Evaluation of the strategy practices of Haier Group

Evaluation of the strategy practices of Haier Group This analysis report is prepared to evaluate the strategy practices adopted by Haier group in recent years. Qingdao Haier Group is a consumer electrical maker which transformed from a refrigerator factory in Qingdao, Shandong Province, China founded in 1984. In 1992, the company had simplified their company name from Qingdao Haier Group to its current name, Haier Group. A new director was appointed in 1984, who is Mr. Zhang Ruimin. Thus, a new management team was formed and leaded under Zhang, to solve companys problems, such as debts, lack of quality control and poor management. This report will be discussed under various collection of sources which found related to Haier group, which includes books, websites, media articles, journal articles, Haiers official website and Haiers yearly annual reports. All the sources will be using in the analysis to support and prove that the related theories have been applied into the companys strategies. 1.0 Introduction Strategic management can be described as the identification of the purpose of the organization and the plans and actions to achieve that purpose. Corporate level strategy means the strategic decisions that lead companies to diversify from one business areas. It also means the role of the corporate headquarters in directing and influencing strategy across a multi-product group of companies (Richard Lynch, 2009). In this strategic analysis, discussions will be focused into three main segments. A general Haiers company overview will be done in the first place to investigate the milestones they have been gone through in past decade. Analysis continues in analyze corporate internal and external environment, SWOT analysis and Haiers unique OEC Management will be criticized in details in this segment. Moreover, the next segment discusses how Haier strategically competes in the local and international markets by using Ansoff Matrix and The Strategic Clock theories. Haiers internalization strategies will be evaluated in the last segment that includes Joint Ventures and Acquisitions where the corporate adopts in the process of globalization. 2.0 Corporate Background Haier Group was founded in 1984 with headquarters in Qingdao, Shandong Province, China. In 1984, Haier produced and selling only a single model of refrigerator, it shows that Haier Group has been gone through major developments in years. Today, they rank themselves as one of the worlds leading white goods home appliance manufacturers (Haier, 2008). In last few decades Haier has grown their group to become the 4th largest white goods manufacturer and one of Chinas Top 100 IT Companies guided by the business philosophy of CEO Zhang Ruimin. Mainly, they has experienced a strategy for growth which is mainly formed into three major development stages, known as Brand Building, Diversification and Globalization (Haier, 2008). According to Michael Kanellos, 2008 Haier is trying to expand its presence globally and go up market. The company has been selling air conditioners, fridges, and other household items in the U.S. since 2000. But in 2006, it began selling LCD televisions. In November, it began selling music players. They has never been satisfied to just become a national brand, in January 2005, Haiers refrigerators were selected as best sellers in the UK by Ethical Consumer (Haier Worldwide, 2008) Haier employ over 50, 000 workers throughout the world, it has 240 subordinate companies and 30 design centers, plants and also trade companies. Their product categories are range from refrigerators, refrigerating cabinets, washing machine, air conditioners, home theatre systems, televisions, mobile phones, water heaters, DVD players and integrated furniture. Haier broadly recognized as a world leader in the technology domains of networked home appliances, intelligent integrated home furniture, digitalization and large scale integrated circuits. Different with other corporations, Haier is a state-owed company leading among others Chinese companies along with its brand name. They have been well developed and consistent which has leaded them rapidly expansion into the international market after the successfulness in its local country, and it is continues to grow until today. 3.0 Discussions 3.1 Haiers Internal and External Strategic Environment 3.1.1 SWOT Analysis The central purpose of the SWOT analysis (see appendix ) is to identify strategies that align, fit or match a companys resources and capabilities to the demands of the environment in which the company operates (Gerry Johnson et al, 2008). Organizations have to critically evaluate all strategic alternatives by using SWOT analysis to achieve its major goals and targets. In other words, Haier practices SWOT as to build on strengths so as to utilize opportunities and counteract threats, and at the same time correct its weakness. Haier has strong technology strength, they are broadly well known by leading nine products in its domestic markets share and also the top three white goods brand in terms of three products (refrigerator, air-conditioner and washing machine) in global market. They are also a world-class group in the fields of household appliances, network appliances, digital and large range integrated circuits and new equipments. Beside that, Haier also has a long term fundamental drive, which is innovation force that applies in its producing and management. As a result, their innovation in providing after-sales service has brings significance response from its customers. New upgraded products like dual drive washing machine, safe care water heater, four temperatures zone refrigerator and smart air conditioner are all been created under Haiers innovation strengths in improving products. Although Haier has a world level of technologies, but they has low level of core technology as they deeply relies on few world well known companies who supply core accessories and core components for Haier. Like for example, Haier used chips which made from Philips in its television industry, also, they bought quality compressors from Mitsubishi in its air-conditioner production. This will be a major weakness for Haier in expanding globally. Haier also weak in channels, the do not have a complete one. They even unable to deliver products to retailers, cost has increased as they needs to rent warehouses for storage purpose. Global economic integration is an opportunity and also a challenge for Haier. Haier may obtain the best quality raw materials from the international markets, recruit the best talents from all over the world, and discover more international markets. Haier should catch this chance and make full use of it to help in its process of globalization. The most important market for Haier is still its domestic market, which is China. As Haier hold more than 26.2% of the overall home appliance market in China, and the household appliances market continues to growth more than 20% every year. Thus, in future, China is still the best market for Haier to earn although they have been entering into international markets. Haier faces tough competition since entering into international markets. In the same industry, there are others worldwide recognized brands such as Panasonic, Samsung, Philips, LG and many mores. Haier is still new in other nations besides China and Asia markets; it is hard to compete with those strong rivals exclusive marketing. As China has bad country image of producing low quality and cheap price products, it is a major problem of Haier which aims to offers premium range of products, they have to against with this threat in order to build its brand into other nation. 3.1.2 OEC Management in Haier OEC stands for Overall Every Control, it also can be indicates as overall everyday/ everyone/ everythings control and clear of every workers in Haier. The CEO of Haier, Zhang, has created the unique OEC management control system to aims at overall control of everything that every employee finishes on his or her job everyday with a 1% increase over what was done the previous day. The OEC management control system has three aspects: target setting, control, checking and clearance; and incentive mechanism. Workers of Haier are awarded based on the quality of their work; it is either red reward or yellow penalty cards will be given. Other than that, promotion is decided by using open biding system to ensure the fairness in the awarding process (Thomas W. Lin, 2005). OEM is a strategic process with all that this involves in terms of the human resources of the company, its change culture and leadership. Thomas W. Lin, 2005 stated that Haiers OEC management-control system and enterprise culture have the following characteristics: Focus on and understand customer value, product quality, operating efficiency, innovation, and speed to market. Commit top management and leadership to creating a new way of management and a performance culture. Involve management and employees in creating the OEC management-control system. Allow them to become familiar with OEC so they feel included and share in ownership of the system. Educate management and employees. Use seminars and weekly company newsletters to explain the firms strategy, customer value, OEC management, and the idea of every employee being a strategic business unit to enable them to understand the concepts and appreciate the benefits. Create desired incentives, and reassure employees that they will be evaluated properly in accordance with their performance. 3.2 Strategic achieves Competitive Advantages If an organization possesses superior knowledge to its competitors then this can deliver core competencies which, in turn, produce competitive advantage (David Campbell, 2007). This segment will be discusses on how Haier adopts Ansoff Matrix and The Strategic Clock to achieve create competitive advantages. 3.2.1 Ansoff Matrix The most commonly used model for anaylysing the possible strategic directions that an organization can follows is the Ansoff Matrix (see appendix ). There are four broad alternatives, which are market penetration, product development, market development and diversification (David Campbell, 2007). Product development involves developing new products for the same existing markets a company has. The ability to innovate is crucial in developing products for rapidly changing consumer markets (Anthony Henry, 2008). In other explanation, product development simply means a company offers or delivers modified or brand new products to the same targeted markets. In the beginning, Haier has only four types of main products, which are refrigerators, air-conditinors, washing machines, and freezers. But in year 1999, Haier had launched a brand new product, named All media, All-digital television. It was a successful launching that has widely attracting a big number of users. Besides that, Haier also developing varieties in the same product line, the modified new products was targeted in the original markets. For example, some new model has been modified in refrigerator line such as little prince series (see appendix ). Market development involves entering new markets with the firms existing products. This may be done by targeting new market segments and new geographical areas, or by devising new uses for its products (Anthony Henry, 2008). Another strategy which Haier adopts to grow is market development. As market development declares as expand existing products to new markets, so it is either through new segments, new users, new geographies, or all three at the same time. In the case of Haier, they overseas to integrates into the global big markets and economies together with their premium white goods. Haier develops in most of the Europe countries included United Kingdom, United States, Germany, and Italy. Thus, they become an international corporation and involves in most of the household appliances manufacturing industry, and also entered cell phone manufacturing, insurance and finance. In the year 2001, they even involves in pharmaceutical industry. Diversification occurs when an organization moves away from a single product or dominant business area into other business areas, which may or may not be related to the original product. Although diversification is a solid strategy that defined as takes the company away from both its existing products and markets, but Gerry Johnson et al, 2008 suggests that a good deal of diversification in practice involves building on relationships with existing markets or products. Diversification is a matter of degree. Clearly Haier has almost perfectly practiced diversification by adopts both product development and market development. Moreover, diversifications have brought extra hidden competitive advantages towards the company. A very common justification of diversification is dispersion risk across a sort of businesses. Haier India has laughed Haier Mobile in year 2005, a whole new product created to entering into new markets. Haier Telecom India Pvt. Ltd. started operations in December 2005 to market Haier Mobiles (see appendix ). With the growing opportunities in India and around the world HTIL has marked its presence across four continents in the high growth centers of Asia, Africa, South America and Europe (Haier Mobiles, 2005). Diversification has been involves in Haier growth stage, besides improvement and growing on white goods industry, they also expanded into other industries that includes communication and IT products, Haier pharmacy, Haier Software and Haier real estate. Diversify from one product to a variety of products (in 1984, we had refrigerators only, and in 1998, we had dozens of products), from white goods to brown goods through capital operation in a way of activating shock fish. Tangible assets were activated using intangible assets and the business was expanded and strengthened at the minimum cost and in the shortest time (Haier, 2008). 3.2.2 The Strategic Clock Cliff Bowman and Richard DAveni emphasis that competitive advantage is achieved by providing customers with what they want, or need, better or more effectively than competitors. The strategy clock (see appendix ) represents different positions in a market where customers have different requirements in terms of money and value (Gerry Johnson et al, 2008). It is important for a firm to focuses on which markets customer they are targeting at, as different customer may have different perceptions on the same product. Most of the consumer have different needs and at the same time searching for different benefits and values. Like for example, for an air-conditioning user, they choose the product based on price or functionality? Haier using differentiation strategy on their new air-conditioning (see appendix ) which has added auto cleaning system. It not just keeps the room chill but at the same time has self-cleaning system works through its new created technology, there is a unique open and close feature adds on to the model. Haier is achieving competitive advantage because with the extra value added on the product yet it still charged at the same price, this shows that they had offers extra benefit that makes their product different from other competitors with a competitive price. 3.3 Strategic competes in International Markets Since 1998, Haier Group exported its outputs first to Germany, then to European countries. After years, they started to entry US markets, Middle Eastern countries, South-eastern countries, and India. According to Charles W. L. Hill et al, 2007 companies need to consider carefully all the possible ways they can set up their operations to minimum risk. He also suggested Haier believes that globalization is not just export, but more crucially create the export license. In order to decrease the risk of entering a new market, they pursue strategic alliances to position its company into new areas, beside that; new plant will be set up (or acquisition decision will be made) only if there is a market and the plant must at least reach a breakeven point. 3.3.1 Strategic Alliances One of the most common ways to entry a new market with low risk is through strategic alliances (see appendix ), where a company can share and use the resources and capabilities held by its partner company. There are some reasons behind of why Haier choosing strategic alliances. First; they may feel that it can benefit from its local partners knowledge of a host nations competitive conditions, culture, language, political systems and business systems. Second, when the development costs and risks of opening up a foreign market are high, they may gain by sharing these costs and risks with its local partner. Third, political considerations in some nations make strategic the only feasible entry mode (Charles W. L. Hill et al, 2007). A New York based import corporation named Welbilt Appliances which owed by Michael Jemal approached Haier to invites them to entry US market in 1994. In the same year, Welbilt Appliances bought 150,000 units consists of three models of compact refrigerators that met the safety and energy standards of US from Haier. All units were sold in a year under Welbilts name. Haier America was formed in 1999 after the successfulness of the mini-refrigerators line, a new office has located in Manhattan with 17 staffs, and for the first year of operations, they target to reach $50 million dollar of sales. After three years, they had reach a wonderful result that they had sold 80,000 full size refrigerators, approximately 2% of the US market. 3.3.2 Acquisition Acquisitions are often been use to enter a new market area for the company when they need other companys competencies to survive in the area. The benefits behind acquisitions are a company can purchase a market leader in a strong cash position overnight, rather than spend years building up market leadership through internal development (Charles W. L. Hill et al, 2007). A company choose to acquiring another company for certain reasons, and for Haier, it simply because they need to move fast in internalization. Charles W. L. Hill et al, 2008 argues that acquisitions are also perceived to be somewhat less risky than internal new ventures, primarily because they involve less certainty. Given the nature of internal new ventures, large uncertainties are associated with projecting future profitability, revenue and cash flow. In the year 2001, a refrigerator plant located in Padova, Italy (one of the most giant manufacturers which producing build-in appliances) has been chosen by Haier to acquire and invested $8 million dollar, the new plant is planned to manufacture build-in freezers and refrigerators for the fast growing build-in sector on that time in European market. Right in the next year, another new Italy-based organization named Haier A/C Trading has been formed and air-conditioners were began to been supplying in the local market. 4.0 Conclusion and Recommendation From the analysis, all the findings showed that today Haiers achievement are much related with the strategies they practised. Based on the SWOT analysis, there is evidences show that Haier has its strengths to competes in its targeted industry, the OEM Management system has even strengthen up its capability to overcome possible threats and help them to catch opportunities for now and future. By practising diversification and other related strategies under Ansoff Matrix, it has allowed Haier to gain competitive advantages in local and international market making them the well-known premium white goods brand in the world. Combination of all strategies has brought Haier to reach first-class performance, and also achieve the quality of service class in its industry, they are still the only Asian company awarded Five Star Diamond Award. Competitive-oriented overseas market entry and uses strategies in gaining competitive advantages are the major motive of Haier to compete with world giants in its internationalisation planning and will be continues reaching successfulness in the future.