3633071. htm – on Zhang

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