CASE A: HAIER GROUP – Internationalisation Strategy, Innovation and Management Approach
1. What are the main features of Haier’s internationalisation strategy since the early 1990s, how successful has it been and how does it differ from the pattern of international development typical of Western enterprises?
2. What are the principal features of Haier’s management system? In what ways do Haier’s principles and methods of management differ from those traditionally deployed by Western companies?
3. What has been Haier’s approach to innovation in the past, how is it changing, and do you think it will continue to be successful?
Haier Group Case Analysis
Haier Group is an international corporation that manufactures and supplies household devices and consumer electronic products. The company began as a small insolvent organization known as Qingdao General Refrigerator Factory before becoming the leading company in the world that produces home appliances. Currently, the organization markets its products in more than 100 countries across the world. Although the company is headquartered in Qingdao China, it has numerous regional headquarters that serve its customers in the various regions. Chen (2016) stated that Zhan Rumin played a critical role in the success and growth of Haier Company. As the Chief Executive Officer (CEO) of the company, Zhang ensured that the organization changes from the insolvent Qingdao General Refrigerator Factory to the most successful and leading brand currently known. During his regime, he ensured that the company produced quality products and used a management system that was customer oriented with product development putting more attention to fulfilling the needs of customers. Under the leadership of Zhang, Haier Company started and significantly improved its internationalization.
The internationalization approach and management techniques of Haiers have been praised and admired by various managers across the world due to their contribution to the growth and success of the company. However, they have received criticisms on equal measure from scholars who contended that they were not orderly and were not integrated as required. Various questions have also emerged concerning the cohesiveness of the approach and its rationale, particularly considering its varying performance in different markets. Despite these criticisms, there is a wide agreement that the strategy was effective and that it provides essential lessons for corporations that intend to internationalize. Therefore, this paper describes features of internationalization strategy adopted by Haier Company since early 1990s and how the strategy differs from that of western enterprises. It also evaluates the effectiveness of internationalization strategy of Haier and ways in which the company’s principles and methods of management differ from those used by western firms. Lastly, the paper describes Haier’s approach to innovation and whether the approach will continue to be successful.
Features of Haier’s Internationalization Strategy since Early 1990s
Corporations can expand beyond national markets through internationalisation. An internationalisation strategy refers to the approach that a company adopts to sell its products in the international markets. It encompasses using one or several modes of global business. Among the critical modes of international business encompass licensing, exporting, franchising, acquisition, strategic alliance, forming new, completely owned subsidiary, and joint venture (Williamson & Wan 2018). In various situations, Haier adopted different modes of international business. For instance, to enter American market, the firm originally exported manufactured products to the country and depended on a strategic partner to deliver the products to various regions. Similarly, to promote its commodities in Germany, Netherlands, and Italy, the organization exported its items under the Haier brand. Moreover, in countries such as Indonesia, Malaysia, and Philippines, the organization established joint ventures with domestic firms and depended on them to manufacture and sell home appliances such as air conditioners and refrigerators (Whitelock 2002).
A critical feature of the internationalization strategy adopted by Haier Company is enhancing localization and adaptive approaches through innovation to enable it fulfil the local demands. To achieve this, the company studied all the market conditions by considering needs so that it could streamline its production based on such needs. Essentially, considering customers’ requests and distributor’s observation enabled the company to produce goods that met the customers’ requirements thus made it succeed in the market. For instance, through customer requests, the company manufactured a refrigerator that runs for more than one hundred hours during power outage, washing appliances that could carry high volumes of materials, as well as, air conditioning device that function effectively in both arid and hot tropical climate for individuals staying in hot regions such as deserts (Wang 2015). Similarly, Haier’s technical bench observed that there was frequent breakdown of refrigerators and that there were no machines to help households wash carrots and potatoes. In response to these market gaps, the company’s technical team established rand new designs that suited the cleaning requirements and training the rural customers’ new uses of machines in clearing vegetables and peanuts. More importantly, introducing an effective living wireless control of home appliances was a significant innovation and adaptive approach used by Haier Company. This innovation enabled the users to remotely control their appliances at their comfort.
Alliances, diversification, acquisitions, and joint ventures are other features of internationalization strategy that Haier Company adopted. From the case study provided, there is a combination of the strategy of internationalization of technology and product diversification. During early 1990s, Haier’s product range increased significantly, indicating a critical role that foreign partnership played in the company’s diversification. Moreover, the company’s technology alliance partners increased from one partner to several partners in different sectors. From 1984-1991, Haier was a single product firm that only focused on refrigerators. However, from 1991 onwards, it began to diversify into new product markets that ranged from air conditioners to freezers. To effectively establish itself in these industries, the company took about two years that saw it recorded huge profit and increased performance. Haier continued with its product diversification in which it successfully developed various products including washers, water heaters, and microwave ovens among others. Due to its success in product diversification, the company became an exporter of its technologies and products. The organization used its improved technology capability and product diversification to widely venture into foreign markets through strategic alliances. For instance, since early 1990s, the company’s products have successfully entered North America, Europe, and other developed countries.
Haier Company has formed a worldwide network of design, manufacture, distribution, and after sale services. Leveraging its product range and technological base, the firm has established cooperative research programs with renowned international companies. Lewin, Välikangas, and Chen (2017) noted that Haier’s global technology co-operations span Los Angeles, Tokyo, Lyons, Amsterdam, Montreal, Sydney, and Seoul. Some of the company’s cooperative partners encompass Lucent, Toshiba, ESS, Metz, Philips, and Mitsubishi. Essentially, these alliances have provided Haier with information regarding international trends in technology advancement. Further, teaming up with these internationally leading innovative organizations servers Haier a radar function that has provided it with the opportunity to scan and assess emerging and new technologies across the world. Still on strategic alliances, Haier formed various international design, as well as, research and development centers that are tasked with producing myriad of household appliances that fulfil the needs of customers from various countries across the world.
Haier’s organizational structure is another feature of internationalization strategy that contributed to its success. Reports have indicated that since early 1990s, Haier’s organizational structure has undergone transformation geared toward innovation (Wang 2015). As stated by the company’s CEO, Haier follows a growingly flat organizational structure that ensures everyone becomes a source of innovation (Ben-Jacob 2016). The organization transformed its U-type organizational structure to M-type structure that has contributed to its product differentiation and innovative products it continues to produce.
Regional expansion and exports is a major feature of internationalization strategy adopted by Haier Company. In the year 1992, Haier became a competent global supplier where its products met certification requirements of ISO9001. Since then, the organization has been exporting its products where it began with the Indonesian market under the pretext of original equipment manufacturer. The company’s products attracted customers due to their design and quality, a situation that made most manufactures across East Asian states to gain interest in joint production venture with the company. One of such venture occurred in 1996 with the Sapporo group of Indonesia in which the joint venture produced various appliances such as air conditioners, washing machines, hot bathing equipment, and microwave ovens (Beugelsdijk et al., 2018). Joint ventures with domestic firms continued to be Haier’s favorite means of forming production units across developing regions across the world.
Comparing the Internationalization Strategy of Haier and That of Western Companies
Beugelsdijk, Kostova, Kunst, Spadafora and Essen (2018) stated that various factors must be considered during internationalization to maximize benefits and reduce losses and risks. Zhang played a critical role in transforming Haier Company. Given that the management thinking of Zhang was influenced by western ideas and Chinese traditions, there are several differences and similarities in Haier’s internationalization strategy against traditional western companies. Principally, the main reason for western companies venturing in the foreign market is to make profit while that of Haier’s is to gain international and local pride. In line with Zhang, findings of a research by Hofstede (2004) indicated that Indian, Chinese and most non-western states chose patriotism as key business goals while western and western influenced colleagues are majorly concerned with the growth and present profits. Further, Haier’s internationalization phase concurred with Chinese government fostering its companies to venture in foreign markets. Due to the domestic success of Haier, central government removed some policy restrictions to give the company a chance to succeed internationally because the success of this company would influence future government international economic policy, as well as, other Chinese companies seeking internationalization. As a result, Haier managed to use internationalization strategy more freely using the opportunities presented.
The Uppsala Model (UM) states that enterprises internationalize with an order, venturing through nearby or culturally close markets and start by little commitment, progressively expanding and deepening until they form strong and reliable subsidiaries (Grant, 2016). Essentially, western companies adopted the UM and would first internationalize into nations with similar culture. Individuals prefer trading with those feel they share similar space. Initially, Haier Company adopted the UM. Following this model, the company began its internationalization by exporting its products to nearby countries and when its sales increased, it shifted to FDI with a joint venture. Nonetheless, rather than progressive action with experiential learning, the company deviated from UM when it established joint venture in Philippines and constructed a plant immediately. This coincide with the findings of study by Chen (2016) that revealed that although several western companies fully backed up UM at initially stage of internationalization, a good number often use a combination of approaches based on other factors that influence each company.
Traditional western companies implemented the eclectic paradigm that stresses on transaction cost analysis (TCA). Given that transaction cost analysis is cost oriented, enterprises often implement low control modes unless it is clear that the benefits surpass the costs (Du, 2003). Nonetheless, Haier Company is taking more risks as evident on its immediate acquisition of new markets. Notwithstanding this, although Haier produced most of its household appliances in the US, it continues to ship the compact refrigerators from China, depicting that the organization failed to evaluate the tradability issue before establishing the optimal location of value chain activities.
Regarding organizational context, Haier Company adopted a decentralized structure that resembles those of European Multinational corporations. Although traditional western companies would decentralize operations and marketing of subsidiaries, their research and development remained centralized. Haier’s foreign subsidiaries operate independently and self adequately with its completely localized structure. Haier was a live to the fact that technology innovation is essential in maintaining competitiveness within the industry and deal with the issue of inadequate resources in China, it had to establish numerous design, as well as, research and development centers in countries with advanced technology to gain ownership advantage (Williamson, & Wan 2018).
The Success of Haier’s Internalization Strategy
Frynas, Mol and Mellahi (2018) argued that the success of an enterprise is determined by its profitability. Given that profits and revenues have been growing steadily for years, and Hair was regarded as the first Chinese appliance company to attain revenue of more than RMB 200 billion, its internationalization strategy is regarded successful. Currently, Haier has formed an industrial park across the international markets such as US and Middle East. Precisely, the company has more than fifty thousand sales agents across the world. The company also exports products manufactured by its factory located in the US and China and sale such products to its affluent citizens. Through the stated achievement, Haier has proved effectiveness and strength through flexibility and adaptability during crisis filled with new challenge when trying to become an international figure.
A major reason for these successes is attributed to accurate target of a particular market niche in various states. Apart from selling its products at relatively cheaper prices than its competitors, Haier Company has been vigilant at setting its products at the right position. This process encompasses establishing a given niche and conducting follow ups and these have resulted in designing appropriate product that fulfils the needs of identified markets. Similarly, in its globalization approach, Haier used re-organization, alliance, and acquisition to succeed and gain competitive advantage by diversifying products, improving them, and using innovation from technological advancements. For instance, when it collaborated with Liebher and made the organization its subject, Haier Company strived to continue partnering with other companies. This partnership enabled the company to deliver quality products that fulfilled the needs of its customers.
Haier Group conducted its activities within its internationalization strategy according to the 3-thirds principle that is construed as follows; a third of the products are manufactured and delivered within China while the next one third is produced in China and delivered while the last third is produced abroad and sold in the foreign markets (Williamson & Wan 2018). This internationalization strategy has resulted in numerous benefits and contributed to the success of the company since it has generated the huge profits and revenues that the company had continued to record.
Haiers’ arrangement of its organ has played critical role on its success as streamlined by its internationalization strategy. As already discussed, the company’s structure has undergone massive transformations and innovations geared towards achieving globalization goal. The idea of the company’s Chief Executive Officer designing a flat organized structure of successful since it ensured that everybody within the company became a source of innovation. Currently, the company has various levels of administration that encompass business department, group headquarters, development center, and human resource center. These organs have been the cornerstone of Haier’s globalization approach and all its operations across the international markets.
Features of Haier’s Management System And How They Differ From Those Used By Western Companies
Leadership plays a critical contextual factor as depicted by Steve Job, Bill Gates, and Zhang (Frynas, Mol, & Mellahi, 2018). Although the definite governance of Haier is unknown, it is not anything to doubt that Zhang holds a considerable power in Haier. Moreover, the organizational structure of Haier enabled Zhang to successfully initiate and execute his strategies throughout the company. However, this appears impossible for most western enterprises that are managed and led by a board of director who are answerable to shareholders. Moreover, although paternalism is viewed a breach of individualism in the west, culture, history and value of Chinese perceived it as morale responsibility for followers to view leaders as their role models and leaders to consequently care for their followers. Therefore, Haier can implement the overall control and clear principle to ensure workers’ responsibility, absolute compliance, and efficiency.
Haier needed its workers to be adaptable, responsible and continue to improve and innovate. The company’s management system shifted from autonomous micro-divisions known as “zizujingyingti” (ZZJYT) with individual performance bonuses and basic salary related to micro-enterprise known as “xiaoweiqiye” (XWQY) with exclusively performance based compensation, as well as, open digital user platforms (Whitelock, 2002). The system stressed on self-management. On the contrary, due to their conformity nature, most workers who were passive could not accept the new system and as a result, left. As such, a workable system relies on human resources including quality, quantity, and acceptance level of workers and available workforce in a given market.
Zhang needed to transform the organizational arrangement from hierarchical to decentralized and team-based so that every worker could pay attention to delivering customers’ needs. For this reason, ZZJYTs was established. In addition to profitability target and baseline sales, each ZZJYT was given complete operational independence, such a profit distribution and mutual selection between workers and heads (Grant 2016). This eradicated the “iron-rice bowl” attitude engrained in the minds of workers for Chinese stated owned companies. Moreover, Haier Company had “10-10” policy in which 10% of workers with lowest performance were replaced while 10% of top performing workers were accorded further training (Ben-Jacob, 2016). Haier established competition internally to ensure that the entire organization is self-driven. Chinese enterprises implemented the performance based incentives to inspire competent workers and deter stackers. Although western companies are currently practicing performance based compensation, the major difference is that Haier adopted it at all levels and assessment is done independently by the team as opposed to superiors.
Haier’s management system is marked oriented, flexible, faster, and nearer to customers. On the contrary, some western companies focused on standardization and established some bind sports. Handling white goods, Haier requires a decentralized structure to respond effectively but not all sectors would be appropriate. A major sector is the hospitality in which autonomy is required from the design of rooms and receptions to the customized services for visitors, based on the comparative advantages for designated market.
Haier’s Approach to Innovation
Open innovation has been critical to Haier’s business strategy. In a quickly growing and very competitive international market place, it is impractical to fully depend on internal resources for innovation. Having identified its workers’ potentiality to create value, Haier has been working for years to establish and strengthen a culture of innovation and entrepreneurship. Workers are aggressively encouraged to become inventors while entrepreneurs are guided to create new products. Haier has established open innovation platforms including Haier Electronics and Qingdao Haier where workers are encouraged to bring new resources and ideas for new services, products or logistical solutions. The intention is to design free market in talent. Similarly, the conventional business units have been awarded to self-managed micro enterprise. Their sustainability relies on their innovative performance, ability to yield revenues and to attract outside partners and funding. Conclusively, Haier has become a leading business incubator. By bringing on board market mechanisms into its research and development process, Haier has been able to produce a flow of disruptive new technologies and transform them into commercial products.
How the Innovation Approach Has Been Changing
Certainly, the innovation approach of Haier has been changing significantly. The first innovation approach was the decision to make the company unique by offering quality products to its customers. To achieve this, the organization reinvented itself as a joint venture with Liebherr, accessed advanced technologies. To improve quality, Zhang fostered a mindset oriented towards accountability and performance. In particular, he borrowed practices and routines for regular improvement from the quality movement. Moreover, it connected pay to performance in way that had never been witnessed in the Chinese market by introducing system known as Overall Every Control and Clear. On a daily basis, employees tracked quality outcomes using pencil and paper, and their remunerations were connected directly to the outcomes. This provided the organization with a simple way of formulating goals and managing all its achievement. Through this innovation approach, the organization managed its logistics with a zero defects focus, leading to reduced delivery times, and low working capital.
The innovation approach of Haier changed in early 1990s when the organization embraced consumer responsive innovation. During this period, quality was not a major differentiator in China since various companies had already emerged. Therefore, Zhang built upon the firm’s hard won workforce discipline, as well as, the accompanying performance pay relationship to connect workers directly to customers. He assigned teams comprised of members of various functional departments to particular projects. To address the disagreements of matrix structure, he introduced market chains that made it possible for all workers in the organization regardless of their responsibilities to trace their actions directly to the marketplace. Similarly, the organization embraced the strategy of occupying the rural regions to encircle the city, taking advantage of specific niches that had few competitors.
From customer responsive innovation, Haier innovation approach shifted to the reorganization into bottom up structure where self managing teams were tasked with making decisions. Lastly, the innovation approach of Haier can shifted towards reinvention of the organization as truthfully internet based organization, to everyone in a manner in which few organizations have tried.
Whether Innovative Approach of Haier Will Continue To Be Successful
Essentially, openness to innovation is indeed a critical element of job at Haier. Indeed, the decisions that the CEO made by legitimizing initiative and demanding selfless action to every worker clearly shows that the company will continue to manage self-renewal innovation across product, technology and business models. Clearly, with this culture, it is not anything to doubt that the organization will continue with its open innovation culture and thus will continue to succeed.
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