The Last 10 Miles The Path to International Competitiveness for Chinese Enterprises
Research Report July 2012 2 The Last 10 Miles Table of Contents
1. Repositioning Chinese enterprises in the post-crisis era 06 China stands out 08 Chinese enterprises usher in a new phase 08 Size matters, but strength is the real goal 08 Chinese companies focus on international competitiveness 11
2. Characteristics of internationally competitive enterprises 14 High performance 15 Accenture’s criteria for high performance businesses 16 Mastery of the S-curve 18 Sustained success 19 Case study - Port of Qingdao 22 Navigation of hidden S-curves 24 Case study - COSCO-Shipyard 29 Corporate social responsibility 32 Environmental responsibility 32
3. Barriers to international competitiveness for Chinese enterprises 34 High growth rate but low profit margin 35 Lack of long-term strategic planning and management capacity 37 Inexperienced leadership teams 38 Legacy of state ownership 38 Succession problems in privately run enterprises 40 Lack of innovative spirit 41 Under-appreciation of brand value 43 Difficulties managing talent 45 Weak corporate culture 46
4. Exploring the path to international competitiveness 48 Establish practices for strategy management 49 Case study - Huatai Group 54 Strengthen executive teams 56 Case study - Tranvic Group 58 Build innovation capacity 61 Case study - New Hope 62 Create brand value 64 Case study - Haier Group 68 Foster a favorable environment for talent 71 Case study - Tsingtao Brewery 72 Clarify organizational values 75 Optimize business and management processes 75 Enhance risk-management capabilities 76
The Path to International Competitiveness for Chinese Enterprises 3 Foreword
Decheng Li Gong Li Executive Vice President and Chairman, Accenture Greater China Director-General, China Enterprise Confederation
In 2010, Accenture and the China the world. Therefore, in our research on whether these big Chinese enterprises Enterprise Confederation jointly issued Chinese enterprises this year, we focus are as internationally competitive as their a research report titled Dancing on on how they can acquire the ability to overseas peers and whether they will the Stage of a Multi-Polar World: compete globally. receive the same recognition and respect The Path to Globalization for Chinese as their foreign counterparts. Does being Enterprises. In this report, we analyzed The timing is highly relevant, for several big automatically mean being strong? An the necessity for Chinese enterprises to reasons. First, Chinese enterprises old Chinese saying holds that even though persevere in the aftermath of the global have undergone tremendous change one has traveled 90 miles of a 100-mile financial crisis. In addition, we discussed following 30 years of opening up and journey, one is still half way. Accordingly, different globalization strategies for the worldwide economic recession. we believe that only by achieving their Chinese enterprises. We also highlighted To prepare for a new phase of growth goals can Chinese enterprises challenges in the globalization process development, they must reevaluate actually be strong in a meaningful sense— and ways to address them. Since the their position in the post-crisis era. and complete the remaining 10 miles of release of the report, we have received their journey. feedback and suggestions from various Second, with its rapid economic parties that prompted us to reflect further development and rising economic Third, China is transforming its on the future development of Chinese strength, China has become the world’s economic growth pattern. It can no enterprises. To globalize, companies must second largest economy. At the same longer pursue speedy economic growth become internationally competitive. Only time, Chinese businesses have been through investment and export at the when Chinese enterprises can compete growing swiftly. Some of them boast expense of resource consumption and in the global market will they secure a a scale on par with that of top global environmental destruction. Instead, it foothold among the great enterprises of companies. However, it remains unknown should seek balanced, sustainable and
4 The Last 10 Miles harmonious development guided by a Against the backdrop of a volatile global scientific outlook. Moreover, Chinese economy, China’s economic direction enterprises need to change their not only draws wide attention but operational models to contribute to the also powerfully influences the world’s country’s economic transformation. It economy. The fate of China’s economy is hard to imagine a healthy and sound depends on tens of millions of Chinese economy composed of under-performing enterprises. Indeed, the next decade companies. Therefore, economic will be vital for China. Recently, the Decheng Li transformation must start with the Chinese government formulated the Executive Vice President and elevation of enterprise competitiveness. nation’s 12th Five-Year Plan, which Director-General, puts forward a strategic adjustment China Enterprise Confederation Our report addresses the following five of China’s economic structure and the major themes: transformation of China’s economic growth model. The Plan lays out the 1. During 30 years of opening up and goal of expanding domestic demand the test of the financial crisis, Chinese and developing the nation’s economy by enterprises made significant contributions coordinating its consumption, investments to China’s rapid economic growth. and exports. The Plan also points out However, in general, Chinese companies that China will step up development lack the ability to compete internationally. of its service industries. In addition, it A considerable gap in competitive prowess identifies technological advancement still exists between Chinese businesses and innovation as the pillars of economic and the world’s leading global companies. growth for China. The strategies and Gong Li tactics essential for implementing the 2. To achieve balanced and sustainable Chairman, Plan must be executed by enterprises. economic growth, Chinese enterprises Accenture Greater China Whether China can successfully must be able to spot their own achieve a new and sustainable mode weaknesses, undertake continuous of development depends on whether improvement and set their next goal on Chinese enterprises can compete becoming internationally competitive. globally. We hope that this report 3. Chinese businesses that are globally sheds new light on Chinese businesses’ competitive should be able to create path to global competitiveness. more value than their international peers—and sustain these gains. They must also contribute to balanced economic growth, social tolerance and harmony and sustainable development in China.
4. International competitiveness comes from a strategic vision of constantly discovering and exploring new markets, establishing unique operational capabilities and achieving strong performance.
5. In addition to their efforts to increase business volume, Chinese enterprises should strengthen their skills in strategy, leadership, branding, innovation, talent, culture and risk management. Only then can they become globally competitive and narrow the gap between their own performance and that of the world’s leading firms.
The Path to International Competitiveness for Chinese Enterprises 5 1 Repositioning Chinese enterprises in the post-crisis era
6 The Last 10 Miles The world in general is still struggling Europe has witnessed debt crises (such as petroleum, natural gas, minerals, after the global financial crisis. For as well, and the credit conditions of fresh water, metals and grain). Additional example, the waves set off by the Greece, Ireland and Portugal have woes—skyrocketing costs, global warming, recession continue to make themselves verged on collapse. Although both the earthquake in Japan and unrest in the felt in the United States. The US the European Union and International Middle East—have only worsened matters. government’s stimulus plans generated Monetary Fund (IMF) offered to relieve little positive outcome. The stagnation the situation, fears of default lingered. The financial crisis dealt a major blow of the US economy was corroborated by Italy and Spain followed suit. The to the old-world economic landscape its gross domestic product (GDP) growth financial crisis’s impact on the European and changed the dynamics between rates of -2.6% and 2.8% in 2009 and Union is hard to estimate, rendering economies. Some countries as well as 2010, respectively. Equally troubling, the the fate of the Euro unpredictable. enterprises have risen and fallen, as unemployment rate hit an alarming 9.2% the old gave way to the new. However, in July 2011.1 Although the Democratic Around the world today, countries emerging markets felt less of an impact and Republican parties agreed at the continue to grapple with the destructive from the global recession and have last minute to raise the debt ceiling to power of the financial crisis. While the recovered relatively quickly, while prevent the government from defaulting deep roots of the crisis have yet to be developed markets have seen their on its Treasury debt, the measure failed dealt with, the huge amount of capital economic strength wane. Indeed, the to solve the fundamental problem of the that has been poured into the market worldwide downturn has accelerated the fiscal deficit. Moreover, raising the debt has created the specter of inflation. The transformation of the global economy limit resulted in downgrading of the US situation is compounded by shortages of into a multi-polar world. (See Figure 1.) government’s credit rating for the first natural resources and commodities time in 70 years and sparked turmoil in the global capital market.
Figure 1. Major countries’ GDP growth rates, 2008-2010
15.0
10.0
5.0
0.0
-5.0
-10.0 Great France United Germany Japan Russia South Brazil China India Britain States Korea
2008 2009 2010
Source: www.cia.gov
The Path to International Competitiveness for Chinese Enterprises 7 enterprises have entered into a new competitive ones. The Fortune 500 China stands out phase of development. This phase is list, which focuses heavily on scale The global financial crisis did not characterized by better technology, (as measured by sales income), has substantially hurt the Chinese economy. improved management, a wider vision and become an important barometer for Chinese enterprises, especially financial a more mature business mentality. Any Chinese enterprises. However, evaluating companies, remained intact because nation’s economic power derives from Chinese enterprises using other criteria China’s capital market has not completely the competitiveness of its companies can generate additional important opened itself up to the world. While and the soundness of their operations. insights about their strength as gauged mature economies’ growth has been Tens of millions of companies create by international competitiveness. halted, China has managed to sustain diverse forms of value for society through Below, we explore such criteria. fast economic growth just as it did over their operations. The countless little the past several decades. Between 1979 streams of their output flow together Brand reputation and 2010, the average growth rate of into the massive ocean of a country’s China’s GDP has been about 10%, the economy. China owes its economic A strong brand helps a company to win highest in the world. During 2008, 2009 prosperity today to the development recognition, renown and popularity, while and 2010, China’s economy grew at and growth of its enterprises. a weak brand dooms it to obscurity and 9.6%, 9.2% and 10.3%, respectively, possibly even oblivion. Despite the size of besting all other economies. In 2010, the Chinese economy, how many world- China surpassed Japan to become the Size matters, but famous brands has China produced? second largest economy in the world, strength is the real goal boasting a total annual import and export A number of well-known Chinese brands volume of almost US$3 trillion.2 While Despite the gains they have made, Chinese have emerged, some of which remain many Western companies were felled enterprises have found themselves at a popular among Chinese consumers. by the financial crisis, a large number turning point. Questions abound: Have However, Chinese companies and their of Chinese companies went abroad, Chinese enterprises bridged or narrowed products are far from well recognized setting off a new wave of globalization. the competitiveness gap between around the world. Consider the Top Between 2008 and 2010, China’s foreign themselves and leading companies 100 Brands ranking by Interbrand. direct investment (FDI) skyrocketed from around the world? Are they ready to Between 2001 and 2010, not a single 5 about US$56 billion to US$79 billion. compete with their foreign counterparts? Chinese brand made it to the list. In China’s FDI in 2010 was 87 times that Can they duplicate their domestic fact, no Chinese brand has ever made of 2000. Statistics show that China success abroad? Have they created the list since Interbrand introduced is the world’s largest producer of 220 adequate value for their shareholders it. Yet brands from other emerging kinds of industrial products, including and other stakeholders? Have they economies—such as Samsung Electronics crude steel, coal and cement.3 created a management philosophy and Hyundai Motor from South Korea and practices recognized across the and Corona from Mexico—have world? Are their current business appeared on the list alongside brands Chinese enterprises models sustainable? Have they helped from the US, Europe and Japan. foster social development? Are Chinese Interbrand uses the following formula to usher in a new phase enterprises conserving natural resources create its rankings: As many as 57 companies headquartered and using their resources effectively? on the Chinese mainland ranked among brand value = economic value of the the 500 in 2011, and China lags Answers to these questions will shed light Fortune enterprise X role of brand X brand behind only the United States (133) and on how Chinese enterprises reposition strength discount rate6 Japan (63) in the ranking.4 Compare themselves on the global stage. Only with a clear position and understanding of this scenario with 2000, when only nine By contrast, the Fortune 500 ranks companies based on the Chinese mainland their own strengths and weaknesses can companies purely according to their made the Fortune 500 list. they define the right goals to pursue. sales income. Apart from economic value of the companies (companies China’s economy has gathered strength Although Chinese enterprises have with negative economic value are ruled in the post-crisis era, and the status made substantial progress over the out automatically) and other brand- of Chinese enterprises in the world past years, they still have a long way to related indexes, Interbrand takes two economy has improved markedly. go to catch up with high performance more factors into account: international Compared with 30 years ago, Chinese businesses, especially internationally
8 The Last 10 Miles operations and market distribution. Electronics and Singapore Airlines, have Productivity For Interbrand, 30% of a company’s made the list.9 Clearly, Chinese businesses total sales income must come from have a major opportunity to burnish their Productivity is an important measure of a countries other than the business’s host corporate image. company’s competitiveness and economic country, and income from one continent vitality. Companies cannot expect to cannot exceed 50% of the company’s Innovation generate more output by simply investing total revenue. In addition, a company in more manpower. After all, the supply must have operations on at least three The ability to innovate is another of human resources with appropriate continents, which must include emerging distinguishing characteristic of strong, skills is limited. And a labor-intensive markets. Companies that fail to meet internationally competitive companies. and low-wage production model does these criteria do not make the list. LIU In 2010, BusinessWeek magazine not help cultivate a domestic market Chuanzhi, Board Chairman of Lenovo, published its list of the world’s 50 most and social stability. To further develop once acknowledged that in overseas innovative companies. To generate China’s economy, Chinese businesses markets, “except [for our] Think series, the list, BusinessWeek distributed a must achieve higher productivity. all [our] products are relatively unknown 21-question survey to senior executives Creating more value with the same to global consumers. They don’t know from various industries around the amount of labor should be the more what Lenovo is.”7 Minister Chen Deming world asking them to nominate the sustainable path to pursue, because it of China’s Ministry of Commerce was most innovative companies in other benefits overall development of society. also chagrined to learn that China has industries. A total of 1,590 anonymous In 2009, the International Institute for produced no famous brands despite being responses were collected. The final list Management Development (IMD) in the world’s biggest exporter.8 weights the survey results 80%, stock Lausanne, Switzerland, ranked countries returns 10% and three-year revenue and in terms of their productivity as measured margin growth 5% each. Four Chinese by hourly GDP output per worker, based Corporate image companies appeared on the list: BYD on purchasing power parity (PPP). Among In May 2011, Fortune magazine released (No.8), Haier (No. 28), Lenovo (No. 30) the 58 countries that were ranked, China its list of the 50 most admired companies and China Mobile (No. 44).10 Although was in 55th place, with US$5.51, ahead of in the world. In selecting companies this recognition shows that Chinese only the Philippines, Malaysia and India. for the list, Fortune emphasizes criteria enterprises have started to innovate, Thailand, Ukraine and Peru were ranked including a candidate’s reputation, the low number of companies suggests higher than China.12 influence and public image. Unlike that their overall innovation skills remain Interbrand, which takes a quantitative nascent. In contrast, 22 US companies Private-sector strength approach in its rankings, Fortune and made the list. its cooperating research institution South Korea and China are both engaged 4,100 senior executives, directors Patents further illuminate a company’s developing countries in East Asia, and securities analysts to score 1,400 innovativeness. Statistics show that and China’s total economic volume is enterprises from 57 industries around the in 2010, China accounted for 20% significantly larger than that of South world in nine qualitative criteria. These of the world’s total population, 9% Korea. China boasts more Fortune 500 criteria are: ability to attract, develop of the world’s GDP and 12% of the companies (57 in 2011) than South and retain talent; global influence; total global spending on research and Korea does (14 in 2011). But no Chinese innovation; quality of management; development. However, among the patent companies have proved as competitive quality of products or services; social and applications received and patents issued as the likes of South Korea’s Samsung, environmental responsibilities; financial by patent organizations outside China, Hyundai, LG and Pohang Iron and Steel. soundness; long-term investment only 1% came from China. Moreover, Why? There may be many explanations. value; and wise use of corporate assets. around half of the patents granted However, a crucial factor is that all the Similarly, this list has been dominated abroad belonged to foreign-invested South Korean companies mentioned by companies from the US, Europe and companies in China. Even though the above are private enterprises. Japan. No Chinese companies have been total number of patent applications has included, even though other companies been huge, 95% of the applications were from emerging markets, such as Samsung submitted to the China patent office, and most of them reflected only minor adjustments to existing designs.11
The Path to International Competitiveness for Chinese Enterprises 9 When Kim Dae-jung became president sheltered by preferential treatment and of A-share companies continued to of South Korea, he started mass numerous protections. Those enjoying a grow, their cash flow deteriorated. privatization, which continued with the natural monopoly or domination of their With the exception of the financial presidency of Lee Myung-bak. Between markets have little incentive to innovate industry, all A-share companies’ cash 2000 and 2003, major state-owned and to enhance their performance. The flow decreased from RMB 468.5 billion enterprises in South Korea finished lack of balance between state-owned at the end of 2010 to just RMB 26.8 their privatization process. In 2008, enterprises and private enterprises hinders billion, which was lower than the number South Korea witnessed a second wave competition and reduces economic for any single quarter during the 2008 of privatization. The South Korean vitality for the nation overall. financial crisis. Excluding PetroChina government has been seeking to sell and Sinopec, total cash flow of all other its controlling interest in the Korean Capital markets A-share companies was negative.14 Development Bank, Woori Finance Holdings and Daewoo Shipbuilding While China’s GDP shows fast growth, the By June 27, 2011, 11 out of the 14 China and Marine Engineering. Privatization country’s stock market has always been stocks traded on the US market had fallen has greatly improved these companies’ volatile, at times even bearish and weak. below their initial public offering (IPO) efficiency and management skills, making (See Figure 2.) prices. To obtain funding, some companies them more competitive. For example, overestimated their assets, revenue and A great number of Chinese listed since its privatization in 2000, Pohang profits in their prospectus. This gave rise companies blindly pursued larger business Iron and Steel has increased its net profit to class actions, negative reports and volumes without considering their bottom five-fold. Currently, Pohang is the second short sales of China stocks. Fraudulent lines and operational cash flow. Some largest listed company in South Korea. financial reporting, loss of data integrity listed companies launched a multitude of Nine out of the top 10 largest companies and transparency were not individual huge projects and grabbed funding from on the Korea Stock Exchange are private cases. The overseas markets have better investors without ever paying dividends. enterprises. In contrast, none of the 10 supervision systems and a lower tolerance Investors could only count on stock price largest companies on the Shanghai Stock for fraud, making it harder for fraudulent increases to make a profit. The capital Exchange are private.13 companies to walk away unpunished. market had serious concerns about this However, in the Chinese market, where Only four companies out of the 57 mode of operation, which resulted in supervision is weak and investors are Fortune 500 Chinese enterprises—Ping An plummeting stock values. Investors were unable to distinguish bad stocks from Insurance, Huawei Technologies, Jiangsu left with no returns. Between April 18 and good ones, there is a credit discount on Shagang Group and Lenovo—are not June 22, 2011, the Shanghai composite stock prices. This partially explains why owned by the state. It is clear that the index shrank by 13%, or 400 points. China’s stock market does not correspond ratio between state-owned and private The total market capitalization of the with economic growth.15 Chinese companies is out of balance. Shanghai and Shenzhen stock exchanges Chinese private companies contribute fell from about RMB 29 trillion to RMB Undoubtedly, Chinese enterprises today over 50% of China’s total GDP and create 25 trillion, a decrease of 13.5%, with differ markedly from those in the late 75% of the jobs in the nation. However, RMB 93 billion evaporating during each 1970s, when China had just opened itself very few of them have business scale trading day. At the same time, the overall to the outside world. They also differ comparable with that of their overseas price-earnings (PE) ratios of the two stock from companies in the early 1990s, which counterparts or even stated-owned exchanges kept falling. On June 17, 2011, saw massive reforms of state-owned enterprises. Marginalized, Chinese private the average PE ratio of the Shanghai enterprises. And they differ from Chinese enterprises are unable to obtain favorable Stock Exchange stood at 15.76, a 27% enterprises during the late 1990s, when policies and financial support. Some drop from 21.6 at the end of 2010. the Asian financial crisis hit. They even industries in China are actually off limits differ from those before the 2008 global Even more disturbing, while listed to Chinese private companies. These financial crisis. During interviews we companies all reported profit increases, unfavorable conditions make it difficult conducted for this report, we acutely felt their cash flow dropped significantly. for private companies to thrive in China. this transformation. We saw the advanced For 2010, the total net cash flow of equipment and orderly production plants. The nation’s underdeveloped private China’s listed companies was RMB We heard about grand strategic plans sector is a major culprit behind the 2.6 trillion, representing a 3 trillion and unique management methods. We dearth of world-class Chinese businesses. decrease, or 13.5%, from 2009. For the listened to many inspiring stories of Today, state-owned enterprises are still first quarter of 2011, although profits business startups and fast development.
10 The Last 10 Miles The management teams we talked with Chinese enterprises that have identified brimmed with confidence and ambition, Chinese companies their weaknesses after 30 years of though they were also fully aware of the focus on international development and that have committed challenges ahead. to addressing their shortcomings competitiveness have a chance to catch up with their Weathering challenges over the past international rivals. Those that fail to see China’s enterprises are more integrated three decades, Chinese companies the bigger picture and that give up at than ever with the world. However, as have matured. They are fueling China’s the last 10 miles by prematurely taking an old Chinese saying goes, even when booming economy and vice versa. But pride in their large size will lose their you have traveled 90 miles of a 100- depite these gains, Chinese enterprises advantages when the world’s economic mile journey, that is still only halfway. are still not competitive enough in the landscape changes. At this critical In other words, approaching a goal is international market, and they have a moment, the Chinese government has entirely different from achieving the goal. long way to go to catch up with leading created its 12th Five-Year Plan. The plan When a goal seems within reach, people global companies. In contrast to their calls for China to transform its economic tend to be content with what they have rapid increase in size, Chinese companies structure, accelerate economic reform accomplished, and they lose motivation face an additional challenge in improving and further expand domestic demand. to push through “the last 10 miles.” the quality of their business. Being big is Additional goals include stimulating praiseworthy, but being strong should be economic growth through coordination the higher goal.
Figure 2. Shanghai composite index and China’s GDP, 2006-2010
450000 6,000
400000 5,000 350000
300000 4,000
250000 3,000 200000
150000 2,000
100000 1,000 50000
GDP (in 100 million RMB) 0 0
2005/12/302006/03/312006/06/302006/09/302006/12/302007/03/312007/06/302007/09/302007/12/302008/03/312008/06/302008/09/302008/12/302009/03/312009/06/302009/09/302009/12/302010/03/312010/06/302010/09/302010/12/30
GDP The Shanghai composite index Source: Wind.com.cn, National Bureau of Statistics of China
The Path to International Competitiveness for Chinese Enterprises 11 of China’s consumption, investment and enhance their international the continuity of Chinese enterprises’ and exports; expediting development of competitiveness, they will lose the chance reform. As President Hu Jintao said at service industries; and making scientific to quickly develop themselves. China’s the rally marking the 90th anniversary progress and innovation the key pillars of status in the world economy will suffer as of the Communist Party of China, the transformation.16 a result. problem of “unbalanced, uncoordinated and unsustainable” development is Against this backdrop, where are Chinese Japan’s experience offers important prominent in China, and the nation must companies heading? What is their next lessons. In 1950, Japan’s GDP per capita seize the opportunity to further reform.18 milestone? How should they adapt to and calculated on the PPP basis was about Chinese enterprises also need a long- support China’s economic transformation 20% of that of the US. In 1990, the term perspective and should not grow efforts? These questions beg answers figure had jumped to 90%. Japan had complacent over what they have already from Chinese enterprises. the most successful enterprises, and achieved. They must acknowledge their their management approaches captured shortcomings and continue to better For any organization, the road to progress imaginations around the globe. Other themselves so they can build momentum is characterized by different stages and countries tried to follow suit. However, for more reform. cycles. Huge success is often followed during the 1990s, the asset bubble burst, by mediocrity and obscurity. Companies Japan’s financial reforms failed and For these reasons, Chinese companies that have made some major gains should enterprises stumbled. The years 1990- should strive to reduce their dependence consider when their strength might ebb. 2000 was a “lost decade” for Japan’s on low-cost manufacturing and Advantages come and go unnoticed, like economy. In 2010, Japan’s per capita GDP enhance their investment efficiency and the tide. As a market develops, the basis fell to 76% of that of the US. Numerous productivity. They could also benefit by for competition deviates from the earlier forces contributed to Japan’s economic enhancing their brand image instead of dominant pattern, setting previously fall. But today, it is important to consider simply producing products. In addition, successful enterprises adrift. Fiercer whether Japanese companies have broken they must become more innovative competition and copycats weaken leading through the restrictions imposed on so they will no longer be perceived as players’ unique abilities. More and more them and whether they have strived for mere copycats. Last, instead of limiting companies begin trying to generate sustainable growth. themselves to the domestic market, the most output with the least input. Chinese businesses should take a global In the face of cut-throat competition, How did events unfold in China during perspective and commit to strengthening enterprises become obsessed with these decades? In 1978, China recovered their international competitiveness. slashing costs, which in turn hinders from the chaos of the Cultural Revolution their talent development. Companies that and rolled out its “reform and open-up” Many Chinese enterprises are fully aware cannot see these cycles might settle for policy. At that time, China’s GDP per of their situation and the progress they past achievements and eventually lose capita was only 3% of that of the US. need to make. When asked where Chinese their advantages over rivals. Now, 30 years later, China’s per capita enterprises are in this post-crisis era GDP has reached 20% of the US level, during our survey, the largest number of Another way to look at the situation is to thanks to the efforts of tens of millions of respondents (29.6%) said, “The current understand that organizations are like the entrepreneurs and workers, opportunities situation is favorable to the development cells of the economic body. That body’s arising from globalization and the free of Chinese enterprises and we have to health hinges on effective management trade framework under the World Trade actively improve ourselves.” They were of many, many companies. In all of human Organization (WTO).17 China’s per capita followed by 26.8% of respondents history, there has never been a thriving GDP remains far behind Japan’s in 1990 in who agreed that Chinese enterprises economy composed of lifeless enterprises. absolute terms, but its growth rate is on “need to learn from global advanced To contribute to a healthy national par with Japan’s. management concepts.” Only 4% of economy, Chinese enterprises must push our survey respondents thought that themselves beyond the limits imposed by Today’s Chinese economy is like Japan’s “Chinese enterprises that have suffered the market and their own capabilities to 20 years ago. Will the next 10 years less damage from the crisis have unique achieve—and sustain—high performance. see China falling behind—or continuing management styles.” (See Figure 3.) to develop? This is a difficult question Today, Chinese businesses face stiffer to answer, owing to uncertainty in the domestic as well as international realms of policy, society, resources and competition. Unless they understand the international environment. Two more the new competitive environment decisive factors are China’s economy and
12 The Last 10 Miles Figure 3. Beliefs about Chinese enterprises’ current situation
Where do you think Chinese enterprises are in this post-crisis era? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
The current situation is favorable to the development of Chinese 29.6% enterprises, and we have to aggressively improve ourselves
Chinese enterprises need to learn from global advanced 26.8% management concepts
The strength and status of Chinese enterprises have both improved 22.4%
Chinese enterprises have accumulated rich experience based on 11.9% which they may further develop themselves
There has been no significant change in their status 5.4%
Chinese enterprises that have suffered less damage from the crisis 4.0% have unique management styles
Source: Survey by Accenture/The China Enterprise Confederation, May-August, 2011
The Path to International Competitiveness for Chinese Enterprises 13 2 Characteristics of internationally competitive enterprises
14 The Last 10 Miles What kind of enterprises can be called Using this method, Accenture has internationally competitive? How is High performance identified high performance businesses international competitiveness defined? Many Chinese enterprises have long across diverse industries. It has also Are there measurable standards for envisioned becoming “world-leading” concluded that high performance does not such competitiveness? In addition, or “first-class” companies. But what necessarily come from large scale. More how can a business gain international do these terms mean? Drawing on important, Accenture has uncovered the competitiveness? Chinese enterprises Accenture’s research on high performance internal reason for these enterprises’ high must have answers to these questions businesses, we maintain that an performance. Over the years, Accenture before they can identify the right internationally competitive enterprise has applied the same study approach to direction to work toward. above all should exhibit all characteristics Chinese enterprises and has found that of a high performance business. This the fundamental reasons underlying We maintain that internationally means the organization can beat business high performance do not change with competitive enterprises are consistently and economic cycles and consistently geographic location and culture. These superior to their international peers in excel over its peers against generally findings can serve as an inspiration and terms of widely accepted performance accepted criteria such as growth, reference for China. However, in light indexes while fulfilling their responsibility profitability and returns to shareholders— of Chinese companies’ developmental for fostering balanced economic growth, regardless of any changes in leadership.19 stage and operational environment, social well-being and sustainable we need to go beyond the existing development. Below, we take a closer By definition, a high performance measurement method and financial these at these defining characteristics. business has the following characteristics: indexes for high performance—taking five additional factors into consideration: • immunity to impacts from economic cycles or changes in the company’s • Chinese enterprises’ desire to catch up leadership with international standards and world- leading companies • consistency and predictability in its performance • the ownership structure of Chinese enterprises • high performance as compared with its peers • requirements of China’s social and political system on enterprises • judged favorably by widely accepted standards, such as financial indexes • Chinese culture and its impact on enterprise operations Accenture has divided criteria for high performance into the following five • Chinese enterprises’ obligation to elements: profitability, growth, positioning achieve sustainable development for the future, longevity and consistency. (See sidebar: Accenture’s criteria for high performance businesses.)
The Path to International Competitiveness for Chinese Enterprises 15 Accenture’s criteria for high performance businesses
Based on the five elements of high Calculation 3. Positioning for the performance businesses—profitability, growth, positioning for the future, ROIC = EBITA * Turnover / Investment future Capital longevity and consistency—Accenture 7-year change in future value relative compares the enterprise within its WACC = Debt / EV * (Kd) * (1 - Tr) + to invested capital industry and grades the enterprises Equity / EV * (Ke), where: based on its standard deviation from 7-year level of future value relative to the average (A for +1 higher than the • EV (Enterprise Value) = Equity + invested capital average, B for any difference between Liabilities +0.33 and +1, and so on). Accenture Calculation • Kd = Cost of Debt calculates an enterprise’s total score • Future Value = Enterprise Value – by averaging all the differences. It Present Value of Current Operations then compares each enterprise’s • Tr = Marginal tax rate (country- specific) score to the rest of the participating • Change Rate of Future Value= enterprises and identifies high • Ke (Cost of Equity) = Rf + Company (Average Future Value for Last 3 Years performers in the industry. Beta * Rm - Average Future Value for First 3 Years) + Average Invested Capital for Calculating the five Rf = Risk-Free Rate Past 7 Years indexes Company Beta = Industry Beta [1 • Level of Future Value = Average The calculation is based on the latest + (1 - Tax Rate)(Liabilities / Market Future Value for Past 7 years / Average Capital IQ data obtained during the Capitalization)] Invested Capital for Past 7 Years study. Beta = a measure of the volatility, • Value of Current Operations = (Net 1. Profitability or systematic risk, of a security or a Operating Profit – Less Adjusted Taxes portfolio in comparison to the market (NOPLAT) / WACC 3-year average spread as a whole • NOPLAT = Net Profit - Adjusted Tax 7-year average spread Rm = Market Risk Premium • Spread = Return on Invested Capital (ROIC) – Weighted Average Cost of 2. Growth Capital (WACC) 3-year revenue growth CAGR
7-year revenue growth CAGR
16 The Last 10 Miles 4. Longevity 5. Consistency 10-year total return on shareholders 7-year median outperformance in CAGR revenue growth
7-year total return on shareholders 7-year median outperformance in CAGR spread
5-year total return on shareholders 7-year median outperformance in CAGR future value
3-year total return on shareholders CAGR
Calculation • TRS = Sum of Share Price Appreciation and Dividend
Greater than expected Continued value creation over returns from investments industry eras and life cycles
Longevity
Profitability
High
Growth Performing Business
Consistency Top line Reliable and predictable revenue growth Positioning for performance the Future
Industry peers
Higher Future Value Growth
The Path to International Competitiveness for Chinese Enterprises 17 These factors are either unique to Eventually, the product is replaced by a Chinese enterprises or have significant Mastery of the S-curve new offering, which ushers in another impacts on Chinese businesses. Internationally competitive enterprises S-curve. High performers successfully However, any company that operates build a deep understanding of the market. climb S-curves. That is, as each business in a market economy has to observe They reinvent themselves as needed, going performance curve begins to flatten, the universal principles of the economy beyond their current capabilities and they jump to the start of the next curve and the market. The underlying logic products to spot and seize new market and outperform their peers yet again. is the same. Therefore, although opportunities. Even as their current Establishing excellence is important, but special circumstances affect Chinese business prospers and their financial maintaining it is even more crucial. (See enterprises, the core principles of high performance is strong, they refuse to Figure 5.) performance and competitiveness content themselves with the status quo. still apply to these organizations. Instead, they always strive to preempt To do all this, internationally competitive their competitors. enterprises innovate continuously and Therefore, the criteria used to measure challenge the status quo. They also international competitiveness include Jumping the S-Curve, a book presenting develop a strategic vision and see the an enterprise’s high performance Accenture’s latest research on high perils lurking behind their success. (profitability, growth, foresight, longevity performance, shows that the development To sustain excellence, a company and consistency) and non-financial trajectory of a market, an industry and must be able to jump ahead of the measures, such as social responsibility even a product is not smooth and upward existing S-curve and enter a new area and sustainable development. (See Figure but rather an S-shaped curve. Revenues of opportunity. Focusing on current 4 and the table “Non-financial criteria for for a successful new product typically management issues matters—but looking internationally competitive enterprises.”) build slowly, then ascend rapidly as the and planning ahead is far more important. offering catches on, and finally taper off. This is particularly true for Chinese
Figure 4. Criteria for internationally competitive enterprises
Non-financial criteria for internationally competitive enterprises High financial performance Profitability, growth, Social responsibility foresight, longevity and consistency • Provision of safe products and services that conform to industry standards • Number of hired employees • Employee remuneration • Safe production records/working environment • Community service/ interaction with the community • Charitable donations/disaster relief • Participation in public welfare activities / organizations (for example, Sustainable Social responsibility the UN Global Compact) development
Sustainable development • Lowest possible carbon emission • Efficiency in resource use (index of energy consumption per unit) • Conservation and application of green technology • Investment in the R&D of new energy, new material and new technology • Development of sustainable products and services • Environmental protection accreditation (such as ISO14000) and inclusion in external sustainability indexes (for instance, the Dow Jones Sustainability Index) • Sustainable organizational structure and position Source: Accenture analysis • Cooperation with stakeholders in sustainable development projects
18 The Last 10 Miles enterprises. With China’s economic boom, that enable them to identify and seize dominated the disposable diaper scene, many Chinese companies grew rapidly. opportunities. Below, we explore three of the high cost of the equipment used Some surpassed their foreign counterparts these traits. to manufacture the product led to a in terms of scale and other indexes. relatively high price that constrained However, new markets, technologies, Continual market relevance sales. Consumers bought disposable business models and growth curves are diapers only when they were traveling. always on the horizon. If a company’s High performance businesses know that P&G saw an important trend emerging previous success keeps it from jumping market relevance is a key to success. By in American society. With consumers ahead of the next S-curve, all the listening to the market, such businesses becoming more affluent and more women strength and advantages it accumulated identify the next new market that can entering the workforce, demand for over the years will soon vanish. help them drive growth. That market convenience products had risen. After five has to be big enough to host a new core years of R&D, P&G managed to reduce the business that offers substantial potential cost of each disposable diaper to just 10 Sustained success for the near future. At the same time, the cents. Yet this was still significantly higher Accenture’s “jumping the S-curve” theory new core business should probably be a than the cost of using a diaper cleaning holds that there is an S-curve in every game changer that redefines or changes service, which was 3.5 cents per diaper. market and product, from small to big and the rules of an existing market. (To wash a diaper at home cost 1.5 cents.) from strong to weak. Only by climbing Only after P&G invented manufacturing Consider Pampers diapers, from US the S-curve can a company grow as equipment that could mass produce its consumer products giant Procter & the market grows and sustain excellent disposable diapers did it reduce the cost Gamble. Before the introduction of financial performance. Truly great of each diaper to 5.5 cents. To be sure, Pampers in 1961, disposable diapers companies possess unique traits that are this was still more expensive than a had been on the market for decades. difficult for competitors to duplicate and diaper cleaning service—but it met the Although “Chux” (from another company)
Figure 5. The S-curve
Performance
Third industry- Path of high performance leading business
Second industry- leading business
First industry- leading business
Time
Source: Accenture analysis
The Path to International Competitiveness for Chinese Enterprises 19 demands of those affluent consumers that The right managerial important, the non-fried concept pitted P&G had targeted. In 1966, the market Grain Dojo against the entire instant- value of Pampers was US$10 million. Just capabilities noodle industry, triggering competitive seven years later, that number reached Once they find a sufficiently big new counter-attacks from other players in US$370 million. Today, Pampers boasts a market, companies often feel compelled that industry. In just three years, Grain multibillion-dollar market.20 to enter it and expand immediately. Dojo embarked on the rollercoaster However, high performance businesses journey from obscurity to prosperity, then Not all new markets are broken open with know that before they jump into the plummeted into bankruptcy. Its attempt technological innovation. Sometimes new market, they should acquire the to climb the S-curve failed.23 strategic insights can also help companies capabilities needed to support expansion. discover and exploit such opportunities. Rushing into a new market without The lesson? To successfully climb the Take Novo Nordisk. In the 1990s, company adequate preparation might end in failure, S-curve, companies need the right skills. executives saw that rising living standards for several reasons. First, the company’s Functional prowess, such as supply in emerging markets (such as China) had management team may not be able to chain management, is important, but it changed people’s diets, which led to duplicate their previously successful cannot guarantee high performance in increased incidence of diabetes. At that practices if the business expands too itself. Companies must also understand time, Eli Lilly occupied about 80% of the quickly. Second, new problems emerge the nature of the markets they are insulin market in North America. Novo when a company expands too fast. These pursuing, define possible offerings Nordisk was a medium-sized company can distract executives from their efforts to serve that market and clarify the tailing behind the big players in many to continue providing unique value to characteristics these offerings need markets. However, it saw the potential customers. Third, rapid expansion might to succeed. For example, P&G decided represented by emerging markets. To draw attention from major players in the that its Pampers product had to offer acquire the necessary resources to market and invite competition. affordability; a combination of luxury, explore these new markets, the company comfort and reliability; ease of use; divested some of its businesses. Now, it Chinese food company Grain Dojo and creative design. Then, companies controls a remarkable 52% of the world’s exemplifies these problems. The company must identify and build the capabilities insulin market.21 entered the non-fried food market swiftly needed to infuse the offerings with before obtaining sufficient capabilities the required characteristics. The next market worth exploring may to handle the new business. Here’s how not necessarily be a brand-new market. the story unfolded: Early in 2005, which But that’s just the beginning. Often, When Porsche, for instance, decided to saw publication of numerous reports on a new market attracts copycats. Thus enter the already competitive SUV market, the health dangers of fried food, Grain companies must find ways to stave it did so with its Cayenne model. The Dojo defined the non-fried food market off duplications by competitors and Cayenne sprinted from 0 to 100 miles per as a new opportunity. It introduced its win as much time as possible to take hour 0.1 second faster than rival model non-fried instant noodles under the a leadership position in the market. Benz ML 63 AMG. It also featured better brand name of Grain Dojo. The company Intellectual property rights, patents, control. Its impressive performance and invested heavily in prime-time advertising technical improvements and management sporty features not only satisfied high- on central television for the new product. models can all help. For instance, Walmart end consumers but also won a sufficiently It also created a number of popular used IT-enabled logistics management vast market for Porsche in the seemingly slogans, including “Say no to fried food to keep copycats a bay, while Facebook crowded SUV market. In 2008, Cayenne and stay healthy.” In November 2005, the and Avon used the Internet to ward became Porsche’s most popular model, non-fried noodles started appearing on off wanna-be competition. and its sales contributed 33% of the the shelves of stores in 12 major cities 22 Only when a company has built up or company’s total revenue. around China. In 2006, Grain Dojo’s sales acquired the necessary skills can it draw reached RMB 500 million, putting it in the The best new business opportunities on these skills to expand its new business. competitive arena with traditional brands are seldom found in mainstream And speaking of expansion, a rapid—but such as Master Kong and Uni-President. businesses. Rather, they are concealed not rash—pace is best. The enterprise However, Grain Dojo failed to maintain in hard-to-see- market trends. Spotting should also try to duplicate its successful momentum. Its management team could them requires close attention and models and processes when possible not keep up with the sudden spike in the the ability to continually listen to instead of redesigning all of them or brand’s reputation and scale. In addition, consumers and customers. Perhaps inventing an entire set of new ones. Last, Grain Dojo’s rapid expansion to launch the it is not surprising, then, that P&G the company must formulate the right new product consumed huge portions of invests as much as US$200 million distribution strategies, whether these the company’s cash reserves. More in consumer surveys each year.
20 The Last 10 Miles consist of maintaining existing capabilities.24 In 2010, the company has created a favorable atmosphere for channels or creating new ones. recorded RMB 12 billion in sales and technical professionals. It has also built Distribution channels are prerequisites ranked 19th among the top 100 Chinese a solid career ladder for migrant workers, for expansion and thus should be electronic information businesses.25 who with improved skills can become full- considered before an expansion However, Shenzhen Huawei Technology time staff and gain promotion to team effort gains momentum, not after. Co., Ltd., which is 14 years younger, leader or workshop director roles.28 (See has annual sales of RMB 185 billion the COSCO-Shipyard case study.) Steady talent surplus and a market share 15 times that of FiberHome’s.26 Why was the elder player The Port of Qingdao is another apt Companies that successfully climb the surpassed by the younger company? example. This organization has sought S-curve also have a large pool of talented And what has prevented FiberHome to build what management expert Peter people. But talent management is a bit from further expanding? The answer Senge called a learning organization. of a mystery. Some companies are able is that notorious condition known as The organization provides managers as to attract and retain talent. Others are brain drain. In November 2007, the well as front-line staff with learning trapped in the so-called talent “death organization acquired Wuhan Zhongguang opportunities through means including spiral,” whereby skilled employees defect, Communications Co., Ltd. Around one advanced training sessions, on-the-job products and services deteriorate, third of Zhongguang’s 300 employees training and skill contests. Employees are the company’s reputation suffers and left the company.27 The talent exodus also encouraged to find innovative ways managers suddenly find it impossible was triggered by the inflexible system to conserve resources and enhance their to recruit and retain good workers. that prevented the execution of business productivity on the job. Many see the Studies by Accenture show that talented decisions and stalled the company’s company as a progressive organization employees are drawn to companies they development. In the past, distributors had and tie their individual development to trust. They want to have confidence in a lined up in front of FiberHome’s factory corporate growth.29 (See the Port of company and to believe that it deserves gate to buy the organization’s products. Qingdao case study.) their skills and energy. If these conditions However, the supervising authority ruled are absent, they leave. out the company management’s proposal Meanwhile, New Hope Group, a privately to expand, which eroded morale within run enterprise, advocates a “college-like” High performance businesses attract the workforce. As a result, a large number corporate culture. To provide employees talent by demonstrating four fundamental of employees decided to leave. Moreover, with the best opportunities, the Group characteristics. First, they have FiberHome failed to reward capable has set up a well-structured system outstanding capabilities overall, which employees and to dismiss incompetent for leadership training, ranging from a inspire a sense of confidence and pride in ones. It proved unable even to hire a biennial management training program employees. Second, they foster a sense of cleaner on its own. In contrast, Huawei for college graduates and triennial youth shared responsibility for the organization’s has established an effective mid- and session for experienced grassroots success, clearly defining business goals long-term incentive plan that grants executives to workshops for assistant and expectations for employees. Third, employees company shares. Its talent directors at the branch/subsidiary level they have a culture of honor, which lets policies helped Huawei to attract a large and above. These training programs are employees know that they are reliable and number of skilled workers, which directly jointly launched by the business school trustworthy. And fourth, they relentlessly contributed to Huawei’s success in within the Group in cooperation with pursue high performance. climbing the S-curve. institutions of higher education. At the top of the pyramid is the Flying Dragon The fate of China’s Wuhan Research Our research shows that some Chinese Plan designed for top executives. About Institute of Posts and Communications, companies have made significant progress 100 people are selected across the now FiberHome Technologies Group, in transforming their corporate culture group to participate in these higher-level teaches a powerful lesson about what can to encourage employees to bring their learning opportunities.30 happen if a company fails to demonstrate talent into full play. These companies these characteristics. Founded in the provide sufficient space for employees 1970s, Wuhan discovered the vast to grow, and they cultivate a sense of market of optical fiber communication belonging among workers. For example, and invested heavily in research into COSCO-Shipyard Co., Ltd. has used its this technology. The business later global talent recruitment program to set became the “cradle” of China’s optical up an R&D team comprising more than fiber communication industry, boasting one thousand members. The company leading innovation and management
The Path to International Competitiveness for Chinese Enterprises 21 Case study 31 Port of Qingdao
Established in 1892, the Port of Building a learning Owing to training, a large number Qingdao is mainly engaged in the of grassroots employees, including handling, storage, transshipment, organization migrant workers, have become the distribution and other logistics The Port backs up its learning backbone of the Port’s workforce. services for containers, ores, crude oil, philosophy with incentives for Xu Wannian, deputy manager coal and other imported and exported employees at the grassroots level. It (and secretary-general of the CPC goods as well as international has even eliminated the distinction committee) of West Port United, a passenger transport services. The between migrant workers and joint venture of Qingdao Port Group Port employs 24,000 people. Since full-time employees, paying equal and China Merchants Group, started 2002, its throughput has boasted pay for equal work regardless of his career with the Port as a migrant a compound annual growth rate employment status. Employees share worker in 1990. Supported by the (CAGR) of 12%, with gross revenue equal opportunities for learning as learning platform and the talent of 14.6 billion yuan and profit of over well. Migrant workers who show incentive mechanism set up by the 3 billion yuan in 2010. The container outstanding performance can be Port and relying on his own diligence throughput reached 12 million 20- promoted to higher technical posts and hard work, he won a series foot equivalent units making the port and gain professional titles. This of promotions. Previously a squad one of the top eight busiest container non-discriminatory system has won leader, he then became a vice team terminals in the world. Qingdao is grassroots employees’ loyalty and leader before taking on his current also one of China’s top two domestic strengthened their motivation to learn. position. “When I first came here,” he ports by foreign trade throughput explains, “I felt inferior to others as and the world’s top port as measured The learning process starts once an a migrant worker with a secondary by container handling and iron ore employee is recruited, beginning with school education background. But unloading efficiency. The Port was orientation training and continuing the Port has transformed us from once regional, with an asset of less through his or her entire career. On- unskilled workers struggling for a than 500 million yuan and an annual the-job training is mainly targeted at living into professional and devoted throughput of just 20 million tons. It is practical problems in the workplace. industrial workers of the new era now the world’s seventh largest port, For instance, managers conduct seeking self-fulfillment.” He has with assets of 27 billion yuan and an technical Q&A sessions to address steadily contributed to improvements annual throughput of 350 million tons. problems regarding production and in the company’s operations by machinery. Such forms of training are drawing on what he has learned. For The Port’s success owes much to more readily accepted by workers than instance, a bulk cargo terminal he its efforts to become a learning more formal approaches. The Port also managed has repeatedly recorded organization. Thanks to the uses technical seminars and on-site new highs across all sea areas around enterprise’s commitment to talent equipment-management exchanges the world, and he has pioneered development, employees have to promote best practices developed nearly 20 work methods and a dozen become increasingly competent. by teams. Skilled workers are required processes for loading beer efficiently. Over 80% of workers advance to take technical examinations every to senior worker, technician and month, and the results are linked to senior technician positions—a figure year-end appraisals. Moreover, the much higher than the average organization holds a skills contest 30% in developed countries.32 every year to encourage employees to put their learning into action.
22 The Last 10 Miles Developing leaders a weighman who reduced per-vehicle weighing time from 36 seconds to All executives at the Port are required 33 seconds, had the “Linlin fast to learn in a variety of ways. For measurement method” named after example, they must take intensive him. His achievement enabled the training camps that end with a strict Port to process more than 10,000 examination. Apart from class hours, additional ore wagons carrying some trainees are given rigorous homework 600,000 tons of ore. The “Xueliang assignments. “One can use up a oil conservation method,” invented dozen ballpoint pens in a training by Zhou Xueliang, was held up as a course,” recalls Shi Xiuqin, Vice Chief national energy conservation and Accountant of Qingdao Port Group. emission reduction demonstration project for its triennial savings of Executives also have to participate in 287 tons of fuel oil valued at over 2.2 field surveys during the coldest and million yuan. More than 290 employee hottest days of the year as another brands representing over 1,500 unique form of learning. For about one week skills have emerged.33 They have each in summer and winter, they helped to improve the efficiency of work side by side with stevedores and the Port’s operations, and some have are paid by the piece. Even Chang broken world records. Dechuan, President of the Group and Chairman of the Board of Directors, The Port invested over 400 million must carry large sacks himself like yuan in building Qingdao Harbor other workers and handle other issues Vocational and Technical College on the site. The field survey program and the Staff Training Center of is 23 years old and has generated Qingdao Port, and it allocates first-hand data for business decision- nearly 100 million yuan every making, as operational problems are year to train more than 20,000 often solved on site. The production employees in over 140 specialties. process and technology are constantly By making learning a priority, the improved and advanced, thus Port accomplishes 6.9% of the accelerating the organization’s growth. national throughput with only 1.3% of China’s total coastal wharfage. ”Branding” employees The Port has established a long-term learning and incentive mechanism in the form of regular introduction of research projects and topics for group-wide public tenders. Research results are awarded on a regular basis. In one type of award, a work method is named after the employee who created it. This encourages employees to learn and innovate on the job as well as to improve production methods. For instance, Wang Linlin,
The Path to International Competitiveness for Chinese Enterprises 23 High performance businesses don’t fall S-curve in competition, high performance Navigation of hidden into this trap. They view strategic planning businesses often adopt what we call an S-curves as two entirely different processes edge-centric strategy. This strategy has rather than a single task. One process three defining foci: edge of market, edge The initial factors supporting a business’s entails continuously operating the core of organization and edge of control. efforts to climb the S-curve—market business that is rising along the financial relevance, capabilities and talent performance curve. The other involves Edge of market development—ebb as a market moves identifying a new market relevance By “edge of market,” we mean access from prosperity to decline. These factors curve and guiding the business toward to critical market insights from beyond thus also follow S-curves. However, these it. Our study shows that most companies conventional sources of information. High curves are usually far less perceptible excel at only the former process and performance businesses attach great than the financial performance curve. neglect the latter. High performance importance to the needs and intentions When the financial performance curve is companies pursue them in parallel. still rising vigorously, these hidden curves of non-mainstream customers. And they are approaching the end of their life cycle, Consider Sichuan Changhong Group. identify these customers’ future demand and the company is unconsciously losing In 1985, the organization embarked on even before the customers themselves are its original advantages. (See Figure 6.) its quest to become the “king of color aware of them. This requires a constant TV sets” when it introduced a color TV search for a big-enough market insight to While other companies are still focused set assembly line. In the cathode ray support a new business. These companies on the financial performance curve, tube (CRT) era, it forged an integrated pay special attention to cutting-edge high performance businesses have industrial chain and gained market share customers in the forefront of the market, already anticipated the maturation on the basis of its price advantage. The since such customers are uncommonly and end of these factors’ life cycle. Group sold more than 11 million color picky about products and have forward- They make preparations beforehand TV sets in 2002, ranking second in sales looking needs. To generate big-enough to jump the hidden curves and begin in the world, behind only South Korea’s market insights, some companies invite blazing a new trail. To jump the Samsung Group.34 However, when external personnel to participate in three invisible S-curves—market flat-panel-display technology emerged internal innovation. relevance, capability and talent in 2003, it rapidly replaced CRT in the For example, US networking technology development—high performance market. Changhong, not yet ready for this giant Cisco has long conducted an in- businesses adopt three strategies. scenario, saw its market share contract. house innovation contest called I-Prize. We look at these in detail below. Back in 2000, the company had foreseen In 2007, the company decided to invite the new FPD market. However, because outsiders to take part and offered a “Edge-centric” strategy the CRT market was still booming, the bonus of up to US$250,000. Cisco management team was content with the Markets are never static; changes can received 1,200 innovative ideas from 104 business’s current performance and failed happen anytime, anywhere. Senior countries.35 Regardless of whether the to seize the opportunity represented by management teams know this. However, final winner can lead Cisco to discover FPD. The group was eventually reduced many find it difficult to judge how, or the next market, the contest has enabled to a follower in the new FPD market for more important, when changes will the company to view potential business several years. strike. For this reason, many corporate opportunities from a global perspective—a executives stay busy planning, improving As the saying goes, a small leak will valuable position. and adjusting their organization’s eventually sink a big ship. Changes in the existing operations. It never occurs to Sometimes information obtained from competitive dynamics of a market and the them that they should spend more time the market can be so voluminous that a emergence of new products and business pondering what changes are taking company has difficulty sifting through it models often come from outside the place in their industry’s competitive all. Many high performance businesses mainstream market and the incumbents’ arena. As a result, they are caught use advanced analytical methods to core businesses. They first take shape on off guard by market changes and filter out “noise.” Then they conduct the unknown, unnoticed periphery. While overtaken by emerging competitors. market experiments using the remaining they are frail initially, they gradually gain meaningful information. Such small- strength—until one day they subvert the scale market-testing activities are highly mainstream. Therefore, to jump the encouraged in companies like P&G and US appliances maker Whirlpool.
24 The Last 10 Miles Edge of organization at times pre-set by the consumer. Initially, management structures and processes. people within the company were skeptical This makes review and modification of the “Edge of organization” means that a about the idea. This was because the strategy highly flexible, driven mainly by strategic vision and its implementation product would require installation of special events or changes in the industry. often occur far away from an electronic devices, and the company organization’s core, directed by persons had not done well with such devices. For example, since its inception in 1907, outside headquarters or core business However, managers launched a small pilot US logistics firm UPS has used edge of units. A company should pay attention to project to explore the idea’s potential. control to constantly reinvent itself. these voices coming from its periphery— The product was piloted in the UK market Initially a company of bicycle messengers such as front-line employees and in early 2004 and proved exceptionally and retailer delivery services, UPS later non-core business units. To do so, an popular. Reckitt Benckiser began mass became a sophisticated shipping company enterprise must set up a decentralized producing. To date, Airwick Freshmatic competing with the US Postal Service, decision-making mechanism and grant has racked up sales in 85 countries and an air express provider and a domestic a degree of autonomy to grassroots enjoys annual revenues exceeding US$250 air express provider of next-day delivery. managers so they can spot and seize new million. It’s now the most successful Next it set up a mail tracking and query market opportunities. product in the company’s history.36 system and established UPS Capital to enter the financial services market. A typical example is British consumer Edge of control Currently, it competes in logistics services goods company Reckitt Benckiser, which and bulk cargo transport. develoed the Airwick Freshmatic air A company practicing “edge of control” freshener spray. The product originated ensures that operations relating to the from the idea of a brand manager at the new market strategy stay at the periphery company’s South Korean subsidiary. It of the company’s overall control system, features a device that sprays air freshener including any centralized planning or
Figure 6. Hidden S-curves
Three key aspects of business mature and start to decline much faster than the company’s financial performance.
Maturity Talent development Capabilities Talent development slows as Distinctiveness of capabilities companies learn to do more with lessens as competition less and as competition forces intensifies and imitation occurs costs down
Financial Market relevance Market relevance ebbs as the performance S curve basis of competition in the industry shifts away from the dominant model Three hidden S-curves
Time
Source: Accenture analysis
The Path to International Competitiveness for Chinese Enterprises 25 Top teams that change ahead High performance businesses can is hard. Your bet is all about what’s ahead, accomplish this because they have a not what’s behind. We needed to pick the of the curve system for timely renewal of the executive person who could thrive in a changed To jump the capabilities curve, a high team to jump the capabilities curve. They environment and take the company up to a performance business renews its also focus on balancing the capabilities new level: 5, 10, even 20 years ahead.”38 leadership to refresh the company’s unique of the executive team. In particular, they capabilities. In most cases, this curve strive to build a team that has diverse ways Sina.com, a China-based Internet company begins plateauing when the financial of thinking, personal experiences and skills. established three decades after Intel, has performance curve is still rising. It will With this diversity, the executive team can had a different experience. The company be too late for a company to acquire the manage the financial performance S-curve has also experienced the appointment of capabilities needed to enter a new market and the capabilities curve simultaneously. five CEOs so far. But each replacement if financial performance begins to decline. came about because the company failed to Therefore, a high performance business Succession planning is critical in this identify the next new channel for revenue builds capabilities for a new market while effort. To ensure that departing executive growth. Charles Cao, the current CEO, the financial performance curve is still team members’ successors can lead succeeded Wang Yan in 2006. “Different on its upward swing. Capabilities in this the business through change, high development stages of a business require respect means the skills of the company’s performance businesses get an early start different strategies and leaders, and Sina core executive team, including discovering on reviewing candidates. That way, they is in need of an environment for steady new markets, making strategic decisions, are ready to select a replacement the growth and a philosophy of thinking calmly allocating resources, reaching consensus instant circumstances call for it. In some before action,” stated Wang regarding and mobilizing the organization as a whole. well-known international companies, the replacement. After taking office, Cao visionary leaders aware of their own launched two brand products—Sina blog Some executives are at their best limitations will give notice so that their and Sina microblog—and began integrating managing existing operations, such as successors can take control. Sina news and other content. Sina’s increasing output, expanding operations revenue has been growing at a compound to new areas and extending product For example, Intel has had just five CEOs annual rate of 15.8%, and the company’s lines. Others are entrepreneurs who since its inception in 1968 and has enjoyed income in 2010 was US$402 million.39 It excel at opening up new markets. A a smooth transition with every incoming took Sina 13 years to replace four CEOs, company must determine which kind leader. When considering the replacement while it took Intel 43 years to experience of executives it needs, and when it of its senior executives, the company as many transitions. This suggests that needs them. Sometimes, an enterprise usually looks as far into the future as the in its early years, Sina lacked long-term urgently needs a leadership group skilled next decade. Moreover, each executive institutional planning for leadership in managing and growing existing begins planning for his or her successor succession, possibly in part because of businesses; other times, it needs a group upon taking office. At the zenith of his China’s volatile business environment. capable of exploring new opportunities. career, 62-year-old Andy Grove decided to transfer his power to his successor Craig It is especially difficult for Chinese Reshaping the leadership team to support Barrett. Each of Intel’s leaders has led the enterprises to reconfigure their top exploration of new opportunities is not company through significant change during leadership teams. The majority of large- easy when the business is thriving and their tenure. For example, Grove made scale enterprises in China are state lucrative. But it must be done. Mediocre a bold decision to shift the company’s owned, and the replacement of executives companies maintain the status quo business focus from memory chips to depends on a variety of non-market until the core business grinds to a halt. microprocessors, which transformed the and non-business factors. Privately run Then they are forced to reengineer their company into a global high-tech leader. companies are generally under family executive team fast. What they don’t know His successor, Barrett, expanded Intel’s control, operated by the founders or their is they have already missed the boat. In business through product-line extension offspring. Leadership turnover in China contrast, a high-performance business strategies. Paul Otellini, Intel’s current CEO, faces two challenges: First, turnover is stays one step ahead of the capabilities is committed to the Atom mobile chip, low. The CEO turnover rate among large curve—by making timely adjustments which can apply to any device connected Chinese companies was only half of the to the core executive team. They thus to the Internet. Intel’s leadership transition international rate in 2010—5.2% versus avoid putting themselves in the awkward allows the company to march forward and situation of having to reconfigure their hold its position as an industry leader.37 leadership team hastily after market According to Jack Welch, former CEO of changes strike. General Electric, “Picking your successor
26 The Last 10 Miles 11.6% for the world’s top 2,500 listed Hothouses of talent High performance businesses avoid this companies.40 Second, leadership turnover fate by applying several practices. First, in China is often poorly planned and is Attracting, retaining, and cultivating talent they recruit people compatible with their not aimed at supporting organizational or is essential for climbing the S-curve . A core corporate culture and values. For business renewal. More frequently, such lack of talent constrains any organization’s instance, the recruitment philosophy of changes are passive. They happen because efforts to improve existing operations and US-based Southwest Airlines is “hire for a leader is underperforming or something develop new businesses. But a company fit and train for skills.” These enterprises’ outside the enterprise’s control forces the may unconsciously slacken its training recruitment and training expenses are change. Companies thus lack experience efforts when climbing the financial higher than those of ordinary businesses, in planning and implementing leadership performance curve. This is because with but they eventually pay off in terms renewal to adapt to changes in the market expanding operations, the company of employees’ compatibility with the and to develop new business. Solving this possesses some capabilities after going corporate culture and reduced “brain problem will require institutional changes, through the initial learning curve. Thus it drain.” Another example is US hospitality which are always difficult. State-owned has turned its attention to concerns other company Four Seasons. The company enterprises can engineer leadership than learning. In addition, intensifying arranges a three-month training session changes to serve commercial purposes only competition may force the company to for every new employee, who must face by stripping top executives of their roles as reduce costs by cutting back on training real guests in a variety of scenarios. In civil servants. For most of China’s privately expenses. While the company’s financial this way, employees incompatible with the owned enterprises, the only path to stable performance has not yet hit its peak, corporate culture become immediately development is to properly position the the talent pool initially prepared for the apparent and are eliminated. Though the roles of owners and management. core business is shrinking. This reduces selection method may seem harsh, Four the proportion of excellent staff within Seasons has an employee turnover rate of the organization’s workforce. When the only 18%, almost half of the average rate company realizes the need to jump the across the industry. S-curve, it will lack the requisite numbers of skilled personnel. This is the dark side of under-investment in training.
The Path to International Competitiveness for Chinese Enterprises 27 Second, high performing companies Fifth, the best companies help employees clear leadership standards for managers establish a clear in-house promotion learn to adapt to changes in the business and compatible training and development system. This is critical because, as their environment. In this age of globalization, systems, COFCO has constantly improved business grows, processes may become rapid changes in technology and well as its staffs’ professionalism, leadership skills more complicated, negatively affecting the economic and social environment and knowledge. The company also gives employee development. For instance, can constantly challenge a company’s young people opportunities to grow in their people may spend much time completing viability. High performance businesses careers and encourages middle managers unnecessary forms rather than engaging in encourage employees to develop diverse to strengthen their capabilities in strategy innovative thinking. Such companies also perspectives by gaining experiences in development and execution. At each key provide employees with a clear career path the outside world. For example, P&G stage of the transformation in its corporate so they can identify and acquire the skills creates opportunities for employees to strategy, COFCO offers training to keep needed to succeed at each step in that interact with not only customers but senior managers abreast of progress. path. Clarity in this respect improves the also retailers and the general public, Between 2005 and 2009, COFCO’s total transparency of management, motivates with an eye toward understanding sales revenue and total profit CAGR rose employees and reduces turnover. these different constituents’ needs and to 22.8% and 40.4% respectively, and its enhancing products’ competitiveness. sales revenue doubled within four years. Third, high performance businesses Collaboration between organizations and Even with the financial crisis in 2009, the simplify their business model and refine sectors can further help stimulate product company’s total sales revenue and profit their internal processes to encourage innovation. For example, Samsung’s Value hit a record high.44 employees to develop solutions to Innovation Program (VIP) Center brings problems and strengthen their skills. UK’s together design, technology and marketing COSCO Shipyard Group Co., Ltd., offers top retailer Tesco has set a good example professionals every three months to another success story. Founded in 2001, in this regard by applying a management brainstorm about new products. Such the Group initially repaired ships and model that integrates global visions and practices have helped transform Samsung became the industry bellwether in 2003. local operations. Tesco’s operational from a memory chip manufacturer into The company then developed new markets, units around the world all use balanced a world-class manufacturer of stylish including ship conversion. Starting in 2007, scorecard performance management as electronic products.42 it saw a steady stream of profitable orders. well as the same system innovation and But executives were not content to rely operations methodologies. But marketing Sixth, high performing companies on the rapid growth of COSCO’s existing decision-making is left entirely up to local consistently invest in training and operations. They shifted their attention managers. This organizational structure development for all their employees, not to the offshore engineering market, has enabled Tesco to successfully enter the just managers, and they do so regardless which had great potential. Deciding to global retail market. of economic cycles. To illustrate, GE has push ahead with repairing, converting never cut its staff training budget, even and building ships simultaneously, they Fourth, high performing companies in 2002 and 2008, when hard economic engaged in the high-tech field of offshore channel stress into strength within their times struck. As CEO Jeff Immelt explained, engineering through the construction of workforce. According to A.G. Lafley, P&G’s although GE can boost its short-term floating production storage and offloading former CEO, “You learn ten times more financial performance any time by slashing (FPSO) units, floating drilling production in a crisis than during normal times.”41 training programs, it has never done so.43 storage and offloading (FDPSO) units Successful businesses deliberately create and deepwater oil drilling and storage a challenging work environment to train Many Chinese enterprises have platforms. Using a combination of in-house talent and to prepare employees for demonstrated effective talent development training and external hiring, the company taking on leadership roles. They give practices. In 2009, for example, COFCO built a technician team comprising more high-potential employees challenging set out to create a grain, edible oil and than one thousand members. With its early but controlled tasks to help them gain food conglomerate to build its overall entry into the market, the company has experience. For example, they might assign competitiveness. Executing this strategy retained its competitive edge around the a leadership candidate to manage a small would call for changes in the company’s globe, and its offshore engineering orders business unit, where he or she will have business structure and leadership have topped US$4 billion.45 full profit-and-loss responsibility in areas practices. COFCO uses annual management ranging from team management and meetings, strategic briefings, regular customer service to contract negotiation unit meetings, group seminars and and operational management of a regional other occasions to deepen employees’ market. The company lets high performers understanding of its core values and to know that it’s safe to make mistakes, as help them internalize new values essential long as they learn from them. to the company’s vision. By establishing
28 The Last 10 Miles Case study COSCO-Shipyard46
COSCO Shipyard Group Co., Ltd. The first transformation shipyards exceeded 70% of the (COSCO-Shipyard) was founded in total ship-related revenue. COSCO- June 2001 and initially engaged When COSCO-Shipyard was Shipyard saw its ship conversion mainly in ship repair. Over the past established in 2001, the majority of its revenue rise to 53% percent of decade, the company has grown into affiliated companies suffered losses, total ship-related revenue, with a an integrated enterprise specializing and cross-regional management was record-high average single-vessel in both ship repair and building difficult. To address these challenges, output value of US$9.66 million.47 by entering the large vessel and the Group decided to apply unified offshore engineering markets. It management across regions by The second transformation has had to transform itself to make creating a management model China’s ship repair market had these changes. Offshore engineering characterized by eight functions: exhibited steady development until accounted for only 6% of the total planning, accounting, technology, 2006, when COSCO-Shipyard’s business in 2007, while ship repair human resources, marketing, sales revenue and profit in the first accounted for 75%. In 2010, the information, security and corporate half of the year increased by 30% former rose to 28%; the latter culture. As the business continued to and 50%, respectively, over the declined to 21%. That same year, grow, COSCO-Shipyard embarked on same period in the previous year.48 COSCO-Shipyard’s domestic market a path of expansion. The management However, the company unexpectedly share of new offshore engineering chose a low-cost approach to decided to enter the shipbuilding engagements reached 58%. The expansion based on integration of and offshore engineering markets. company currently possesses seven resources, with the goal of scaling up Although the ship repair market large-scale enterprises of offshore production and reducing acquisition was thriving, the company was well engineering, shipbuilding and ship costs through new construction, aware of the potential dangers. repair as well as eight specialized renovation, acquisition and leasing. Given the low barriers to entry and fitting manufacturers, located In 2005, four out of China’s top 10 limited technical requirements, in China’s northern, central and ship repairers by output value were shipyards of all sizes had proliferated southern regions. It employs more affiliated with COSCO-Shipyard. around China, and fast-growing than ten thousand people, while its But the company did not rest on its foreign competitors had arisen in subcontractors employ nearly 45,000. laurels. Instead, it augmented its Southeast Asia. The intensifying In 2010, the Group’s principal business ship repair business with expansion competition triggered price wars, revenue amounted to 18.8 billion yuan, into the ship conversion market. As putting companies dependent on with a CAGR of 38.5% since 2000. the company advanced to a new ship repair in a perilous position. stage of development, repairing COSCO-Shipyard realized that to bulk carriers or break-bulk vessels achieve sustainable development, it was clearly not enough to satisfy its must maintain a sense of crisis and be “appetite.” An early transition to ship the first to identify and command a conversion, with its higher technical new market. Therefore, the company requirements and profit margins, was turned to the technologically its preferred choice. By 2007, the demanding industries of shipbuilding output value of ship conversion of and offshore engineering. the company’s Nantong and Dalian
The Path to International Competitiveness for Chinese Enterprises 29 This change in direction presented had never been fabricated before. The arrival of foreign experts brought COSCO-Shipyard with some practical COSCO-Shipyard acted boldly even changes to COSCO-Shipyard’s problems, including personnel who as many other companies shrank construction management system. lacked required skills, inadequate back from these difficulties. The Through the introduction of CIMS, technology, insufficient funding, brand strength it had gained through a South Korean-based shipbuilding inferior equipment and skepticism successful ship repair helped it win management information system, within the ranks. Management customers’ confidence. COSCO-Shipyard built a proprietary proceeded with the strategic management system for shipbuilding. transformation anyway, against all After taking orders, the company And by hiring experts from odds. In fact, the idea of transforming launched a global talent recruitment Singapore as offshore engineering the company in this way had occurred program. “The world’s top experts are project managers, the company to executives as early as 2002. That numbered, and once they are invited widely promoted the Singaporean year, the company expected to enter here, we will get the core technology,” management approach. the offshore engineering market by said Vice President Lv Shimin. The cooperating with Singapore SembCorp business set its recruitment sights on COSCO-Shipyard also offers a growth Marine but was finally assigned Singapore and South Korea, both top- path for front-line workers, namely sub-construction projects without notch sources of talent. The former promotion to posts at higher levels. any opportunity to grasp the overall specializes in manufacturing offshore Migrant workers demonstrating good construction process. Therefore, in this drilling platforms, while the latter does performance can become dispatch latest transformation, the company well in fast delivery with guaranteed workers or even contract workers as determined to rely only on itself. In quality. COSCO-Shipyard hired an well as regular employees. Migrant 2007, COSCO-Shipyard set a new offshore engineering expert from workers receive training before industry policy for steady progress in Singapore as project manager. His working in a plant and then continue ship repair, conversion and building arrival attracted a group of experts training in their unit. These measures simultaneously. The company then and technicians from his previous ensure workforce stability and high immersed itself in the high-tech field job to join the company. Before long, construction quality, and the turnover of offshore engineering through the a design and construction team of rate has declined from 50% to 30%. construction of FPSO units, FDPSO about 30 members took shape. The units and deepwater oil drilling and team later brought in many domestic Proprietary core technologies experts and quickly expanded to more storage platforms. COSCO-Shipyard see advanced than 300 members. Xu Xiulong, vice technology as crucial to gaining a general manager of the company’s Success factors for firm foothold in the high-end market. technology center, is one of the In April 2006, the company set up COSCO-Shipyard’s employees recruited from Singapore. China’s first Deepwater Engineering & Originally from China, Mr. Xu once transformation Technology Research Center in Harbin. worked with ABS Singapore. “Born in The center focuses on addressing Savvy talent management the 1960s and having graduated in urgent problems regarding deepwater the 1980s, we migrated to Singapore COSCO-Shipyard took orders even in oil and gas development in China, in the 1990s and came back in the the absence of a task force, thanks including high-tech requirements, 21st century. Working for more than to the timing of its access to the engineering feasibility studies and a decade respectively in China and offshore engineering market. Few talent demand. In 2007, COSCO- Singapore before coming to COSCO- companies were able to take orders Shipyard set up technical sub-centers Shipyard, we have always been abreast at the time, because the barriers to in Shanghai, Nantong and Guangzhou with the world’s most cutting-edge entry were high. Additionally, many to provide affiliates with timely on- technology,” explained Mr. Xu.49 customers demanded products that site technical guidance and service.
30 The Last 10 Miles The company has also introduced a (SEVAN DRILLER), the prices and costs product positioning. In the words of digital shipbuilding approach, whereby of the latter two were greatly reduced, President Wang Xingru, “One should it applies information technology further improving COSCO-Shipyard’s never manage shipbuilding with the throughout the process of creating market competitiveness. In 2007 mindset of ship repairing.” ship-related products, including and 2008, the orders the company development, design, manufacturing, received in offshore engineering Not content with the results it has management, operations and and shipbuilding amounted to about achieved, COSCO-Shipyard has also decision-making. The goal is to rapidly US$9 billion, and its technical team formulated a strategy for in-depth increase production efficiency, ensure was further expanded to include product restructuring. It seeks to go shipbuilding quality and shorten more than 1,300 members. beyond merely undertaking projects production cycle time to reinforce the and completing orders and to remain company’s competitiveness. Future outlook one step ahead of its peers. All of its offshore engineering projects under Huge investment has generated The decision to engage in offshore construction are technologically high returns. COSCO-Shipyard engineering enabled COSCO-Shipyard demanding products for deepwater has controlled the key links in to ward off shocks of the financial application purposes, involving its value chain from design to crisis in 2008. The shipbuilding mainstream offshore engineering construction, especially with its industry has a long cycle, so products ranging from shallow seas own intellectual property rights in production is affected a while after a to deep oceans. COSCO-Shipyard is high-tech equipment. It has shaken crisis erupts. Therefore, not until 2009 gradually growing into a cutting- off the made-in-China OEM model did the shadow of the financial crisis edge ship repairer and shipbuilder in characterized by low added value loom over the industry. That year, offshore engineering as well as a high- and few high-tech elements, and has monthly orders of new ships shrank to end manufacturer of key equipment emerged as a general contractor with less than 1 million DWT by volume in for global marine development. the core technology and competencies the shipbuilding market, a record low needed for turnkey projects. over a decade.50 But COSCO-Shipyard thrived in this “freezing winter.” In June 2006, Harbor Special 001, a Currently, the company holds orders 10,000 deadweight tonnage (DWT) exceeding US$4 billion. deck barge with a length of 118 meters, was delivered as COSCO- Attracted by the lucrative offshore Shipyard’s first offshore engineering engineering market, many companies product, marking the formation of tried to muscle market share away its offshore engineering construction from COSCO-Shipyard. However, system. In 2009, SEVAN DRILLER they were at least three to five years was delivered to a Norwegian ship behind and had difficulty replicating owner. The world’s most advanced its high-tech products. cylinder platform for ultra-deepwater Since 2008, COSCO-Shipyard has offshore drilling, this ship is worth initiated yet another round of US$650 million. COSCO-Shipyard transformation. The goal of the effort thus made its mark for the first time is to completely separate strategy in the global offshore engineering development and production capacity market. The Norwegian ship owner planning for its shipbuilding, ship soon placed an order for SEVAN repair and offshore engineering 650 No. 2 and SEVAN 650 No. 3. businesses to further strengthen its Compared with the first product
The Path to International Competitiveness for Chinese Enterprises 31 • Operate with integrity to provide year. It has also stepped up investment and Corporate social consumers with safe and reliable products scientific research in safety-related issues. responsibility and services. By engaging in sustainable, safe production in the high-risk coal mining industry, the • Comply with the law and business ethics A business provides customers with company has set an example for its peers to combat bribery, corruption and other satisfactory products and services and and demonstrated excellent performance illegal acts. creates value for shareholders through its on its corporate social responsibilities.52 production and operation activities. But • Create a healthy and safe working a business is also a social organization environment for employees. whose operations affect society overall, Environmental not just customers, employees and • Engage in community services to enhance shareholders. This impact on society can exchange and interaction with members of responsibility be positive or negative. For example, a the community. High performing businesses incorporate thriving business will give more workers • Demonstrate enthusiasm for public sustainable development into their marketable skills and job opportunities and welfare and charity work, zealousness for corporate strategy, and with good reason: thus enable them to launch and sustain a public interests and active participation in Following two centuries of industrialization, career. This reduces the possibility of social poverty alleviation as well as disaster relief. human beings have exhausted the planet’s unrest and contributes to the creation of resources, degrading the environment harmonious communities, cities and even The majority of Chinese companies have to a point hardly suitable for human life. whole societies. However, a business may recognized the importance of CSR and Businesses today must take environmental also have negative effects on the society. have made solid efforts in this regard. For responsibility and sustainable development For instance, a company that discharges example, from its inception, Haier Group into account when striving to increase pollutants into the environment without has been committed to giving back to their competitiveness. A company should proper treatment measures undermines the community by providing education never lose sight of the purpose of its people’s health. for children. In August 1995, Haier own existence. The purpose of any value sponsored construction of the first Haier creation is to improve the quality of Businesses are thus critical members of the Hope Primary School in Wubei Town of life. The more competitive a business is, communities in which they operate. For this Qingdao city. In November 2003, it won the smaller its resource consumption reason, they must contribute to sustainable the Advanced Donors to Schooling award and the less negative its impact on the social development. Financial performance in Shandong Province. Haier has invested environment. Societies around the world and shareholder value are not enough to some 500 million yuan in social welfare agree on the importance of sustainable measure an enterprise’s competitiveness. so far, including donations for the Hope development. Moreover, governments, These standards must be augmented by Project totaling about 51 million yuan, with NGOs and businesses have defined it in fulfillment of social responsibility. The goal 129 Hope Schools built using its aid.51 their codes of conduct. is to maximize an organization’s positive impact on society while minimizing its Consider Yanzhou Coal Mining Company Some Chinese companies have become negative impact. Businesses must also Limited (Yanzhou Coal) as well. This exemplars of environmental responsibility. take the initiative to contribute to the enterprise has attached great importance For instance, the Port of Qingdao has communities, cities and societies to which to production safety while maintaining actively promoted energy conservation they belong. When companies benefit double-digit growth in its coal mining and and emission reduction and has committed society, they also create a favorable sales revenue in the past few years. By to building a green port to reduce energy external environment for their own December 31, 2010, Yanzhou Coal recorded consumption, pollution and emissions. The operations and development; for example, a zero mortality rate per million tons of organization has invested over 40 million by fostering demand for their offerings raw coal production for four consecutive yuan into the construction of a wind- and and supporting the development of skilled years, with roughly 190 billion tons of coal dust-resistant wall to isolate bulk cargo for workers who can be recruited. produced safely over 1,646 days. Yanzhou environmental protection purposes. And Coal’s has built a safety concept system it has spent nearly a million yuan to plant Corporate social responsibility (CSR) that has three priorities: safety in all work, tall trees around the port. All domestic manifests itself in numerous ways. in all investment and in the implementation sewage has been disposed within the port But in China’s current commercial of all tasks. To live these ideals, the area. Thanks to these measures, the Port environment, businesses need to company analyzes in advance all key tasks site today boasts blue sky, green land and fulfill the following responsibilities: and their stages, and revises emergency clear water. At the same time, the Port has plans to ensure safety throughout the invested 596 million yuan to transform its
32 The Last 10 Miles coal and ore operating systems—moves that downward trend among high performers comprehensive system that incorporates should save 4.6 million liters of fuel oil and in sustainability was not as sharp as it was sustainability throughout its business and reduce carbon emissions by about 3,400 among the rest of the players. The five-year operating models. And it must embed the tons per year.53 shareholder returns of high performance concept of sustainable development into businesses was also considerably higher every aspect of its day-to-day activities. Businesses have also realized that than those of companies ranking in the Above all, it needs to formulate feasible sustainable development can become the middle and at the bottom, by 21 and 38 strategies for sustainability that take into engine of new growth for an enterprise. percentage points, respectively. account short- as well as long-term goals. Accenture recently studied 275 Fortune Next, it should develop an action plan Global Top 1,000 companies to survey By adopting environmentally sustainable spelling out clear objectives, and implement the qualitative and quantitative impacts corporate strategies and practices, a the plan decisively and rapidly. Finally, it of sustainable strategies and initiatives business can launch new products and should advocate and foster a culture of on enterprises’ performance. All the services to increase revenue, improve sustainability to ensure a long-term focus companies in the study have incorporated efficiency and reduce costs. It can also on sustainability across the business. sustainability into their business strategy manage operational and regulatory risks and operation model. Moreover, the 50 more effectively as well as gain intangible In today’s global wave of industrialization, companies with the most sustainable assets, such as brand strength, a respected China is a latecomer. In the tide leadership also outperformed the rest in reputation and collaborative networks. of information technology, China terms of shareholder returns. The average Through these means, sustainability is a follower. But in the trend of triennial shareholder return of the top 50 becomes an engine for creating value. sustainable development, Chinese companies was 16 percentage points higher The study also suggests that the abilities companies can keep pace with leading than that of the 50 companies ranking a business needs to achieve sustainability international players and thus become lowest and 6 percentage points higher than coincide with the basic capabilities it internationally competitive. This is that of the 50 companies ranking in the develops to pursue high performance.54 because they have made solid progress middle. Affected by the financial crisis, all in energy saving and environmental companies saw their shareholder returns To implement environmentally protection through their innovation, decrease significantly in the past three sustainable development strategies, an technology, processes and products. years. However, it was obvious that the organization must establish an integrated,
The Path to International Competitiveness for Chinese Enterprises 33 3 Barriers to international competitiveness for Chinese enterprises
34 The Last 10 Miles The global financial crisis has presented data, indicating that Chinese companies an opportunity for Chinese companies High growth rate but suffered fewer shocks than their foreign to catch up with the world’s leading low profit margin counterparts in the 2008 global financial players. It is no longer merely a daydream crisis. The high growth rate of Chinese for Chinese enterprises to become Using Accenture’s criteria for high enterprises in the three industries competitive on the global economic performance businesses, we selected reflected China’s rapid economic growth. stage. However, to advance along the 99 domestic and foreign listed Construction and industrial machinery path to international competitiveness, companies in three sample industries— benefited from large-scale infrastructure they must surmount numerous barriers. construction, industrial machinery and construction in preparation for the These barriers may take the form of pharmaceuticals—and analyzed their Olympic Games, as well as the economic competition on the global market or financial data over the period 2006- stimulus package of 4 trillion yuan in arise from disparities among different 2010. Similar to our findings in the past response to the financial crisis. The markets’ political, economic and legal few years, the growth of sample Chinese pharmaceutical industry also enjoyed systems; business environments; history; companies was much higher than that a growing market, owing to changes in cultures; and languages. However, the of other sample foreign firms. CAGR people’s lifestyle, diseases related to most daunting barriers stem from Chinese of turnover in China’s three sample affluence and the aging of the population. companies’ inherent characteristics. We industries reached 24%, compared to only examine these in detail below. 6.2% of the world’s other businesses. (See Figure 7.) The difference was even greater if calculated by the triennial
Figure 7. Chinese and global companies, 5- and 3-year growth
5-year turnover CAGR 3-year turnover CAGR
27.2% 26.1% 26.0% 24.0% 23.2% 23.3% 20.5%
14.3%
7.1% 6.7% 6.2% 5.7% 4.8% 1.5% 0.2% ﹣0.7%
Construction Industrial Pharmaceuticals Three industries Construction Industrial Pharmaceuticals Three industries machinery machinery
China Global
Source: CapitalIQ, Accenture analysis, 2011
The Path to International Competitiveness for Chinese Enterprises 35 However, if we look at the enterprises’ capital than foreign enterprises, 10.5% Since the outbreak of the financial profitability, we see a large gap and 6.3%, respectively, in WACC. The crisis, Chinese businesses have increased between Chinese enterprises and foreign originally small difference in operating in size and outperformed their global businesses. We use economic value margin translated into a sharp difference counterparts in terms of growth. However, (net profit after deduction of the cost in net profit after subtraction of they lag behind in profitability. This of capital) as a metric of profitability: the cost of capital, -1.1% and 5.2%, reflects the growth pattern of Chinese five-year profitability (ROIC - WACC) of respectively. In view of the role of enterprises: driven by investment and Chinese enterprises averaged -1.1%, while economic value in measuring the value expansion in size and characterized that of global businesses averaged 5.2%. created by a business, the State-Owned by low added value, low operational (See Figure 8.) Calculated by the three- Assets Supervision and Administration efficiency and low productivity. To grow, year data, the average profitability of Commission of the State Council (SASAC) these companies have depended less on Chinese and global enterprises was -0.8% proposed to replace return on equity capabilites related to strategy, operations, and 4.7%, respectively. (ROE) with economic value as an appraisal marketing, human resources and standard for state-owned enterprises culture—all of which are essential for an What explains the low profitability of (SOEs) in 2010. In the SASAC system, enterprise’s international competitiveness. Chinese enterprises? We identify two WACC was set at 5.5%. This cost level Chinese companies must spare no effort explanations. First, their operating costs is undoubtedly low even for large SOEs to improve their profitability if they hope were generally higher than those of enjoying low-cost financing. Even if to become globally competitive. foreign enterprises, leading to slimmer the requirements of shareholders and operating margins. In the three sample creditors for ROI (return on investment) industries, operating margin was 11.5% are not taken into consideration, given for global companies and 9.4% for the current annual bank loan rate at 6.5% Chinese enterprises. Second, Chinese plus other costs, WACC should still be companies undertook a higher cost of above 7%.
Figure 8. Chinese and global companies, 5- and 3-year profitability
5-year average economic value (spread) 3-year average economic value (spread)
9.8% 10.8%
4.9% 5.2% 4.7% 3.8%
1.7% 0.7% -0.2% -2.8% -0.9% -1.1% 0.1% -3.5% -0.1% -0.8%
Construction Industrial Pharmaceuticals Three industries Construction Industrial Pharmaceuticals Three industries machinery machinery
China Global
Source: CapitalIQ, Accenture analysis, 2011
36 The Last 10 Miles Through effective strategy formulation, a economy. A large number of SOEs, even Lack of long-term company defines a roadmap for fulfilling after being transformed into corporations, strategic planning and its mission, for realizing its vision and for are still trapped in the legacy of honing its competitiveness now and in the government administration. They base management capacity future. A clear, executable strategy directs their strategy formulation not on changes all members of the business toward a in the market but on administration and In the market, a company faces not common goal. In addition, the corporate other non-economic factors. Meanwhile, only a complex reality but also a future strategy helps leaders decide what kind some companies’ management teams with infinite possibilities. It is essential of organizational structure the business lack experience in different economic and for a business to define a strategy requires, what corporate culture to foster market conditions as well as strategic based on its own ideas about how to and how to attract and train talent—all of vision and insight. seize market opportunities. A business which have far-reaching implications. without a strategy usually focuses only In our recent survey, 12.8% of the on immediate interests and thus ends up In striving to become internationally respondents said that they believe being eliminated from the increasingly competitive, Chinese enterprises Chinese enterprises “do not have clear fierce competitive arena. A company with have limited strategic planning and strategic objectives.” (See Figure 9.) Many an inappropriate strategy will likely lose management capabilities. Many lack a such companies are more concerned the game by making a single careless clear long-term development strategy. about turnover, profit and other financial move, or it may struggle for survival by Such companies have not yet mastered indicators when crafting their strategies. doubling its efforts, only to see its results the art of strategic management because They ignore questions of strategic dwindle by half. they haven’t yet shifted their mindset positioning and the initiatives needed to from a planned economy to the market achieve their strategic objectives.
Figure 9. Gaps between Chinese enterprises and high-performance businesses in strategic management
What are the major gaps between your company and high performance businesses with respect to strategic management? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
Failure to assess the enforcement of the strategic plan 31.8%
Failure to make timely adjustments to the strategy based on changes in external circumstances 22.0%
Failure to set a strategic goal for creating a world-leading company 14.0%
Lack of a clear strategic objective 12.8%
The strategic plan is hard to operate and cannot be implemented 11.4%
The strategic goal is too ambitious to achieve 8.1%
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
The Path to International Competitiveness for Chinese Enterprises 37 Lack of strategic planning among Chinese rather than an organization’s development enterprises also manifests itself as the Inexperienced leadership needs. Corporate executives can remain development of unrealistic strategies. teams in their positions in government agencies In the survey, 8.1% of respondents said even if an agency needs leaders with a they believe that Chinese enterprises’ Outstanding business leaders and different set of skills. We believe that this strategic objectives are “too ambitious to executive teams play a critical role system has exposed Chinese enterprises achieve.” A company’s strategic objectives in guiding companies to success. An to many problems on their way ahead. should be not only clear and explicit executive team formulates a strategic but also consistent with the businesses’ vision for the future and drives For example, it has interrupted these capabilities. A strategy that is beyond or the changes needed to achieve the companies’ transformation efforts and below an enterprise’s capabilities would company’s goals, informed by internal strategy development. As mentioned erode competitiveness in the market. conditions and the external business earlier, the world’s leading enterprises For instance, regardless of their own environment. In today’s challenging attach great importance to the timing capabilities, many Chinese enterprises business environment, an executive team of adjustments made to their leadership single-mindedly pursued scale and that lacks experience cannot position team. A leader who lacks required diversification, extending their businesses an enterprise for success. As leadership capabilities will usually be replaced and operations to markets beyond their expert John Kotter explained, “Successful when the business must change knowledge or capacity. Consequently, change is 70%-90% leadership and its strategic direction. In contrast, they not only failed to conquer the new only 10%-30% management.”55 adjustments to executive teams in markets but also lost the advantages they Chinese SOEs are often not aimed at Corporate executives must have a had gained in their original sectors. serving the enterprise’s interests. Indeed, strategic vision and a global perspective according to the business media, many Poor execution of strategy constitutes as well as the ability to govern, make officials are appointed as executives another difficulty facing Chinese decisions and exert influence. These of SOEs after they fail to obtain a organizations. Some companies’ strategies capabilities require executives to practice higher position in the government.56 are little more than slogans, which cannot leadership in an ever-changing market, be implemented in practical terms. Even all while learning from their successes SOE executives often shift between if a company has stipulated financial and failures. Only in this way can they enterprises and government organizations. objectives regarding turnover or profit, accumulate the required intelligence, According to Finance magazine, of the it may not have defined any metrics for courage and vision to lead a business. 35 SOE chief executives who have left assessing progress on those objectives A group of outstanding entrepreneurs their posts since 2003, 13 have retired or made arrangements to allocate the have emerged in China, growing step (37%), nine are serving in government relevant corporate resources. In our by step with the expanding enterprises agencies (26%), nine are working as survey, 31.8% of respondents reported and making their presence on the chief executives in other SOEs (26%), believing that Chinese companies “fail to world stage. However, many Chinese two are serving a sentence (6%) and the assess the enforcement of their strategic enterprises still lack leadership teams other two do not fit any of the above plans.” And 11.4% maintained that “the capable of transforming their businesses descriptions.57 strategic plans developed are not operable into world-class leading players. This and thus cannot be enforced.” deficiency has sharply constrained Indeed, swapping of executives is their international competitiveness. commonplace among enterprises in Finally, Chinese enterprises’ strategies the same industry (such as banking tend to be rigid: Companies don’t Legacy of state and telecommunications). Such revise them in response to changes swaps undermine the companies’ in the market. Inflexible strategies ownership competitiveness. For instance, a new have prevented these businesses leader may adjust the company’s strategy from adapting to the profound and Unlike in the vast majority of the world’s simply to highlight his or her leadership, diverse changes characterizing the leading companies, executives of Chinese forcing the enterprise to diverge from its post-crisis era. This situation is bound SOEs are mainly appointed by authorities. original strategy. A new executive with to affect their competitiveness and They are also subject to a tenure a limited understanding of the business hinder their performance. In our system, usually lasting three years. This may miss opportunities arising in a rapidly survey, 22% of respondents opined appointment system is characterized by changing market. And one who assumes that Chinese enterprises “fail to adjust opaque, non-market-oriented selection executive positions successively in a their strategies in time in response to processes. The timing of leadership number of enterprises within the changes in external circumstances.” turnover is decided by the authorities
38 The Last 10 Miles same sector could create a strategic and appoint lieutenants according to in their careers. Lack of a clear path for homogeneity among these enterprises— their own visions for the business and career advancement can lead employees preventing each organization from their need for team members with skills to defect to other organizations that differentiating itself. complementary to their own. This sets a offer more opportunity. As a result, the leadership team up for internal conflict, appointment authorities have fewer and For many SOE executives, their top as team members form factions to seize fewer candidates to choose from when career priority is to get government power rather than focusing on developing a position does open up on a leadership positions at a higher administrative level, the business. Such a team is unlikely to team. Saddled with inadequate talent, because these positions tend to pay establish a positive and healthy corporate businesses struggle to achieve their long- larger salaries. Therefore, their personal culture, which is essential for boosting term goals. goal may not be consistent with their employees’ morale and uniting them organization’s strategic goal. This lack of toward a common goal. alignment can hurt a company’s long- term prospects. Business leaders may be Finally, China’s current appointment more interested in the enterprise’s short- system for SOEs makes it difficult for term performance than its long-term these enterprises to cultivate corporate value. And if they pay more attention leaders’ successors. Lack of succession to their own promotion prospects, they planning threatens the long-term will focus on building relationships with advancement of a business. Because their supervisors or discerning the intent business leaders are appointed by of authorities instead of developing the authorities, the current leadership team businesses they manage. has no incentive to develop training programs for its own members. This sends Under the appointment system, a a clear message that aspiring leaders— company’s leadership team is entirely managers and employees occupying determined by authorities. Leaders of positions lower in the corporation’s the business have no power to select hierarchy—have little hope of advancing
The Path to International Competitiveness for Chinese Enterprises 39 agenda. Media reports have touched on enterprises. Respondents’ second and Succession problems in the issues regarding successor selection third concerns were “failure to take the privately run enterprises in New Hope, Huiyuan, Huawei and other initiative to complete the turnover of companies. To become competitive, CEOs as planned according to the growth For China’s privately run enterprises, China’s private enterprises must properly needs of the company” and “corporate the leadership challenge is the flip side separate management from ownership. executives burned out by daily routine of the difficulties facing state-owned have no strategic vision.” companies. Typically, only the founder In our survey, 28% of the respondents of a privately run business has say over maintained that their biggest concern the organization’s direction. Owing to regarding building an executive team in the lack of professional managers, the a Chinese enterprise is “over-reliance on fate of an enterprise is closely tied to its the CEO’s personal authority and failure founder, who may single-handedly topple to give play to the initiative of each the business by making a wrong decision. individual executive.” (See Figure 10.) This Some companies have introduced external suggests that under the appointment managers but failed to properly handle system, too much emphasis is attached the relationship between the founders to rank, and everyone is at the mercy of and the managers so that managers his or her supervisor. Leaders have the inform the founders’ decisions. Now, final say on decisions, eroding democratic with founders of privately run enterprises decision-making and workforce vitality. aging, succession planning is on the This is particularly true for privately run
Figure 10. Concerns about executive team building
What do you think are the main difficulties for Chinese enterprises in building their leadership teams? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
Over-reliance on the CEO's personal authority and failure to 27.6% stimulate the initiative of each individual executive
Failure to take the initiative to complete the turnover of CEOs as 19.0% planned according to the growth needs of the company
Corporate executives burned out by daily routine but have no 17.3% strategic vision
Failure to appoint each executive according to his or her 13.0% characteristics and preferences
Inadequate diversity of the leadership team 12.6%
Failure to train the successive CEO in house 5.3%
Failure to engage external executives 5.2%
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
40 The Last 10 Miles Finally, innovation is an activity Inadequate property-rights Lack of innovative spirit undertaken by creative individuals. To According to management expert sustain innovative efforts, organizations protection Peter Drucker, “Core competencies are need an effective incentive mechanism for A favorable external environment different for every organization, but every these employees. According to one study for innovation should include a well- organization — not just business — needs we examined, the four most powerful established property-rights protection one core competence: innovation.”58 motivators for knowledge workers system. Beginning in the 16th century, World-leading enterprises never cease are individual growth, job autonomy, a system of property rights gradually innovating. Their philosophy is that a business achievements and personal took shape in Western countries, coupled business should continually invest in wealth.62 High-performance businesses with the formation of a sound legal innovation, integrate innovation with can establish incentives to maximize system. Both encouraged innovation reform of its core strategy and acquire employees’ creativity and encourage a to flourish.64 It is easy to understand strategic resources and talent. It must creative corporate culture. Facebook, for that if a company’s senior managers also build a sound incentive system and instance, has created a program called or R&D employees worked only to gain culture to foster innovation. Hackamonth, in which three winners from access to advanced technology and then an in-house competition have a month resign to start their own businesses, Innovation requires foresight and ongoing to develop a project in which they are then the enterprise’s owner would be investment in needed resources. Only interested. This encourages innovative reluctant to drive innovation. If this through foresight can a business see activity and keeps the company abreast attitude prevailed throughout a society, the future direction of a market and of with innovation trends.63 then the whole society would lose the consumer preferences. Innovation also incentive to innovate. Unfortunately, needs to be customer-centric. This means Chinese companies have made impressive the copycat culture is rampant within concentrating on customers’ current progress in the last three decades, China. Plagiarism and imitation have needs as well as fostering new markets delivering Made in China to every corner become common practices in a society and creating innovative business models of the world. Nevertheless, the country where property rights are weakly to succeed in those markets. remains at the intermediate and low protected and where businesses ends of the global manufacturing chain. lack the motivation to build their The social networking site, Facebook, With constant inflation and steady reputation through innovative action. offers an apt example. In 2010, the RMB appreciation, the advantages of company was only six years old, yet Fast China’s manufacturing industry—mass A well-established patent-protection Company magazine ranked it first among production, cheap labor and low raw system can largely compensate for the world’s most innovative companies. materials costs—are vanishing. Limited the resulting damage, but this system Facebook initially was used only by innovation capacity and product must be built on a fair, executable legal Harvard University students. Today, the competitiveness have severely curtailed system. We must admit that China 59 number of users tops 750 million. these companies’ ability to compete in needs to improve its legal environment. Indeed, Facebook is the most frequently the international market. We believe Currently, local governments put their visited online site in the United States, is that the problem stems from inadequate own interests above legal justice, and the the world’s largest social networking site property-rights protection, insufficient patent-protection system is ignored by 60 and is worth tens of billions of dollars. investment in proprietary R&D, deficient governments seeking to attract businesses A creative business model enables the in-house incentive mechanisms and and investment. Long-term overall company to employ many fewer people underdeveloped concepts of business- interests are sacrificed for short-term 61 than its peers employ. Its ability to model innovation. Below, we examine individual interests. transform the way people understand each of these four issues more closely. and interact with the world has further contributed to its success. In this sense, Facebook represents the new generation.
The Path to International Competitiveness for Chinese Enterprises 41 Insufficient investment in innovation by Chinese enterprises and Chinese companies, developing within lower-than-expected input in recent the nation’s traditional culture and a proprietary R&D years. Inadequate input, in turn, severely unique socioeconomic setting, have not Innovation requires sufficient investment curbs innovation capability and the yet realized the importance of innovation in proprietary R&D. Currently, R&D emergence of innovative products. nor consciously established incentives for investment usually accounts for 5% of encouraging it. They therefore have failed sales revenue among large international Deficient in-house incentive to establish innovation campaigns for companies. The figure for some players customer-centric technology and business can range as high as 10% to 15%. In mechanisms models. Facing intense competition at contrast, in 2009, R&D expenditure According to some experts, people give home and abroad, Chinese businesses accounted for only 1.4% of sales revenue only 20%-30% of their ability on the job must build incentive mechanisms among China’s top 500 enterprises. The without incentives; this rises to 80%- for integrating innovation into their figure was only 2% for the manufacturing 90% once incentives are in place.66 development strategies. industry,65 far below international Apple has been successful because it standards. Only 6.7% of manufacturers sees innovation as the essence of its Undeveloped concepts of in the top 500 saw their figure exceed corporate culture. Apple believes that 5%, indicating that more than 90% of management’s role is to create a work business-model innovation manufacturers were below the world- environment that stimulates employees’ Business-model innovation refers to class threshold. (See Table 1.) creativity and imagination. Apple today is multi-dimensional innovation of an an outstanding IT player with the highest enterprise in technology, management, China’s 11th Five-Year Plan spelled out an market value in the world. marketing, organizational systems and objective that R&D expenditure should so on. Peter Drucker once said: “[Future] account for 2% of GDP. But the goal was competition among today’s businesses not achieved. This testified to insufficient [is] not competition between products,
Table 1. R&D expenditure as percentage of sales revenue for China’s top 500 enterprises and top 500 manufacturers
Year 2004 2005 2006 2007 2008 2009
R&D expenditure vs. sales revenue for 1.20 1.45 1.61 1.32 1.34 1.42 top 500 enterprises
R&D expenditure vs. sales revenue for 1.88 2.29 2.41 2.13 1.95 2.03 the top 500 manufacturers
Proportion of manufacturers whose 9.85 9.59 12.87 10.71 8.87 6.72 R&D expenditure accounted for over 5% of sales revenue
Source: China Enterprise Confederation, Development Report on China’s Top 500 Companies, Enterprise Management Publishing House, 2010
42 The Last 10 Miles but competition between business China, though ranking second in the to ensure the quality of its tires but models.”67 Conventional innovation, world in terms of GDP, possesses few failed to put these standards into which focuses on products, technologies outstanding brands. Many Chinese practice.71 Without a fundamental or markets, will likely be imitated by other enterprises are not yet fully aware of the concept of brand-quality assurance, companies quickly. Since business-model value and profitability a strong brand can the standards were useless. innovation is more complex, involving create. According to UNIDO statistics, simultaneous changes in multiple aspects there are 85,000 brands in the world, but Organizational integrity shortfalls are of an organization, it is more difficult to famous brands make up less than 3% also commonplace in other industries in imitate. This it usually brings a company of this total. However, they account for China. For example, to sell products at competitive advantages that can endure 40% of the world market share and 50% higher prices, some Chinese garments for many years. With the rise of Internet of the world’s total sales volume. The brands have disguised themselves as technology, the emergence of each new value created by brand-name products foreign brands, simply by registering Internet star represents the success of accounts for 60% of GDP in the US, but trademarks in another country or using business-model innovation. the figure is less than 20% in China.68 an exotic name. These tactics not only In the seventh listing of the World’s 500 violate consumers’ right to know what Chinese enterprises often learn from or Most Influential Brands (2010), only 17 they are buying; they also border on false imitate the business practices of mature Chinese brands were included, accounting advertising and fraud. Such dishonesty companies in the West. For example, for 3.4% of the total and far below will damage brand reputation and erode companies in China have imitated online the 237 seats occupied by US-based consumers’ enthusiasm for and trust portals, online search engines, social companies. What’s more, not a single in brands. Left unaddressed, it will networking sites and group-buying Chinese brand ranks in the world’s top undermine brand value and the long-term websites. Some of these followers have 100 brands.69 Strong company brands development of a business. been quite successful. However, they worldwide mainly offer consumer goods, owe their success in part to geographical while listed Chinese brands in 2010 were Shortage of brands advantages and policy-based primarily resource-based companies, A serious shortage of brands has also protectionism, which are bound to weaken state-owned banks, state-owned hindered the development of Chinese as the market opens further. Therefore, enterprises, telecommunication giants and enterprises. As a manufacturing giant, Chinese companies must learn how to other monopoly companies. innovate their own business models. China is the world’s third largest trader, Brand building needs to be strengthened and is the largest producer of nearly among privately run enterprises, 200 product categories. Yet it is an Under-appreciation of especially in the consumer goods sector inferior player in branding. Many Chinese brand value and the auto industry, which have great companies are original equipment potential for nurturing brands.70 Below manufacturers (OEMs) for foreign Today, a brand is no longer simply a we examine this issue in greater detail. brands. Without their own brands, these trademark but the embodiment of a companies remain at the low end of the company’s overall competitiveness, Failures in product quality and global value chain, generating low added including its reputation, products, value and profit margins and lacking services, culture, overall operations and organizational integrity international competitiveness. According corporate strategy. It is an essential Lack of understanding of brand value to data provided by China’s Ministry intangible asset. Brand value lies at the among Chinese enterprises is reflected of Commerce, less than 20% of trade core of brand management. A well- in their inadequate awareness of product companies in China possess proprietary positioned brand image can gratify quality and organizational integrity. brands, and exports of brands account consumers’ emotional needs and create Failure on these two fronts occurs for less than 10% of the country’s total. perceptions of added value, thereby frequently even with products and To illustrate, although China is a major commanding a higher premium. It thus companies once trusted by the public. textile exporter, 50% of its textile exports improves a company’s profitability and Consider Kumho, one of the world’s top are processed with provided materials, helps its offerings stand out among 10 tire manufacturers serving General more than 30% are processed to order more homogeneous products. Nike, for Motors, Shanghai Volkswagen and (with trademarks, styles and patterns example, is a leader in the international many other auto manufacturers. The provided by importers) and only 10% are 72 sporting goods market, with young people largest such supplier in China, Kumho produced as brands. in a wide range of countries flocking has recently faced accusations of selling to its brand. In fact, Nike’s business is substandard products. The company all about brand: the company has never formulated a set of operating standards manufactured a single product itself.
The Path to International Competitiveness for Chinese Enterprises 43 44 The Last 10 Miles At this stage, brand contribution to Similar problems plagued Japanese company’s competitiveness. Lack of key Chinese enterprises accounts for merely companies in the 1970s and Korean talent as well as high employee turnover 52%, much lower than the 87% average companies in the 1980s. When these constitute major problems for Chinese in international companies. Price is the enterprises first tried to access European enterprises. One survey showed that most important competitive metric of markets, their products were regarded the vacancy rate of senior management Chinese enterprises.73 This is mainly as cheap and unsophisticated, and it positions in China is much higher than owing to their pursuit of immediate took them more than 20 years to win a that in many other countries, and that profit. Though companies have gradually reputation for producing high-quality the turnover of management personnel paid more attention to their brands, offerings. At first, they also made the in China is 25% higher than the global they often choose sales volume over mistake of simply imitating Western average.76 From 2001 to 2005, China’s brand building when the two go against companies’ marketing tactics. They did core personnel turnover increased from each other. In comparison, the world’s not recognize the importance of brand 4% to 21%.77 From 2001 to 2008, among greatest companies have been building management or develop a branding China’s oil companies, core personnel their brands and core competitiveness strategy that highlighted their unique (including senior managers, technical for decades or even centuries. OEMs and value and that targeted the proper experts and highly skilled professionals) suppliers can be replaced, but once a consumer niches. exhibited an average turnover of 9%, brand is well established, competitors will which grew at an average annual rate of have difficulty replacing it. High performance businesses attach 21% and continues to accelerate.78 great importance to brand value and Brand development is indispensable to brand management. Many of these Lack of clear performance innovation. Among the world’s top 500 businesses have even employed a chief companies, the average R&D investment branding officer for professional and management mechanisms accounts for 5%-10% of sales revenues, systematic management of their brand as Brain drain is commonplace in Chinese much higher than in most Chinese an intangible asset.75 Chinese enterprises enterprises, primarily because they companies. According to statistics, only have made a late start in brand building lack clear performance management 3,000 out of 10,000 Chinese companies and positioning, but some have stepped mechanisms. Promotions are often possess intellectual property rights, up their effort. For instance, Haier has decided by superiors and based on length and many still equate brand building set up a dedicated brand operation unit, of service, not job performances. Without with expenditure on advertisements. responsible for systematic management of a systematic, standardized and rational They often fail to invest in research its brand. mechanism, companies cannot effectively and innovation or to renew packaging, evaluate performance. This results in design and advertising strategies. This Difficulties managing inefficient use of human resources. Even lack of innovation undermines consumer in companies that have such systems in satisfaction, and thus further hinders talent place, performance appraisal is often companies’ development.74 merely a formality. Thus it cannot offer A key to competitiveness is a company’s viable information to facilitate smarter ability to develop capabilities that Unclear brand positioning use of human resources. As another are difficult for rivals to imitate. A consequence of inadequate performance Many large enterprises in China strive core capability centers on managing appraisal, companies retain incompetent to increase their popularity by simply talent. Chinese companies still have employees and even promote them. This mimicking marketing strategies of a long way to go regarding this sends a message to good employees and Western companies, copying their exterior capability—for reasons we discuss to customers that performance doesn’t design or sponsoring events. They fail in the sections that follow. matter to the organization. Tolerance of to recognize the need to formulate low performance destroys the confidence branding strategies for various phases of Lack of key personnel coupled and trust of key talent in the company, their development and across different resulting in costly turnover. markets. Without a professional brand with a high turnover management system or a clear brand Key employees distinguish themselves positioning strategy, they cannot from the general staff in their specialized emphasize the uniqueness of their expertise, control of critical resources and products. Consumers are thus left with mastery of key business operations. The only vague impressions of the offerings. defection of such talent devastates a
The Path to International Competitiveness for Chinese Enterprises 45 Lack of talent selection and Many Chinese enterprises lack a corporate Weak corporate culture culture that has clear values, for reasons training systems Intangible as it is, corporate culture we explore below. Lack of systems for talent selection and seeps into every corner of a business training is another important reason for and plays a vital role in its performance. Superficial understanding of the talent shortages and high turnover Corporate culture is not just slogans; it’s facing Chinese companies. Selection an implicit code of behavior. According corporate culture of employees suitable for business to Zhang Ruimin, CEO of Haier Group, “A Chinese enterprises have started to development is the first step in training. successful company must have a very realize the importance of corporate However, in their recruitment of key strong corporate culture, which holds culture and put it on their agenda. talent, Chinese enterprises often rely all its people together. In the case of Yet their understanding of corporate on written tests and interviews instead a century-old company, many things culture is often superficial. Many view of systematic, scientific and effective may have changed, but its spirit always manifestations of corporate culture selection mechanisms. As a result, newly remains what it was a hundred years ago. as only magnificent office buildings, recruited employees may not fit the job. Corporate culture is the spirit and soul expensive corporate logos designed Moreover, after new hires start a job, they of the business; so long as the soul is by advertising firms, neat uniforms for often receive little help in growing their immortal and evergreen, the company will employees and catchy slogans. They have skills and advancing their careers. never perish.”80 yet to develop a deep-seated culture that can guide employees’ every behavior. In addition, many Chinese companies tend Management scientist Fons Trompenaars to put greater emphasis on development sees corporate culture as consisting of Vague values and training of professional skills of their three layers81: employees while ignoring enhancement Many Chinese companies have built the of their overall competence (such as • The outer layer is explicit culture, which explicit layer of their corporate culture, management skills). Only 12% of Chinese is the first impression outsiders have of a but that is far from enough. Upon SOEs and 15% of privately run enterprises business and is easy to observe. Examples browsing the official websites of various cultivate back-up roles for key positions include architectural style and interior Chinese companies, we found that almost to respond to unexpected departures of decoration of the office building as well every corporate site highlights corporate senior managers. This number is 27.4% as dress and other behaviors of employees culture, including vision, mission, business in foreign-owned enterprises and 21% in (rate of speaking, ways of expressing principles, philosophy, values and so forth joint-venture companies.79 themselves, pace of walking and so forth). in often eloquent words. However, the terms used—such as people-oriented, In addition, Chinese companies invest • The middle layer comprises the integrity and innovation—are general. less in personnel training than Western company’s norms and values. These are Thus visitors to these websites have no enterprises do. This is because they have the enterprise’s fundamental principles way of knowing how these values are not yet realized that investment in staff guiding executives’, managers’ and expressed in the company’s practices. training is actually a powerful motivator employees’ behaviors and attitudes. In our survey, most of the respondents for employees. Simply put, norms and values enable the recognized that poor perception of values business to tell right from wrong and to hampers a company’s ability to achieve address internal and external conflicts. high performance. (See Figure 11.)
• The innermost layer is implicit An enterprise’s corporate culture contains culture, which involves a series of basic the rules and principles guiding the assumptions, codes of conduct and operation of the business. The culture behavior models applied when a business thus should cover all aspects of business has to make difficult decisions or faces management. However, core values should ethical dilemmas. The implicit culture is highlight priorities, instead of being all- difficult to observe, but will present itself inclusive. “Forward-looking companies clearly when a company faces a high- tend to have only a few core values, stakes situation. usually between three and six. In fact, we
46 The Last 10 Miles find none of the visionary companies to China has long been stained by shoddy have more than six core values, and most cotton, toxic toys, exploding electrical have less,” stated Jim Collins and Jerry appliances and other product problems. Porras in their work Built to Last. Negative impact of Chinese Disconnection between words culture and deeds Corporate culture in Chinese enterprises is For some Chinese companies, their shaped in part by Chinese culture overall, corporate culture and core values are which dates back five thousand years. more like slogans than a deeply rooted For example, influenced by Confucianism, philosophy. They therefore cannot serve many Chinese businesspeople picture as guides to behavior. For example, themselves as intellectual businessmen— Sanlu Group, which advocated honesty, gentlemen who pursue fortune in harmony, innovation and responsibility as appropriate ways. But some aspects its core values, produced dairy products of Chinese culture are not conducive containing hazardous substances and to the development of enterprises. For ultimately went bankrupt. Shuanghui instance, most Chinese people feel Group, which claimed Business based on uncomfortable disagreeing with leaders, integrity, world-renowned for morality, prefer collective decision-making used clenbuterol-contaminated pork in and are content with the status quo. its products. But inconsistency between These behaviors can discourage the words and deeds is not seen only in the spirited exchange of ideas and debate food industry; the reputation of Made in necessary to move a business forward.
Figure 11. Cultural factors hindering Chinese companies’ competitiveness
What cultural factors of Chinese enterprises do you think have blocked their way to high performance? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
Lack of clear values, not aware of dos and don’ts 16.4%
Preference for collective decision-making to dodge accountability 15.3% Absolute obedience to leadership, unwilling to put forward one’s own opinion 14.1%
Emphasis on scale and neglect of efficiency 13.9%
Lack of cooperative spirit 13.0% Strict hierarchy without an environment for democratic discussion and decision-making 9.5%
Content with the status quo 9.3% Insufficient attention to business ethics and social responsibilities 8.6%
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
The Path to International Competitiveness for Chinese Enterprises 47 4 Exploring the path to international competitiveness
48 The Last 10 Miles To become internationally competitive, dominant control of the board. In Chinese enterprises will need to address Establish practices for addition, independent directors usually the above-described challenges. Our strategy management account for no more than one third of the survey and interviews included questions total, a figure significantly lower than the regarding the capabilities required We believe that Chinese enterprises would international level. Homogeneous board for Chinese enterprises to accomplish benefit by establishing the following members cannot complement each other this feat. (See Figure 12.) They also practices for strategy management: in terms of their expertise. Moreover, the explored respondents’ beliefs about decision-making teams, strategy lack of legal and financial accounting which capabilities Chinese enterprises enforcement and flexibility. professionals further weakens boards. should focus on improving in the Finally, selection and review mechanisms next stage of their development. In Decision-making teams for independent directors are not yet well the sections that follow, we interpret Many Chinese enterprises still lack established, a situation that has further our findings and offer ideas. well-structured corporate governance prevented independent directors from practices, manifested mainly as the playing their required role. absence of independent boards of directors. This situation has several causes: For one thing, centralized ownership is common among Chinese companies, with one shareholder taking
Figure 12. Capabilities required for Chinese enterprises to become internationally competitive
What capabilities should your company make efforts to improve if it is to become a high performance business? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
Strategic vision to constantly discover new business growth points 22.5%
Key personnel in compliance with the company’s values and development strategy 15.9% Corporate governance and organizational structure in line with the corporate strategy and development scenario 14.5% Brand strategy, channels and customer service capabilities in support of operations 13.6%
Innovation capacity 12.0%
Smooth and timely turnover of the executive team to lead the 6.3% company to move forward constantly
Solid business support capabilities, such as IT, human resources 6.2% management and financial management
Risk management capabilities 4.8%
Global operations capability 3.0%
External cooperation capability 1.4%
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
The Path to International Competitiveness for Chinese Enterprises 49 In our survey, respondents identified professional decision-making. Privately diligence on the part of independent the biggest concerns of corporate run enterprises must establish a board in directors is critical to ensuring that they governance among Chinese enterprises as which the majority of directors are non- effectively fulfill their role. For example, follows: Boards do not establish effective family members and which assumes the the US-based National Association incentive and restraint mechanisms for vital mission of selecting the management of Corporate Directors requires each management. They lack independence team and formulating strategic plans. independent director to work on his or her because of an overly concentrated A democratic and diverse board will respective board at least four weeks every ownership structure. And they don’t steer also improve the quality and amount of year, putting in 40 hours during each of companies’ strategic orientation. (See feedback. Thus it will enable enterprises those weeks.82 China could benefit by Figure 13.) to adapt to a rapidly changing market. developing similar standards.
How can Chinese companies strengthen Second, Chinese businesses must also In recent years, Chinese companies their governance practices? First, their incorporate more independent directors have strived to improve their corporate boards should be more independent. into their boards. In addition to further governance mechanisms. SASAC has Only then can they carry out the reforming non-tradable shares and selected 30 enterprises for board-of- critical functions they are meant to weakening the power of large shareholders director pilot projects, by drawing on serve, including shaping strategy over the board, they need to set up a the experience of the United States, and supervising senior management. mechanism for selection of independent European countries and Singapore Companies can increase the proportion directors. In other countries, independent and tailoring the projects to China’s of non-executive and independent directors are chosen according to specific circumstances.83 In one pilot enterprise, directors and enhance external checks rules and processes. This approach results the majority of board members are and balances mechanisms to avoid in selection of high-quality independent external directors. They are not selected excessive concentration of power within directors and improves the system by the company’s management but are their board and to ensure objective and of corresponding intermediaries. Due directly assigned by SASAC, with their
Figure 13. Corporate governance problems in Chinese enterprises
What do you think are the major problems of corporate governance among China enterprises? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
Failure to establish effective incentive and restraint mechanisms 23.9% for management 20.6% Insufficient independence of the board
15.4% Over-concentrated ownership structure
Board’s failure to lead the right company strategy 13.7%
Boards’ failure to give full play to democracy in house 9.1%
Failure to guarantee shareholders' rights and interests 9.0%
Incomplete and inaccurate disclosure of corporate financial 8.2% reporting data
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
50 The Last 10 Miles remuneration, evaluation and selection In addition to strengthening their boards strategic management among team all subject to direct management of in the above-described ways, Chinese members. In our survey, just over 34% SASAC. External directors are entitled companies should also ensure that their percent of respondents said that the most to express their views independently executive teams focus their attention effective strategies not only optimize a and exercise independent voting on both current operations and future company’s existing operations but also rights on behalf of investors. development. A common mistake among position the business to compete in the executives is to spend too much time on future. (See Figure 14.) Third, Chinese companies would do well day-to-day operations at the expense of to establish a performance appraisal future planning. According to an overseas Strategy enforcement and incentive system for directors. survey, the executive teams of most For the vast majority of Chinese listed companies spend 80% of their time on To enforce the strategies it has formulated, companies, annual reports only disclose decisions whose impact on the company’s a business must have a top team that the performance evaluation system for long-term value is less than 20%. This can lead strategy implementation. The senior management, not for directors. This leaves them little time to consider the company should also replace executive prevents enterprises from identifying and business’s long-term development.84 team members if needed to respond addressing incompetence among board to major changes in the competitive members, a situation that can damage a In high performance businesses, the environment that call for new strategies. company’s long-term performance and executive team devotes adequate time and To prepare for such changes in the development. An incentive mechanism for energy to discussions about strategy and executive team, the board of directors directors is also necessary, to ensure that the company’s future. In addition, during must regularly review candidate directors take the company’s long-term selection of executive team members, successors so that the company can put interests into full consideration during attention is paid to maintaining diversity the right person in place as soon as the decision-making. of their capabilities so as to ensure a need arises. balance of skills in daily operations and
Figure 14. Strategies that help Chinese enterprises achieve high performance
What kind of corporate strategy will help Chinese enterprises to achieve high performance? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
Optimizing existing operations but, more important, positioning 34.6% companies to compete for the future
Providing innovative products and services 22.4%
Attracting key personnel to join the company 17.9%
Discovering potential markets not yet identified by competitors 11.4%
Encouraging non-principal business units to explore new 7.3% opportunities for breakthroughs
Carrying out globalized operation 6.4%
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
The Path to International Competitiveness for Chinese Enterprises 51 Next, strategy enforcement calls for achieve its strategic objectives. A few and revise them as needed to reflect an organizational structure that can years ago, multinationals attempting to changes in the external environment and be adjusted to support execution of enter the Chinese market often cooperated the company’s internal circumstances. the company’s strategy. Regarding with local enterprises to strengthen In addition, strategic business units the defining characteristics of high their understanding of local markets and departments should adapt their performance businesses’ organizational and work around policy restrictions in own strategies to reflect any changes structure, our survey respondents some industries. Our survey respondents in the corporate-level strategy. identified “flexibility with timely agreed that Chinese enterprises can learn adjustments to strategic or operational valuable lessons from these companies’ Strategic flexibility requires accurate, changes” (24.9%) and “quick response experiences. (See Figure 16.) timely and fully communicated to changes in the external market information. When revisiting their environment”(19.7%). (See Figure 15.) Strategic flexibility strategies, companies must analyze a large amount of information and avoid making Finally, companies need to cooperate According to former General Electric CEO impulsive decisions. Modern information with other entities to break through Jack Welch, “Business success is less a technology plays an indispensable role common bottlenecks that impede function of grandiose predictions than in strategic decision-making within strategy execution. Such bottlenecks it is a result of being able to respond businesses. As our survey respondents include insufficient resources or technical rapidly to real changes as they occur. pointed out, such technology can provide capabilities to immediately meet the That’s why strategy has to be dynamic a company with timely, comprehensive and demands of a newly identified market, and anticipatory.”85 To ensure that accurate data about markets, competitors inadequate channels to serve target their strategies remain flexible and and other key elements of the business customers and government restrictions on dynamic, Chinese businesses can more environment. (See Figure 17 and the Huatai market access. In such cases, cooperation frequently examine the strategies outside Group case study.) with other agencies can help a business of regular, formal strategy meetings
Figure 15. Defining characteristics of high performance businesses’ organizational structure
What characteristics do you think high performance businesses should have with respect to their organizational structure? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
Flexibility to support timely adjustments upon changes in 24.9% strategies or operations
Quick response to changes in the external market environment 19.7%
Operating according to rules rather than individual capabilities 16.2%
Facilitating effective information flow within the organization 15.6%
Clear, concise and uncomplicated 13.6%
Conducive to innovation 10.0%
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
52 The Last 10 Miles Figure 16. The significance of cooperation How can your business benefit from seeking partners to establish a win-win scenario? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
A standalone business cannot achieve good performance, cooperation is an important way to achieve our strategic intent 24.5% Cooperation contributes to globalization and access to 18.6% overseas markets Cooperation can provide our business with the advanced 18.0% technology we lack Management experience may be acquired and transplanted 15.4% from partners
Cooperation facilitates access to new sales channels 14.1%
Making use of the brands of partners 4.3%
Financial support from partners 2.9%
More likely to succeed by means of mergers and acquisitions 2.1% with partners
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
Figure 17. The roles of information technology
What key roles can IT play for your company to become a high performance business? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
Providing timely, comprehensive and accurate information for 36.4% the company to make strategic decisions
Enhancing the efficiency of internal operations 26.3%
Speeding up response to customer needs 13.0%
Strengthening corporate risk management 7.2%
Reducing operational costs 6.5%
Promoting marketing and branding 6.0%
Improving organizational transparency 4.6%
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
The Path to International Competitiveness for Chinese Enterprises 53 Case study Huatai Group 86
The Huatai Group is a private March 1993 constituted a turning By 1995, Huatai Group had invested enterprise located in Dongying, point for the company. As one of the over 250 million yuan in eight Shandong. Founded in 1976 with two first batch of 50 pilot enterprises technological transformations. Its paper manufacturing machines, the for the joint-stock reform of the annual production capacity increased group embarked on an aggressive province, the Group issued shares 15-fold, and the company was development effort in 1990 and by way of directed placement and producing a variety of product lines was listed on the Shanghai Stock was restructured as Dongying Paper ranging from low-end writing paper Exchange in 2000. Since 2001, its Group Co., Ltd. Non-tradable shares and glazed paper to mid- and high-end principal business income has had an were issued to employees, through offset paper and coated paper. average CAGR of 35%, making it one which 13 million yuan was raised. The of the country’s top 500 companies business used the funding to embark The second leap: Seizing in terms of growth. The company’s on its next mission. Although Huatai the high-end market major businesses are paper making Group had been growing rapidly, the and chemical engineering. But it has paper industry was experiencing some In 1999, Li Jianhua went abroad to also integrated many other businesses difficult challenges. To stay competitive investigate coated paper projects. including printing, thermal power, in the face of these challenges, During the trip, he learned that a logistics and real estate. In 2010, the Huatai Group developed a strategy German factory was about to halt a Group produced roughly 1.4 million stressing both quality and scale. And newsprint production line, leaving the tons of machine-made paper, up 17.5% it decided to leverage technology to equipment for sale, which coincided over the previous year, and recorded an achieve high-speed and large-scale with his intent. Around 2000, rapid operating income of 7.1 billion yuan.87 production of quality paper products. development of China’s domestic print Huatai entered the newsprint industry media spurred demand for newsprint, in 2001 and became the world’s largest In November 1993, Li Jianhua led the much of which was imported and newsprint base by 2006. It drove its management team to visit Wuxi Paper thus expensive. Huatai Group needed own development by seizing three Mill in search of equipment. There, the a high-end core product to help strategic opportunities and using team acquired a paper manufacturing it gain a foothold in the domestic technology to support achievement of machine for just 1.5 million yuan. paper industry, and newsprint was its growth goals. Huatai wanted to begin using the a preferable choice. Li Jianhua met machine as quickly as possible, so with the executive vice president of The first leap: Expanding the “commando” of the management the German company, who reacted team took the day to dismantle the with indifference, thinking that Li’s product lines equipment, using simple tools such as delegation were more tourists than In May 1976, Dawang Paper Mill, jacks and sledge hammers. The parts businesspeople. Li Jianhua invited Huatai’s predecessor, was established in were transported back to the Group the Germans to visit Huatai. At the Dongying. Li Jianhua, current chairman in just 25 days, a feat for which the workshop, the visitors found the of the Group, began serving as director commando won wide acclaim. By machines neat and clean and the of the Mill in 1983. From 1987 to 1989, October 1994, Huatai saw three major workshops free from the pungent smell Huatai Group launched a series of projects put into operation, thanks to characterizing other paper mills, though paper manufacturing projects to satisfy the newly acquired machine, and the the facilities were outdated. Impressed market demands and completed the company’s business started to snowball. by Huatai’s well-organized on-site shift from offering a single product to management, the Germans eventually developing multiple product lines. agreed to sell the equipment.
54 The Last 10 Miles Huatai successively sent 32 technicians machinery, moving promptly into This strategy will hinge on two to Germany on a training session the newsprint market. In 2006, the initiatives: (1) integration of woods and lasting over five months. In spite of Group’s annual sales revenue reached paper, a state-level transformation cultural and language differences, the a new high of 10.2 billion yuan, a 36% project affecting 600,000 acres technicans worked day and night to increase over the previous year. of forest, 300,000 tons of poplar master the technology and equipment. pulp and 600,000 tons of coated All devices on the production line The third leap: Leveraging paper, and (2) integration of reed with an annual capacity of 160,000 M&A and paper to harvest 700,000 acres tons were numbered, photographed, of reed marshes to make 100,000 dismantled, packaged and shipped to The outbreak of the financial crisis in tons of fine office paper. The Group China and then reassembled. Later, a 2008 dealt a heavy blow to the paper has also set out to irrigate reed German worker visited Huatai and saw manufacturing industry. Prices of pulp marshes and fast-growing trees the machine he had once operated still and scrap paper dropped 30% and with treated wastewater reclaimed running efficiently. Huatai invested 65%, respectively, while the prices from paper manufacture, thus 750 million yuan in the project of the majority of finished paper supporting sustainable development. to produce mainly top-level color products fell 20%.89 Still, Huatai Group newsprint, which could replace the did not decrease production. On the In its first leap, Huatai Group uses high-grade newsprint products being contrary, it embarked on a mergers funds raised to scale its production imported into China and could sell and acquisitions (M&A) drive to forge and upgrade its products, leaving small briskly in the international market. alliances with giants in the industry. paper mills far behind. With the next The idea was to mitigate the risks leap, the Group used the funds raised Huatai’s newsprint had a remarkable arising from the company’s dependence through its initial public offering to price advantage over imported similar on a single industry. At that time, fill a vacuum in the domestic market products. A ton of newsprint could mergers and acquisitions could be had with the introduction of advanced bring a net profit of over a thousand for relatively little money. In addition to equipment and quick access to the yuan, with the full cost of the enabling it to expand its capacity, M&A newsprint industry. And in its third production line recovered in less than helped the Group extend its business to leap, Huatai seized the opportunity for two years.88 Newsprint consumption forestry and pulp production and thus low-cost expansion arising from the reached a CAGR of 15% from 1991 to move up in the industry’s value chain. financial crisis to integrate the industry 1999 and 17% from 2000 to 2004. value chain for regional distribution. For Huatai, access to the newsprint The Group set up production bases in Constantly learning advanced industry was a critical decision. “Huatai Dongying (Shandong), Anqing (Anhui) technologies and processes, Huatai has may no longer exist if we had not and Xinhui (Guangdong) for wood, pulp obtained industry-defining technology, engaged in newsprint manufacturing at and paper production, respectively. equipment and talent. Currently, the that time,” says Li Jianhua. The location of these bases made company’s production sites boast strategic use of major river systems. efficient imported equipment as well In September 2000, Shandong Huatai For example, distribution in the Pearl as foreign technicians. Huatai would Paper Co., Ltd. made a public offering River Delta was targeted at the markets not be what it is today if its leaders of 90 million A-shares on the Shanghai in Guangdong, Hong Kong and Macao, had failed to seize opportunities time Stock Exchange. It became the first which are developed regions with huge and again to decisively introduce key A-share listed company in the paper demand for newsprint. Given the heavy technology and if its technicians had industry in Shandong Province as well weight of newsprint and high cost failed to master the new equipment. as the first local enterprise in Dongying of transport, local distribution could Thanks to these efforts, the Group City to get listed. The financing raised greatly reduce transportation expenses. has grown into the world’s largest 1.06 billion yuan, which Huatai Group newsprint base after its humble used to begin expanding its production The company’s goal is to build an beginnings as a township paper mill. capacity. The company invested in an “eco chain” comprising paper world-class paper manufacturing manufacture, agriculture and forestry.
The Path to International Competitiveness for Chinese Enterprises 55 Strengthen executive These changes cannot be completed Improve executives’ equity overnight. But they must be made if incentives teams Chinese enterprises hope to become internationally competitive. To help Chinese companies can further In any organization, the executive team push these changes forward, Chinese strengthen their executive teams by plays a critical role in guiding the business companies can analyze how SOE improving executives’ equity incentive toward international competitiveness executives in other countries are mechanisms. Currently, most executives and achievement of its strategic goals. managed, then design systems suitable for of Chinese listed companies are not well Chinese enterprises can strengthen their China’s unique characteristics. Small, local compensated. Thus, many of them lack executive teams’ leadership effectiveness SOEs could be used for pilot programs initiative and deliver less than stellar through a number of means, which we that may generate lessons that could be business performance. Establishing a discuss below. applied to larger efforts. long-term, market-oriented and dynamic incentive mechanism for executives could Foster professionalism in SOE Standardize corporate help to address these problems. executives governance structures in For example, introducing stock options Executives of Chinese SOEs need to let privately owned enterprises would enable executives to share the go of administrative tasks and function benefits of business growth and gain Privately owned Chinese enterprises could as professional managers who possess a sense of ownership, both of which also create more effective executive the competence, courage and insight may motivate them to pursue long- teams by building a standardized required to oversee operations and term performance of the company. corporate governance structure as they strategy. In developed markets, managers The financial and securities market grow. They can do so by introducing have cultivated these qualities. In China, can serve as an incentive as well as a professional managers and establishing most SOE executives have administrative discipline for executives. For one thing, systems and processes focused on titles and manage businesses according it can discourage the short-sightedness maintaining business operations. to administrative appraisal standards. that comes when executives’ annual According to Forbes’ 2010 Chinese This situation has catalyzed many of the pay depends heavily on quarterly or family business survey, compared with problems discussed earlier in this report. yearly operating results. In addition, companies where family members equity-based incentives can help perform management duties, companies To surmount these problems, we companies retain the high-quality talent that hire professional managers generally recommend that Chinese SOEs establish required for long-term development. achieve better performance and operate a true corporate management system Such incentives can also partially more efficiently.90 Foreign family-owned appropriate for the market economy. alleviate cash-flow challenges that businesses follow a similar management Appointments by higher authorities would arise during times of rapid expansion, approach, in which the family sends need to be eliminated in this scenario. especially in high-tech companies. Moreover, executives would have to be representatives to the board instead subject to a performance management of interfering with daily operations. Equity options are much more frequently system characterized by compensation, Chinese private enterprises that introduce used in the United States than in other evaluation and incentive mechanisms in professional managers should gradually countries. In as early as 2000, CEOs of line with the market. We believe that the separate the owners and managers’ the S&P 500 companies saw half of their right mechanism will guide executives decision rights by setting up monitoring remuneration paid in the form of stock to act in the interests of the enterprises and discipline mechanisms to foster options.91 Japanese companies, including they lead. In state-controlled joint-stock trust and agency. By looking beyond the Sony and NEC, have also begun providing companies, boards can be held more narrow concept of family management, a such options for executives.92 In the past accountable for selecting and appointing business can gradually expand the scope few years, some private enterprises within executives in ways that respect the of personnel selection and introduce China have adopted equity incentive company’s governance structure and professional managers. These managers mechanisms. Whether these incentives relevant legal provisions. can be tasked with orchestrating the can be enforced at this stage depends company’s daily affairs, executing corporate strategic decisions and being accountable to the board.
56 The Last 10 Miles on the source and the exercise price executive compensation to performance of shares as well as the time to grant and risk management, especially in equity. Meanwhile, companies would the financial sector. As much as 40% do well to establish other parallel long- of executives’ remuneration should term incentives to prevent executives be subject to deferred payments in from putting too much emphasis on commercial banks, mainly targeted at stock price at the expense of all other executives and personnel associated important performance indicators for with the risk, and this proportion can their organization. be as high as 50%-60% for executives if conditions permit.93 Shenzhen Link executive compensation to Development Bank was a pioneer in this risk management regard, beginning its deferred payment trial in 2007.94 In the vast majority of developed-market economies, listed companies assess the performance and approve the incentive compensation of the CEO, other executive directors and senior managers through a remuneration committee comprising external and independent directors. In China, such incentives are still determined by the cadre system instead of being pegged to company performance and executives’ risk-management abilities. After the global financial crisis struck, Chinese enterprises began to link
The Path to International Competitiveness for Chinese Enterprises 57 Case study Tranvic Group 95
Sichuan Tranvic Group Co. Ltd. Restructuring strategies At present, half of its equity is held by was restructured from Wei Yuan middle and higher-level managers, and Steelworks and became a private Joint-stock reform half by employees. company in 1998, involved mainly in The Tranvic Group transformed steel smelting, cement, mining and itself from a state-owned enterprise Building of the leadership steel structure. The Group has assets to a joint-stock company through team totaling 13 billion yuan, controls 57 employee buyouts. It provided one- The restructuring began with the companies (including three overseas) time cash payments to employees and holds shares in 10 companies. selection of new leaders. Wang Jin, who were laid off as SOE workers. age 33, was elected chief of the China Vanadium Titano-Magnetite Employees could accept the cash or Mining Co. Ltd., one of the Group’s company from the original vice chief. transfer the money into shares. At the The leadership election was based holding companies, was listed on same time, on the basis of evaluating the Hong Kong stock exchange in on competence instead of age or assets and defining property rights, title. Thus a group of young people 2009. In 2010, the Group’s sales shares held by the state-owned revenue hit 30 billion yuan, and the with modern management skills and enterprise were transferred in whole expertise became new managers, organization hired more than 17,000 or in part to the staff. Moreover, new employees. the youngest being just 23 years managers received compensation upon old. The selection was followed by Ten years ago, things looked very voluntary pooling, equal equity and a streamlining process to shake off different: Tranvic was a small, state- sharing of risks and profits. The Group the previous inefficient, overstaffed owned steel plant on the verge of encouraged employees to purchase structure. It took the company only bankruptcy, with small scale, low shares in line with the bottom-up one day to merge 51 secondary output and few technically advanced principle—granting preemption to divisions into 37 and to cut the products. Its sales revenue in 1997 grassroots workers, then to directors number of mid-level managers from was only 530 million yuan, with and finally to executives. 168 to 117. just 100 million yuan recovered. These moves enabled employees to The plant suffered a heavy loss become owners of the company, Conceptual restructuring that year, defaulting on payment which encouraged enthusiasm and Breaking down an original of wages and water and electricity responsibility, and which linked organizational structure, by necessity, fees. Workforce morale eroded. their individual interests closely to benefits some individuals and Against this backdrop, the plant the company’s long-term business disadvantages others. Many people started a restructuring process in interests. All money raised through did not understand the reasoning 1997. Ultimately, it transformed this restructuring was invested in behind Tranvic’s restructuring when itself from a small steel mill into production capacity, which greatly informed of the decision, and some a steel-based company featuring alleviated the Group’s capital shortage. even sent threatening letters to diversified operations that counted Through this approach, the Group Wang Jin’s home. Nevertheless, the among China’s top 500 enterprises. gradually became a non-controlling leadership team was well aware that SOE. After several changes, state- the business had no choice but to owned shares retreated step by step change if it hoped to survive, and that and the Group eventually evolved into employees must be convinced of the an employee-owned private enterprise. wisdom behind this decision. Wang Jin and other leaders kept talking about change to create the most favorable
58 The Last 10 Miles atmosphere possible for the Divestment of non-core same year, it ranked among the restructuring. In addition, they operations top three cement manufacturers invited Professor Chen Weizheng, in Sichuan Province, boasting an from the Sichuan Economic Before its restructuring initiative, annual output of 8 million tons. It Management Personnel Institute, Tranvic’s headquarters had taken had Asia’s largest production line to come and talk with employees responsibility for many non-corporate of slag cement by vertical roller about why the restructuring was roles. For example, it had facilities milling. As for manufacturing, with needed and how it would help the ranging from kindergartens, primary an annual steel structure output business. The professor’s lectures schools and secondary schools of 60,000 tons, the Group could were recorded and circulated to hospital, canteens, hotels and produce aseismic steel and other among employees to reiterate the shops. After the restructuring, special steel products, and ranked importance of the restructuring. the core and non-core operations first among manufacturers in western were separated, with all industries China in terms of steel structures. Revival of core operations irrelevant to the core operation stripped off and commercialized Tranvic went global in 2007 by Tranvic also upgraded its equipment for independent operation. purchasing a mine in Indonesia, and technology. It invested 2.5 gaining control over raw materials million yuan to put one converter Motor transport, machinery years earlier than its peers. This saved into operation within just 100 days, manufacturing and other supporting the Group from being eliminated when even as the cost of its steel plant operational units were also stripped the central government took control was cut by 285,000 yuan one month off for self-financing. The staff of China’s steel mills. In addition to after production. Later, the Group hospital, canteens and schools for the mine in Indonesia, the company scaled two additional converters children of staff and other non- now owns 19 mining rights in Panxi only two months before they began operating units were gradually weaned and Aba (both auonomous prefectures production. Within six months, the away from corporate financing. in Sichuan) as well as Yunnan. Group also expanded its steel-making For instance, the staff hospital was capacity from 250,000 tons per year stripped off in early 1998. At that The Group’s strategy has been to 600,000 tons. This exponential time, the company issued a fixed clear: “going global” for overseas growth required a big increase in subsidy equivalent to 60% of the file mergers and acquisitions, “going the company’s oxygen-generating wage of the hospital staff, with the regional” in Sichuan to reach out to capacity. Accordingly, Tranvic invested rest subject to self-funding among peripheral areas and “going public” 25 million yuan in an oxygen- staff members. This motivated medical by promoting the listing of steel generating project, installing all the personnel to improve their know-how structures, logistics, real estate and machines in only 87 days to cut the and service. In 1999, the subsidy was other affiliated companies. In the power bill by over ten thousand yuan completely cancelled, with the average 12th Five-Year Plan period, Tranvic per day. monthly income of the staff rising to will continue to highlight its steel, nearly 1000 yuan from the original cement and other entities and create In June 1999, the Group accomplished 500 or 600 yuan.97 its own resource chain to make the roll-in-one-heat approach from additional great leaps forward. steel smelting to casting, reducing per-ton material cost by around 150 Results of the reform yuan with a continuous casting ratio During 1998 to 2000, Tranvic’s annual of 100%. The project achieved results steel production capacity soared from three months after being put into 250,000 tons to 600,000 tons, and operation. The Group became the first its sales revenue ballooned from 553 enterprise in the industry to achieve million yuan to 1.1 billion yuan.98 The continuous casting in full, even though Group gradually embarked on the it was the last to construct continuous path of diversification after entering casting facilities in the province.96 the cement industry in 2001. That
The Path to International Competitiveness for Chinese Enterprises 59 60 The Last 10 Miles Set up executive training and Build innovation Move from innovation follower succession planning capacity to innovation leader Leading international companies tend Being a latecomer to a particular arena Chinese companies’ emphasis on to develop candidates for future senior of innovation has advantages, as many manufacturing prowess arising from size management in-house. Such companies Chinese companies have discovered. and low cost alone is not sustainable. take this approach for two main reasons: A latecomer can draw on first movers’ This is because businesses that lack technologies or business models, saving unique abilities can easily be copied by • Personnel trained in house with a good R&D time and money. But Chinese competitors and will thus find it hard to understanding of the business can adapt enterprises should also be proactive in survive in the future. To enhance their quickly to new challenges and make their innovation efforts by building on competitiveness, Chinese enterprises must appropriate decisions after taking office. their own unique advantages—becoming build the capacity to innovate. And they innovation leaders and not just followers. • The original executive team members must do it themselves, because innovative know the new members well and have foreign companies are often reluctant to Networking and telecom giant Huawei confirmed their values through long-term export their core technology. Below, we offers an apt example. Early in its observation. This understanding fosters offer ideas for how Chinese companies development, Huawei knew it had only mutual cooperation. can accomplish this. limited funding for R&D and faced other resource constraints. It learned advanced These companies’ approaches to executive Establish incentives for technology and avoided investing heavily and successor training offer valuable innovation in product development unless the lessons for Chinese enterprises. When new technology had clear commercial an executive resigns unexpectedly, a An enterprise can encourage employees value. Its R&D expenditure accounted company must replace him or her as soon to innovate by establishing the right for about 10% of its annual revenue. Of as possible to maintain daily operations. incentives. Consider the American this expenditure, 90% was invested in Leading foreign companies’ boards and multinational conglomerate 3M. As early development of applied technology. The existing executive teams ensure a ready as 1956, the company began requiring its remaining 10% went to basic research. supply of successors by continuously technology staff to spend 15% of their Supported by years of technology build- identifying and training high-potential time on innovating new product ideas in up, Huawei has engaged in ongoing individuals through job rotation and areas that interested them. A series of innovation in expertise, products, promotion. The goal is to gradually lucrative new products came out of this solutions and business management. Its transfer the most talented individuals to practice, including the renowned Post-it overarching goal is to enhance customer the company’s executive team when they notes and the reflective license plate. value through customer-demand- are needed. driven R&D. For instance, Huawei has Linking innovation outcomes to shifted its R&D focus from wired to It is critical for Chinese enterprises employees’ compensation can further wireless technology. Beginning with to establish their own mechanisms encourage innovation. For example, first-generation analog technology such for executive training and succession France Telecom’s R&D department as CT2 and ETS, and moving to second- planning. Such mechanisms can take has been awarded more than 7,600 generation GSM and then 3G technology, various forms, including formal training patents and is widely recognized for its Huawei has become a global leader in 4G sessions and informal exchanges. The advanced technology and innovation in wireless technology. current executive team members can capabilities. The company awards bonuses act as mentors and assess candidates’ to its employees based on individual values as well as guide and inspire performance, accomplishment of them. They can also expose individuals individual work objectives and the market showing leadership potential to the value they create through their patents. best developmental opportunities and Technicians can get a bonus of up to observe their performance. This approach 20% of their annual salary. An annual demonstrates to other employees that Innovation Prize ceremony further fosters the organization offers the possibility of an innovative spirit among employees. career advancement. Promising employees may therefore strive to strengthen their professional skills, managerial capabilities and professional ethics.
The Path to International Competitiveness for Chinese Enterprises 61 Case study New Hope99
The New Hope Group is one of where New Hope has a share. And it Yonghao. To this end, the Group China’s largest feed companies and supports the construction of these created its own human resources constitutes the largest dairy and meat cooperatives and communities, by echelon, with personnel organized manufacturer in western China. The providing farmers with breeding into four groups representing different Group was founded in 1997, and its technology services as well as management levels in the business. At predecessor was the Hope Group, information about epidemics releases, every level, there is a corresponding China’s first private consortium. In seed, veterinary drugs, feed and other training program featuring formal 1998, the New Hope Agribusiness agricultural matters. learning and practice. There is also Co., Ltd., a holding company of the a clear ladder for career growth at Group, was listed on the Shenzhen Excelling at human each level. Individuals are provided Stock Exchange. After nearly 30 years resources management with a platform for realizing their full of development, the Group’s sales potential, and each has a chance to revenue approximated 60 billion yuan New Hope owes its current size and advance into mid-level management in 2010, and its core business has had industry-leading position to its clear and even the executive ranks. a CAGR of 36% since 2005. The Group strategic objectives centering on employs 67,000 people and owns agriculture and animal husbandry and Developing leaders 400 subordinate enterprises. Over the a mature management system. Within Mr. Liu began New Hope’s bold years, it has grown from a simple feed this system, the organization’s human expansion in the 1990s. He had company into a large-scale private resources function has played a difficulty recruiting the right people consortium involved in agriculture and particularly crucial role. This function when preparing for the construction animal husbandry with appropriately has clarified responsibilities and of plants in Chongqing and Mianyang diversified operations. It covers four allocated decision-making rights based (in Sichuan). The Group therefore had industry clusters—farming and food, on staff responsibilities. It has also to train personnel itself. Although chemicals and resources, real estate developed a performance appraisal none of the managers who would head and infrastructure, and finance and system to ensure implementation up the two plants had any experience investment—and ranks among the top of strategies and budgets and to in the feed industry, they quickly 500 Chinese enterprises.100 encourage promising managers to stand out. Most noteworthy, it has learned from seasoned managers In 2010, sales revenue of agriculture established a training system to sent from older plants. Thanks to and animal husbandry accounted for develop talent and build a pool of this mentoring, they could replicate 92% of the Group’s total income. Its back-up managers so the business can New Hope’s established management three industry value chains include continue to grow. approaches as well as its systems and swine, poultry and dairy, whose processes. Since then, the Group has links range from seed sourcing, feed New Hope’s approach to human insisted on in-house training in the production and breeding services resources management is closely selection of high-level managers. It to slaughtering and processing. related to its corporate culture of has promoted more than one thousand The Group also has created two building a company by educating managers to senior positions—95% of useful networks. Specifically, it the staff: “An excellent business the company’s executives—through provides funding, guarantees and should also act as a school, allowing learning and training. other financial services to farmers’ its employees to grow and improve cooperatives and farming communities constantly,” explains Chairman Liu
62 The Last 10 Miles The Group’s leadership development CFO training session in Chengdu, “On March 6, 2008, I joined New program comprises four levels. Fresh mainly targeted at chief financial Hope as an ordinary back office graduates are at the bottom of officers, senior managers and worker. Now I am a professional the talent pyramid. The Group has regional finance officers from various manager responsible for the Mianyang developed a management trainee industries and affiliated companies Branch Office. . . . New Hope has program, with 10 to 15 people of the Group. The training aimed to changed my life trajectory.” selected every year from candidates “improve the management and control nationwide. Since trainees have capabilities of the financial system, Through training, many young people no work experience, the company reduce corporate financial risks and can assume leadership positions and arranges a two-year training session strengthen the analytical capabilities even make it to the top management for them. Trainees spend the first and professional competence of the ranks at the Group. Lang Bo, current year at headquarters in various accounting staff.”101 vice president of the New Hope posts based on their personal Finance Company, is one of them. interests and strengths. The Group At the top of the pyramid is the Ms. Lang had a master’s degree in designates a senior manager as Flying Dragon plan designed for the finance from Southwest University their mentor. The mentor’s main highest-level executives. About 100 of Finance and went through the tasks include helping trainees people are selected across the Group Group’s management training gain new insights from their work to participate in sessions covering program. She spent the first year at experiences and build their strategic professional skills including big-picture the administrative center to learn and operational thinking skills. In thinking and future orientation. about the Group’s overall operations. the second year, trainees are sent to In the second year, she was sent to New Hope’s grassroots companies Youth is the Hope other provinces for an independent survey of major projects. In Ziyang to further develop their skills. Liu Yonghao attaches great and Leshan, she established an importance to the development of At the second level of the pyramid is industrialized swine breeding model youth. As an entrepreneurial mentor the youth session. Mid-level cadres, as featuring local cooperation. of Youth Business China, he always the backbone of the business, directly takes time to communicate with lead the grassroots employees in Ms. Lang yearned to accomplish even young people in entrepreneurial implementing corporate-level strategy. more. She was especially eager to organizations and offer suggestions. New Hope has developed a three-year use her financial knowledge in the This philosophy has been internalized training course for young cadres that work. Through the inception of Leshan in New Hope. Fresh graduates and progresses from easy to difficult. The Guarantee Company, she helped local young middle-level cadres have access first year focuses on corporate culture enterprises develop an industry value to training and a platform to show and management fundamentals; the chain featuring high-quality customers their talent. “New Hope must rely on second, on the upgrading of students’ to boost sales of feed and seeds. these young people if it is to become management skills; the third, on a world-class brand of agriculture and New Hope’s talent development leadership training. animal husbandry. They are our main mechanisms enable the Group to The third level of the pyramid consists force because they are bold enough to turn out quality personnel on a of workshops for assistant directors innovate and forge ahead,” says Tang sustained basis. As a result, the at the branch/subsidiary level and Yong, Chief Operation Officer. organization continually progresses above. These training programs are toward achievement of its strategic New Hope uses a number of strategies jointly launched with institutions of objective: to “create a standardized, to select back-up cadres, including higher education. In August 2009, environmentally friendly and world- essay writing, speech and innovation New Hope and Tsinghua University class enterprise of agriculture and competitions. Talented employees jointly launched an MBA program for animal husbandry.” are discovered and followed through reserve cadres. The following year, a series of activities. According to New Hope Business School held a Han Xiaoxiao, one such employee,
The Path to International Competitiveness for Chinese Enterprises 63 Innovate the business model First, Chinese enterprises need to create Create brand value their own proprietary brands. After the Technological innovation often requires There are numerous ways in which global financial crisis struck, many OEM large-scale investment in scientific Chinese enterprises can create companies in China saw a decrease in research over a long period of time. By brand value. We examine them orders from overseas customers. Their contrast, business-model innovation— in the following sections. labor costs increased, and tax incentives transformations in how a company decreased within China. They can secure makes money—requires relatively little Ensure business integrity and control over the market by transforming such investment but can revolutionize themselves from OEMs characterized by and even create entirely new industries. product quality high energy consumption and low added To illustrate, Twitter quickly seized the In 2009, Accenture conducted an online value to the creators of proprietary imaginations of consumers and businesses survey of 4,600 consumers from six brands upstream in the value chain. alike by creating an online communication countries: China, the United States, Proprietary brands can add more value to business model that provides convenience Germany, France, Japan and South Korea. products and thus strengthen a company’s and simplicity for users. Today, it is the We found that the brand attributes international competitiveness. 102 world’s ninth largest website. that these consumers value most are product integrity, reliability and quality. ZTE has set a good example in this regard. Another innovative business model Indeed, 44% of our survey respondents Initially a telecom OEM, the company gathers consumers together and links gave first priority to the creation of a has turned to developing high-end smart them with merchants, enhancing brand effect through product quality phones as its proprietary brand. Thanks consumers’ buying power and lowering in the brand strategy. (See Figure 18.) to ZTE’s global marketing system, all merchants’ marketing costs. This new To compete in the international market, handsets sold in China and one third of business model has attracted a large Chinese companies must deliver quality the handsets sold in overseas markets number of Chinese imitators. However, products and services to build consumer use ZTE’s proprietary brand. Among these companies should go beyond confidence and a strong brand image the rest of the handsets sold overseas, copying successful foreign models by for the enterprises themselves as well as one third uses co-brands of ZTE and creating models that are not only tailored for their offerings. Government policies, operators and the other one third adopts to the Chinese market but that also are authorities in industry and commerce, sub-brands of operators or third parties. competitive in the international market. quality assurance, patents and the legal Blade, ZTE’s proprietary Android smart phone, has topped the sales chart for Although barriers to innovation are not system can help to guarantee quality by eight consecutive weeks in Finland while high, Chinese businesses still lag far combating counterfeiting and creating a remaining the champion in the best behind leading foreign companies in terms healthy business environment. Orange UK smart phone sales ratings. of business-model innovation. Some are not fully aware of the significance Translate brand value into Second, Chinese companies can also of such innovation; others may not be profitability purchase existing superior brands. Many motivated to develop new business high performance businesses purchase As market competition intensifies, price models. But to become major players such brands in local markets. For instance, and advertising wars may bring short- in the international market, they will Unilever owns more than 400 brands term benefits to companies but cannot need to surmount these hurdles. worldwide, most of which it purchased guarantee continued improvement in and then promoted all over the world. their performance. More and more Unilever’s brand strategy has brought Chinese companies are paying attention rich rewards across the globe and has to brand value as a key element in their enabled the company to strengthen competitiveness and their ability to emotional bonds between local brands achieve high performance in the future. and consumers. According to Zeng Xiwen, The following moves can help them vice president of Unilever (China) Ltd., translate brand value into profitability. “Unilever’s acquisition of [a] local brand
64 The Last 10 Miles is not aimed at weakening its impact on family business, CIFA’s brand helped ZLJT Fourth, Chinese enterprises can pursue our proprietary brand by laying it idle consolidate its position as the world’s multi-brand and brand-extension and eventually wiping it out. Instead, the largest concrete machinery company.104 strategies. In today’s fast-changing purpose is to incorporate it into Unilever’s product markets, a single-brand overall brand operation strategy and build Third, Chinese businesses can work on strategy may prove insufficient to meet it into an international brand.”103 building brand alliances. Internationally increasingly diversified and ever-changing competitive businesses often use consumer demands. Many foreign high In China, there is a severe shortage of their strong brand appeal and market performance businesses have multiple proprietary brands. Acquisition of existing advantages in their respective industries brands and brand extensions that brands may help Chinese businesses to join hands with other industry leaders. complement one another. For example, quickly expand their markets and enhance This can enable them to expand their P&G has more than 300 brands, each their brand value. This is especially true market vertically and horizontally and with a unique appeal. The consumer in the post-financial crisis period, when reinforce their brand image. For instance, goods giant has gained enormous market many foreign brands are undervalued. Starbucks, a US coffee industry leader, share in a variety of sectors by meeting Chinese enterprises have an opportunity works with businesses such as United different consumer needs through the to carefully select and purchase valuable Airline, Sheraton, Pepsi-Cola and Dreyer’s brands’ diverse attributes. brands worldwide, for reasonable (ice cream) to reach new business investment. Some Chinese companies fields,105 which in turn improves these have made such moves. For example, companies’ respective brand value. Small- in 2008 ZLJT acquired CIFA, an Italian and medium-size enterprises (SMEs) can concrete machinery maker that was use a similar approach by allying with struggling financially. As an 80-year-old strong brand companies.
Figure 18. Effective brand-development strategy
What brand-development strategies can help a company become a high performance business? (Choose three options for weighting according to degree of importance. Weights of three options: most important = 0.5, second most important = 0.3, third most important = 0.2. The scores for each item added up and divided by total score equals percentage points)
Creating brand effect by raising product quality 44.0%
Concentrating on the development of a single core brand 17.0%
Increasing investment in advertising and marketing 12.6%
Employing external services for professional brand management 11.8% and planning
Developing diversified brands 7.4%
Purchasing existing superior brands 7.3%
Source: Survey by Accenture/ The China Enterprise Confederation, May-August, 2011
The Path to International Competitiveness for Chinese Enterprises 65 66 The Last 10 Miles Brand extensions can help companies They can also communicate their brand’s meet diverse and changing consumer contribution to society. Accenture needs by building on the legacy of the research shows that this is an important original master brand. This lowers the cost consideration among consumers, of launching entirely new products and especially Chinese and American, when sub-brands. A caveat: Brand extensions they are choosing a product. In fact, can fall flat in the marketplace if the many high performance businesses business misreads consumers’ feelings have made social responsibility of their about the original brand. For instance, brand a core element in their marketing the cigarette brand Marlboro and the strategy, especially in emerging markets. pen brand Parker, which had won US For example, Johnson & Johnson Group consumers’ loyalty with their high quality, won the praise of the Chinese government suffered when their companies created for supporting the preservation and lower-end versions of the products as part display of the Terracotta Warriors, of a brand-extension strategy. Similarly, artifacts highly prized in China, during Chery, a private automotive enterprise the 2008 Olympic Games in Beijing. in China, recently introduced its high- In the Haier Group’s latest consumer end Seolin series. Because Chery has survey, nearly 70% of respondents said been positioned in the mid- and low- they favor environmentally friendly end markets, it lacks adequate high-end brands. Haier has begun transforming marketing channels and impetus. As a its brand positioning by stepping up result, the Seolin series has not created investment in social responsibility. the sensation that Chery was hoping for. Use interactive brand Clarify brand position marketing channels A company’s or product’s brand can be In the social media era, customers affected by the reputation of its national value interactions with brands. High origin. For example, Korean brands are performance businesses have long known as trendy, American brands often realized the significance of such reflect the latest technology and German interaction. To illustrate, Samsung Group brands evoke images of high quality. launched Uberme, a social networking Companies can play on such national forum designed exclusively for Asian brand attributes. For example, when users to share information and videos. In Volkswagen China released a car targeted the past few years, Chinese enterprises at consumers in Hong Kong and South have increased their investment in social China in 2008, the company developed media. For example, Haier Group has the tagline “Engineered by Germans. retained some traditional advertising Loved by everyone,” which proved hugely channels but also intends to use the 106 successful. Chinese enterprises in other Internet to further strengthen its industries—such as home appliances, food brand value and foster interactions and consumer goods—have steadily built with consumers. The Group has set credibility among domestic consumers. about building a new website where By clarifying their brand position, they consumers can establish a “do it yourself” may be able to leverage their own brands’ zone to interact with the business. nationality to compete with esteemed foreign brands.
The Path to International Competitiveness for Chinese Enterprises 67 Case study Haier Group107
Founded in 1984 and listed on the maintaining that “a defective conditioner for free and to arrange Shanghai Stock Exchange in November product is a reject.” This sharpened for installation. The CEO then 1993, Haier Group has grown from a Chinese consumers’ as well as Haier mandated an in-house analysis of small collective factory into a global employees’ awareness of quality as a the division’s service processes to business over the past 20 years. It core brand attribute. In 1998, Haier’s identify problems and ensure that employs more than 70,000 people refrigerator won the first quality this kind of incident would not and has operations in more than championship in China’s history. happen again. The analysis revealed 100 countries across North America, that many customers had to carry Europe, South Asia and Central Africa. In 1992, Haier moved into its their purchases themselves, which Its businesses cover home appliances, diversification stage, gearing increased the risk of such mistakes communications, IT, logistics and up to develop multiple products occurring. Therefore, the division many other industries. In 2010, Haier’s from its former single offering of proposed a “zero moving” service and operating income reached 60.588 refrigerators. The company set out a policy of installing purchased air billion yuan, an increase of 35% to enhance its size and strength as conditioners in customers’ homes or over the previous year.108 From 1993 swiftly and cheaply as possible. It places of business within 24 hours. to 2010, its core business’s CAGR did so by building on the success These efforts greatly enhanced Haier’s averaged 29%. Haier refrigerators of its already renowned brand to reputation among consumers. accounted for 25% of the retail share expand into other home appliances. in the domestic market, ranking first At the end of 1995, Haier’s freezer, From internationalization air conditioner and refrigerator won in market shares for 20 consecutive to globalization years. In the international market, the Golden Bridge Award for best- the Group has improved both its sales selling domestic goods, all ranking Eager to improve on its position revenue and profit through a “go first in their respective categories. as the domestic market leader of global” strategy focused on products home appliances, Haier began its During this period, service quality with a high-end image. globalization drive in 1998. It started became a key element of Haier’s selling its products in major regional Haier intends to make itself a world- brand building. In 1995, the company markets and then established its own renowned brand—a strategic goal defined its Star Service philosophy networks of overseas distributors and defined by CEO Zhang Ruimin in late and committed to being “forever after-sale services. 2005. Haier’s strategic development sincere.” Stories abound regarding has advanced through several stages. Haier service. In March 1995, for In April 1999, Haier invested US$30 example, an elderly woman bought a million in South Carolina to set up From branding to Haier air conditioner and took herself a production base (Haier Industrial and the product home in a taxi. At Park) in the United States. The base diversification home, she left the box in the taxi integrated design, manufacturing Mr. Zhang’s philosophy—”Either and went upstairs to call someone and marketing. In March 2000, quit or fight to win as a prestigious to help carry the air conditioner for the first made-in-America Haier brand”—has been enforced throughout her. The taxi driver, unaware that refrigerator rolled off the production Haier’s history. In April 1985, Haier the box was still in his vehicle, drove line. According to the market status stunned the home appliances away. When Mr. Zhang learned of ratings of global refrigerator brands sector by smashing sub-standard this incident, he immediately asked in the Report on the Market for refrigerators it had produced and the director of the air conditioning White Goods 2000 prepared by division to give the customer an air
68 The Last 10 Miles Euromonitor, the product ranked in life. The Casarte series gained a support these changes, the company second place with a market share standing in the high-end market and has increasingly integrated consumer of 5.3%. In April 2001, the state inspired many imitators. Later, Haier interaction and brand building with government named a road near Haier’s successively launched eight major the Internet. In September 2009, its US plant Haier Road free of charge Casarte product lines, including air conditioning division inaugurated in recognition of the company’s wine cabinets, air conditioners, an online interactive club for interior contributions to the local economy. washing machines, water heaters, design, purchase and installation. It is the only road in the United kitchen appliances, convenience This platform enables consumers to States named after a Chinese brand. appliances and integrated cabinets. choose air conditioners consistent Brand recognition for Casarte has with their home’s décor and to gain Haier gained access to the US market increased from just 6% in 2009 access to services ranging from by setting up a design center in to 29% in China’s first-tier cities, delivery and installation to after-sale Los Angeles for study of American according to the IPSOS Brand Survey repair and maintenance. Haier offers consumer needs. The company’s first 2009. Additional data shows that more than 3,000 options, 200 color US offering was its mini fridge, which Casarte’s French-style double-door combinations, 70 air conditioning sold briskly, especially among college refrigerator, which costs 15,000- programs and 70 aesthetic styles. students. When Haier learned that 20,000 yuan, captured 46% of the Orders submitted to the platform are students also used the flat surface market, with the runner-up brand fulfilled by Haier sales outlets and of the mini fridge to carry things, it achieving just 25%; Casarte’s six- distribution networks to provide door- developed a new version featuring a door refrigerator has held a solid to-door delivery. Haier plans to further folding table top and a later version sales lead since its launch, taking update its home page to create a that included a computer desk. Haier more than 60% of the market.110 sense of community, where consumers is now estimated to have a 50% share can customize their own products and of the US small-refrigerator market.109 Creating differentiated communicate with the manufacturer and even other consumers. In December 2005, the company products with consumers’ celebrated its 21st anniversary and help Since its inception, Haier has held a seminar on its global brand refined its brand strategy to support Haier has renewed its vision of building strategy at Diaoyutai changes in its corporate strategy, brand building yet again to meet State Guesthouse in Beijing. At the constantly adding vitality to its brand consumers’ need for interaction seminar, Mr. Zhang announced a new through excellent product quality and communication. “In this era of development strategy, growth model and considerate after-sale services. personal media, we have to capture and corporate culture all aimed at Through brand differentiation, the needs of individuals,” explains establishing a localized Haier brand in brand extension and creation of Zhang Tieyan, Director of Haier’s each national market. The global brand high-end brands, the Group has Global Branding Operation. Technology strategy differs from the international fully tapped the power of the Haier has transformed businesses’ strategy stage in that the latter brand. Indeed, Haier ranks in the top communication with consumers from focuses on exports with China as the 10 best-known Chinese trademarks one-directional messages “pushed” base of production while the former is as the sole representative of home from companies to consumers to devoted to building localized brands. appliance manufacturers. Its brand two-directional exchanges between diversification strategy has enabled the day. From low-end to high-end the company to expand across products Accordingly, Haier is shifting its sectors. And through its strategy of viewpoint from product-centric going global to build brands, Haier In 2007, Haier announced the launch has gained entrée to dozens of of its Casarte series of high-end to user-centric, and refining its production, inventory and sales international markets. This disciplined, products. The design principle behind deliberate approach has helped Haier Casarte is to draw inspiration from approaches to emphasis supply on demand. It is also seeking to move its to evolve into a world-renowned exquisite living to create everlasting brand—step by step. artistic quality and a high-quality focus from large-scale manufacturing to large-scale customization. To
The Path to International Competitiveness for Chinese Enterprises 69 70 The Last 10 Miles has clearly defined performance metrics, their knowledge platform. For instance, Foster a favorable business goals and expectations. With ConocoPhillips employees may phone or environment for talent shared responsibility, members of teams e-mail experts for help within stipulated work more effectively together, top- time frames.111 Chinese enterprises Internationally competitive businesses performing employees stay with the have been catching up with the world’s have fostered a favorable environment company and under-performing players leading companies in terms of IT-based for talent by establishing a reliable are motivated to improve. management and operations. (See the work environment, a strict recruitment Tsingtao Brewery case study.) However, system, flexible training programs and an Third, companies can benefit by creating a there is still much room for improvement efficient organizational structure. Chinese culture of honor characterized by mutual for them in IT-based knowledge enterprises can draw on these companies’ trust. Such a culture enhances team spirit management, especially training. talent management practices to build and discourages individual interests from their own pools of skilled employees. eclipsing the organization’s interests. In an enterprise that has a culture of honor, Different high performance businesses people are more likely to do the right adopt different talent strategies. thing without managers having to resort But all of these strategies have one to legal means. characteristic in common: the companies provide key personnel with a reliable Fourth, businesses can identify and work environment favorable for their establish an in-house promotion system enhancement. This fosters employees’ to ensure that employees are aligned trust and confidence in the business with the organization’s culture and and their conviction that their skills, core values. In our survey, factors that values and efforts will be rewarded. respondents identified as essential for Workers who feel this way tend to remain retaining good employees included a loyal to their employer. By creating long-term employment system or equity- such a work environment, Chinese based incentives and other methods to companies can gain a competitive retain key personnel, establishment of edge in the international market. a clear path to in-house promotion for employees and appropriate delegation of They can build such an environment authority to give full play to employees’ by first establishing a performance capabilities. Chinese enterprises can pave appraisal system that clearly defines the way for training primarily by building the skills required for employees in all a mechanism for in-house promotion. positions. This system should help an Through this mechanism, they can enterprise select competent personnel conduct training programs to prepare during recruitment, regularly review employees at all levels for skills upgrading performance of employees at all levels and career advancement. in the organization and make training, compensation and promotion decisions. Fifth, a knowledge platform can support training programs. Such platforms enable Second, companies can develop a system employees to easily search internal of shared accountability among the networks, any time, for information staff. Through such a system, employees and resources they need to perform are managed and inspired rather than their jobs and strengthen their skills. controlled by rules. Workers gain a sense Moreover, some companies have provided of shared accountability when a company an expert system to add interactivity to
The Path to International Competitiveness for Chinese Enterprises 71 Case study Tsingtao Brewery112
Tsingtao Brewery Co., Ltd., began as particularly as it has stepped up Promoting the knowledge a joint-stock company set up in the its M&A activity in recent years. early 1990s through a merger with As much as 95% of its affiliate management system three other factories. In 1993, Tsingtao breweries came from mergers Tsingtao has drawn on three was listed on the Hong Kong and of businesses that had different principles—traction, driving force and Shanghai stock exchanges as China’s management structures. This required supporting force—to promote use of first company to complete dual a unified platform for standardizing its knowledge-management system. listing of A and H shares, respectively. management systems and processes In the late 1990s, the enterprise and for duplicating Tsingtao Brewery’s Traction developed 58 beer production established management model within For Tsingtao, the word traction means bases in 19 Chinese provinces, newly acquired businesses. With a linking knowledge management with municipalities and autonomous history of nearly a hundred years, the corporate strategy to realize the regions through means including the company had accumulated a enterprise’s vision of “building an mergers and acquisitions, bankruptcy wealth of knowledge and expertise. international company with globally acquisitions and joint ventures. From A unified platform would enable influential brands.” To this end, the these moves, a national strategy it to share these assets across knowledge management system was took shape, and Tsingtao Brewery its divisions and businesses. set up for a specific purpose: to build began expanding across the country. Tsingtao’s competitiveness. In 2010, sales of Tsingtao beer Ensuring knowledge totaled 6.35 million kiloliters and sharing 19.9 billion yuan. Tsingtao’s core Driving force business has boasted an average To ensure knowledge sharing, Tsingtao The driving force for Tsingtao’s CAGR of 36% since 1993.113 Brewery has communicated its knowledge management system importance to employees through derives from assessment and Building a knowledge- means including posters, display incentive mechanisms. For example, boards, websites and activities. It also the company created a knowledge- management system conducts campaigns for defining the management scorecard that depicts Tsingtao Brewery originally operated company’s vision, mission and logo— such indicators as volume of uploaded through business units that handled all of which encouraged employees to files, channel click rate, score for planning, marketing and independent share insights and ideas. personnel knowledge and file update accounting for unified production, rate. Individual employees win points distribution and sales. In 2005, the In addition, the company encourages for good performance on these company changed its business units employees to participate in activities indicators, and entire departments into marketing companies. After that call for application of their that show high collective performance 2007, these marketing entities were knowledge, such as offering ideas are awarded bonuses. restructured into three centers: for implementing projects. It investment, manufacturing and fosters timely exchange of views marketing. The company has further before, during and after each refined its management structure, project so that employees can address problems immediately.
72 The Last 10 Miles Supporting force Generating results The platform has also helped employees to improve their individual The supporting force behind Tsingtao’s Tsingtao’s knowledge-management capabilities. By transforming system comes from the knowledge- platform has proved remarkably their covert knowledge into overt management platform the company fruitful, with most employees now knowledge, they have boosted has established. This platform consists recognizing and favoring it. The their operational efficiency and of the pool of knowledge embodied in monthly click rate showing use of management effectiveness. the enterprise’s workforce, business the platform has increased to ten More important, through process documents, e-business processes, thousand from just a few thousand standardization and knowledge operating plans, contract and schedule person times upon the platform’s sharing, Tsingtao can now replicate its management, internal communication inception. And the cumulative click management model quickly in newly and even meeting management—all rate amounts to more than one million acquired businesses, thus ensuring of which are documented on the person times. The number of processes efficient post-merger integration. As a platform for sharing and utilization. run on a monthly basis on the result, the company has gradually built This platform has a central channel platform increased from fewer than a bank of valuable intangible assets. at headquarters and functional 100 in 2008 to nearly ten thousand. channels in Tsingtao’s human Moreover, the number of users rose resources, finance, information and to more than 20,000 from fewer than legal affairs units. Local channels one to two thousand in 2008, covering exist in the marketing business units more than 70% of the workforce. and manufacturing units. These channels are interconnected. For The platform has helped the company instance, knowledge residing in the promote its corporate strategy, plan local channels can be recommended business processes, further develop to the central channel for unified its technology and foster its desired broadcasting upon review and organizational culture. Using the approval by the competent authority. platform, Tsingtao develops its annual operating plan by decomposing its Tsingtao Brewery regularly conducts businesses’ strategic objectives. It can exchanges of best practices in then review progress against the plan knowledge management between its online and make any needed mid- businesses that achieve the highest course corrections. The platform has scores on key performance indicators. clearly defined authorities in the areas The company has also organized of personnel, budget and investment. a number of activities related to Tsingtao Brewery maintains that knowledge management, including “sharing, collaboration and innovation” quality-control campaigns and have become part of employees’ project-proposal competitions. daily routine and work, and that knowledge sharing has helped foster the company’s development.
The Path to International Competitiveness for Chinese Enterprises 73 74 The Last 10 Miles key areas by focusing on, measuring, process improvement. For an individual Clarify organizational and redesigning their customer- function or department in the company, values facing and internal processes.”116 process optimization may not necessarily serve the unit’s interests; indeed, it Most internationally competitive Business processes are the activities may even conflict with those interests. enterprises have a corporate culture through which an organization creates Leaders and employees of units negatively clearly reflecting their core values. This value for its customers; such processes affected by a process-optimization culture serves as a code of conduct form the core of the enterprise’s effort may resist the effort. To mitigate for the business overall as well as operations. Efficient business processes resistance, management must help them for its employees. When a conflict improve resource utilization, enhance understand how the project will support of interests arises between different interdepartmental communication and execution of the organization’s strategy. parties who are seeking to make a increase product and service quality. business decision, the core values guide Get structure and control mechanisms the parties to a resolution. An example Many Chinese enterprises have costly right. Chinese companies need to is the chemical and pharmaceutical and inefficient operations that erode establish a rational organizational company Merck. Since its inception their profitability. Improving their structure that fosters process back in 1668, Merck has abided by the operational efficiency could help efficiency and control mechanisms core value “Our business is preserving them reduce their costs and thereby for ensuring optimal use of resources. and improving human life.”114 After enhance their profitability. Research There is no one-size-fit-all structure developing Ivermectin, a drug urgently shows that by 2007, 53% of the world’s or mechanism. Instead, these depend needed by river-blindness patients top 500 companies had implemented on the company’s strategic objectives, in the poorest third-world countries, various process-standardization current circumstances, business culture Merck decided to offer the drug to projects. As much as 83% of the top and history. However, a relatively flat such patients free of charge, proving 100 companies around the globe had organizational structure can help an its core value through its actions. optimized business processes. According enterprise achieve its control objectives, to one survey, process-optimization if it is accompanied by clear decision- Each Chinese enterprise must cultivate projects have saved a total of US$427 making protocols between headquarters its own corporate culture with clear billion for Fortune 500 companies and the organization’s functions and core values to guide decisions and during the past two decades.117 departments. Moreover, performance behavior, especially when facing major targets for the organization overall and challenges. Such a culture can help to In our questionnaire, the majority for its functions and departments should mitigate distractions and ensure that of respondents believed that the reflect the business’s strategic objectives. people throughout the organization most important factors in process abide by the values. “All resources optimization for Chinese enterprises are Help employees absorb change. Chinese in the world may be exhausted, but “attention from senior management” companies can benefit by helping one resource can last forever. That is and “a well-established organizational employees to carry out the changes called culture,” says Ren Zhengfei, CEO of structure.” At the operational level, for by process improvements. Supporting Huawei Technologies Co., Ltd.115 four principles can help organizations employees in this way facilitates the optimize their business processes. optimization process. Companies can Optimize business and provide such support in the form of Let strategy be the guide. Process training in new job skills required by a management processes optimization should be guided by the process change as well as training that company’s strategy. A corporate strategy highlights the organization’s culture and Optimizing business and management defines an organization’s direction, overall core values. processes can further help a company goals and operational blueprint, while enhance its competitiveness. According processes are the means to execute the to management expert Michael strategy. Therefore, process optimization Hammer, “In virtually every industry, must meet the requirements of the overall companies of all sizes have achieved strategy instead of isolated interests. extraordinary improvements in cost, And strategic goals should serve as the quality, speed, profitability, and other benchmarks and evaluation criteria for
The Path to International Competitiveness for Chinese Enterprises 75 Leverage information technology. Address innovation-related Guidelines on Comprehensive Risk Information technology can strongly Management of Central Government- support process optimization. Process risks owned Companies121 can serve as a improvements that involve multiple Today, a enterprise’s competitiveness useful reference for Chinese enterprises departments can become quite complex. stems in large part from its ability to seeking to accelerate construction of a Information technology can help an innovate. To sustain high performance, comprehensive risk-management system. organization consolidate the optimized a business must continually introduce Many SOEs have already made strides in processes, which fosters efficiency. We new products and services or business this area. have seen many companies improve models to satisfy customers’ ever- business processes by implementing IT- changing needs. Such innovation Train risk-management based solutions embedded with industry- inevitably catalyzes many changes for defining practices, such as enterprise the company—not only in organizational professionals resource planning (ERP) and customer structure, personnel, systems and The most effective risk-management relationship management (CRM). processes but also in competitors, professionals have qualitative and customers and suppliers. These changes, quantitative analytical skills, profound in turn, introduce a variety of risks. For knowledge about risk management and Enhance risk- example, a modified process introduces business operations, and theoretical management capabilities inefficiency into the company’s and practical experience. All this calls operations. A revised sales strategy for years of learning and practice, and In the post-crisis era, Chinese companies ends up reducing rather than increasing many Chinese companies have difficulty face a more complex and volatile business market share. A new product exposes the finding such professionals in the talent environment. Enterprises in China are company to legal liabilities. Or a newly marketplace. Therefore, they need to suffering from the combined effects of selected supplier goes out of business. develop such talent in-house. A business insufficient foreign demand, inflationary can improve the professionalism of its pressure and macro-economic controls. A Chinese enterprises must address new risk-management personnel through business can put its competitiveness—if risks emerging from innovation. They can external and internal means. The former not its very future—at stake if it ignores do so by regularly identifying potential include collaborating on risk-management risk management under these conditions. new exposures and developing strategies initiatives with foreign counterparts, As Jack Ma, Chairman and CEO of Alibaba for preventing them as well as mitigating purchasing training programs and (China) Technology Co., Ltd., explains: “I them should they occur. attending academic conferences. The always believe that we are either in crisis latter can include company-provided or on the way to crisis.”118 Accelerate construction training as well as job rotation aimed at strengthening employees’ risk- Many Chinese enterprises, especially of a comprehensive risk- management skills and knowledge. banks, have significantly built their management system risk-management capacity in the wake of the global economic downturn. Enterprise risk management (ERM) helps Foster a risk-management However, they still have a long way to go businesses not only dodge potential risks culture to become internationally competitive. but also create value. This is because In a company with a strong risk- To make further progress, they will need it enables managers to anticipate and management culture, employees to establish a comprehensive risk- effectively deal with risks so that they understand the importance and management system. Below, we offer will be less likely to have negative nature of risk management and can suggestions for doing so. consequences and more likely to bring positive results. Many foreign companies readily transform that understanding have embraced the concept of ERM. into action. Chinese enterprises can Recent empirical studies show that foster such a culture by applying ERM and Tobin’s Q119 are statistically the following practices: correlated, indicating that ERM indeed helps to increase value for a business.120
76 The Last 10 Miles • Demonstrate leadership from the • Create incentives. The right representing a record high and a 36% top. The board of directors and senior incentives will encourage employees increase over the previous year.123 An management can set a good example by to act in the organization’s long-term emerging problem facing many such regularly emphasizing the importance of interests, including comprehensive globalized enterprises is how to manage risk management. In strategic planning, management of risks. risks to their overseas investments. To management and other activities, they compete in the international market, should give top priority to risk-related Manage globalization risks Chinese enterprises can learn from factors. When risks do arise, addressing the experience of the world’s leading them promptly can send a clear message For the majority of inexperienced companies and accelerate the building of to employees that the organization takes Chinese enterprises, globalizing their necessary risk-management capabilities. risk management seriously. operations is riskier than limiting themselves to domestic operations. • Establish rules. Chinese businesses Thus risk management is essential could benefit by developing a clear for successfully formulating and and integrated set of risk-management executing globalization strategies.122 rules. Effective rules lay out the organization’s risk-management Chinese companies have stepped their principles, mandates for each department globalization efforts after the worldwide should specific kinds of risks arise and credit crisis. According to statistics, key processes for risk management. in 2010, Chinese investors made non- financial direct investments in 3,125 foreign enterprises in 129 jurisdictions, worth a total of US$59 billion and
The Path to International Competitiveness for Chinese Enterprises 77 Conclusion
Chinese enterprises have made their understanding of the challenges remarkable achievements in the past lurking in international markets and About our research three decades of reform and opening up. develop strategies for surmounting them. Our study drew on a survey, in-depth This becomes especially apparent when Otherwise, they may fall further behind interviews with company executives, their achievements are viewed against the other global players. literature and media analysis and the backdrop of the global financial methodologies developed by Accenture. In today’s globalized economy, Chinese crisis. Chinese companies have overcome In this report, we have used qualitative enterprises are at a historic turning the fragility characterizing them in analysis, quantitative analysis and case point. Their next stop is international the late 1970s, pulled themselves out studies to present and interpret our competitiveness, which means high the mire of SOE restructuring in the findings and to offer our analyses and performance, social responsibility and 1990s and are no longer merely striving recommendations to readers. for survival (unlike like many foreign sustainable development. The most enterprises still staggering from the prominent feature of an internationally Asian and global financial crises). A large competitive business is the ability to jump The survey number of Chinese companies grew up the S-curve—by continuously reinventing We used a survey featuring a series of with the rising Chinese economy and itself, finding new markets and sustaining questions that enabled respondents are promoting social progress, creating superior performance over its peers. to fully express their views. We began an economic miracle and occupying an There are neither shortcuts nor tricks to conducting the survey in May 2011 increasingly important position in the attaining international competitiveness. and ended on July 10, 2011, with a global economy. A company must do the hard work of total of 143 questionnaires recovered. developing unique insights into the The sample includes respondents from However, Chinese enterprises’ market, building effective leadership several industries, such as energy, performance and international teams and taking a disciplined approach pharmaceutical, manufacturing, competitiveness still lag significantly to risk management—among other services, construction and real estate. behind those of the world’s leading challenges. Some of the recommendations Sample companies were mostly large players. As late starters, they need we propose in this report can offer food businesses. The revenue of more than time to catch up. The good news is for thought for Chinese enterprises half of these businesses exceeded 10 that the global financial crisis has seeking to surmount these challenges. billion yuan in 2010. Moreover, 55% of presented these organizations with more the sample companies had more than opportunities than challenges. To seize In view of the development momentum 5,000 employees. Non-listed state-owned these opportunities and improve their and position of Chinese enterprises, companies accounted for 62%, followed competitiveness, Chinese companies one thing is certain: a generation of by listed companies at 28%, with the rest will need to resist any urge to become internationally competitive enterprises being non-listed private enterprises. All complacent regarding their achievements will emerge from China in the near statistical data were screened and sorted to date. They will also have to candidly future, competing in the same arena to ensure their accuracy and reliability. recognize the gap between their own as the world’s leading players. We competitiveness and that of international hope that this report will accelerate leaders. And they will want to deepen realization of this scenario.
78 The Last 10 Miles Interviews High performance analysis We conducted in-depth interviews We adopted the Accenture High face to face with more than a dozen Performance Business methodology executives from influential domestic to compare the differences between companies in different industries. These sample Chinese and foreign enterprises interviews gave us access to a rich vein measured by the five metrics for business of first-hand information. Before we performance: profitability, growth, began each interview, we carried out positioning for the future, longevity and background research on the company, consistency. To do this, we selected 99 created an outline for the interview listed companies at home and abroad and established interview relationships. in three sample sectors: construction, But the actual interview was not rigidly industrial machinery and pharmaceutical limited to the outline provided. On the industries. We then compared their contrary, we encouraged respondents financial data in the five-year period to freely put forward their own views 2006-2010. Meanwhile, we studied and questions so as to foster greater factors affecting these companies’ interaction and exchange of ideas. return on invested capital to identify Through the interviews, we obtained gaps between Chinese companies and timely and detailed information that outstanding foreign businesses and to supplemented our literature review propose reasons for such gaps. and survey responses. Interviewees came from industries ranging from machinery and equipment manufacturing, transportation and real estate to home appliances manufacturing, fast- moving consumer goods and steel mining, as well as from state-owned enterprises, privately run companies and organizations characterized by other forms of ownership.
The Path to International Competitiveness for Chinese Enterprises 79 80 The Last 10 Miles Notes
1 Central Intelligence Agency website: https:// 8 Idem. 23 “Grain Dojo: Tragedy of despising business www.cia.gov/lHibrary/publications/the-world- common sense,” Southern Weekly, January 9 factbook/index.html; The US Department Fortune, China Edition, May 2011. 23, 2008. Available online: http://www. of Labor website: http://www.bls.gov/news. 10 “The 50 most innovative companies 2010,” infzm.com/content/7740; “Mystery of Grain release/empsit.nr0.htm. Bloomberg BusinessWeek. Available online: Dojo’s decline,” China Times, January 5, 2008. Available online: http://finance.sina.com.cn/ 2 “China export reached 2,972.8 billion US http://www.businessweek.com/interactive_ reports/innovative_companies_2010.html review/observe/20080105/09454370183. dollars, trade surplus decreased,” Sina Finance. shtml Available online: http://finance.sina.com.cn/ 11 A. K. Gupta and H. Wang, “China as an 24 roll/20110120/10179284043.shtml innovation center? Not so fast,” The Wall “FiberHome faces talent crisis after large numbers of staff leave for Huawei,” 3 Street Journal, July 28, 2011. “China produces the most of 220 Chutian Dushi Newspaper, March 30, 2008. types of industrial products,” www.ce.cn, 12 “Labor productivity (PPP),” Greater Available online: http://telecom.chinabyte. March 5, 2011. Available online: http:// Zurich Area. Available online: http://www. com/469/8059469.shtml www.ce.cn/macro/more/201103/05/ greaterzuricharea.ch/content/01/01_301en.asp t20110305_22270603.shtml 25 “The Institute ranks No. 19 among top 100 13 “Why China doesn’t have its Samsung,” Chinese electronic information companies in 4 “Another 12 companies from Hong Kong ftchinese.com, August 27, 2010. Available 2011,” FiberHome Technologies Group, wri. and Taiwan made the list, making a total of 69 online: http://www.ftchinese.com/ com, July 1, 2011. Available online: http:// enterprises from Greater China on the Fortune story/001034341 www.wri.com.cn/html/2011/71/2114.shtml 500 list,” Fortune China. Available online: http://www.fortunechina.com/. 14 Y. E. Tan, “China stock market: Cure it 26 “Huawei reports a more open structure of instead of save it,” ftchinese.com, June 22, board of directors and scores 23.8 billion RMB 5 “Best global brands,” Interbrand. Available 2011. Available online: http://www.ftchinese. of net profit in 2011,” Tech Sina, April, 18, online: http://www.interbrand.com/en/best- com/story/001039212?page=1. 2011. Available online: http://tech.sina.com. global-brands/best-global-brands-2008/best- cn/t/2011-04-18/06595416782.shtml global-brands-2010.aspx. 15 Idem. Statistics show that by June 17, 2011, 122 out of the 156 stocks that went public 27 “FiberHome faces talent crisis after 6 According to Interbrand.com, brand effect this year were traded below their IPO prices. large numbers of staff leave for Huawei,” measures the extent to which consumers are Fifty nine of them have been falling since day Chutian Dushi Newspaper, March 30, 2008. influenced by the brand when considering one. Only 34 newly listed stocks did not drop Available online: http://telecom.chinabyte. buying a product or service apart from other below IPO prices. com/469/8059469.shtml non-brand factors such as price and function. In theory, brand effect accentuates the 16 China’s 12th Five-Year Plan for National 28 Interview, June 2011. difference in the demand for the same service Economic and Social Development. 29 or product with or without a brand. There are Interview, May 2011. 17 “China follows in Japan’s footsteps?” three ways to measure the impact of a brand: 30 Interview, June 2011. field surveys and interviews, study of the ftchinese.com, June 17, 2011. Available online: historical effect of brands on companies in a http://www.ftchinese.com/story/001039145 31 The main information about the case specific industry and expert opinions. Brand 18 “Hu Jintao: China must continue reform, comes from interviews. influence measures the impact of brands on opening up for future development,” a company’s future revenue on a scale of 0 to 32 “Great efforts to build a learning port and Chinanews.com, July 1, 2011. Available online: 100, with 100 being the most ideal outcome. foster the scientific development,” Qingdao http://www.chinanews.com/gn/2011/07- Ten factors are included in brand influence, Port News, Section 3, May 20, 2011. 01/3150441.shtml such as management’s input in the brand, 33 “Chang Dechuan: Learning is the vitality of protection of the brand, a clear message of 19 P. Nunes and T. Breene, Jumping the Qingdao port,” Qingdao Port News, Section 2, the brand value and position. All these indexes S-Curve. Boston: Harvard Business Review May 23, 2011. are usually compared with those of other Press, 2011, p. 9. companies in the same industry. The discount 34 “Changhong color TV ranks first in 20 rate of brand influence is determined by the P. Nunes and T. Breene, Jumping the China and second in the world by sales extent to which a brand can help a company S-Curve. Boston: Harvard Business Review volume,” Xinhuanet, April 14, 2003. achieve future revenue. Press, 2011. Available online: http://finance.sina.com. cn/o/20030414/1551331304.shtml 7 “The logic of world class brands,” IT 21 Idem. Manager, April 20, 2011, Volume 314. 22 Idem.
The Path to International Competitiveness for Chinese Enterprises 81 35 P. Nunes and T. Breene, Jumping the 52 Annual Social Responsibility Report 2010 65 China Enterprise Confederation, S-Curve, Boston: Harvard Business Review and Annual Report 2010 of Yanzhou Coal Development Report on China’s Top 500 Press, 2011. Mining Company Limited. Companies, Enterprise Management Publishing House, 2010. 36 Idem. 53 “Qingdao Port to reduce comprehensive unit energy consumption by 4.1% annually by 66 Z. Lin and A. Fang, “An approach 37 All content on Intel comes from Nunes and promoting energy conservation and emission to cultivating incentive mechanism for Breene, Jumping the S-Curve. reduction,” Xinhua News Agency, June 21, employees,” Economic & Trade Update, 2008, 38 J. A. Byrne and J. Welch, Jack: Straight 2010. Available online: http://feature.mei.net. (2), p. 223. cn/jnjp/news/20100621/310791.htm from the Gut. CITIC Publishing House, 2001. 67 P. Drucker, The Daily Drucker, Shanghai 54 39 “Sina’s CEO Charles Chao: The only “Integrating sustainability to promote Translation Publishing House, 2010. value creation,” Accenture, 2010. opponent is yourself,” China Daily, July 21, 68 “The environment and the status quo 2011. Available online: http://www.chinadaily. 55 L. Lan, Leadership Meditations, CITIC of brands in China,” BNET, August 6, 2010. com.cn/micro-reading/tech/2011-07-22/ Publishing House, November 2009. Available online: http://www.youshang.com/ content_3269699.html; “Sina’s former CEO content/2010/08/06/38624.html Wang Yan: How I resigned from the position 56 S. Xiaowu, “An unspoken rule - officials of CEO,” IT Times, June 9, 2006. Available upon blocked promotion go to state-owned 69 World Brand Lab website: http://www. online: http://it.sohu.com/20060609/ enterprises for high salaries,” www.caijing. worldbrandlab.com/world/2010/ n243653093.shtml; “Charles Chao to succeed com, January 7, 2011. Available online: http:// 70 Wang Yan as Sina’s CEO,” The Beijing News, www.caijing.com.cn/2011-07-01/110762003. “The environment and the status quo of May 11, 2006. Available online: http://tech. html brands in the world,” BNET, August 6, 2010. qq.com/a/20060511/000026.htm; “Sina Available online: http://www.youshang.com/ 57 to be changed to shake off the sluggish “Abnormal turnover of CEOs in China Steel content/2010/08/06/38624.html Group: A glance at leaders who resigned from scenario,” First Financial Daily, May 11, 2006. 71 central enterprises,” Finance, 2011, No. 12. “Current situation of Chinese brands Available online: http://it.sohu.com/20060511/ as reflected in milestones of Chinese n243186963.shtml 58 P. Drucker, Management Challenges for brands launched in March,” ChinaValue. 40 “CEO turnover report,” CEO CIO China, July the 21st Century, Mechanical Industry Press, Available online: http://www.chinavalue.net/ 5, 2011, No. 319. 2006. Story/64902.aspx 59 72 41 P. Nunes and T. Breene, Jumping the “Insiders estimate users of Facebook to top “The environment and the status quo S-Curve, Boston: Harvard Business Press, 750 million,” Hexun science and technology, of brands in China,” BNET, August 6, 2010. 2011. June 28, 2011. Available online: http://tech. Available online: http://www.youshang.com/ hexun.com/2011-06-28/130949835.html content/2010/08/06/38624.html 42 Idem. 60 Wikipedia Facebook entry: http:// 73 Brand contribution refers to the proportion 43 Idem. zh.wikipedia.org/wiki/Facebook#2010.E5.B9. of brand factors in the consumer purchase B4 decision. See “CCID Consulting releases 44 COSCO case study, Harvard Business research results of brand competitiveness,” 61 Review. Available online: http://www. “FACEBOOK incentives.” Available online: CCID Consulting Online. Available online: ebusinessreview.cn/articledetail-1659.html http://dongxi.net/b069l; “FACEBOOK saw http://www.ccidconsulting.com/zh/zxyj/mtxw/ a sharp rise in the number of employees 45 webinfo/2008/03/1281488185039908.htm Interview, June 2011. to 1,300 in 2010,” Tech Sina, March 21, 74 46 Information for this case comes primarily 2010. Available online: http://tech.sina.com. Idem. cn/i/2010-03-21/09483967241.shtml; “Google from interviews with the company’s business 75 Z. Min, “From CEO to CBO: Highlighted leaders. to employ 20,316 people in 2011,” news. cnblogs.com. Available online: http://news. effect of brand management,” Liberation 47 W. Jingmin, “COSCO-Shipyard to soar cnblogs.com/n/101354/ Daily, January 17, 2005. high,” China Ship News, June 26, 2009. 76 62 Z. Wangjun and P. Jianfeng, “Empirical “Turnover of Chinese management 48 COSCO-Shipyard website. analysis of incentive mechanisms for personnel tops the world,” Chinese Network knowledge-based employees in Chinese for Management Personnel. Available online: 49 F. Qing, “COSCO-Shipyard goes beyond enterprises,” Science Research Management, http://www.cimac.cn/detail_news.asp?id=183 the repairing championship to promote November 2011. &rei=%D2%B5%BD%E7%D0%C2%CE%C5& management upgrading through strategic group_id=2 transition,” First Financial Daily, July 28, 2009. 63 “Here’s how Facebook wants to keep 77 its engineers happy,” Forbes.com. Available “How to retain key talents,” Gongtai 50 Z. Xuefeng, “COSCO-Shipyard: Leader of online: http://billionaires.forbes.com/ Management Consulting, July 2006. Available China’s blue ocean strategy,” China Ocean article/0dq1d4u8gp1J7 online: http://www.qgongtai.com/tx/ Shipping Monthly, No. 9, 2010. go.asp?id=808 64 D. C. North, The Rise of the Western World: 51 Haier website: http://www.haier.cn/about/ A New Economic History, HuaXia Press, 1999. contribute_01.shtml
82 The Last 10 Miles 78 “Priorities of human resource management 93 Supervisory Guidelines on Sound 110 Casarte website: http://www.casarte.cn/ in view of the core brain drain from oil Compensation in Commercial Banks issued portal.php?mod=view&aid=51 companies,” Modern Business, April 2010. by the CBRC to take effect in March 111 Available online: http://www.ltbka.com/Html/ 2010. Available online: http://www.gov.cn/ “Three ways to train talented people for c32/2010-04/504.html gzdt/2010-03/10/content_1552367.htm your organization,” Chinese Entrepreneurs. Available online: http://www.iceo.com.cn/ 79 Z. Hongguang, “Research on the core 94 “Bank executives see a 10 percent chuangye/73/2011/0516/217893_2.shtml personnel succession planning of Chinese reduction in their pay with more than half 112 enterprises,” Master’s degree thesis, Nanjing of the salary subject to delayed payment,” The information for this case comes University of Finance, 2006. Shenzhen News, April 7, 2011. Available primarily from interviews. online: http://www.sznews.com/finance/ 80 113 Tsingtao Brewery website: www. Story and Philosophy of Haier, Editorial content/2011-04/07/content_5508871.htm Board of Books on Management Stories and tsingtaobeer.com 95 Philosophies, 2005. Information for this case comes primarily 114 Merck website: http://www.merck.com/ from interviews. 81 Driving a High-Performance Corporate about/our-values/home.html?WT.svl=mainnav 96 Culture, Melcrum Publishing, 2006. S. Huagao and Y. Xu, “The Tranvic Group 115 “Mottos of Ren Zhengfei.” Available accomplishes the roll-in-one-heat approach 82 C. Wenhao, Corporate Governance, 2nd online: http://www.xyzlove.com/Celeb/rzf/rzf. from steel smelting to continuous casting,” htm edition, Shanghai Finance University Press, Sichuan Daily. Available online: http://www. 2011. sichuandaily.com.cn/0105/08/b05.html 116 “The process audit: PEMM,” Harvard 83 Business Review, October 2009. “Enterprises directly controlled by the 97 S. Huagao and Y. Xu, “Documentary of the central government should strengthen Tranvic Group to grow in leaps and bounds,” 117 L. Gang and Z. Shizhen, “Achieving high internal control to combat corruption,” China Sichuan Daily, May 8, 2001. performance through continuous process Corporate Governance Network. Available improvement,” Accenture Insights. online: http://cg.org.cn/news/dispdetail. 98 Idem. asp?id=3493 118 Yabuli China Entrepreneurs Forum 2010, 99 Information for this case comes mainly Harbin Press, 2010. 84 P. Nunes and T. Breene, Jumping the from interviews. S-Curve Boston: Harvard Business Review 119 Tobin’s Q is calculated as the market value 100 Press, 2011. New Hope Group publicity materials. of a company divided by the replacement 101 value of the firm’s assets. 85 J. A. Byrne and J. Welch, Jack: Straight New Hope Group website. 120 from the Gut. CITIC Publishing House, 2001. 102 “Enable users to be the chief innovation R. E. Hoyt and A. P. Liebenberg, “The value of enterprise risk management.” 86 officer,” Tsinghua University Management The information for this case comes mainly Available online: http://papers.ssrn. from interviews. Review. Available online: http://www. tbr.net.cn/index.php?option=com_ com/sol3/papers.cfm?abstract_ 87 Huatai Group annual report, 2010. content&view=article&id=146:2011-06-23- id=1440947&rec=1&srcabs=1155218 07-52-46&catid=40:2011-06-22-12-18- 88 121 The Committee of Sponsoring “From thin to thick: A diversified path of 49&Itemid=78 the newsprint giant, 21st century business Organizations. COSO is a sub-committee herald,” Chen Xiaoping, May 6, 2011. 103 C. Zhuping, Brand Management, China of the National Commission on Fraudulent Development Press. Financial Reporting dedicated to the design 89 “Paper-making industry: The fourth and promotion of the ERM framework and quarter of 2008 may have been the worst 104 “Dancing on the stage of a multi-polar guiding principles. time,” Guotai Junan Securities, January world: The path to globalization for Chinese 122 2009. Available online: http://money.163. enterprises,” Accenture Institute for High X. Hui, “Studies on risk identification com/09/0119/13/5019M3II00251M00.html Performance, 2010. and control regarding internationalization,” Science Press, April 2010. 90 “Family business survey: The foundation 105 C. Zhuping, Brand Management, China 123 of a time-honored family business,” Development Press. ”China’s foreign investment scores a Forbes China, October 21, 2010. Available record high in 2011,” Ministry of Commerce, 106 online: http://www.forbeschina.com/ D. Blecken, “Volkswagen fires off its first January 17, 2011. Available online: review/201010/0004406.shtml branding campaign,” Media, May 29, 2008, http://fec.mofcom.gov.cn/article/xwdt/ p. 8. gn/201101/1185849_1.html 91 C. A. Mallin, International Corporate 107 Governance: A Case Study Approach, Peking The information for this case comes University Press, 2011. primarily from interviews. 108 92 Y. Rong, Study on the International Haier Group Annual Report 2010. Competitiveness of Chinese Enterprises: From 109 “Haier’s minor refrigerators rank top two the Perspective of Corporate Governance, in the U.S. market,” Worker’s Daily, August 3, Shanghai Century Publishing Group, 2009. 2003.
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