Leadership, Management and Change in a Chinese Public-Owned Corporation: the Case of Haier from 1984-2013

Leadership, Management and Change in a Chinese Public-Owned Corporation: The Case of Haier from 1984-2013

Xiaoran Sun

A thesis in fulfilment of the requirements for the degree of Doctor of Philosophy

School of Business

University of New South Wales Canberra, Australia

August 2013

Table of contents

Table of contents ...... i Acknowledgements ...... iv Abstract ...... vi Acronyms ...... viii List of Figures ...... x List of Tables ...... x List of Appendices ...... x Chapter One Introduction ...... 1 1.1 Aims and Objectives...... 1 1.2 The Case of Haier ...... 1 1.3 The Research Problem...... 3 1.3.1 Primary data collection: ...... 4 1.3.2 Secondary data collection:...... 7 1.3.3 Tertiary data collection ...... 7 1.3.4 Data analysis ...... 7 1.4 Chapter Structure and Integration ...... 10 Chapter Two Literature Review ...... 16 2.1 Introduction ...... 16 2.2 Leadership and Change ...... 16 2.3 The Role of the Environment in Organisational Theories ...... 26 2.4 The Influence of Culture ...... 27 2.5 Total Quality Management Theories and Dissemination ...... 31 2.5.1 Definition of TQM ...... 33 2.5.2 TQM models ...... 34 2.6 Implementing Business Process Reengineering ...... 38 2.6.1 The definition and goals of BPR ...... 39 2.6.2 The spread of BPR ...... 43 2.7 The Influence of Management Fashions ...... 44 2.8 Globalisation and the Development of a Global Mindset ...... 48 2.9 Conclusion: Gaps in the Literature and the Focus of this Research ...... 53 Chapter Three China‘s Open Door Policy: The Economic and Industrial Context from 1978-2013 . 55 3.1 Introduction ...... 55 3.2 A Centralised Socialist Economy Before 1978 ...... 56 3.3 Economic Reform in China Since 1978 ...... 60 3.3.1 1978 to 1992: the first stage of China‘s opening-up and economic reform...... 61 3.3.2 1992-2001 The establishment of a socialist market economy ...... 70

3.3.3 2001: Joining the WTO and participation in the world economy ...... 78 3.4 The Development history of the Chinese Home Appliance Industry...... 80 3.4.1 1978-1982: initial stage ...... 80 3.4.2 1983-1990: the stage of rapid development ...... 82 3.4.3 1990-2001: the outbreak of a price war and industrial restructuring ...... 85 3.4.4 2001: joining the global market ...... 90 3.5 Conclusion ...... 92 Chapter Four The Emergence of Zhang Ruimin as a Charismatic Leader ...... 94 4.1 Introduction ...... 94 4.2 The Early Life Experience of Zhang Ruimin...... 95 4.3 A Turning Point: The Assignment of Zhang Ruimin as the Director of Qingdao Refrigerator General Factory ...... 96 4.4 Zhang Ruimin‘s Leadership Style...... 104 4.4.1 Charm and charisma ...... 104 4.4.2 Control and authority ...... 113 4.4.3 Sight and vision ...... 116 4.5 Zhang Ruimin‘s Unique Management Philosophy ...... 126 4.6 Conclusion ...... 129 Chapter Five From Rags to Riches: The Role of TQM in the Brand Building Phase (1984-1991). 132 5.1 Introduction ...... 132 5.2 Industrial Policy from 1980 to 1991 ...... 132 5.3 Changes in Organisational Culture in Haier ...... 138 5.4 Brand Building through Total Quality Management at Haier ...... 140 5.5 Conclusion ...... 153 Chapter Six OEC Management, Competition and Expansion in the Diversification Phase (1991-1998) ...... 155 6.1 Introduction ...... 155 6.2 Haier‘s Development Strategies from 1991 to 1998 ...... 156 6.2.1 Diversification and development through merger and acquisition ...... 156 6.2.2 Market-oriented service improvement ...... 168 6.3 OEC Management ...... 171 6.4 Making Sense of the Policies: the Third Eye Theory ...... 179 6.5 Conclusion ...... 183 Chapter Seven Business Process Reengineering (BPR): The Solution to Company Obesity (1998- 2005) ...... 185 7.1 Introduction ...... 185 7.2 Internationalisation and Avoiding a Price War ...... 186 7.3 The Introduction of Business Process Reengineering (BPR) ...... 193 7.4 Management Innovation: The Strategic Business Unit (SBU) ...... 211 7.5 Conclusion ...... 213 Chapter Eight The Emergence of a Global Brand (2005-2013)...... 215 8.1 Introduction ...... 215 ii

8.2 Market and industrial policy changes since 2005...... 216 8.3 Organisational Change: A New Round of BPR ...... 221 8.4 Management Innovations: Integrating Order with Personnel to achieve SBU, T Mode and ZZJJT ...... 235 8.5 The Emergence of a Global brand ...... 242 8.6 Conclusion...... 245 Chapter Nine Conclusion and Discussion ...... 247 9.1 Introduction ...... 247 9.2 The Key Findings across the Four Phases of Haier‘s Development...... 248 9.3 The Role of Zhang Ruimin as the Key Change Agent ...... 252 9.4 The Influence of Policy Changes ...... 255 9.5 The Influence of Management Fads ...... 257 9.6 The Influence of Culture ...... 261 9.7 The Globalisation of Haier ...... 266 9.8 Evaluation of the study and future research directions...... 268 9.8.1 Key contributions of the study ...... 268 9.8.2 Limitations of the study and directions of future research ...... 268 Bibliography ...... 272 Appendix 1: The interview questions ...... 304 Appendix 2: The list of interviewees...... 308 Appendix 3: List of primary sources ...... 309 Appendix 4: List of secondary and tertiary sources ...... 311

iii

Acknowledgements

I would like to express my gratitude to the following people for the crucial roles they played in every step to complete this thesis.

I would like to express my special thanks to my supervisor, Dr. Nelia Hyndman-

Rizk, who has been working with me through multiple iterations on each chapter as the thesis proceeded, for her patient guidance, constant support and encouragement. The completion of this thesis would not have been possible without her help and support.

I would like to thank my co-supervisors: Dr James Warn, who guided me through the conception of this thesis and provided me important comments on my research at various stages; Prof Michael Hess, who offered me insightful guidance on the construction of the thesis and Dr James Conner, who provided me important comments on leadership literatures.

I would like to extend my appreciation to the Chinese Scholarship Council and

The University of New South Wales. This study would not have proceeded without the financial support from them.

I am also grateful for those who generously help me with my research with their professional knowledge and insights: Prof Michael O'Donnell, Dr. Marian May and Dr

Lin Cui from the Australian National University.

I would like to acknowledge those who helped me with my fieldwork: Prof Guilin

Dai and Dr Jintian Gao from the Ocean University of China and all the anonymous interviewees in my research.

My thanks are extended to my friends: Clara, Fangfei, George, Joyce, Juliana,

Leora, Monica and Qiang Li, who have shared joy and sorrow with me in the past four

years. Their friendship helped me through all the hard times and will remain part of my best memories in Australia.

Last but not least, I would like to express my thanks to my beloved parents, my grandparents, my uncle, my aunts and my lovely cousin who supported me unconditionally throughout my research.

Abstract

Despite extensive research on change management in Western corporations, there have been relatively few studies on Chinese corporations. This thesis aims to fill the gap by providing a longitudinal case study analysis of The Haier Group (Haier), because of its distinctive performance in organisational change and management innovation. The thesis answers the central research question, ―What were the factors driving the management of change in the Haier Group during the four phases of its development from 1984 to 2013?‖

In order to answer the central question, a longitudinal case study methodology was adopted. Face to face interviews with Haier employees, managers and scholars were carried out and primary, secondary and tertiary sources were analysed in order to investigate how leadership and organisational change evolved in response to key policy changes and competitive pressures. The theoretical framework adopted in this research is based on Dunphy and Stace‘s (2001) contingency model of leadership and organisational change, which provides a useful explanatory framework for the shifts in leadership style during Haier‘s four developmental phases, as outlined in the chapters of this thesis.

Based on the analysis, this thesis argues that leadership, government policy and management fads, including Total Quality Management (TQM) and Business Process

Reengineering (BPR), emerge as the key drivers of change. The leader, Zhang Ruimin, played the role of the change agent, who applied different leadership and management strategies according to the context. Therefore, this study concludes that the leader was the central driver of change, who steered Haier through each stage of its development.

Unlike Western companies, whose leadership changes frequently, leadership in Chinese

public-owned corporations is comparatively stable and consistent over a long period of time, which mirrors the stability in Chinese political leadership. The case of Haier, which had one leader for three decades, reflects the pattern of leadership evolution in

Chinese public-owned corporations. However, the significant influence of consistent leadership is both the great strength and weakness of Haier‘s development. Thus, the problem of leadership succession will be the next major challenge facing the corporation.

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Acronyms

BCG Business Circulation Group BPR Business Process Reengineering CESRRI China Economic System Reform Research Institute CMI Corporation Marketing Innovation CPC Communist Party of China CSG Customer Solution Group CST Corporation Strategy and Technology CVS Chinese Values Survey DPG Digital Products Group EPG Equipment Product Group ERP Enterprise Resource Planning ETDZ Economic and technological development zone FDI Foreign direct investment FDRS Factory director responsibility system FIN Finance FSG Finance Service Group GATT General Agreement on Trade and Tariffs GDP Gross domestic product GFC Global Financial Crisis GLF Great Leap Forward GO Global Operation HGVS Haier Global Value-adding System HR Human Resources IDV Individualism JUSE Union of Japanese Scientists and Engineers LTO Long-versus Short-Term Orientation M&A Merger and Acquisition MAS Masculinity MBO Management by Objectives MNC Multinational Corporation NDRC National Development and Reform Commission

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OEC Overall, every control and clear OEM Original equipment manufacturer PDI Power Distance Index PRC The People‘s Republic of China PSI Process and System Innovation R&D Research and Development RMB Renminbi RPI Retail Price Index SBU Strategic business unit SEZ Special economic zone SME Small and medium-sized enterprise SOE State-owned enterprise TQC Total Quality Control TQM Total Quality Management UVI Uncertainty Avoidance Index WGG White Goods Group WTO World Trade Organisation ZZJJT Zi zhu jing ying ti (self-managed business unit)

List of Figures

Figure 1: Pattern-matching analysis process (Source: Trochim, 1989:356) ...... 10 Figure 2: Chapter structure of the thesis ...... 11 Figure 3: Dunphy and Stace‘s contingency model of leadership and organisational change (Source: Dunphy and Stace, 2001:109) ...... 23 Figure 4: Oakland TQM Model (Source: Oakland, 1989:435) ...... 36 Figure 5: Business system diamond (Source: Hammer and Champy, 1993:80) ...... 42 Figure 6: Management-fashion-setting process (Source: Abrahamson, 1996) ...... 45 Figure 7: Mindsets conceptual framework (Source: Gupta and Govindarajan, 2002)...... 51 Figure 8: Global mindset framework (Source: Beechler and Javidan, 2007) ...... 52 Figure 9: The influential factors to Haier‘s development in the brand building phase ...... 152 Figure 10: OEC Evaluation Worksheet (3E Card A) for Monthly Evaluation (Source: Lin, 2005:9)...... 176 Figure 11: Analysis of the influence of institutional and management factors from 1991 to 1998 . 182 Figure 12: Linear organisational structure of Haier (Source: Zhang, 2006:19)...... 199 Figure 13: Functional organisational structure of Haier (Source: Zhang, 2006:24) ...... 200 Figure 14: Process-based organisational structure of Haier (Source: Zhang, 2006:25) ...... 204 Figure 15: Haier BPR workflow (Source: Xu, 2005) ...... 211 Figure 16: Matrix structure of Haier (Source: Hu, 2008:63) ...... 230 Figure 17: The circulation of orders (Source: Hu, 2008:50)...... 237 Figure 18: Three steps to integrate order with personnel Source: (Hu, 2008:53) ...... 238

List of Tables

Table 1: Images of leadership (Source: Adapted from Palmer et al., 2005) ...... 22 Table 2: Comparison of the four indices among four countries/districts (Source: Adapted from Hofstede, 1993:87) ...... 28 Table 3: Comparison between BPR and other organisational changes (Source: Hammer and Champy, 1993:48,49) ...... 39 Table 4: Management fashions in the 20th century (Source: Brindle and Stearns, 2001) ...... 47 Table 5: China‘s economic performance 1996-1998 (Source: China Statistical Yearbook 1998) ...... 74 Table 6: 13 Rules (Source: Archive of Haier culture centre) ...... 107 Table 7: Sales income and profit of Haier, 1984-1991 (Source: adapted from Haier corporate reports) ...... 151 Table 8: Part of Haier 6S management standards (Source: Haier internal training program) ...... 177 Table 9: Haier's four development phases and management changes...... 249 Table 10: Haier's management practices in its four development phases ...... 258

List of Appendices

Appendix 1: The interview questions ...... 304 Appendix 2: The list of interviewees ...... 308 Appendix 3: List of primary sources ...... 309 Appendix 4: List of secondary and tertiary sources...... 311

Chapter One

Introduction

1.1 Aims and Objectives

Change has become a significant aspect of contemporary organisations. While change management theories have evolved in Western countries and a range of different management strategies have been adopted over the last few decades, the results of these transformations have not always been satisfactory. According to Raps (2004:49), the real success rate of strategy implementation is only 10 per cent to 30 per cent, while Beer and

Nohriaand (2000:134) and Boonstra (2004:1) indicate that more than 70 of the change programs in organisations either stall prematurely, or fail to achieve their intended results.

Although there has been extensive research on change management in Western countries

(Beer and Walton, 1987; Ginzberg and Reilley, 1957; Glueck, 1969; Goodstein and Burke;

Guest, 1962; Judson, 1966), there have been relatively fewer studies on the management practices of Chinese corporations. Since 1978, with the implementation of the Open Door

Policy in China, many publicly owned Chinese corporations began to implement organisational and management changes by adopting popular Western and Japanese management theories and practices. What factors affected the adoption of these change initiatives and how successful were they?

1.2 The Case of Haier

This thesis aims to fill a gap in the literature on change management in China by providing a longitudinal case study analysis of the Haier Group (Haier), distinctive in its approach to organisational change and management innovation. The headquarters of the

Haier Group is located in Qingdao, the main coastal city in Shandong province, an important region of Eastern China. Shandong Province has seen rapid development and substantial change in its economic landscape in recent years. Much of this development has been concentrated in Qingdao. To comply with the Open Door Policy, which will be further discussed in Chapter Three, the Chinese government assigned 14 coastal cities in

1984 to become open cities, and Qingdao was one of them. In the same year the Chinese government named a district of Qingdao an economic and technological development zone (ETDZ). Along with this district, the entire city went through a remarkable development of secondary and tertiary industries. Construction proceeded at a relatively fast pace. As the most important trading port in the province, Qingdao flourished with foreign investment and international trade. South Korean and Japanese firms, in particular, made extensive investments in the city (Qingdao Bureau of Statistics, 2013).

Located in Qingdao, Haier‘s development followed the opening up of the Chinese economy and the coastal city. From 1984 to 2013, Haier benefited from supporting policies from both the central and local governments and evolved from a poorly managed local factory into an internationally competitive company. The transformation and development of Haier is divided into four phases, as detailed in chapters Five to Eight.

The Haier Group evolved from a handicraft producers‘ cooperative in 1955 and was renamed the Qingdao Refrigerator General Factory in 1984. The operating performance of the Qingdao Refrigerator General Factory was not satisfactory, however, prior to 1984 because of a lack of morale in the factory and, consequently, a chaotic and undisciplined approach to management system and organisation. This changed when a new leader,

Zhang Ruimin, was appointed as the director of the Qingdao Refrigerator General Factory in 1984. Zhang implemented a series of management changes and quality controls that were successful in lifting output and quality standards in the factory. In the following

years, he continued with his efforts to change the company enabling Haier to become a strong competitor in both the domestic and international markets.

1.3 The Research Problem

This thesis examines the development history of Haier by focusing on the management and organisational changes that occurred between 1984 and 2013. Drawing on leadership, cultural and management theories, this thesis explains the process of management change in Haier and makes an original contribution by adapting them to the Chinese context. The research answers the central question:

What were the factors driving the management of change in the Haier Group during the four phases of its development from 1984 to 2013?

The following sub-questions are also considered:

1. How did government policy changes influence the development of Haier?

2. What role did leadership play in the management of change in Haier?

3. How did Chinese cultural values influence Haier‘s management practices?

4. How were Total Quality Management (TQM) and Business Process

Reengineering (BPR) implemented at Haier?

5. To what extent were Haier‘s management practices influenced by management

fashions?

6. How did Haier expand into international markets and how successful was this

global expansion of the firm?

In order to answer these research questions, this thesis proposes that the adoption of particular management practices in the organisation was shaped by a synthesis of external pressures including the policy context, competition, the industrial environment

and organisational politics in the Chinese cultural context. In addition, the thesis argues that internally the leader played a central role in interpreting the competing pressures the company faced. The empirical chapters of this thesis address the central question and sub- questions and draw on Dunphy and Stace‘s (2001) contingency model of organisational change (discussed further in Chapter Two), to explain the dynamics of leadership and change in the Haier Group.

This study adopts a qualitative research strategy and is based upon an in-depth, longitudinal case study (Bryman and Bell, 2007:57-62), which combines semi-structured interviews with employees, managers and scholars of the Haier Group (see Appendix 1 and 2 for the complete interview schedule and list of interviewees), with an analysis of primary and secondary sources to examine the characteristics of the economic and industrial environment during the four key phases of Haier‘s development (see Appendix

3 and 4 for the complete list of primary and secondary Sources). Thus, the data collection for this doctoral thesis was undertaken in three steps.

1.3.1 Primary data collection:

In order to collect primary data, I undertook two field trips to China. The first field work was conducted in January 2012, and following a thematic analysis (Bryman and Bell,

2007:572) of the data, a follow-up field trip was made in March 2013. Three key types of primary source data were collected:

Interviews

The interview is widely employed in qualitative research (Bryman and Bell, 2007:465).

Interviews are divided into three types: unstructured, structured and semi-structured. The

‗unstructured‘ interview has a series of open ended questions, while the ‗structured‘ interview uses ‗closed‘ questions, similar to a survey questionnaire (Bryman and Bell,

2007:473). A semi-structured interview, however, has an open interview guide, which has a structure, but allows new ideas to be brought up during the course of the interview, as a result of what the interviewee says (Bryman and Bell, 2007:474). In this study, a total of

30 face-to-face, semi-structured interviews were conducted with 21 interviewees including management and employees from Haier as well as scholars who have undertaken research on the selected case during two field trips. The interviewees were selected through purposeful sampling, which aims to sample participants in a strategic way (Bryman and Bell, 2007:442). Purposeful sampling is adopted when the researcher has a certain research goal in mind and sites and participants are selected because of their relevance to understanding a social phenomenon (Bryman and Bell, 2007:442). In this research, the interviewees chosen were expert scholars and managers in the company.

They were selected due to their professional knowledge in management theories and practices, as well as their in depth understanding of the history and development of the target organisation. This approach helped to build an in depth history of the target company, by drawing on both insider and expert knowledge. A snowballing strategy was also adopted to gain access to more research participants. Snowball sampling is an approach for locating information-rich informants or cases by asking well-situated respondents to suggest other people who may be willing to participate in the research

(Patton, 1990; Liamputtong and Ezzy, 2005). This way of sampling is especially useful when the informants are well networked and difficult to approach directly (Patton, 1990).

In this study, I started with some key participants, including two senior managers in Haier and one scholar who had a close connection with both researchers and Haier management.

They then introduced me to more interviewees before my field trip. During the interviews with these interviewees, the new participants introduced me to more potential interviewees. On average, each interviewee was contacted twice to finalise one interview.

Before the field trip, I contacted the potential interviewees through email or phone call to send out the invitation for the interview and to make further contact with those who replied and showed their interest to conduct the interview by phone call once I arrived in

Qingdao. A total of 21 interviewees participated in a face-to-face interview during the two field trips. Each interview lasted between one and two hours. After the first field trip, I transcribed and coded all 21 interviews and discovered new fields to probe further in subsequent interviews. Nine follow-up interviews, which lasted one hour on average, were made during the second field trip. Theoretical saturation was reached when no new information emerged from the interviews. Among the 30 interviews, six of them were conducted in the interviewees‘ workplace, i.e., their offices or meeting rooms, while the others were conducted in a cafe or in other public places. A complete list of de-identified interviewees can be found in Appendix 2.

The collection of official state documents

Official state documents were collected to illustrate the economic and industrial context of Haier‘s development from 1978 to 2013. These documents include the First to

Eleventh Five-Year Plans established by the Central Committee and National Congresses of China, the communiques of the Plenary Sessions of the Central Committee of the

Chinese Communist Party and the regulation documents on the development of the

Chinese home appliance industry issued by China's Ministry of Finance, China's Ministry of Commerce, and China's Ministry of Industry and Information Technology (refer to the complete list of primary sources in Appendix 3). All official documents were translated from Mandarin to English.

The collection of official company documents

The Haier Corporation‘s periodical reports were taken from the company‘s archives, including 59 annual and quarterly reports for Haier from 1994 to 2012 (refer to the complete list of primary sources in Appendix 3). These documents were translated from

Mandarin to English.

1.3.2 Secondary data collection:

This step included the collection of relevant secondary studies undertaken on Haier, including published academic articles written by both Chinese and international scholars.

Further secondary sources included biographies of Zhang Ruimin, published media interviews with the leader and newspaper articles (see Appendix 4 for the complete list).

These documents were translated from Mandarin into English and coded based on the research questions. The findings from the secondary sources were used to provide further in-depth analysis of events in the period under consideration. Further secondary sources included the collection of relevant theoretical and scholarly journal articles and books, which are included in the literature review (see the Bibliography for a complete list).

1.3.3 Tertiary data collection

This consisted of gathering official government statistics relevant to the study from the

National Bureau of Statistics of China to support the analysis of the shifts in government policy relevant to the development of Haier. The official statistics consulted in this study include: the China Statistical Yearbooks and the Statistical Bulletin for Economic and

Social Development of Qingdao (see Appendix 4 for the complete list).

1.3.4 Data analysis

All the face-to-face interviews were de-identified, transcribed and translated from

Mandarin into English. The transcriptions were then thematically coded (Bryman and

Bell, 2007:572), based on the development stages of Haier and the key recurring themes were identified until theoretical saturation was reached.

With regard to the large amount of documents collected in this research, an historical approach was undertaken in this study to analyse the primary and secondary source data. Historical analysis is the study of a subject in light of its earliest phases and subsequent evolution (Lawrence, 1984:308). In the study of major changes in organisations, historical analysis is an important analytical tool. However, historical analysis is not as widely used in the field of management research though several scholars

(Bryman and Bell, 2007:340) argue for the importance of historical analysis, particularly for business history, in understanding the historical and social context of companies and view history as a tool to interpret both the present and the future.

New histories are always in the process of being created from a particular cultural, political and economic reality (Gummesson, 2000:107). The role of systematic historical analysis in case study research can only be understood through a comprehensive analysis of historical and social contexts. Therefore, historians contend that the purpose of historical analysis is to reflect historical diversity as a stimulus to action (Gummesson,

2000:108).

Gummesson (2000) proposed a practical process of systematic historical analysis.

Firstly, he suggested the use of ―milestone classification‖ for the major changes that occurred both within the company and in the external environment. (In the case study for this thesis, this researcher divided Haier‘s change management history into four phases in accordance with both the company‘s development strategy and the reform of the Chinese economy.) Secondly, Gummesson proposed the analysis of ―critical events‖, their backgrounds and consequences (Gummesson, 2000:110). The change projects conducted in Haier in each development phase were investigated as critical events and their

institutional background is also analysed to get a sense of how the institutional environment affects organisational actions.

After coding of interview data and the historical analysis of the primary and secondary sources, pattern-matching was adopted to compare the findings in this study.

Yin (2008) regards pattern-matching to be the most desirable analytic strategy for case study research. A pattern refers to any arrangement of objects or entities. Pattern matching usually involves an attempt to link two patterns where one is a theoretical pattern and the other is an observed or operational one (Trochim, 1989:356). Therefore, pattern matching is broadly used for theory testing in case studies. The basic steps taken to conduct pattern- matching analysis are illustrated in Figure 1.

Theoretical Realm

Theories, ideas, hunches

Conceptualisation task

Theoretical pattern

Pattern Matching

Observed pattern

Data organisations

Observations, data, measures

Observation Realm

Figure 1: Pattern-matching analysis process (Source: Trochim, 1989:356)

As seen in Figure 1, pattern matching analysis starts from translating theories into a specifiable theoretical pattern. The bottoms part of the figure shows the observation realm, where the data is collected and organised according to the theoretical pattern. The inferential task in pattern matching involves the attempt to relate, link or match the theoretical pattern and observed pattern, as indicated by the double arrow in the figure

(Trochim, 1989).

This research draws on Dunphy and Stace‘s (2001) contingency model of organisational change. The data in the empirical chapters is organised based on the themes from the theoretical framework. The comparison between the theoretical model and the reality on the ground in Haier is examined in order to draw conclusions on the feasibility of organisational theories for change management in the Chinese context.

In order to consolidate the arguments, triangulation was adopted in the process of data collection and analysis. Triangulation is a principle of seeking different ways to verify or corroborate a particular event, description, or fact being reported by a study (Yin,

2010). It embodies the use of different methods at different times, in different places

(Bryman and Bell, 2007:397). The data source triangulation approach is adopted in this research in an effort to minimise bias. The data used in this research is obtained through three different sources: primary, secondary and tertiary sources. Each argument made in this research is supported by data from different sources to enhance the credibility of the conclusions drawn.

1.4 Chapter Structure and Integration

This thesis consists of nine chapters including the introduction. Chapter Two reviews the

relevant literature on leadership, organisational change, culture and globalisation (see

Figure 2), in order to identify gaps in the literature. Dunphy and Stace‘s contingency model of organisational change is highlighted as a useful explanatory framework for the case of Haier. In order to answer the research problem some arguments on the role of leadership, policy, culture, management fads and global mindsets are outlined in order to set the stage for the subsequent empirical chapters.

Figure 2: Chapter structure of the thesis

Chapter Three, ―China‘s Open Door Policy: The Economic and Industrial Context from 1978-2013‖, addresses the sub-question How did government policy influence the development of Haier?‖. In order to answer the question, the chapter provides an account of the economic environment in China before and after the Open Door Policy was introduced in 1978, with special emphasis on China‘s shift from a planned economy to a market-oriented economy and the development history of the Chinese home appliance industry since the end of 1970s. The analysis of the changing economic and industrial context illustrates how the changing policy context affected the behaviour of the company.

The first part of Chapter Three explores the shift in economic policies after 1978 and the globalisation of Chinese firms. The second part examines the evolution of the Chinese home appliance industry. The industry has been changing with regard to market focus, competitive strategy, management style, industrial structure and characteristics.

Chapter Four, ―The Emergence of Zhang Ruimin as a Charismatic Leader‖, addresses the sub-question ―What role did leadership play in the management of change in Haier?‖. Zhang Ruimin was appointed the director of the Qingdao Refrigerator General

Factory in 1984 and implemented a series of management changes and quality control, which successfully resurrected the factory. In the following years, he continued with his efforts to change the company and to adapt to the new economic environment in China.

This enabled Haier to become a strong competitor in both the domestic and international market. In view of the significant role that Zhang Ruimin has played in the success of

Haier, it is important to have an understanding of his life, in order to show how his personality and leadership style enabled him to rescue a near bankrupt factory and nurture it into a successful global brand. This chapter, therefore, provides a biography of Zhang

Ruimin, as the CEO of the Haier Group, by focusing on his personality and charismatic leadership style and, I will argue, he developed his unique management approach through

experience and the adaptation of popular management philosophies into the Chinese context.

Chapter Five, ―From Rags to Riches: The Role of TQM in the Brand Building

Phase (1984-1991)‖, addresses the sub-question ―How was the Haier group influenced by

Western and Japanese management techniques, such as TQM?‖. The years from 1984 to

1991 were the brand building phase in Haier‘s development history, when Total Quality

Management (TQM) was introduced into the company. This chapter depicts how Haier developed from a near-bankrupt factory in 1984 to a well-known home appliance brand in

China by the early 1990s and examines the key management initiatives that were undertaken by Haier from 1984 to 1991. The interaction between institutional factors and organisational factors illustrates how Haier made sense of competitive pressure and conducted corresponding change management initiatives. Based on the analysis, it is found that the key driving force behind Haier‘s development from 1984 to 1991 was the new leader, who made sense of the institutional factors and was the agent of change by introducing TQM into Haier.

Chapter Six, OEC Management, Competition and Expansion in the

Diversification Phase (1991-1998), addresses the sub-question: ―Did Haier create its own management philosophy by drawing on Chinese culture and philosophy?‖. The chapter illustrates the development strategies and management approaches adopted by Haier in the period from 1991 to 1998 during the company‘s diversification phase. In this period,

Haier evolved from a single-product company to a manufacturer with multiple product lines and expanded its brand to include both white goods, as well as brown goods. This chapter provides an analysis of how Haier developed into a comprehensive corporation with diversified businesses though merger and acquisition (M&A) and its management innovation of OEC (overall, every control and clear). It then analyses the factors which

contributed to the success of Haier in this period, including government policy, the leader‘s reputation and the management system and expansion through diversification.

While government policy played an important role in supporting Haier‘s M&A, the leader remains critical in making sense of the changing market and policy context, which enabled Haier to conduct a merger with 18 companies.

Chapter Seven, ―Business Process Reengineering (BPR): The Solution to

Company Obesity (1998-2005)‖, addresses the sub-question ―How was the Haier group influenced by Western and Japanese management techniques, such as BPR?‖. It analyses the shift in the development strategy of Haier and the corresponding change approaches it adopted in the period from 1998 to 2005, during its internationalisation phase. Haier adopted an internationalisation strategy to expand its foreign business holdings by building local factories in other countries. With the expansion of the company‘s scale and business scope, some problems of low efficiency began to emerge in the company, which is referred to as ―company obesity‖. To solve these problems, Zhang Ruimin adopted

Business Process Reengineering (BPR) as the solution. BPR was the key factor which affected Haier‘s development in this period. Although the leader was still critical in making the strategic decisions for the company, the influence of management fads played a more significant role in the adoption of BPR and this influence was received through the advice from external experts and consultants.

Chapter Eight, “The Emergence of a Global Brand (2005-2013)‖, addresses the final sub-question, ―How did Haier expand into international markets and how successful was this global expansion of the firm?‖. It examines the organisational and management changes conducted in Haier from 2005 to 2013, by examining how Haier carried on with its efforts of constant change and improvement and became an internationally competitive brand. This period is the global brand-building phase and the key feature of Haier‘s

development in this period is constant change. Haier implemented the biggest reform within the group referred to as ―1000 days process reengineering‖ in this period. Zhang

Ruimin tried to solve internal problems with the help of external experts; however, the

BPR program ended up with the resignation of the experts and frequent changes of executives. Despite the unhappy ending, the BPR reform still achieved some success in information system building and inventory reform. The policy support from the Home

Appliance to the Countryside Program was also a key factor, which helped Haier to retain its sales during the economic downturn.

Chapter Nine, ―Conclusion and Discussion‖, argues that leadership has been the key driver of change through all the four phases of Haier‘s development. While government policy and management fads played an important role, the leader acted as the change agent who made sense of the policy context and introduced particular management concepts into Haier. The findings shed light on how Chinese publicly owned companies have adjusted to cope with the institutional and competitive pressures during the shift in China from a central command economy to market socialism. However, the centrality of Zhang Ruimin suggests that leadership succession is a potential problem facing the company and will be an important direction for future research into the Haier

Group.

Chapter Two

Literature Review

2.1 Introduction

This thesis explores the factors driving the management of change in the Haier Group during the four phases of its development from 1984 to 2013. In order to answer the central question, this chapter aims to identify the key factors affecting the adoption of change management initiatives in organisations in China, by reviewing the literature on leadership and change, national cultures, environmental forces, management fads and fashions, Total Quality Management theories, Business Process Reengineering and globalisation. Furthermore, this chapter explains why Dunphy and Stace (2001) contingency model of leadership and organisational change is a useful explanatory framework to make sense of leadership practices in the case of Haier. After reviewing the relevant literature, this chapter will identify the gaps in the literature, in order to justify the research problem and the sub questions, which this study addresses.

2.2 Leadership and Change

Change simply means moving from the current status quo to a new desired state, which is either planned or unplanned in response to pressures and forces that are both external and internal to the organisation (Jick and Peiperl, 2003:1). As to organisational change, it is defined as ―modifications in an organisation‘s structure, goals, technology and work tasks‖

(Todnem By, 2005:370), but since the 1980s, with the application of behavioural science in organisational change research, it can also include changes in attitudes and cultural values (Linstead et al., 2007:9). Organisational changes are divided into three types,

according to their scope and depth: developmental change, transitional change and transformational change (Jick and Peiperl, 2003:2). Developmental change refers to the improvement of skills, method or condition that for, some reason, have not measured up to current expectations. Transitional change replaces the current way of doing things with something new. Transformational change, the most radical change, is typified by a radical reconceptualisation of the organisation‘s mission, culture, critical success factors, form and leadership (Jick and Peiperl, 2003:2-3).

There has been extensive research on change and change management since the

1940s, starting with Kurt Lewin‘s force field analysis (Lewin, 1947:39), which proposed that the forces for change can be subdivided into driving forces and restraining forces, while implementing change breaks the equilibrium between driving and restraining forces

(Lewin, 1951). Based on this assumption, Lewin (1951) developed a three-phase model of organisational change, which still remains the basis of many change models today: unfreeze, change and refreeze. Lewin‘s concept has been durable over time and was widely accepted and adopted by later researchers (Miller, 1967, Elsass and Veiga, 1994,

Schein, 1996, Bozak, 2003).

Scholars in the 1960s began to investigate the function of behavioural science in effecting organisational change by arguing that organisations are changed through shifts in values, attitudes and people‘s beliefs within organisations (Glueck, 1969). Bennis analysed some organisational change programs and discovered the relevance of behavioural science for organisational change (Bennis, 1963). Blake et al. (1964) developed the management grid and used it to investigate the case of Sigma‘s development from the perspective of behavioural science. In this period, the methods mainly used in behavioural research were laboratory training (through T-group) and the managerial grid (Bennis, 1963; Buchanan, 1969; Golembiewski, 1967).

The 1980s also witnessed an increase in change management research. Culture became a focus, especially in combination with leadership. Schein showed in his study that leadership processes play a significant role in identifying, nurturing and shaping the cultures of organisations in every stage of development to achieve their goals and missions. Without a complete understanding of the difference of the role that organisational culture plays in an organisation‘s stage of growth, organisational change can be a victim of cultural resistance (Schein, 1985).

However, after the 1990s, scholars began to question the applicability of traditional universal change models and contingency models were developed to explain the process of change, which argued that the optimal course of action is contingent

(dependent) upon the internal and external situation. (Dunphy and Stace, 1993; Palmer et al., 2005). Thus, the forces for changes can vary from case to case and can be either internal, external or both. With regards to organisational and management changes within corporations, many researchers put emphasis on the role of leadership.

Leadership is defined by researchers from a range of different perspectives. It is commonly believed that leadership is a social influence relationship, interactive between leaders and followers who are dependent upon one another for the attainment of certain mutual goals (Bass and Stogdill, 1990; Hollander and Julian, 1969; Smircich and Morgan,

1982). Based on this proposition, Pierce and Newstrom defined leadership as ―a dynamic and working relationship, built over time, involving an exchange between leader and follower in which leadership is a resource embedded in the situation, proving direction for goal attainment‖ (Pierce and Newstrom, 2000:6).

The significance of leadership in organisational change has been recognised by researchers since the late 1950s. Ginzberg and Reilley argued that the essence of successful change lies in the leader‘s adaptability, while the key to change is altering

behaviours rather than organisational charts (Ginzberg and Reilley, 1957). Kotter

(1990:13) adopted the view that leadership creates change. According to his research, more than 70 per cent of changes are created by leadership rather than management.

Heifetz states that leaders should ―get on the balcony‖ to get the context for change from a leadership perspective (Heifetz and Laurie, 1997:47). However, Burke and Litwin distinguished transformational dynamics from transactional dynamics and argued that

―transformational change is associated more with leadership, whereas transactional change is more within the purview of management‖ (Burke and Litwin, 1992:530-531).

Despite the consensus on the significance of leadership among these researchers, some scholars challenge the role of leadership for the functioning of organisations.

Gemmill and Oakley (1992) questioned the causality between leadership and organisational outcomes, as well as the traits explanation of great leaders. Rather, they argued that leadership is a social myth caused by the terror of helplessness and powerlessness (Gemmill and Oakley, 1992:117). Based on this proposition, they viewed the importance of ―charisma‖ for leadership as a social fiction, which allows followers to escape the responsibility for their own actions and inactions (Gemmill and Oakley,

1992:119). Therefore, they argued, real change only occurs when followers liberate themselves through expanded awareness and self-created programs of action (Gemmill and Oakley, 1992:122). Moreover, Amanda Sinclair (2004) pointed out that the so-called great leaders, such as Jack Welch, were more controlling than leading. She questioned the assumption that leaders sit above the dramatic processes of change that they set in train for their organisations (Sinclair, 2004:17).

By contrast, those who did advocate the importance of leadership in making change drew on different models of leadership, varying from top-down to bottom-up

(Beer, 2001). Three levels of leadership-driven change have been identified: The first is

coercion, whereby employees are forced into change through authority. The second is identification, whereby employees are persuaded to change through rational argument.

The third, internalisation, is when employees change due to their belief in the value of the change (Floyd and Wooldridge, 1992).

Heifetz and colleagues (Heifetz et al., 2009) put forward the point of view that leaders force employees to adapt rather than protect employees in times of distress.

Adaptive changes require members of organisations to adopt new beliefs, values and knowledge through interaction. It is the responsibility of leadership to set the vision, identify the adaptive change, regulate distress and protect the voice from below.

A similar argument was made by James Krantz from the perspective of betrayal

(Krantz, 2006). He proposed that betrayal is an essential element of leadership and organisational change. He links betrayal with leadership through the role of direction setting and vision. The term betrayal also refers to revealing the truth. In this sense, a leader‘s betrayal ―necessarily destabilises both the status quo and whatever emotional equilibrium has developed around it (Krantz, 2006:223).‖

While Kaplan et al. (1987) likewise stressed the development of strategic leadership in organisational change, other researchers focused on the development of staged models for the implementation of change (French, 1971; Gouillart and Kelly, 1996;

Judson, 1966; Kotter, 1996; Lewin, 1951). Among these, Kotter‘s eight-step change model was a milestone in the history of change management theories. Kotter and Cohen

(2002:8) argued that the key to changing people‘s behaviour is changing people‘s feelings, by showing people what the problem is with visualised presentations, rather than by changing people‘s thinking with information and analysis. Thus, Kotter substituted ―see- feel-change‖ for ―analyse-think-change‖ (Kotter and Cohen, 2002:8).

In his earlier work, Kotter (2000:4) made a comprehensive comparison between leadership and management and proposed the important viewpoint that ―management is about coping with complexity…leadership, by contrast, is about coping with change‖ . He compared the different functions of leadership and management and draws the conclusion that producing change is primarily a function of leadership. But leadership, he argued, is actually a process, which includes establishing direction, aligning people, motivating and inspiring (Kotter, 1990:5-10). Unlike planning, setting a direction means creating a vision of where the changes are heading to. Creating, communicating and empowering others to act on a vision are the three critical steps in doing transformation work (Kotter, 1995:63).

Thus, leadership controls the direction of an organisation from a macro perspective, while management deals with detailed plans to produce orderly results. From this perspective,

Kotter‘s model puts more emphasis on leadership than management in comparison to traditional change models.

According to Palmer et al. (2005), a common assumption is made by stage models that planned change can be successfully implemented as long as leaders follow the correct steps that need to be taken. In this way, leaders are viewed as directors and the outcomes depend on the strategic choices made by leaders. This assumption has, however, been critiqued by some theorists (Barge and Fairhurst, 2008; Grint, 2008; Tourish and Barge,

2010). Grint separated leadership from command and management, depending on the different problems they are attempting to solve (Grint, 2008). He argues that command is adopted when confronting critical problems, for example, a ―crisis‖ when there is certainty about what needs to be done, while management is related to tamed problems, which may be complicated but resolvable through unilinear acts (Grint, 2008:11-12). But leadership, Grint concluded, is associated with wicked problems, which are intractable, for which there is no unilinear solution and no stopping point. Any apparent solution

generates other problems, whereby there is no right or wrong answer, only better or worse alternatives (Grint, 2008:11). Tourish and Barge (2010:328) also made similar arguments that in a fast-paced continuously changing world, situations are unique, emergent and complex. Therefore, they proposed that the leader‘s role in dealing with the complex situation, or wicked problem, is to make sense of the situations and systems and take action (Grint, 2008; Tourish and Barge, 2010). In the case of Haier, the focus of this thesis, the situation that the company faced during the time of reform was a complex environment with constant change, chapters Four to Eight will analyse the leader‘s role in making sense of the situation and communicating the vision to the followers.

Palmer, Dunford and Akin (2005) used metaphor to describe the images of leaders in different theories. As outlined in Table 1, combining two key images of leaders and three key images of change outcomes, the images of a leader who brings about change can be summarised as director, navigator, caretaker, interpreter and nurturer.

Table 1: Images of leadership (Source: Adapted from Palmer et al., 2005)

Images of leadership Controlling Shaping Intended Director Coach Images of Change Partially intended Navigator Interpreter Outcomes Unintended Caretaker Nurturer

Dunphy and Stace (2001) also queried the applicability of traditional universal change models. They investigated 13 Australian service organisations, aiming to describe the prevailing leadership style used to mange change. They drew the conclusion that universal models of change management are inadequate because of the diversity of approaches actually used in these organisations (Dunphy and Stace, 1993). Based on the

analysis, their contingency model of leadership and change, which this thesis draws on due to its flexibility, aligns leadership strategy with the scale of organisational change being implemented (see Figure 3).

Figure 3: Dunphy and Stace’s contingency model of leadership and organisational change

(Source: Dunphy and Stace, 2001:109)

As shown in Figure 3, Dunphy and Stace identified four approaches to corporate change: ―Developmental Transitions‖, ―Task-focused Transitions‖, ―Charismatic

Transformations‖ and ―Turnarounds‖. The fifth category, ―Taylorism‖, is usually associated with lower performance and was not discussed in this model (Dunphy and

Stace, 2001:110). The ―Developmental Transitions‖ approach represents constant change.

Organisations use this approach when they are able to maintain their strategic alignment with the environment, or actively create the playing field to which the rest of the industry

must adapt (Dunphy and Stace, 2001:110). Corporate-wide Total Quality Management

(TQM) and service quality both belong to the category of Development Transitions, a topic examined closely in Chapter Five of this thesis. Task-focused Transitions are strongly driven from the top and business unit leaders are given considerable autonomy in strategy implementation and in operational matters. Dunphy and Stace characterised

Task-focused Transitions as ―let the managers manage, but hold them accountable for results (Dunphy and Stace, 2001:111).‖

Charismatic Transformations refer to revolutionary changes used when the organisation is radically out of strategic alignment with its environment, where there is little time for executive participation in decision-making, but where there is support for radical change within the organisation (Dunphy and Stace, 2001:113). Organisational

Turnarounds are also revolutionary changes used under the same situation as Charismatic

Transformations. The difference is there is often little support within the organisation for radical change, but nevertheless radical change is vital for organisational survival

(Dunphy and Stace, 2001:116), as chapters Four and Five examine in detail with respect to the case of Haier.

Dunphy and Stace further argued that each of these four approaches requires a different style of leadership. They identified four styles of change leadership:

Collaborative, Consultive, Directive and Coercive. They adopted four analogies to describe the leadership style needed for these changes and propose that, in Developmental

Transitions, leaders play the role of ―coaches‖, who are people-centred, personable, inspirational and skilled at informal communication and negotiation (Dunphy and Stace,

2001:165), and an example of this approach can be seen in Chapter Four of this thesis.

However, the leadership style required in Task-focused Transitions is metaphorically referred to as ―captains‖, who are directive, authoritative and focused on

the task to be accomplished. The emphasis is put on rationality rather than on charisma

(Dunphy and Stace, 2001:172). This thesis examines the role of Zhang Ruimin as a captain in Chapter Five. While in Charismatic Transformations, charismatic leadership is necessary to develop commitment to new directions and vision to make radical and fundamental changes. In this category of change, the vision is often developed by the executive team and delivered in a top-down fashion. Interaction and participation is also emphasised so that organisational members develop a strong feeling of identification with the ensuing changes and a sense of ownership of them. This can be more readily accomplished when the leader personifies the changes and becomes the appealing key factor in an emerging dramatisation of the main features of the change process (Dunphy and Stace, 2001:179). This model of leadership will be shown to work in the early phase of Haier‘s development from 1984. With regard to Organisational Turnarounds, Dunphy and Stace argued that effective leaders of Turnarounds are tough-minded, directive and prepared to take forceful measures if necessary to counter resistance to the new vision they imposed on the organisation (Dunphy and Stace, 2001:183). Therefore, they described the leadership style for Organisation Turnarounds as ―commanders‖, which this thesis examines in chapters Six and Seven. However, this thesis asks: to what extent this model can be shown to apply to the context of China?

After reviewing the theories of leadership and change, this thesis proposes that

Dunphy and Stace‘s contingency model aligns well with the four developmental phases of

Haier outlined in the chapters. Thus in this study, Dunphy and Stace‘s contingency model is found to be ideally suited to explaining why a different leadership style was adopted in the different development phases of the corporation. However, Grint, Tourish and Barge

(Grint, 2008; Tourish and Barge, 2010) offered a constructionist view of leadership which also sheds some light on the leader‘s role in making sense of the environment that the

company is placed in and communicating his understanding with the followers. This is further discussed in chapters Four to Eight.

2.3 The Role of the Environment in Organisational Theories

The prevailing change management theories advocate the adoption of change strategies that align with the organisations‘ business strategies. Change management theorists also believe that coordination and control of activity are critical to organisational success.

However, organisational theories also acknowledge the role of the environment in shaping organisational processes (Meyer and Rowan, 1977). Institutional theory and resource dependence theory elaborate on the interaction between the external environment and organisational processes (French and Bertram, 1959; Meyer and Rowan, 1977; Pfeffer and Salancik, 2003; Thornton and Ocasio, 2008).

Institutional theory views organisations as existing in networks of interdependencies and social relationships. Organisations are dependent on external sources for the resources they need, including financial, physical and information resources. A critical premise of resource dependence theory is that decisions made inside organisations reflect pressures from the environment. With regard to the case of Haier, the development of the company also reflected changes in the environment, including the economy, industrial policy changes and competitive pressures. The success of Haier is partly attributed to the level of support the firm received from the external environment.

Institutional theory also emphasises the importance of the external environment.

Both resource dependency theory and institutional theory assume that the environment imposes constraints upon organisations which affect both their structure and practices.

Institutional theory emphasises the role of social rules and norms in creating pressures that organisations conform to (Meyer and Rowan, 1977; Thornton and Ocasio, 1999).

Meyer and Rowan (1977) highlighted the role of culture and cognition in institutional analysis. DiMaggio and Powell extended Meyer and Rowan‘s focus from the broader society to the level of the organisation. DiMaggio and Powell maintained that competitive and institutional pressures are two sources for isomorphic changes and that competitive pressure are the most relevant for organisations facing open market competition.

In the context of China, competitive pressures only explain part of the adoption of change within organisations. Institutional pressures affect organisational change through three mechanisms: coercive changes that stem from political influence and legitimacy, mimetic changes that stem from standard responses to uncertainty and normative changes resulting from professionalisation (DiMaggio and Powell, 1983). This thesis explores how policy changes, particularly in relation to industry policy and state support, influenced the development of Haier. The thesis also considers how mimetic changes, particularly the adoption of management practices from other countries, influenced the development of Haier, while the adoption of management fads and fashions is developed later in the chapter.

2.4 The Influence of Culture

Hofstede (1984:13) defined culture as ―the collective programming of the mind, which distinguishes the members of one human group from another‖ and identified three levels of culture: the universal, the collective and the individual. National culture falls into the category of the collective, where mental programming is shared by a group of people

(Hofstede, 1984). Furthermore, Hofstede (1993:87) created a four-dimensional framework for cross-cultural investigation based on an extensive survey across 40 countries. The four dimensions affecting human thinking, organisations and institutions are: power distance, uncertainty avoidance, individualism/collectivism and

masculinity/femininity. Based on his survey, he compared the index of these four dimensions across 40 countries (listed in Table 2).

Table 2: Comparison of the four indices among four countries/districts (Source: Adapted from Hofstede, 1993:87)

PDI UAI IDV MAS

USA 40 46 91 62

Germany 35 65 67 66

France 68 86 71 43

Netherland 38 53 80 14

Japan 54 92 46 95

Australia 36 51 90 61

Hong Kong 68 29 25 57

Taiwan 58 69 17 45

China 80 60 20 50

Mean of 39 countries 51 64 51 51

As demonstrated in Table 2, Hofstede‘s research shows a remarkably higher power distance index (PDI) value in China than in Western countries, such as the USA,

Germany and Australia, which means power in Chinese organisations is distributed unequally (Hofstede, 1980). Therefore, organisational structures and leader-follower relationships within Chinese organisations tend to be more hierarchical, which might make the empowerment of employees more difficult to implement. As to uncertainty avoidance, even though China‘s index was lower than the mean, it is still higher than most Western countries. In another study, Hofstede also concluded that the average

uncertainty avoidance index (UVI) of Chinese cities is higher than Western countries

(Hofstede, 1984:230), which suggests that Chinese people are less tolerant of uncertainty or ambiguity and less likely to break rules.

Hofstede‘s value survey showed a remarkably lower individualism index for

China, as compared to many Western countries. It may be assumed from this finding that

Chinese organisations value collectivism more than individualism. Despite its importance and influence, some researchers critique Hofstede‘s model, because it exemplifies the very nature of the difficulties (Stening and Zhang, 2007:123). The original work of

Hofstede only identified four major components of culture, as illustrated above. While

Michael Bond and his colleagues (Chinese Culture Connection, 1987) survey of students‘ values in 23 countries, using the Chinese Values Survey (CVS), proposed a new dimension relating to Chinese culture, namely ―Confusion Work Dynamism,‖ which is similar to Hofstede‘s concept of ―Long-versus Short-Term Orientation (LTO)‖ (Stening and Zhang, 2007:123). This refers to how much society values long-standing, as opposed to short-term, traditions and values. In countries with a high LTO score, delivering on social obligations and avoiding "loss of face" are considered very important (Minkov and

Hofstede, 2012:4). Minkov and Hofstede‘s (2012) subsequent study using the World

Values Survey proved the feasibility of the LTO dimension.

With regard to Chinese culture, there is extensive research on the influence of traditional Chinese values on organisations (Fan, 1995; Jacobs et al., 1995; Stening and

Zhang, 2007; Tsui et al., 2006; Wang et al., 2012; Yang and Stening, 2013, Yang and

Stening, 2012). Yang and Stening divided the major sources of the Chinese ideological and values system into three categories: traditional Chinese cultural values, the socialist ideology of Marx, adapted by Mao Zedong to China and hence often labelled ―Maoism,‖ and the philosophy of Deng Xiaoping (Post-Maoism) (Yang and Stening, 2013:423).

Among these three categories, traditional values in China have largely been shaped by

Taoist, Buddhist and Confucian philosophies (Yang and Stening, 2013:423). Yau (1994) identified four cultural values of traditional Chinese culture: spirituality, group orientation, face-saving and power distance, which is in accordance with Hofstede‘s results on long-versus short-term orientation, power distance and individualism/collectivism. Traditional Chinese culture influenced the management philosophy and leadership styles of Chinese leaders, particularly Confucian writings, which emphasise the importance of setting a moral example, and using rewards and punishment as leadership tools for moulding moral behaviour. On the other hand, according to Taoism, effective leaders should maintain a low profile and work through others (Pierce and Newstrom, 2000:7). As Lao Tzu, the initiator and representative of

Taoism said:

A leader is best when people barely know he exists. Not so good when

people obey and acclaim him. Worse when they despise him. But of a

good leader, who talks little, when his task is done, his aim fulfilled,

they will all say, we did it ourselves (Pierce and Newstrom, 2000:3).

According to Hofstede‘s definition, organisational culture is another form of collective culture. Kunda (1992:8) defined organisational culture as ―the shared rules governing cognitive and affective aspects of membership in an organisation, and the means whereby they are shaped and expressed‖. Contemporary organisations are attempting to establish a more intensive, explicit and systematic normative system (Jaffee,

2001:169). Kunda described this system as strong culture: ―Strong cultures are based on intense emotional attachment and the internalisation of clearly enunciated company values that often replace formal structures and therefore no longer require strict and rigid external control‖ (Kunda, 1992:10). Based on the analysis of strong cultures, Kunda

(1992) emphasised the impact of organisational culture by arguing that normative control demands much more of the individual than structural control. He argues that under traditional bureaucratic structures, workers carried out specific job assignment because they were required, while organisational culture, and the normative forms of control with which it is associated, bases control and conformity on the internalisation of a value system (Jaffee, 2001:171). Regulated by the organisational culture, members

… entered into a contract that is more than economic, one that must

contend with overt external claims on self-definition…In this sense,

members have internalised the ‗problem of control‘ that lies at the heart

of the organisation and the private selves of members have become part

of the ‗contested terrain‘ (Kunda, 1992:214).

In the later phases of Haier‘s management history, the leader achieved the goal of normative control over the company by imposing the management concept of strategic business unit (SBU) and self-management, which will be further discussed in chapters

Seven, Eight and Nine. In this study, Hofstede‘s culture model is adopted to analyse the influence of Chinese cultural values on management practices in Haier, in particular power distance, uncertainty avoidance and individualism/collectivism.

2.5 Total Quality Management Theories and Dissemination

TQM‘s origins can be traced to 1949, when the Union of Japanese Scientists and

Engineers (JUSE) formed a committee of scholars, engineers and government officials devoted to improving Japanese productivity and enhance their post-war quality of life

(Powell, 1995:15). Influenced by Deming and Juran (Deming, 1986; Juran, 1992), the committee developed a course on statistical quality control for Japanese engineers, followed by extensive statistical training and the widespread dissemination of the Deming philosophy among Japanese manufacturers. As quality control programs became more

widely implemented and sophisticated, it became clear that some aspects of the TQM philosophy could also be applied to non manufacturing functions such as product development, purchasing and billing, with potential applications in service and not-for- profit organisations (Powell, 1995:16).

American firms began to take serious notice of TQM around 1980. By the end of the 1980s, a significant proportion of large U.S. manufacturers had adopted TQM (Powell,

1995:17). Subsequently, it has been implemented in other developed countries, including

Western Europe. The decade of the 1990s witnessed the most rapid progress in the volume of TQM practices and research, most of which was conducted by Japanese and

Western companies and theorists (Ahire, 1997; Dotchin and Oakland, 1992; Feigenbaum,

1991; James, 1996; Juran, 1992). According to management fashion research, TQM became dominant in the Western world during the 1980s and 1990s (Abrahamson and

Fairchild, 1999; Abrahamson, 1996; Brindle and Stearns, 2001; Newell et al., 2001) (refer to Table 4 in the last section of this chapter).

Companies in developing countries like China also began to adopt TQM to improve their performance and competitiveness (Yusuf et al., 2007:510). The concept of quality control was introduced into China in 1978 when the Beijing Internal Combustion

Engine Factory first implemented quality management. In 1985, some consultant companies in Shanghai began to provide TQM training and conducted examinations in quality. In 1986, the Chinese government decided that all large and medium-, state-owned enterprises had to carry out Total Quality Control (TQC) (Li et al., 2003:1030). Extensive studies have been conducted regarding the adoption of TQM within the Chinese context

(Chan et al., 2000; Chin and Pun, 2002; Lee, 2004; Lo and Sculli, 1995; Noronha, 2002;

Yusuf et al., 2007; Zhan and Zhang, 2006; Zu et al., 2011). Many of them focused on the overall adoption of TQM in Chinese corporations (Lee, 2004; Lo and Sculli, 1995; Yusuf

et al., 2007) or framework-building from a macro perspective (Chin and Pun, 2002; Zu et al., 2011). Fewer case studies were found on research into TQM in Chinese companies. In

Chapter Five, this thesis, presents a case study Haier‘s implementation of TQM, as part of the longitudinal analysis, focusing on the factors affecting the implementation process of the TQM program and the influence of management fads.

2.5.1 Definition of TQM

Quality as a concept is defined as ―the capacity to satisfy human wants‖ (Edwards,

1968:36). In the context of management, scholars include the requirement of the

―customer‖ in the assessment of quality (Oakland, 1989). Deming (2000:167) contended that ―quality should be aimed at the needs of the consumers, present and future‖. Juran

(1992:9) defined quality as ―fitness for use‖. He argued that defining quality, in terms such as conformance to specification or conformance to standards, is not precise at the managerial level. Rather, conformance to customer needs is essential (Juran, 1992:11).

Quality, defined as meeting customer requirements, gives people in different roles in the organisation, the requirement for improvement and enables people to communicate with each other in pursuit of a common goal (Oakland, 1989). Ishikawa also emphasised the significance of team work for all functions and all employees (Ishikawa and Lu, 1985).

Total Quality Management (TQM) is generally viewed as a process-oriented approach to improving customer satisfaction that aims to deliver goods and services of the highest quality (Mehra et al., 2001:855-856). The continuous improvement of the quality of goods and services is delivered through the participation of individuals at all levels and functions of an organisation (Pfau, 1989:17).

2.5.2 TQM models

TQM researchers have proposed different models for Total Quality Control.

Deming (1986:23-24) proposed 14 key principles for managers to transform business effectiveness, which later became known as the 14 points for TQM. These 14 points include:

1. create constancy of purpose for improving products and services,

2. adopt the new philosophy,

3. cease dependence on inspection to achieve quality,

4. end the practice of awarding business on price alone; instead, minimise total

cost by working with a single supplier,

5. improve constantly and forever every process for planning, production and

service, institute training on the job,

6. adopt and institute leadership,

7. drive out fear,

8. break down barriers between staff areas,

9. eliminate slogans, exhortations and targets for the workforce,

10. eliminate numerical quotas for the workforce and numerical goals for

management,

11. remove barriers that rob people of pride of workmanship,

12. eliminate the annual rating or merit system,

13. institute a vigorous program of education and self-improvement for

everyone, and

14. put everybody in the company to work accomplishing the transformation.

Similar to Deming, Crosby (1979:149-222) proposed 14 steps of TQM implementation:

1. make it clear that management is committed to quality,

2. form quality improvement teams with representatives from each department,

3. determine where current and potential quality problems lie,

4. evaluate the cost of quality and explain its use as a management tool,

5. raise the quality awareness and personal concern of all employees,

6. take actions to correct problems identified through previous steps,

7. establish a committee for the zero defects program,

8. train supervisors to actively carry out their part of the quality improvement

program,

9. hold a ‗zero defects day‘ to let all employees realise that there has been a

change,

10. encourage individuals to establish improvement goals for themselves and

their groups,

11. encourage employees to communicate to management the obstacles they

face in attaining their improvement goals,

12. recognise and appreciate those who participate,

13. establish quality councils to communicate on a regular basis,

14. do it all over again to emphasise that the quality improvement program

never ends.

Oakland (1989:453) assembled concepts and components from different models and developed a systematic model for TQM. He distilled 10 points for senior management to adopt and categorises them into soft and hard outcomes of TQM. The soft outcomes create the basis of the model.

The soft outcomes include identifying the customer-supplier relationship; managing process; changing the culture; improving communication and showing commitment. The process core is surrounded by board management necessities like systems, tools and teams. Figure 4 provides a multi-dimensional approach to TQM

(Oakland, 1989:435). In this model, he discovered aspects such as the management, system, teamwork and tools as the basis of TQM.

Figure 4: Oakland TQM Model (Source: Oakland, 1989:435)

Juran (1992:300) developed the Juran trilogy of TQM, based on the universal management processes of planning, controlling and improving–namely, quality planning, quality controlling and quality improving. Quality planning includes the steps of setting quality goals; identifying the customers‘ needs; developing product features to meet those

needs; developing processes to produce those product features; and establishing process controls. Quality control consists of evaluating actual quality performance, comparing the performance to quality goals and acting on the difference. Quality improvement is the means to raising quality performance to an unprecedented level through the following steps:

1. establishing the infrastructure,

2. identifying improvement projects and establishing a team for each project,

3. providing resources, motivations and the training needed by the teams to

achieve annual quality improvement (Juran, 1992).

Among the works of TQM, it is commonly believed that quality management should be conducted throughout different dimensions of the organisation in order to achieve true effectiveness. Feigenbaum (1991:16) argued that quality control cannot be achieved by concentrating on just the production function, since quality is determined at all phases in the industrial cycle. The scope of total quality involves the entire organisation: all people, all functions, it also extends to external organisations, such as suppliers and customers (Dotchin and Oakland, 1992). Researchers include different dimensions in their quality control models. Ishikawa (1985) emphasised the importance of cross-functional management, continuous improvement and customer orientation.

From the previous works, Dotchin and Oakland (1992:141) generalised several facets of TQM:

1. Recognising customers and discovering their needs,

2. Setting standards which are consistent with the customers‘ requirements,

3. Controlling processes and improving their capability,

4. Establishing systems for quality,

5. Management‘s responsibility for setting quality policy, providing motivation

through leadership and equipping people to achieve quality,

6. Empowerment of people at all levels in the organisation to act for quality.

Mehre et al. (2001) conducted an extensive review on TQM literature and summarised five key factors indicating the critical elements in the implementation of

TQM: human resources focus, management structure, quality tools, supplier support, customer orientation (Mehra et al., 2001:860). Jamali et al. (2010:112) reviewed research conducted on the critical success factors for TQM implementation and found nine critical success factors, which were listed as: top management commitment, training, customer focus, employee involvement, supplier management, strategic planning, product and service design, process management and quality culture. This thesis explores the roles that leadership, management support and employee commitment played in the implementation of TQM and the development of a quality culture in Haier.

2.6 Implementing Business Process Reengineering

Another popular management technique implemented in many Western firms in the 1990s was that of Business Process Reengineering (BPR). BPR evolved from the experiences of a few US-based companies in the 1980s. They significantly improved their performance by radically changing their work processes (Martinsons and Hempel, 1998:394). The distinguishing characteristic of BPR is the fundamental, radical and dramatic nature, by which BPR can be differentiated from other organisational developments, such as Total

Quality Management (TQM) (Hammer and Champy, 1993:32-33). It was developed when

US companies were facing a new customer and competition environment. While TQM found its original and greatest support in an Asian context, BPR may be considered to be

an American re-interpretation of TQM (Martinsons and Hempel, 1998:393). However, with the market-based reform of the Chinese economic system, many Chinese firms initiated BPR to achieve better performance and meet international standards.

2.6.1 The definition and goals of BPR

Business Process Reengineering (BPR) is defined as ―the fundamental rethinking and radical redesign of business process to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed‖

(Hammer and Champy, 1993:32). The objects of reengineering are processes rather than organisations. A business process is ―a collection of activities that takes one or more kinds of inputs and creates an output that is of value to the customer‖ (Hammer and Champy,

1993:34). Compared with organisational units and structure, processes are invisible and obscure. Visualisation and mapping of processes can be effective tools to achieve successful reengineering (O'Neill and Sohal, 1999:574).

The concept of BPR is often confused with other types of organisational change, such as downsizing, restructuring, reorganising and Total Quality Management (TQM)

(Hammer and Champy, 1993:47). Table 3 illustrates comparisons between BPR and other organisational changes:

Table 3: Comparison between BPR and other organisational changes (Source: Hammer and

Champy, 1993:48,49)

Downsizing/ Reorganising/Delayering/ Total Quality Restructuring Flattening Management Doing less with less Redesigning of Incremental organisational structure improvement within existing processes Reengineer- Doing more with Redesigning of process Replacing the existing ing less structure processes with new ones

The driving forces behind BPR are summarised as ‗3Cs‖ by Hammer and Champy

(1993:18-24):

1. Customers who can now be very diverse, segmented and expect consultation,

2. Competition has intensified to meet the needs of customers in every niche,

3. Change has become pervasive, persistent, faster and in some markets a

prerequisite.

These forces create a new environment for business, which requires changes within organisations. Aside from the external environment, internal factors, such as low efficiency in existing process, support for change from the management level and people‘s awareness of the urgency of change can also make forces for BPR increase or restrain the possibility of BPR. Empirical studies in different countries also investigate the motives behind BPR. Hammer and Champy (1993:103) identified three kinds of companies undertaking BPR. The first category typifies companies that are in deep trouble; the second, companies which are not in trouble, but whose managers can see trouble coming; and the third typifies companies that are in peak condition and see an opportunity to develop a lead over their competitors. O‘Neill and Sohal (1998:860) indicate that the most significant event triggers, which lead to BPR in Australian companies are competitive pressures and the intense need to cut costs.

Before setting the goals of a BPR program, leaders and project managers need to be aware of what a reengineered company should look like. This is referred to as rethinking the business process by Hammer and Champy (1993:50). Rethinking business process means getting a clear picture about the components of a reengineered process, which includes: jobs, empowerment, the steps performed in a natural order, work performed, where it makes the most sense, a reduction of checks and controls, minimised

reconciliation, a case manager and hybrid centralisation/decentralisation operations

(Hammer and Champy, 1993:52-60).

Based on the above features of a reengineered process, Champy (1995:3) conducted a study in North America and Europe about the state of reengineering and generalised the potential goals of reengineering as: a 70 per cent decrease in cycle time, a

40 per cent decrease in cost, a 40 per cent increase in customer satisfaction, quality and revenue and a 25 per cent growth in market share.

A survey conducted by Guimaraes and Bond (1996:25) in the US manufacturing industry showed that the key goals and objectives of BPR projects were to focus on the end results and to build consensus for making changes, while to a lesser extent, to use time reduction to gain competitiveness. Using similar criteria, a study conducted in the

Australian context drew a different conclusion. Though focused on the primary use of goals and objectives, more emphasis was placed on time as a competitive weapon

(O'Neill and Sohal, 1999).

Reengineering business process means ―changing everything about the company‖

(Hammer and Champy, 1993:65). As illustrated in Figure 5, all four aspects in a business system are linked together. Therefore, redesigning the process requires changes in jobs, people, management and values.

Figure 5: Business system diamond (Source: Hammer and Champy, 1993:80)

Changes that occur in BPR fall well into these four dimensions (Hammer and

Champy, 1993). Specific changes in each dimension are as follows:

 Business process refers to the work units change from functional

departments to process teams.

 Job and structure changes include simple tasks to multi-dimensional work,

shifts from training to education, changing organisational structure from

hierarchical to flat and empowering people‘s roles.

 Management and measurement systems consist of the focus of performance

measures and compensation changes from activity to results advancement

criteria changes from performance to ability, managers change from

supervisors to coaches and executive changes from scorekeepers to leaders.

 Values and beliefs refer to the value changes from protective to productive

(Hammer and Champy, 1993).

There have been extensive empirical studies on the dimensions of BPR. Most of them concentrate on the concrete aspects of job and structure and management and measurement systems (O'Neill and Sohal, 1999; O'Neill and Sohal, 1998; Ranganathan

and Dhaliwal, 2001; Zairi and Sinclair, 1995), relatively few studies have explored the value and beliefs changes which are affected by culture issues.

2.6.2 The spread of BPR

As discussed earlier, BPR was developed when US companies were facing a new customer and competition environment in the 1980s. The significant improvement in their performance by radically changing their work processes made BPR the American management phenomenon of the early 1990s and prompted its international diffusion

(Martinsons and Hempel, 1998:394). Since the 1990s, BPR has become a widely used approach to the management of change (Fowler, 1998; Galliers and Baker, 1995; Hill and

Collins, 1998). Chinese state-owned enterprises are undergoing significant change as they confront the new competitive pressures created by the economic reforms of the past decades. Ever since China‘s accession to WTO in 2001, Chinese corporations have been facing a different external and internal environment. The impact of the WTO entry stressed the need to reform the employment relations within organisations. More Western- style practices can now be found in Chinese corporations. The concept of BPR is accepted by more and more managers of young ventures, as well as state-owned enterprises (Zhu and Warner, 2004:312).

Despite its popularity, BPR has been criticised due to its high failure rates and the low level of financial gains by some companies (Harrington et al., 1998:44). It has been reported that 50-70 per cent of reengineering efforts have failed to achieve their goals and

70 per cent of organisations have failed to achieve any result from their reengineering efforts (Oliver, 1993; Stanton et al., 1993; Stebbins et al., 1998). Recent researchers have begun to critique the adaptability of BPR in this regard (Cao et al., 2001; Grey and Mitev,

1995; Zairi and Sinclair, 1995) and claim that what BPR has created is a ―fetish of change‖

and the ―current fashion‖ for delayering or slimming down (Harrington et al., 1998:45).

In the development history of Haier, the company conducted two BPR programs, one in

1998 and another in 2007. Chapters Seven and Eight will explore how effectively Haier implemented BPR and will focus on both the successes and failures experienced by the firm.

2.7 The Influence of Management Fashions

In a particular time period, theorists and practitioners tend to advocate certain management approaches, which are not necessarily efficient. Organisational theories have attempted to resolve why certain organisational procedures exist without any obvious technical or economic value. Early studies (Meyer and Rowan, 1977; Tolbert and Zucker,

1983) showed that technical or economic criteria were less important determinants in the later stages of innovation diffusion. Therefore, late adaptors tended to use legitimacy rather than technical and economic rationality as the basis for their actions (Staw and

Epstein, 2000). Institutional theorists described the ebb and flow of management techniques as following a fashion cycle and explained the adoption of fashionable management techniques in terms of social bandwagon effects, whereby information about the adoption and adopters of the techniques creates social pressure for their further adoption (Abrahamson, 1996; Newell et al., 2001). Under this assumption, firms may adopt new management practices to gain legitimacy rather than efficiency. Staw and

Epstein‘s (2000) research on the effects of popular management techniques illustrated how companies associated with popular management techniques tended to attain a higher reputation and the CEO was paid more, rather than achieving an improvement in economic performance, which provides strong support for institutional theory.

Management fashions are experienced as rapid, bell-shaped swings in the popularity of management techniques, which are produced by a management-fashion- setting process involving management fashion setters (Abrahamson, 1996:261). By this definition, management fashion is treated as both a process and an outcome. Abrahamson

(1996) described fashion-setting as a four-fold process: creation, selection, processing and dissemination (see Figure 6).

Figure 6: Management-fashion-setting process (Source: Abrahamson, 1996)

The arrow leading from the demand bubble to the supply bubble shows that fashion setters sense preferences in fashion demand and create corresponding management techniques in the creation stage and select those techniques that satiate this

demand in the selection stage (Abrahamson, 1996). Abrahamson argued that, unlike aesthetic fashions, management fashions are not shaped by social-psychological forces alone. Rather, social-psychological forces compete with technical and economic forces to shape the demand for management fashions.

Social-psychological theories (Newell et al., 2001; Staw and Epstein, 2000) assume that fashion followers are vulnerable to fashion setters under one of the following psychological states: (a) frustration, (b) boredom and striving for novelty, (c) striving for status differentiation. Therefore, Abrahamson (1996:262) suggested that management fashions are in demand to meet manager‘s needs for individuality and novelty; that there will be more management fashions when managers‘ expectations are disappointed; and new management fashions tend to emerge when old fashions are adopted by lower reputation organisations.

A variety of economic, political and organisational forces open gaps between an organisation‘s actual and desired performances. These technical and economic changes create preferences among fashion followers for certain types of management techniques to fill the gaps. Macroeconomic fluctuation, labour union activity and technical contradictions within organisations can all affect the flow of management fashions

(Abrahamson, 1996). Brindle and Stearns (2001) summarised the transformation of management fashions in the 20th century, as shown in Table 4:

Table 4: Management fashions in the 20th century (Source: Brindle and Stearns, 2001)

Management Enthusiasms Year Key Words Early Theories Scientific Management 1900-1930s Process, one way to do things, efficiency Administrative Management 1930s Division of labour functions, hierarchy Human Social 1940s Workers' social needs are important for optimal Factors motivation and productivity Beginning of True Faddism Theory X and Theory 1950s Authoritarian versus participatory management, Y motivation Leadership 1950s Criticality of the leader as being pivotal to the firm's success or failure, traits could be identified

Strategic Planning 1950-1960s Plan, control, external environment critical Management by 1950s-1960s Individual goals related to company goals Objectives Portfolio 1973 Boston Consulting Group, matrix of business Management products, cash cows, stars, dogs and the like Matrix Management 1970s Restructure reporting relationships to eliminate functional structures Quality Circles 1970s-7980s Monitor, workplace improvement Total Quality 1980s-1990s Customer focus, efficiency, processes, quality Management Empowerment Benchmarking Reengineering 1990s Process, start-over, structure Team-Based Work 1980s-1990s Self-Managed Teams Downsizing 1990s Layoffs, called restructuring for efficiency Learning in 1990s Constant learning, how organisations learn new Organisations ways of doing things, share learning Leadership 1980s-1990s Traits, charisma capable of being learned, individual pivotal to survival Entrepreneurship 1990s Start-ups, e-commerce

As illustrated in Table 4, management fashions changed in different periods, while there were also several themes of continuity within those fashions. Abrahamson and

Fairchild (1999:722-724) propose that the transition in management fashions is triggered by both endogenous and exogenous forces and concluded three conditions under which particular management fashions emerge: (a) a collapse or elimination of the previous fashion; (b) a widespread performance gap; (c) a discourse highlighting a performance gap.

Although there has been extensive work on management fads and fashions, we still know little about the dissemination process of management fashions from fashion setters to users (Abrahamson, 1996). Consultant companies and business schools are considered to be the fashion setters, who select and process new fashions. However, it is argued that consultants can be divided into two types: self-promoting gurus and educators. The former tend to promote their solution as a fix for all problems instead of educating their clients (Barabba et al., 2002). As a result, gurus might promote practices which facilitate their own fame, rather than solving particular corporate puzzles. It is widely accepted that publications are the main disseminators of management fashion. Management gurus use book publishing to diffuse their rhetoric, as educators use textbooks to disseminate their ideologies. Haier‘s adoption of change practices are in line with the broader evolution of management fashions. The empirical chapters of this thesis will further investigate how management fads were adopted and implemented at Haier.

2.8 Globalisation and the Development of a Global Mindset

The thesis also explores how successful Haier was in exporting its products beyond its traditional domestic product markets. The concept of globalisation has been widely used across the social sciences and in business since the 1980s. Globalisation has been defined from a range of different perspectives. Existing definitions of globalisation can be grouped into four categories: globalisation as internationalisation, globalisation as

liberalisation, globalisation as universalisation and globalisation as Westernisation

(Scholte, 2005:54). Scholte argued that these four definitions are flawed, because they are redundant and, instead, proposed a fifth notion which conceptualises globalisation as the spread of transnational or supraterritorial connections between people (Scholte, 2005:59).

Therefore, in this regard, globalisation involves the intensification of transnational social contacts (Scholte, 2005:59). This perspective is reflected in Harvey‘s (1989) important concept of time-space compression, whereby globalisation collapses distance through transport improvements, enhanced telecommunication and digital technologies. With regard to production, Scholte argued that globalisation has accelerated the process of commoditisation and led to greater organisational efficiency for capital accumulation, which he refers to as ―hypercapitalism‖ (Scholte, 2005:160). Hypercapitalism manifests as the growth of offshore centres and the proliferation of transnational companies with the organisational conditions for enhanced accumulation (Scholte, 2005:177).

China began liberalising the post-Mao economy in the late 1970s. China‘s entry into the World Trade Organisation (WTO) in 2001 further enhanced China‘s integration into the world economy and business system (Nolan and Zhang, 2002). A consistently stated goal of China‘s industrial policy has been to construct globally powerful companies that can compete on the global playing field (Nolan and Zhang, 2002:2089). As discussed earlier in this chapter, globalisation has become a central organising principle since the

1980s (Lattemann et al., 2012). China‘s entry into the WTO was an historical milestone in the process of its integration into the world economy and business system. The impact of globalisation has been spectacular since China‘s entry into the WTO. The country has maintained over 10 per cent annual gross domestic product (GDP) growth for over ten years, holding billions of dollars of foreign direct investment and a worldwide reputation as a global manufacturer (Lattemann et al., 2012:145).

China‘s globalisation has been driven, in large measure, by its outward and inward foreign direct investment (FDI) activities which have evolved rapidly (Alon et al.,

2011:191). China has been the recipient of inward FDI since the first joint venture was built in 1980 (Cui, 2008:1). In recent years, especially since its entry into the WTO, it has also become an important source country for outward FDI. After the Chinese Premier

Wen Jaibao announced in 2004 that ―the Chinese government encourages more enterprises to go global‖, the Chinese government has openly encouraged Chinese investment abroad, supported by a vast pool of savings and export surplus earnings, in addition to relatively cheap labour (Alon et al., 2011:192). Chinese outward investment began to increase at a fast pace since then. China recorded an average of 60 per cent annual growth in outward FDI from 2002 to 2006 (Cui, 2008:1). Extensive research was conducted on the FDI of Chinese firms, most of which focused on the drivers which encouraged Chinese firms to engage in outward FDI (Buckley et al., 2007; Child and

Rodrigues, 2005; Dunning, 2004). Cui and Jiang (2009) investigated how Chinese firms invest overseas from the perspective of the FDI entry mode of Chinese firms. Other studies were also conducted with regard to the globalisation of Chinese firms (Cui and

Jiang, 2012; Cui and Jiang, 2009; Kang and Jiang, 2012).

The expansion of globalisation presents new requirements for the players in the globalised economy. To become globally competitive players, leaders are required to develop global mindsets. The concept of mindset originated from cognitive psychology and has been used to describe a set of mental images gained from experience. Generally speaking, mindset is the way people make sense of the world (Gupta and Govindarajan,

2002). Mindset also exists at the organisational level. An organisational mindset can be seen as the aggregation of the individual mindsets of all members. The leader‘s mindset plays a significant role in shaping the organisation‘s mindset (Paul, 2001). Gupta and

Govindarajan illustrated mindsets in a two dimensional conceptual model with differentiation (openness to diversity across culture and markets) as the x axis and integration (ability to integrate diversity across culture and markets) as the y axis (Gupta and Govindarajan, 2002). Summarised from different definitions, a global mindset can be described as a mindset which is open to and aware of the diversity among different cultures and markets (Gupta and Govindarajan, 2002). The concept of geocentrism is considered to be an underlying construct for a global mindset (see Figure 7).

Figure 7: Mindsets conceptual framework (Source: Gupta and Govindarajan, 2002)

Beechler and Javidan‘s (2007) group leadership characteristics outlines the behaviours that contribute to and influence others from various cultural systems, in order to build their framework for a global mindset. A global mindset plays an important role in leading change. Dunphy and Stace (2001) argue that successful leaders and managers

must think globally and push the boundaries of thinking about how their organisation can succeed internationally (Dunphy and Stace, 2001:44).

Figure 8: Global mindset framework (Source: Beechler and Javidan, 2007)

Since China‘s Open Door Policy in 1978, management practices were brought to

China by young managers who were educated in Western universities and through joint ventures. There has been some discussion on whether these Western practices would be accepted by Chinese corporations. Zhuang and Whitehill (1989) suggested that although the opening up of the Chinese economy offered opportunities for Western management systems to be adopted in China, their total adoption would not be suitable for China‘s reality. Even so, many Chinese corporations began to adopt these practices to cope with the opening of the economy to the market. Some of them successfully changed themselves into globally competitive organisations, while others n failed. Many studies

were also conducted on how Chinese corporations have adapted to their integration into the world economy since the time of the reforms (Child, 1996; Cui and Jiang, 2012; Cui and Jiang, 2009; Cui, 2008; Kang and Jiang, 2012; Warner, 1987; Wang and Hong, 2009).

Most of these studies analyse the influence of the opening up process and Western management concepts on the behaviour of Chinese corporation‘s from a macro perspective (Chin and Pun, 2002; Ge and Voß, 2009; Lee, 2004; Lo and Sculli, 1995;

Wang et al., 2005; Zhang et al., 2003; Zu et al., 2011). Fewer are case studies that investigate the development of organisations in China from a micro perspective. Among these case studies, most have focused on a short period of the corporation‘s history. There have been a limited number of longitudinal studies of organisations in China (Fischer et al., 2013).

Chapter Three will examine the globalisation of Chinese firms, while chapters

Five to Eight will further analyse the influence of globalisation on Haier and how the leader‘s global mindset enabled the company to adapt to Haier‘s integration into the global economy.

2.9 Conclusion: Gaps in the Literature and the Focus of this Research

In conclusion, there has been a lack of longitudinal case studies on Chinese organisations that investigate their development during the period of the Open Door Policy. This research aims to fill a gap in the literature by providing a longitudinal case study of a

Chinese corporation, the Haier Group, from 1984 to 2013. Based on the literature, it was concluded that leadership, culture, globalisation and management fashions were influential in the development of Haier. As outlined in the introduction, this thesis addresses the central question:

What were the factors driving the management of change in the Haier Group during the four phases of its development from 1984 to 2013?

The thesis also explores the following sub-questions:

1. How did government policy changes influence the development of Haier?

2. What role did leadership play in the management of change in Haier?

3. How did Chinese cultural values influence Haier‘s management practices?

4. How were Total Quality Management (TQM) and Business Process

Reengineering (BPR) implemented at Haier?

5. To what extent were Haier‘s management practices influenced by

management fashions?

6. How did Haier expand into international markets and how successful was

this global expansion of the firm?

By drawing on Dunphy and Stace‘s (2001) contingency model of leadership and

organisational change, leadership and management practices within Haier will be

examined during the four phases of its development from 1984 to 2013, in chapters

Four-Eight. More particularly, this thesis asks to what extent the case of Haier aligns

with the contingency model and to what extent it diverges? Furthermore, this thesis

explores what is unique about leadership and management practices in the context of

Chinese publicly owned corporations, such as Haier. The next chapter examines more

closely the development of China‘s Open Door Policy and the establishment of the

Chinese home appliance industry, in order to set the stage for the subsequent

empirical chapters which follow.

Chapter Three

China’s Open Door Policy: The Economic and Industrial Context from 1978-2013

3.1 Introduction

As discussed in Chapter Two, organisational theorists advocate the point of view that the development of individual companies is constrained by institutional factors such as external resources, national level policies and the industrial environment. Haier‘s development history is in line with the opening-up of the Chinese economy since the end of the 1970s. Therefore, the analysis of the external environment is crucial to understand the strategies adopted by Haier. This chapter addresses the sub research question: ―How did government policy changes influence the development of Haier?‖. It provides an account of the economic environment in China before and after the Open Door Policy in

1978, with special emphasis on the reform from a planned economy to a market-oriented economy, the globalisation of Chinese firms and the development history of the Chinese home appliance industry since the end of 1970s. The analysis of the changing economic and industrial context illustrates how the changing policy context affected the behaviour of the company. The first part of Chapter Two explores the shift in economic policies after

1978 and the globalisation of Chinese firms. The second part examines the evolution of the Chinese home appliance industry. The industry has been changing with regard to market focus, competitive strategy, management style, industrial structure and characteristics.

3.2 A Centralised Socialist Economy Before 1978

The People‘s Republic of China (PRC) was founded in October 1949 and was led by Mao

Zedong until his death in 1976. Mao‘s main aim was to develop a massive socialist industrial complex through direct government control (Naughton, 2007). Affected by decades of civil war and the Japanese invasion, China inherited an economy in shambles in 1949. Modern industrial output showed no growth between 1935 and 1949 and production in most industries had declined sharply from previous peak levels (Hudson,

1997:3). The new leaders were committed to building socialism in China. The leaders of the Communist Party of China (CPC) adopted the Soviet economic model, which followed a socialist heavy-industry-priority development strategy, or the Big Push

Strategy (Naughton, 2007:56). Under this development strategy, consumption was squeezed as rapid industrialisation was given the highest priority. In order to channel resources into the Big Push Strategy, China adopted a ―command economy‖ modelled on the Soviet Union, whereby the government controlled the bulk of the economy directly and used its control to pump resources into the construction of new factories (Hart-

Landsberg and Burkett, 2005). This system was adopted by China in the 1950s and was altered to fit with Maoist ideology during the 1960s and 1970s (Naughton, 2007).

The years from 1949 to 1952 were a period of economic recovery. During these years, the government pushed through radical land reform in rural areas and distributed land to poor peasant households. Between 1950 and 1952, 42 per cent of China‘s arable land was redistributed (Hudson, 1997:4). In urban areas, the new government took over many factories including those expropriated from the Japanese and those belonging to the

Kuomintang Government. By the end of 1950, 63 per cent of industrial output was under state control (Hudson, 1997:6). Under the banner of ―New Democracy‖, the Communist

Party welcomed those who worked for the Nationalist government under the Kuomintang

to work for the new government and capitalists who were willing to stay in China were encouraged to expand their production too. By putting skilled entrepreneurs and technicians to work, the government was able to revive industry quickly. By the end of

1952, economic recovery and rehabilitation had become a resounding success (Naughton,

2007).

After the economic recovery, the government was ready to launch socialist industrialisation in 1953. As discussed before, China adopted the Soviet Union economic model, based on state ownership in the modern sector, large collective units in agriculture and centralised economic planning. The Soviet approach to economic development was manifested in the five-year plans (see Appendix 3), which were a series of social and economic development initiatives shaped by the national government (Hudson, 1997).

From 1953 to 1957, China launched its First Five-Year Plan. The first task highlighted was to concentrate efforts on the construction of 694 large and medium-sized industrial projects, including 156 with the aid of the Soviet Union, so as to lay the primary foundations for China‘s socialist industrialisation. The second task was to develop agricultural producers‘ cooperatives to help in the socialist transformation of the agricultural and handicraft industries and the third task was to put capitalist industry and commerce under state capitalism to facilitate the socialist transformation of private industry and commerce (Li, 1955).

The implementation of the First Five-Year Plan reached a peak during the ―High

Tide of Socialism‖ in 1955-1956 (Naughton, 2007:69). In mid 1955, Mao criticised the slow pace of the reform of agricultural cooperatives. His intervention touched off the campaign to push farmers into producers‘ cooperatives. This campaign then raged through the cities, during which, factories and shops were turned into cooperatives or else

―joint public-private‖ factories (Naughton, 2007:67). The predecessor of Haier, the

Qingdao Electric Appliance Repair Cooperative, was founded in 1955 during the cooperatives reform (Haier University, 2012). Owing to the incentives of the government, and with help from the Soviet Union, China achieved great improvements in industrial production. However, the growth of agricultural output lagged far behind that of industry.

In order to stimulate the development of agriculture and light industry, Mao launched a movement of mass mobilisation, in which new forms of social organisation would provide the basis for overcoming the production constrains imposed by nature (Hudson,

1997:7). The movement was later known as the ―Great Leap Forward‖ (GLF), under which China set the unrealistic aim to double national income in a short period of time

(Mao, 1956).

The Great Leap Forward spanned from 1958 to 1960, during which the government sought to maintain rapid growth in both industry and agricultural production using labour-intensive techniques. To support the goal to leap toward a fully communist society within a few years, communes were established in rural areas on a large scale, which combined both government and economic functions in order to mobilise labour for construction projects, provide social services and develop rural small-scale industries

(Naughton, 2007:69). Under the commune system, material incentives and monetary rewards were rejected and free markets in the countryside were shut down. Due to a lack of planning and experimentation, both the commune system and the GLF soon met with great difficulties. The products of the new industries were poor in quality or even unusable and the diversion of labour from agriculture led to a decline in output.

Meanwhile, the extreme politicisation of everyday life placed great pressure on local cadres to report large increases in output that grossly misrepresented actual circumstances, which broke down the national statistical system and deprived the national leadership of an accurate means to assess agricultural output (Hudson, 1997:8). As a result, a serious

food shortage occurred throughout China in 1960. Although the government claimed the famine was the result of natural disaster, many Western scholars still believe that the fundamental cause was the blindness of the top leadership and errors in their strategic decisions (Lin and Yang, 1998; Naughton, 2007; Smil, 1999). The famine caused an immense catastrophe. Data shows that towards the end of 1961, about 25-30 million excess deaths occurred due to the great famine and another 30 million births were postponed due to food shortage (Naughton, 2007:72).

After the great famine, the years from 1961 to 1965, were the post-leap recovery period, marked by the recentralisation of economic control and the restoration of planning, material incentives and living standards. However, during the recovery, Mao was disturbed to see the emergence of a technology oriented society in which the pursuit of individual benefit superseded ideology (Hudson, 1997). Moreover, he was dissatisfied with his marginalised role in the party. In order to regain his dominant role in the party,

Mao found outside support from millions of youth activists. In 1966, Mao announced the launch of the so-called Cultural Revolution and encouraged groups of students, called

Red Guards, to overthrow the entrenched Communist Party leadership, except for him

(Naughton, 2007:75). Proponents of the Cultural Revolution argued that, although the economic basis of the society had been socialised since 1949, the institutional structure and the patterns of national thought had yet to be transformed accordingly. Therefore, they viewed the Cultural Revolution as the struggle between two roads, one leading to socialism and the other to capitalism (Hudson, 1997:10).

During the 10 years of the Cultural Revolution, those who sought individual liberties, or who supported the preservation of traditional Chinese culture, the use of examinations in education, or advocated the use of the market or any other rationalistic means of economic management, were all denounced as ―capitalist-roaders‖. They were

harassed, attacked or dispatched to the countryside for ―re-education‖. Some of them were even killed. Some of the party leaders and other cadres were also defined as

―capitalist-roaders‖, during this period, and came under severe attack. Deng Xiaoping, who became China‘s paramount leader after Mao‘s time, was also persecuted during the

Cultural Revolution (Hudson, 1997:10). In the turmoil of the Cultural Revolution, traditional forms of education were discarded. Academic education was not emphasised in middle schools and students were often sent to participate in physical labour. University entrance exams were eliminated and replaced by a recommendation system, under which social class status was the primary criteria for selection.

In the 10 years of the Cultural Revolution, everyday life was extremely politicised, material incentives were deprived from farmers and workers, living standard stagnated in both urban and rural areas and a deep cynicism prevailed throughout the country (Hudson,

1997:11). Despite the chaos in social life, the economy, on the other hand, was not as adversely affected by the Cultural Revolution as it was during the Great Leap Forward.

Output in industry and agriculture continued to rise from 1966. Nevertheless, the collective organisation of agriculture and the extremely high rate of capital accumulation by the state limited the popular living standard across China (Naughton, 2007:75). The

Cultural Revolution ended with the death of Mao in 1976. His successor, Hua Guofeng attempted to remedy some of the worst abuses of the Cultural Revolution, but not until

1978, when Deng Xiaoping became the paramount leader, did a break with the Maoist social vision occur and China entered into the era of reform (Hudson, 1997:11).

3.3 Economic Reform in China Since 1978

The opening-up and reform of the Chinese economy was embarked on from 1978 with the Third Plenum of the 11th CPC Central Committee. The years from 1978 to 1992 were

viewed as the first stage of the reform. The policies issued in this period can be distinguished into two categories, the Open Door Policy and the materialisation of the

Chinese economy. Section 3.3.1 discusses the changes in Chinese economic environment from these two perspectives.

3.3.1 1978 to 1992: the first stage of China’s opening-up and economic reform

The first major shift in economic policies came in December 1978, with the Third Plenum of the Eleventh CPC Central Committee. The reform decisions made then focused on two main aspects: opening up the Chinese economy and conducting economic reform. To achieve the first goal, the Chinese government adopted a set of policies to promote the integration of the economic relations with the capitalist world economy, referred to as the

Open Door Policy which covered foreign trade, foreign direct investment and foreign borrowing (Howell and Yusuf, 1993:3). Except for the decision to open up to the world, another key decision made on this meeting was to transfer the focus of the party‘s work from class struggle to economic construction (Central Committee of the Chinese

Communist Party, 1978). In April of 1979, at the working conference of the CPC Central

Committee, the guidelines for the economic development in this period were summarised as ―readjustment, reform, consolidation and improvement‖. Readjustment means shifting priorities from industry to agriculture, from heavy industry to light industry and focusing attention on bottle neck sectors. Reform in industry means to give enterprises greater autonomy in decision-making, using profit as an incentive and allowing enterprises to retain a portion of profit, to introduce limited competition and increased flexibility in the labour management. Consolidation and improvement aimed to upgrade the level of management and efficiency (Warner, 1987:9). Guided by these principles, the Chinese

government implemented a series of reforms in different sectors since 1978, including taxation reform, price reform, management reform and labour force reform.

The first stage of the Open Door Policy in this period was from 1978 to 1986, when the central administration sought to restrict foreign exchange expenditure. Some large-scale import contracts were cancelled during this time. In the 1980s, American and

Japanese firms began to move their manufacturing off-shore to search for lower labour costs, which were seen as an opportunity for China to attract foreign investment (Jinglun,

1989). During this time, the Chinese government decentralised control and innovation in the spheres of foreign trade, foreign borrowing and foreign direct investment. Such new forms of foreign trade as compensation trade, processing and assembly were introduced

(Howell and Yusuf, 1993:51). The foreign trade system was also reformed. Beijing,

Shanghai and Tianjin were designated as experimental sites for foreign trade reform; their experience was then extended to Guangzhou province in 1980. Eight ports on the Yangtse

River were opened to foreign trade in April 1980. In July 1979, China‘s first law on Sino- foreign joint ventures came into effect, which guaranteed the legal protection of foreign investment. In 1980 China joined the IMF and the World Bank, which was a breakthrough for China (Howell and Yusuf, 1993:52). Decentralisation of foreign trade and foreign exchange were carried out from 1984 to1986. The drafting of a law on wholly owned foreign enterprises in 1986 was a milestone in the improvement of foreign economic legislation to attract foreign capital (Howell and Yusuf, 1993:53).

To comply with the Open Door Policy, Chinese cities were also opened to the world. In 1979 the Chinese government announced that special economic zones (SEZs) were to be established in Shenzhen, Zhuhai, Shantou and Xiamen. By 1988, five SEZs had been established in China including Hainan. In 1984, a decision was made to expand the Open Door Policy into 14 coastal cities, including: Dalian, Qinhuangdao, Tianjin,

Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou,

Guangzhou, Zhanjiang and Beihai. Fifteen economic and technological development zones (ETDZs) were subsequently set up in those cities. The coastal cities were granted some privileges in the approval of foreign direct investment, taxation and foreign trade, which were less than the SEZs but greater than the inland areas (Howell and Yusuf,

1993:55). The primary role of ETDZs were to introduce and absorb new technology and management concepts, expand export, develop products that were in short supply domestically and to develop an educated workforce for the new open economy. Most

ETDZs are located in coastal areas in Eastern China, where the economy is more developed; there is a strong industrial base, convenient public transport, advanced technology and active foreign trade. Their development mode varies due to the location and the development level of the city. The functions of ETDZs can be generalised under four categories:

1. Developing cutting-edge technologies and establishing new industries.

2. Developing the export trade and transit trade.

3. Developing tertiary industry, especially the tourism industry.

4. Developing foreign investment and economic cooperation.

The state government issued a series of taxation preferential policies to promote the development of ETDZs. Qingdao was one of the first batch of coastal open cities with an ETDZ. Qingdao ETDZ is divided into six functional zones: the petrochemical industrial zone; the international business and processing industrial zone; the harbour industrial zone; the ecological and efficient agricultural zone; the administrative business centre; and the comprehensive tourist zone.

The second stage of China‘s opening up initiative occurred between 1986 and

1992. Policies were issued to offer more concessions to foreign investors during this period. In 1986, 22 new regulations were introduced to grant foreign investors more incentives, including reductions in wages, land and other costs, as well as further tax concessions (Howell and Yusuf, 1993:81). Except for coastal cities, China also opened inland borders to expand trade with the Soviet Union and gain access to the European market. Frontier cities formed the second line in the opening up process. Inland cities such as Wuhan and Beijing also gained privileges in foreign trade and investment

(Howell and Yusuf, 1993). A more favourable climate for foreign investment was also created. In May 1988 the State Council approved new regulations governing the hiring rights for joint ventures. As regard to the banking sector, more flexibility was offered to stimulate foreign trade. The Bank of China raised its foreign currency loan quota to support export production in the coastal cities. In June 1988, foreign banks were also given permission to conduct business using the Renminbi (RMB) currency in SEZs, which enabled an improvement in investment conditions (Howell and Yusuf, 1993).

Despite the expansion of the Open Door Policy, some problems also began to emerge in the economy. Foreign debt was growing too fast and a bilateral trade deficit appeared. Although the government made some attempts to bring foreign trade and foreign exchange under control, such as the five measures issued by the Minister of

Foreign Relations and Trade, in order to strengthen central control over the foreign trade sector in 1988, the overheating of the economy and rising inflation still caused fears both domestically and internationally. The discontents with state corruption led to political crisis in 1989 and economic and political instability took its toll on foreign investment.

Consequently, the growth rate of foreign direct investment (FDI) fell dramatically in 1989, especially FDI from the USA and Japan (Howell and Yusuf, 1993:89).

Triggered by the relaxation of international economic sanctions and the realignment of the economy, a more favourable and secure environment was created after

1990 for the further expansion of the Open Door Policy under the Eighth Five-Year Plan and the ten-year development program. Whilst former policies focused on the opening up of the coastal areas, the government extended this process into the inland frontiers

(Howell and Yusuf, 1993:95). Reform in the foreign trade system continued apace in this period, including the implementation of agency and contract systems, the abolition of subsidies on export commodities and the introduction of the unified foreign exchange retention system. Cuts in import tariffs for 225 different kinds of commodities were implemented in January 1992. In October 1992, the 14th Party Congress took place, which was a milestone in the process of reform and opening up. The idea of a ―socialist market economy‖ was officially introduced in this congress, implying a shift from a centrally planned economy to a market-oriented economy (Howell and Yusuf, 1993:115).

With regard to the economic reform from 1978 to 1992, it mainly covered three macro aspects, which were: taxation reform, price reform and labour force reform. On the micro level, management reform was also carried out among Chinese companies.

Subsequently, a reform of taxation profits for state-owned enterprises was introduced after 1983. Before the reform, most state-owned enterprises were under a profit-delivery system and were entitled to retain profits in excess of their required delivery. Bonuses and welfare were both provided by those retained funds. The system confronted some problems in delivery, level setting and uncertainty of government revenue. To solve these problems, a revised system was introduced in 1993. Under the new system, income tax replaced fixed profit delivery. In the first stage, large and medium enterprises were required to pay an income tax equal to 55 per cent of their target profit as well as a quota of after-tax profit. A lower income tax was imposed on smaller enterprises. In the second

stage, profit delivery was entirely replaced by income tax; value added tax, resource tax, local tax and the adjustment tax. By the end of 1985, 80 per cent of state-owned enterprises were regulated by the new system.

Price reform was also carried out in this period. As discussed earlier, before 1978

China adopted the command economic system of the Soviet Union. Under the central planning command economic system, the volumes of goods or services were mainly determined by the planning authorities before the price was set; therefore, price could not play its allocative role. The price of a product was composed of the cost of raw materials, power, labour, depreciation, tax and a planned profit, having little relationship with the actual cost incurred by individual production units. Profits were turned over to the state and losses was subsidised by the state (Mackerras et al., 1994).

To rationalise the price system, the government implemented a dual price system in 1984 to induce enterprises to face market competition without sudden disruption to the planning mechanism. Under the dual price system, planned prices were applied to products covered by state planning quotas and market prices to the products outside of the quotas (Hay, 1994). The purpose of the dual price system was to make an incremental change through state-planned prices to market-oriented prices. It is commonly concluded by scholars that this gradual approach was a rational choice, in accordance with China‘s situation (Fan, 1994; Lau et al., 2000; Wu and Zhao, 1987). Since 1984, the dual price system played a significant role in making the transition of China‘s economy smoothly

(Fan, 1994).

By increasing the share of production carried out in the market, it would play an increasingly important role in guiding resource allocation. The system had some impact on the production of enterprises. Firstly, since it allowed enterprises to sell products, which exceeded quotas at higher market prices, they had greater incentive to improve

efficiency, production and hence profitability. Secondly, under the new system, input prices were determined by the market rather than being fixed by the state, giving greater incentive for enterprises to save energy and materials. To sum up, the dual price system forced enterprises to improve efficiency and meet the requirements of the state macroeconomic plan (Hay, 1994).

Despite the role it played in the transition from a planned economy to a market- oriented economy, the dual price system also had some disadvantages. Although it enabled prices to reflect market demand and supply relations more directly, price levels were also substantially increased under the new system. The rise of inflation in the late

1980s was partly attributed to the dual price system (Mackerras et al., 1994). Moreover, the dual price system also caused some problems in speculation, bureaucratic corruption and enterprises‘ deceptive behaviour (Hay, 1994). Consequently, the retail price index

(RPI) went through some significant rises at the end of the 1980s and RPI grew by 18.5 per cent in 1988 and 17.9 per cent in 1989 (National Bureau of Statistics of China,

2001:281). The rise of prices seriously jeopardised the purchasing power of normal families and resulted in some problems of social instability. Therefore, the central committee was alarmed by the subsequent problems caused by the dual price system.

Therefore, Zhao Ziyang, the general secretary of the Central Committee of the

Communist Party of China (CPC), proposed to make a quick breakthrough in price liberalisation at the meeting of the Standing Committee of the Politburo in May 1988, which discarded the previous gradual reform practice and made a radical change to rationalise the chaotic price system in a short period and move the economy towards normalisation.

This action is considered irrational nowadays by most researchers (Du and Zhu,

2003; YU and Ren, 2011; Zheng, 2005), who argued that it reflected an ignorance of the

macroeconomic environment. Researchers believe that, facing serious problems of inflation and the pressure from the huge gap between input and output prices under the dual price system, the priority should have been curbing inflation and to reduce the discrepancy between input and output prices rather than attempting to achieve a radical success in price reform (Du and Zhu, 2003; YU and Ren, 2011). Time proved the price reform to be incorrect. There was a huge gap between input and output prices under the dual price system, which made the price rise inevitable after the price liberalisation.

Before the official implementation of price reform, the expectations of a price rise already caused a rush of panic purchasing in early 1988. Towards late August of 1988, the snapping up rush reached its peak. The newspaper then described it as:

People have totally lost their senses. They are hoarding all kinds of

products, whether they are durable goods or basic consumer goods or

even unsaleable goods (Wu, 2010).

The snapping-up rush resulted in the pre-consumption of durable goods, which caused the consumption of these goods years ahead of their normal consumption cycle.

The snapping up caused by price reform also affected the situation of the Chinese home appliance market at the end of the 1980s and early 1990s, which will be further elaborated in Section 3.4 and in Chapter Five.

As regards the labour force, corporations experienced three outstanding changes in the 1980s. The first was the adoption of the labour contract system, named smashing the iron rice bowl. Together with the widespread employment of casual labour, the mobility of the labour force was dramatically enhanced (Howell and Yusuf, 1993). The second was the intensification of competition among enterprises for labour, especially specialist and skilled labour, resulting in the free flow of labour (Reynolds, 1987). The third was the power over personnel and labour given to managers in state-owned

enterprises. A fundamental principle of China‘s political and economic organisation was that ‗the Party controlled personnel‘. The Party exercised its ultimate control over personnel selection and dismissal through its organisation departments at different levels

(Qian, 1996). The promulgation of ―Provisional regulation on further extending the decision-making power of the state industrial enterprises‖ gave factory directors or managers the right to appoint or dismiss cadres under them. The directors or managers, who were appointed by higher departments, have the right to employ, reward and punish employees. They also have the right to reject forced assignment from higher agencies or individuals (Laaksonen, 1988:294).

Management practices among Chinese companies also went through some major changes during this time. The ideology in China since 1949 emphasised that a socialist country is not supposed to adopt Western values or practices. Before the reform, based on socialist ideology, the main criteria of organisation cadres was loyalty to the Party, rather than management knowledge and skills. Most Chinese managers were not trained by

Western standard. Therefore, Western management style can hardly be found in Chinese organisations before 1978 (Zhuang and Whitehill, 1989). Since the 1970s, the reform of the economic system sought to streamline administration and give enterprises more power.

The policy involved two aspects: (a) reducing the government‘s administrative interference in the enterprises‘ affairs, particularly mandatory plans for day-to-day business activities and (b) expanding the markets influence on the enterprise by generating rational price signals and making demand a binding force on supply (Reynolds,

1987). From 1979-1983, greater management autonomy in the form of contract responsibility was offered to enterprises to assist profit tax reform. In 1984, a new system of manager (or director) responsibility was introduced, offering greater power for managers and releasing them from political control (Hay, 1994). According to a survey

conducted by CESRRI (China Economic System Reform Research Institute), by 1984, more than half of the sampled industrial enterprises enjoyed some degree of autonomy in materials supply, production and marketing. Over two thirds of those enterprises had to keep the market situation in mind when mapping out their production plan (Reynolds,

1987:48).

3.3.2 1992-2001 The establishment of a socialist market economy

The second stage of economic reform started after 1992 when Deng Xiaoping took a trip to several pro-reform cities in South China, known as Nanxun. This trip marks a breakthrough in China‘s reform. As illustrated in Section 3.3.1, with the progress of the reform, the old economic system began to disintegrate and a new market economic system began to emerge. The conflict between different interest groups based on the two different systems became increasingly severe. Economic maladjustment and the overheating of the economy began to emerge by the end of the 1980s, resulting in a heated discussion on the evaluation of the reform and open-up policies and the future development of the Chinese economy. Some conservatives held the point of view that the reform had failed, which proved that a market economy was not the right choice for

China. This view spread rapidly after the political disturbance in 1989 and became dominant in the early 1990s. As a result, China faced confusion both in practice and theories. Two urgent problems needed to be answered. First, should market-oriented economic reform be carried on? Second, should the opening up of Chinese economy be accelerated (Zhao, 2002)?

These two questions were answered by Deng Xiaoping, the leader of China of the time. During his visit to some southern cities, including Wuchang, Shenzhen, Zhuhai and

Shanghai, from 18 January to 21 February 1992, Deng Xiaoping made a series of

speeches on economic development and the opening up of China, which was then issued in 1992 by the CPC (Communist Party of China) Central Committee and known as the

―South Tour Talk‖ or ―Nanfang Talk‖. He pointed out in his speeches that the essential difference between capitalism and socialism does not lie in whether the economy is planned or market oriented, but that socialism can also have a market. Moreover, he argued, in order to gain comparative advantage to capitalism, socialism must boldly assimilate all of the achievements of human civilisation, including those from capitalism

(Deng, 1995). With regard to the Open Door Policy, Deng Xiaoping stressed that: ―we should be more daring in reform and opening up and be daring to try new things‖ (Deng,

1995:377). Deng‘s concept of a ―socialist market economy‖ was then accepted at the 14th

Party Congress in October 1992 (Wong and Bo, 2010). It was made clear in the 14th

Party Congress report that the goal of the economic system reform was to establish the socialist market economic system (Jiang, 1992). This was the first time in the history of the party the socialist economic system with the market-oriented economy was incorporated. Under the guidance of the report the ―Decision of the Central Committee of the Communist Party of China on Some Issues Concerning the Establishment of the

Socialist Market Economy‖ was approved by the Third Plenary Session of the 14th

Central Committee in November 1993, which specified the target of economic reform and sketched out the framework of a socialist market economy (Central Committee of the

Chinese Communist Party, 1993). With Deng leading the charge, the reform of the

Chinese economy took off again. The target of reforms in this period were expanding the operation of the market in the economy and refining the market mechanism. The dual- track economic system in the first stage was replaced by a market-oriented economy.

The reform policies issued by the 14th Party Congress heated up the Chinese economy. As discussed before, the Chinese government issued a series of control policies

to control inflation at the end of the 1980s, which cooled down the economy temporarily.

However, after 1992, stimulated by Deng Xiaoping‘s Open Door Policy to accelerate economic development, the economy heated up and went into expansion again. However, behind the illusion of prosperity, the bogus boom was created by unsustainable investment bubbles, which led to serious problems of an overheated economy and subsequent inflation in 1992 and the first half of 1993. The retail price index (RPI) went through a rise of 13.2 per cent in 1993 and this rate rocketed to 21.7 per cent in 1994, which was the highest peak in the annual RPI growth rate since the formation of the

People‘s Republic of China (National Bureau of Statistics of China, 2001).

In order to control the overheated economy and inflation the Chinese government took a series of steps to tackle the problem. On 24 June 1993, the CPC Central Committee and State Council of China issued the document ―The CPC Central Committee and State

Council on the Current Economic Situation and Strengthening Macroeconomic Controls‖.

The document contains 16 economic measures to rectifying the financial order and control inflation, including adjustment of the interest rates and the bank reserve ratio, as well as to open market operations (CPC Central Committee and State Council of China,

1993). Facing the serious economic situation, Zhu Rongji, the Deputy Premier, decided to use an iron-handed policy to get the economy back on track. A series of concrete macroeconomic policies were implemented, which aimed to achieve a soft landing for the economy. These policies included: rectifying the financial order; restraining irregular fund raising; controlling investment scales; raising the interest rate on deposits; and a differentiated loan policy.

These policies achieved remarkable results in curbing inflation and stabilising the economy. In 1996, the growth rate of CPI was reduced to under 10 per cent for the first time in five years and the economy still retained a growth rate of 9 per cent. However,

these contractionary macroeconomic policies also resulted in the potential trouble of deflation in the future. The measures effectively solved, however, the problems of inflation and rising prices. Towards the end of 1996, the economy was about to achieve a successful soft landing when the financial crisis hit Asia. The crisis began when Thailand devalued the Baht on July 2 1997, and rapidly spread to Indonesia, the Philippines,

Malaysia and South Korea. Although China was not directly hit by the crisis, it did not completely escape from the so-called contagion effect.

The economic downturn of other countries affected China‘s economy. After the second quarter of 1997, China's economic growth slowed down significantly. The slowing down was partly attributed to the financial crisis and also partly due to the contradictory macroeconomic policies being carried out since 1993 (Yu, 2000:164). Facing the threat of the financial crisis, the Chinese government still refused to ease its monetary policy due to the fear of the rebounding of inflation in the middle of 1997. When other Asian countries underwent currency depreciation, the Chinese government pledged not to depreciate the RMB. This decision prevented China from the depreciation competition and the accompanying economic instability. However, compared to other depreciated currencies, the RMB was relatively appreciated in this period, which influenced China‘s exports and further reduced overall demand and production (Zheng, 2005). The decreasing demand for imports in countries hit by the crisis meant a shrinking international market for Chinese exports. Moreover, the dramatic devaluation of the region's currencies meant China faced increased competition, not only from neighbouring countries, but also in the broader international market. China's refusal to devalue the

RMB caused tremendous difficulties for Chinese companies exporting footwear, textile, garments and electronics. China's export growth began to slow down in the second half of

1997 and the downward trend has since worsened (Wang, 1999:539).

Meanwhile, the currency devaluation and the economic recession in Southeast

Asia significantly reduced investments in China. In addition, as the repercussions of the

Asian financial crisis spread to countries outside the region, such as Russia and Brazil, investors turned away from emerging markets in developing countries to safer havens in developed countries. As foreign trade and FDI are the twin engines of China's economic growth, their slowdown naturally led China's economic growth rate to decline, as illustrated in Table 5:

Table 5: China’s economic performance 1996-1998 (Source: China Statistical Yearbook 1998)

Growth Rate 1996 1997 1998

Export 1.50 21.00 0.58

FDI 11.20 8.40 0.07

Economy 9.70 8.80 7.80

Enterprise reform was also the core of the transition in this period. In the 1990s, enterprises in China were divided into three categories according to their ownership model. The first type was state-owned enterprises (SOEs), which were owned by the central government and supervised by the central or local governments. The second type was collective enterprises, which were founded on the basis of group ownership. These two types of ownership were together referred as public-owned enterprises. Firms other than these two types are categorised as private enterprises (Cao et al., 1999:104). Public- owned enterprises form the basis of the Chinese economy and industry. They constituted the backbone of the economy and include most resource and basic industries. They are also the main revenue source, but also a major financial burden, because the state provides explicit and implicit subsidies to them (Qian, 1996). With the establishment of a market economy in China, the previous command system was now open to the market. A

new mechanism, which undermined the authority of central planning, began to emerge and caused conflicts between the regulation of the government and the autonomy of public-owned enterprises (Ji, 1998:25). From 1992, the Chinese government implemented a series of reform initiatives regarding public-owned enterprises, but especially for S. It was pointed out in the decisions of the Third Plenary Session of the 14th Central

Committee that in accordance with the requirement of a socialist market economic system, the reform of the enterprise system should target clearly established ownership, well- defined power and responsibility, separation of the enterprise from administration and scientific management (Central Committee of the Chinese Communist Party, 1993). The enterprise reform in this period followed the gradualist strategy of ―nurturing the giant state-owned enterprises, while letting smaller ones go‖, known as zhuadafangxiao.

Although these requirements were used for state-owned enterprise reform, the principle of establishing a new system with scientific management also affected other enterprise. The reform mainly covered three aspects:

1. Decentralisation of decision-making (Mackerras et al., 1994)

A salient feature of traditional state-owned enterprises in the Chinese economy was their lack of autonomy (Lin et al., 1998). Decentralisation in a centrally planned economy is often known as a movement of decision-making power from higher to lower levels of bureaucracy. A key element of the decentralisation of the decision-making process of state-owned enterprises is the factory director responsibility system (FDRS).

As stated before in Chapter Three, under a central-planned economic system, the state allocated raw materials, coordinated production and distributed finished goods for the whole country. A Chinese enterprise then was just a production unit inside the vast central planning system. Each year it would be assigned a production quota, and all its products were then sold to the state at predetermined prices (Boisot and Child, 1996). Enterprises

had little to do with quality, market demand or profit. Their main task was to meet the state output quotas. Professional and technical personnel, including the enterprise manager, were responsible to the Communist Party of China (CPC) branch in the enterprise. The FDRS devolved decision-making authority to the enterprise managers or directors (Mackerras et al., 1994). Under the new FDRS system, the relationship between the government and enterprises became regulative and profit related rather than administrative (Luo, 2008). Rather than having the government to make decisions for them, enterprises needed to decide for themselves the quality and quantity of their production according to the market (Newell, 1999).

2. Reintroduction of material incentives (Mackerras et al., 1994)

The use of material incentives was never popular before the economic reform in

China, especially state-owned enterprises. Workers' lack of motivation had been a major problem in Chinese state-owned enterprises. With the implementation of the Open Door

Policy, Deng Xiaoping introduced the ideology of using both material and moral incentives to boost productivity (Mackerras et al., 1994). The ideology of material incentives resulted in policy changes for state-owned Enterprises which were now allowed to keep a fraction of their profits, where previously all profits had to be remitted to the state. Enterprises began to sell some of their outputs and buy some of their inputs in free markets, rather than selling and procuring everything at state-controlled prices.

Managers were now given monetary rewards, explicitly based on their firm's performance.

The right to decide what to produce, how much to produce and how to produce it were now shifted from the state to the enterprise (Groves et al., 1994:183).

3. The establishment of the modern enterprise system

Enterprise reform entered a new stage after 1992. The purpose of the first stage of reform was to adjust the relationship between the enterprise and government; the second stage targeted adjusting the relationship between the enterprise and the market. Therefore, the target of this period was set as ―establishing a modern enterprise system‖ at the Third

Plenary Session of the 14th Central Committee of the CPC. The modern enterprise system was defined as one that ―has clear property rights, well defined rights and responsibilities, scientific management which can meet the needs of the market economy‖. Guided by this principle, organisational reforms were conducted in both state-owned enterprises and collective enterprises to cope with the application of market forces.

Besides the economic reform, another important decision made by the central committee in 1992 was to further expand the scope of opening the Chinese economy. Six cities along the Yangtze River were opened up in 1992. Eighteen inland provincial capital cities were also opened to foreign trade and investment. By the end of 1992, China‘s opening up covered an area of 339 cites with a population of more than 300 million (Fan,

2004).

Concluding the economic development of China since 1978, the main aspects of the economic reform can be summarised into three main aspects. Firstly, the primary change was the reform from a planned to a market-oriented economy. The second was the opening-up of the Chinese economy to the international market with the Open Door

Policy. The last characteristic in this period was the economic fluctuation and the introduction of regulation. The regulation issued in the end of the 1980s effectively controlled inflation. However, stimulated by the new round of reform policies, the economy heated up again after 1992. A series of macro regulating policies were implemented by the state council after 1993 in order to control the over-heated economy with the aim to achieve a soft-landing. However, just as this goal was about to be realised,

the Asian financial crisis hit most Asian countries, including China and this, together with the tightening policies, caused deflation in the end of the 1990s.

3.3.3 2001: Joining the WTO and participation in the world economy

A milestone in China‘s Open Door Policy was its successful accession into the World

Trade Organisation (WTO) in 2001. The process of joining the WTO was quite torturous for China. As discussed earlier in this chapter, China began to open its economy from

1978. To comply with the effort to open up, China formally applied to rejoin the GATT

(General Agreement on Trade and Tariffs, which was disseminated in 1993 and re- founded as the WTO) in 1986 (Naughton, 2007:391). After that, China began its long journey of negotiation with GATT. The attitude of Western countries towards China was basically favourable in the beginning, due to China‘s effort in market reforms and opening up. However, this attitude was changed after the traumatic events of Tiananmen

Square in 1989. Negotiations on the GATT entry for China were delayed as human rights became a prominent issue in the US congress debates on relations with China (Hudson,

1997:181). In order to get in line with the WTO requirement on tariffs, China began to lower its tariffs after 1994. The average nominal tariff was reduced from 43 per cent in

1992 to 17 per cent in 1999 (Naughton, 2007:391). At the same time, China continued its efforts in negotiating with the world trading institutions. After years of unremitting efforts,

China finally became the 143rd member of the WTO on December 11, 2001.

Chian‘s entry into the WTO was an opportunity as well as a challenge for its economy. The Chinese leadership viewed the WTO membership as a means to continue economic growth and open up the economy further (Sim, 2003:74). Firstly, the WTO membership was a helpful means to attract foreign investment, capital and advanced technology. On the macro level, this would accelerate the economic development of

China. China‘s economic growth had been fuelled by FDI and its accession to the WTO would result in an influx of FDI into China, which was critical for the future growth of the economy. From the micro perspective, on the other hand, this offered easier access to foreign capitals and technologies for Chinese companies. But the influx of foreign investment created a more competitive environment in the domestic market. The WTO membership was an opportunity for China to expand its export markets and China made remarkable efforts in lowering tariffs, which further opened the enormous Chinese market to the member countries. While its trading partners focused on China‘s concessions,

China too was able to enjoy lower trade barriers from its partners under the WTO agreement (Sim, 2003:74). This, on the one hand, enabled Chinese companies to export their products with more favourable tariffs. On the other hand, the non-tariff barriers required companies to get more familiar with international rules and regulations and improve the quality of their products to meet the international standards. Thirdly, China‘s entry into the WTO brought in pressures for enterprise reform. Despite the rapid development of the private sector, public-owned enterprises, especially state-owned enterprises, still played a dominant role in China‘s economy even though many of them have been financially unviable for years. Through the accession to the WTO, however, outside pressure was brought to bear on state-owned enterprises and, through increasing foreign competition, they would undertake the necessary subsequent reforms (Sim,

2003:75).

In conclusion, after its entry into the WTO in 2001, China has positively undertaken continued market-oriented reforms and further opened up its economy to trade and investment, which created an open environment for foreign investors as well as an opportunity for Chinese companies to participate in the global economy. Meanwhile, the competition in its domestic market became fiercer with the influx of foreign investment.

The changes in the economic environment also influenced the development of the home appliance industry. The next part of this chapter will discuss the development history of the Chinese home appliance industry since 1978.

3.4 The Development history of the Chinese Home Appliance Industry

3.4.1 1978-1982: initial stage

The home appliance industry is a relatively new industry in China with a history going back only 35 years. Western countries like the USA began the production of refrigerators in the 1920s, while the Chinese home appliance industry was developed in the late 1970s, in line with China‘s process of reform and Open Door Policy for its economy. As discussed earlier in this chapter, under the central planning economic system before 1978, the emphasis for economic development was placed on heavy industry, while light industry in China was neglected. In 1978, a decision to implement a program of socialist modernisation was made at the Third Plenary Session of the 11th Central Committee

(Central Committee of the Chinese Communist Party, 1978). The development of light industry began to draw more attention from the government and matching support policies were also put forward. With regard to the home appliance industry, the state implemented a series of policies including increasing the scale of basic construction investment for light industry, appropriating idle factories and funds from heavy industry for light industry and increasing loans to light industry (China Appliance Press, 2008).

In 1978, the Ministry of Light Industry sent a delegation to Japan to learn about their experience and cutting-edge technologies in the home appliance manufacturing industry. Meanwhile, the state introduced an industrial development strategy to

―encourage the introduction of advanced technology and equipments‖ (Liu, 2008:20). The

State Planning Commission, which has broad administrative and planning control over

the Chinese economy, set aside a large amount of foreign exchange specifically for the home appliance industry, in order to purchase equipment and technologies. Under the decision of the State Planning Commission, the home appliance industry, both national and regional, was put under a centralised management structure by the Department of

Light Industry. A new section called the Hardware Appliances Industrial Bureau was set up, within the Light Industry Department, to take charge of the planning and management of the home appliance industry (Liu, 2008:22).

Unlike similar industries in Western countries, which had developed since the

1920s, the Chinese home appliance industry developed in a unique way. The development of the Chinese home appliance industry began by importing advanced production lines and technologies. This model was adopted in accordance with the situation of the industry in China at the time. The home appliance industry is a capital and technology intensive industry. Based on the instability of the Chinese industrial foundation and the lack of production equipment for electrical appliances, it was impossible for China to catch up with the developed countries, which started production in the 1920s, by developing new technologies and equipments independently. Wan Derun, the former director of the

Bureau of Home Appliance of the Chinese Department of Light Industry explained that:

There were some arguments about which way Chinese home appliance

industry should take for the start. Some advocated that we should be

self-dependent and develop our own equipment and technology.

However, the reality was that there was not even a single production

line in China then. Starting from importing remained the only way to

start up Chinese home appliance industry (Liu, 2008).

Government policies played an important role in stimulating the Chinese home appliance manufacturers‘ to introduce production lines from overseas. The Department of

Light Industry of China was in charge of the regulation and control of the home appliance industry. In 1980, the Department of Light Industry set up the development plan for the home appliance industry, which focused on refrigerator production in five major cities,

Beijing, Shanghai, Guangzhou, Suzhou and Tianjin. By 1982, the policy to ―support the home appliance industry‖ had a dramatic impact on the production of home appliance products. The annual output of refrigerators increased from 28 thousand in 1978 to 99.9 thousand in 1982 and the yearly production of washing machines soared from 0.4 thousand in 1978 to 2532.6 thousand in 1982 (Liu, 2008:21).

Apart from policy and legislative support, increased income and purchasing power amongst the Chinese population made it possible to expand market sales for home appliance products. The first consumption cycle for home appliance products started from

1980 and expanded into a consumer wave throughout the urban areas.

3.4.2 1983-1990: the stage of rapid development

The home appliance industry went through a golden age in the 1980s. As a newly developed and burgeoning industry, the home appliance industry drew intense attention from the relevant government department all over the country in the beginning of the

1980s. Under the planned economic system, many local governments rushed to invest in home appliance production.

In 1984, the Department of Light Industry readjust the allocation for refrigerator production, assigning 44 factory national wide to produce refrigerators. Haier was the last one authorised for refrigerator production. Yang Bo, the former minister of the

Department of Light Industry of China, described how Haier got permission for refrigerator production in one of his articles:

Haier was not included in the list of designated producers at first.

However, under the request of the municipal government and the party

committee of Qingdao, we (the Department of Light Industry of China)

paid a site visit to Qingdao. Considering that the population of

Shandong province was as big as 70 million, there was a great potential

market for the home appliance industry. After discussion among the

heads of the Department of Light Industry, the decision was made to

designate a production site in Qingdao and the predecessor of Haier,

Qingdao Refrigerator General Factory, was assigned to be the only

designated refrigerator producer in Qingdao (Yang, 2009).

Qingdao was not the only city striving to be designated as a site for home appliance production. Affected by the incentive policies and with great potential demand, many local governments made plans for the development of the home appliance industry.

Initially 22 manufacturers were designated for refrigerator production, however, under pressure from local governments, the final number was raised to 44 and the expected production capacity reached 17 million per year, which exceeded consumption capacity.

With support from the Department of Light Industry and local governments, most home appliance producers in China began their production by importing production lines.

Therefore, introducing production lines from other countries became the dominant trend in the home appliance industry during this period. Haier followed this trend and introduced its first refrigerator production line from Germany in 1984. These imported production lines helped the Chinese home appliance industry to make its first breakthrough. However, the rapid development of the industry in the early 1980s was not in accordance with market demand, and production exceeded market demand. Moreover, many companies purchased the equipment without learning about the technology and how to operate it. One employee in Haier described how:

Production was the priority then. Many companies imported equipment

from other countries. But a lot of the equipment ended up in storage

without working. Some of them didn‘t even know how to operate the

machines (Interviewee 4).

As a result, although still in the start-up stage in the mid-1980s, the Chinese home appliance industry already showed signs of blind expansion and excessive production. In order to regulate the home appliance industry and ensure the healthy development of home appliance production, the State Planning Commission, the State Economic and

Trade Commission and the Department of Light Industry held a national meeting of refrigerator and washing machine production in March and September 1985. The Report on the Regulation of Refrigerator Producers and Control of Blindness in Introducing

Production Lines was then was passed and issued by the State Council (Yang, 2009).

However, those administrative orders did not have any remarkable effect on the regulation of the home appliance industry. By the end of the 1980s, overcapacity and industrial disarray had become a serious problem for the Chinese home appliance industry.

The authorities realised that the only way to solve this problem was to let the companies into the market and enhance the role of market competition in resource distribution (The

Research Group of the Academy of Macroeconomic Researches of the State Planning

Commission, 2000:39).

In 1988, a round of institutional reform was conducted within the Chinese government and the Bureau of Home Appliances, which used to be in charge of the control and allocation of the home appliance industry, was separated from the Department of Light Industry, which ended the history of administrative control and intervention to

Chinese home appliance industry (Liu, 2008:21). On 31 December 1988, the China

Household Electric Appliance Association was founded as the self-regulation association

for the Chinese home appliance industry, under the permission of the Ministry of Civil

Affairs. The shift in industry administration and regulation laid the foundation for the marketisation of the Chinese home appliance industry. With the announcement of the market economic system reform in 1992, the Chinese home appliance industry entered a new phase. The market became regulated by competition rather than the government.

3.4.3 1990-2001: the outbreak of a price war and industrial restructuring

The home appliance industry was one of the earliest Chinese industries which went through marketisation. As discussed above, the initial development of the Chinese home appliance industry was primarily stimulated and supported by the government‘s policies to support light industry and encourage the introduction of production lines. Stimulated by these supportive policies, the Chinese home appliance industry managed to start from scratch. However, by the end of the 1980s, the irrational expansion of the Chinese home appliance industry had caused serious over production problems. Therefore, by the late

1980s, government policies for the home appliance industry turned from supportive to regulative. Without supportive policies, the Chinese home appliance had to face the market and compete with foreign companies. As discussed above, the marketisation of the

Chinese home appliance industry started at the beginning of 1990s. Under the rule of the market, the price of home appliance products was no longer set by the government; on the contrary, the price under market regulation was determined by the supply and demand of the home appliance market.

From the demand side, price reform in the late 1980s caused a fluctuation of the demand for durable goods, including home appliance products. As discussed in 3.2, the

Chinese government implemented a dual price system in 1984 in order to make a smooth

transition from a planned system to a market-oriented system. Towards the end of the

1980s, the problems caused by the dual price system included speculation, bureaucratic corruption and deceptive behaviour amongst enterprises. Therefore, the Central

Committee of the Communist Party of China (CPC) decided to liberalise price controls, which led to a rise in prices over several years. The expectations of a price rise caused a rush of panic purchasing in early 1988 and 1989. The snapping-up rush resulted in the pre-consumption of durable goods, including refrigerators, which made the consumption of these goods years ahead of their normal consumption cycle. By the early 1990s, the purchasing power for refrigerators in China was already pre-consumed, hence the shrinkage in the demand for refrigerators.

Realising that price inflation and panic purchasing was getting out of control, the

Standing Committee of the State Council issued a notice on the 30 August declaring that the rationalisation of prices was a long-term objective to achieve in over five years, or even longer, and the reform proposal needed further modifications and improvements.

Later that year, the Third Plenary Session of the 13th Party Congress was held in Beijing from 26 to the 30 of September. The meeting decided to adjust the economic order by controlling demand (The 13th Party Congress of the Chinese Communist Party, 1988).

Affected by the deflation policies as well as the decline in purchasing power caused by the economic downturn, Chinese consumer goods market turned into a state of slump in the following two years.

With regard to the supply side of the Chinese home appliance market, the supportive policies to encourage the development of home appliances in China in the early 1980s stimulated the production of home appliance products. In a sellers‘ market in the early 1980s, most Chinese home appliance manufactures blindly expand their production for more profits. As a result, the production of home appliance products

exploded in the early 1980s (Liu, 2008). The arrival of foreign competitors also affected the situation in the Chinese home appliance market. The opening up of China‘s economy offered the opportunity for foreign home appliance companies to enter the Chinese market. Before 1997, direct investment was still not allowed for foreign home appliance producers. Therefore, joint ventures became the preferred choice for foreign home appliance companies. At the same time, some Chinese home appliance companies looked to foreign partners in order to gain a technology advantage. Therefore, joint ventures became dominant in the home appliance industry from 1990 to 1995. Hitachi opened its branch in Shanghai in 1993. Sanyo cooperated with Royalstar and built a joint venture in

Hefei in 1994. Sony also expanded its business to China by joint venture with Shanghai

SVA Ltd. Some American and European home appliance manufacturers such as

Whirlpool and Siemens also stepped into the Chinese market in the same way.

The rapid development of foreign home appliance ventures created pressure on the market, especially when the demand for home appliance products went into decline.

Towards the beginning of the 1990s, fundamental changes had taken place in the Chinese home appliance market due to the shifts in demand and supply, featuring the shift from a seller's market to a buyer's market and the oversupply of products. After the introduction stage (1970s to mid-1980s) and rapid growth stage (mid 1980s to mid 1990s), the Chinese home appliance market entered a mature stage, where the market approached saturation and profit margins started to decline. The growth rate of freezer production had dropped from 209 per cent in 1990 to 0.8 per cent in 1999 and for washing machines, the production growth rate had remained above 10 per cent in the early 1990s, but in 1999, it had declined to -1 per cent. The price of major home appliance products like washing machines, refrigerators, air-conditioners, microwave ovens, TVs and DVDs had experienced continuous decline in late 1990s, hence an average drop of 30-40 per cent in

profit for those products (Hu, 2000). The economic downturn caused by the Asian

Financial Crisis and structural adjustments later at the end of the 1990s also had a remarkable influence on durable goods markets, including the home appliance market.

The turning of the market situation brought about radical changes to the mode of competition among home appliance companies. In the 1980s, the Chinese home appliance market was a complete seller‘s market, where the consumers needed special coupon to buy home appliances. Companies competed to obtain permission from the government for home appliance production and loans to purchase production lines from other countries.

Once the goods were produced, the profit was ensured. But this golden period did not last long. After the market turned in the early 1990s, the consumers had more choice. Quality became the first consideration when choosing home appliance products. The value of the brand name was recognised by both the suppliers and consumers. Therefore, competition within the home appliance industry in the 1990s centred on the quality of products (Qu,

2006).

Facing a serious situation and fierce competition, many home appliance manufacturers panicked and attempted to retain their sales by reducing the price. The competition in price reduction got worse and worse and became a ―price war‖ (Fang and

Liu, 2000; Sun, 2002; Zhao, 1999). The price war first started among home appliance distributors in 1993, when the major department stores adopted similar marketing strategies by offering discounts and complementary services (Sun, 2002:61). The competition soon spread to the home appliance distributors all across China. In 1996, home appliance producers also got involved in the price war. Starting in the TV industry, a major TV manufacturer Changhong announced it would reduce the prices of its TV sets by 8-18 per cent (Sun, 2002:61). Other companies were also forced to take the same action in order to retain their sales. This trend soon spread to other products like DVD

players, air-conditioners and washing machines. The late 1990s witnessed a period of chaotic competition in the Chinese home appliance industry and the price war reached a peak in 2001.

Except for the price war, many Chinese home appliance manufacturers also chose to compete by cooperation with partners. Some of them, as illustrated above, chose to cooperate with foreign partners to gain competitive advantage. Many state-owned home appliance companies in China built joint ventures with foreign partners in the early 1990s.

Towards the end of 1994, were more than 20 Chinese home appliance companies cooperating with foreign partners. Some well-known Chinese home appliance national brands such as Narcissus and Yangtze Refrigerator founded joint ventures with Whirlpool and Siemens respectively. However, these brands were either replaced by their foreign partners or eliminated through furious competition after the mid 1990s. By the end of the

1990s, almost 80 per cent of former national brands had disappeared from the market (Li,

2010).

Except for joint ventures, merger and acquisition (M&A) was the next strategy

Chinese home appliance companies took to deal with the competition. Some well known local brands expanded their scale by annexing smaller and weaker companies. Haier was one typical example. Some other home appliance manufacturers including Little Swan,

TCL and Gree, also expanded in scale through M&A and edged themselves into the most valued national brands. This period was a dark age for the Chinese home appliance companies. The price war caused destructive damage to most home appliance producers.

As a result of the price war and the tide of joint venture and merger and acquisitions,

Chinese home appliance industry completed a round of major industrial restructuring and reconfiguration (Pang, 2003). Smaller and weaker companies were either eliminated or annexed by stronger ones. The production of home appliances became more concentrated

among several leading manufacturers. The market share of those brand-name companies and the rate of market concentration went through a significant growth. After their dominant position was well entrenched within the industry, some leading brands started to expand their business scope through diversification. The tide of diversification reached a peak in the mid 1990s. Many well-known home appliance manufacturers such as Hisense and Changhong in TV set production, Little Swan and Royal Star from the washing machine industry, and Chunlan and Gree in air conditioner manufacturing, all dabbled into other areas beyond their specialty. Some of them did achieved more competitive advantage and profits from diversification, while others were stuck in a dilemma where they could not make a profit in an unfamiliar business and their advantage in the old business was lost due to spreading their capital (Pang, 2003). Therefore, the price war and

M&A trend during this period also helped re-organise the Chinese home appliance industry through selection, eliminating the weak players and leaving some powerful competitors in the market.

3.4.4 2001: joining the global market

As discussed in Section 3.3.3, China‘s entry into the WTO brought about both opportunities and challenges for Chinese companies. As for the home appliance industry, it is commonly believed that it is one of the main industries which benefited from China‘s

WTO membership. Firstly, the tariffs for home appliance products were reduced after

China‘s entry into the WTO. Before 2001, some developing countries with an enormous potential market for home appliance products imposed tariffs as high as 50 per cent on

Chinese exporters, which held back China‘s home appliance exports to those countries.

After China‘s accession into the WTO, under the no discrimination trade principle, the tariffs were largely reduced and Chinese exporters gained easy access to these markets

(Wu, 2002:24). Secondly, to comply with the requirement of the WTO, China also

reduced its tariffs on the components imported from other countries, which reduced the cost of home appliance production for those companies, which used imported components for production. Moreover, the influx of cheaper foreign components also stimulated the improvement in the quality and technology of similar products in China and further offered more options for the Chinese home appliance producers (Wu, 2002:25).

Despite the benefits for the Chinese home appliance industry as a result of China‘s entry into the WTO, it also brought some challenges. The reduction in tariffs and reforms in market-access made it easier for foreign competitors to enter the Chinese market (Gong,

2002:12). By the end of the 1990s, the international home appliance market had reached saturation; the need to explore new emerging markets became urgent. The focus for the home appliance investment and production began to transfer from developed countries to developing countries (The United Study Group of Chinese Urban Home Appliance

Market, 2001:4). Many multinational corporations adopted new competing strategies, including contracting domestic markets and looking for new emerging markets internationally, controlling core technologies and shifting their production bases to developing countries. As a consequence, China became an important site for investment and production transfer of multi-national home appliance manufacturers due to its vast potential market and relatively lower labour cost (Hu, 2000). China‘s accession to the

WTO created a friendlier environment for these foreign corporations to enter the Chinese home appliance market, many foreign home appliance companies decided to transfer their production bases to China. In 2001, Hitachi announced an increase in investment in the

Chinese market, including the establishment of a new R&D centre and construction of several production bases in Anhui, Shenzhen and Fujian. Toshiba also declared its TV production in Japan would be transferred to China in the same year. Panasonic even announced it would build another Panasonic in China. Other home appliance

manufacturers like LG, Samsung and A.O. Smith from the US also increased their investment in the Chinese market (Zhao, 2001). Besides, the reduction in tariffs after

China‘s entry to the WTO also reduced the cost of foreign products in the Chinese market

(Gong, 2002:12). As a result, the price advantage that the Chinese home appliance products held for many years was eroded. In order to compete with more and more foreign competitors, it was necessary for Chinese home appliance producers to adjust their core competence from price to technology and to keep up with the international regulations. Compared to the previous stage, the Chinese home appliance industry in this period formed a healthy and orderly competition pattern. The price war was no longer the preferred option to gain market share. Instead, competing in innovation and technology was becoming the new trend among the Chinese home appliance producers.

3.5 Conclusion

This chapter discussed the changes in the economic and industrial environment in China since 1978. The changes focused on the Open Door Policy and market-oriented reform, which transformed the centrally planned system and pushed Chinese companies into the international market. As for industrial development, the Chinese home appliance industry developed from scratch at the end of 1970s, by importing foreign production lines. It went through a stage of rapid development in the 1980s, but the boom in this period was stimulated by irrational expansion, which then caused irrational competition after 1990.

After years of selection, some small and weak companies were eliminated and this left several powerful players dominating the Chinese home appliance industry. Haier remains one of these leading companies. The changes in the economic and industrial environment played an important role in the development of the companies. (The case study chapters analyse the interaction between Haier‘s development and its external environment.)

Chapter Four starts with an account of the emergence of Zhang Ruimin as a charismatic

leader, who played a crucial role in Haier‘s success by implementing a series of changes to cope with the changing environment.

Chapter Four

The Emergence of Zhang Ruimin as a

Charismatic Leader

4.1 Introduction

The operating performance of Haier (the Qingdao Refrigerator General Factory) was not satisfactory before 1984. The factory suffered a total loss of RMB1.47 million in 1984 and, due to the lack of morale in the factory, the workers also performed poorly and the factory was in a chaotic and undisciplined situation. This changed when a new leader,

Zhang Ruimin, was appointed as the director of the Qingdao Refrigerator General Factory.

Zhang implemented a series of management changes and quality control, which successfully resurrected the factory. His leadership style varied from charismatic to commander, captain and coach according to Dunphy and Stace‘s (2001) contingency model. In the following years, he continued with his efforts to change the company and to adapt to the new open social and economic environment in China. This enabled Haier to become a strong competitor in both the domestic and international market. In view of the significant role that Zhang Ruimin has played in the success of Haier, it is important to have an understanding of his life in order to show how his personality and leadership style enabled him to rescue a near bankrupt factory and nurture it into a successful global brand. This chapter, therefore, provides a biography of Zhang Ruimin, as the CEO of the

Haier Group. Focusing on his personality and leadership style, this chapter presents the argument that Zhang Ruimin developed his own unique management approach through

experience. Through the analysis of Zhang Ruimin as a charismatic leader, this chapter addresses the sub-research question: ―What role did leadership play in the management of change in Haier and how did Chinese cultural values influence Haier‘s management practices?‖.

4.2 The Early Life Experience of Zhang Ruimin

Zhang Ruimin was born in January 1949 in a small coastal city called Laizhou in

Shandong province, China. His family were ordinary workers. His mother was a tailor and his father worked in a factory. In 1966, Zhang Ruimin went to Qingdao First High

School, which was the key high school in Qingdao at the time. But not long after he commenced high school, the Cultural Revolution began and education was no longer the emphasis in schools. Academic classes were either cancelled or converted into labour practices. But Zhang Ruimin did not give up on his learning. He read a lot of history and biography books from the library during that time. As Shi (2010:32) argued, ―He was eager to learn and curious in high school. He often read by himself and his academic results were always outstanding‖.

When Zhang Ruimin graduated from high school, the national college entrance examination was cancelled due to the Cultural Revolution. As a result, he was not able to go to university despite his excellent performance. He had no choice but to work in a factory, as his father‘s successor. In 1968 Zhang Ruimin took over his father‘s job and became a worker in the factory. His work was to manufacture hardware products. During the years of the Cultural Revolution, knowledge was not only neglected, but also regarded as the symbol of capitalism. Therefore, most people did not have any intention to get educated and intellectuals were denounced or even persecuted. However, even in this environment, Zhang Ruimin still did not lose his passion to learn and recognised the

importance of knowledge. In order to improve himself and arm himself with the necessary skills, Zhang Ruimin enrolled in some evening courses in a community college in Qingdao. In the following four years, he worked in the factory during the day and then rode a long way to take courses on mechanical manufacturing after work. He built his knowledge base during this time, which helped him with his promotion and the management work he did in the future. After some time into his courses, he used the knowledge he learnt to experiment with some technical improvements in the workshop.

His work was recognised and appreciated by his co-workers and his leaders. As the one with the highest degree in the workshop, Zhang Ruimin was soon promoted to be group leader, workshop manager and then vice director of the factory. The experience in the factory had a significant influence on Zhang Ruimin. When asked about where he got his management experience from, Zhang replied in his biography:

From being managed for so many years…My deepest feeling from the

years‘ of being a factory worker is that what we lacked then was the

trust and equality between managers and those who were managed.

That‘s why I attempted to build an equal and reliable environment in

Haier when I became the leader (Zhang, 1999b).

His early experience as a frontline worker enabled him to get a clear understanding of the employee‘s perspective when he did management works later, and his attitude of continuous learning helped him to keep up with cutting-edge management practices from around the world.

4.3 A Turning Point: The Assignment of Zhang Ruimin as the Director of Qingdao Refrigerator General Factory

The year 1984 is viewed as a turning point for Haier, when Zhang Ruimin was assigned as the director of the Qingdao Refrigerator General Factory, the predecessor of the Haier

group. The change of leadership brought in a new management mechanism and led the factory into a new era.

The origin of the Qingdao Refrigerator General Factory dates back to 1955, when it was founded as the Qingdao Electric Appliance Repair Cooperative. As discussed in

Chapter Three, the First Five-Year Plan was conducted in China from 1953 to 1957. The

First Five-Year Plan reached a peak during the ―High Tide of Socialism‖ in 1955-1956

(Naughton, 2007:69). During this high tide, the factories and shops in cities were turned into cooperatives or else ―joint public-private‖ factories (Naughton, 2007:67). Qingdao

Electric Appliance Repair Cooperation was also founded during this time. It was in the form of a handicraft producers‘ cooperative, a collective economic organisation where members owned the means of production and participated in communal production work.

In 1959 it was reformed into a cooperative factory named Qingdao Motor Repair Factory

(renamed the Qingdao Dongfeng Motor Factory in 1966). The factory mainly produced electric motors and hoists at the beginning and got into the home appliance industry after it developed its own line of hair driers and electric fans. In March 1979, Qingdao

Dongfeng Motor Factory managed to manufacture washing machines. In the year that followed, Dongfeng Motor Factory and the Qingdao Fourth Tools Factory were amalgamated into Qingdao Domestic Electrical Appliance Factory with the permission from the Qingdao Second Light Industry Bureau. In the years of 1979 to 1983, the

Qingdao Domestic Electrical Appliance Factory produced more than 58 thousand washing machines. However, those washing machines were soon obsolete from the market due to their poor quality. In October 1983, the Qingdao Domestic Electrical

Appliance Factory started to do market research and preparation for refrigerator production and was officially renamed Qingdao Refrigerator General Factory on January

1st 1984.

The Qingdao Refrigerator General Factory was an affiliate factory of the Qingdao

Home Appliance Company and Zhang Ruimin was the deputy manager in charge of the supervision and administration of the factory. His responsibility was to update the technology of the home appliance producers in Qingdao, including the refrigerator factory.

As discussed in Chapter Three, as a result of the opening up policies, the introduction of production lines became a trend in the Chinese home appliance industry. Consequently, the parent company of Qingdao Refrigerator General Factory, the Qingdao Home

Appliance Company, also tried unsuccessfully to attract international project partners for the factory. During that time, the production of refrigerators required permission from the

National Development and Reform Commission (NDRC) and the Department of Light

Industry. In order to get the official approval, Zhang Ruimin went to Beijing to apply for permission to produce refrigerators at the Qingdao Refrigerator General Factory.

However, he was told by a division director of NDRC that the list of designated factories for refrigerator production had already been finalised. But Zhang Ruimin did not give up; he assumed that as long as NDRC and the Department of Light Industry hadn‘t announced a halt on the introduction of refrigerator production lines, there would be hope for him. Therefore, he decided to stay in Beijing and wait for any possible project. During his stay in Beijing, he went to the office of the Department of Light Industry every morning to ask if there‘s any new project for refrigerators.

The days in Beijing were not easy for him. Yang Mianmian, Zhang Ruimin‘s right-hand co-worker and the ex president of Haier Group recollected that Zhang had to cut the cost to minimum when he went to Beijing. He usually took a camp stool with him when he could not get any seat on the train. He also saved money when he was waiting for projects in Beijing, by eating peanuts for his meal (Yang and Shu, 2006). As the days passed, he received nothing but disappointment, until one day when he was waiting in the

office of the Department of Light Industry and a German refrigerator company, Liebherr, came to seek a partner factory in China. The leaders from Liebherr arrived in China later than the other companies. When they arrived at the Department of Light Industry of

China, the deadline for submissions had already passed and they missed the opportunity to cooperate with the big brands in China. But they were just in time to meet Zhang

Ruimin who was thrilled with the opportunity to introduce the Liebherr production line in

Qingdao. He immediately submitted all the documents for the application and went back to Qingdao. After that, instead of just waiting for the result, he continued his efforts to convince the provincial government, NDRC and the Department of Light Industry of the significance of the German project for the development of light industry in Qingdao

(Zhang, 2011).

This story is cited in different reports and academic articles as a reference of

Zhang Ruimin‘s character and evidence of his contribution to Haier as the saviour of the company. Tracing the origins of the story, the earliest source is an article named ―Yang

Mianmian, the woman behind Zhang Ruimin‖ from Jiangmen Daily, a newspaper published in Jiangmen city, Guangzhou province. The article was published in 2004 based on an interview with Yang Mianmian, the then president of the Haier group (Qin, 2004).

Yang Mianmian told the writer how Zhang Ruimin got the cooperation program with

Liebherr by waiting in the Department of Light Industry. This story was then used in different online articles about Zhang Ruimin and Haier, as well as in case studies of

Zhang‘s personality and philosophy in management (Yang and Shu, 2006). In a book published in 2001, named The Confucian Wisdom in Zhang Ruimin’s Business Thinking, this story was quoted to explain Zhang Ruimin‘s philosophy of persistence and ambition.

Among the interviews, this story was also mentioned by one interviewee, who heard it from the person who actually went to Beijing with Zhang Ruimin in 1984.

I‘ve heard a story from a colleague who has worked with Zhang Ruimin

for many years. When Zhang was still working in the Qingdao Home

Appliance Company, he made a lot of effort to fight for the program

with Liebherr for our factory. The person who told me the story went to

Beijing together with Zhang, to convince the head of National

Development and Reform Commission. Without any money or

connection, he had nothing to impress the head with but his sincerity

and persistence. He waited outside the director‘s home till late in the

night and finally convinced the director to grant the permission to

produce refrigerators to the Qingdao Refrigerator General Factory. I

think Zhang‘s personal charm played a big role in convincing NDRC

(Interviewee 8).

With Zhang Ruimin‘s persistent effort, the introduction of the production line from the German company Liebherr was granted and the Qingdao Refrigerator General

Factory became the last designated refrigerator producer in 1984. Zhang Ruimin went on the business trip to Germany immediately to organise the contract with Liebherr. During this trip he managed to sign the contract to introduce the Liebherr refrigerator production line to the Qingdao Refrigerator General Factory.

Before the successful negotiation in Germany a more serious problem was brought to Zhang Ruimin. The Liebherr production line would cost nine million RMB, according to the contract. In 1984, the average monthly salary of workers in Qingdao was merely RMB40; thus, RMB9 million was almost an astronomical amount of money to raise. The Qingdao Refrigerator General Factory was a poorly run factory in serious debt, which could not even pay the salaries of its employees. In 1984, the annual production of refrigerator was only 740, bringing in RMB 3.48 million worth of sales revenue. Its annual loss accumulated to RMB1.47 million. (The announcement of the 15th board

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meeting of Haier Co. Ltd). It was almost impossible for this factory to get a loan of RMB

9 million from a bank. The director of the factory was also aware of this. The bad performance of the Qingdao Refrigerator General Factory but also collapsed the leaders‘ faith in the factory. Therefore, despite the permission for the production line being granted to the Qingdao Refrigerator General Factory, no one wanted to be the director of the factory. In 1984, three different directors resigned from the Qingdao Refrigerator

General Factory. One of the interviewees, who has worked in Haier for 15 years and had a thorough understanding of the company‘s history, explained the situation at the time:

The development of the refrigerator industry was not fully supported by

the government. They thought the average living standard of the people

was not high enough to consume home appliance products and there

was no market for refrigerators. Without support and encouragement

from their superiors, the former directors of Qingdao Refrigerator

General Factory also lost their enthusiasm (Interviewee 1).

As the production line from Liebherr was about to arrive at the Qingdao

Refrigerator General Factory, Zhang Ruimin received a call from the third director of the factory in 1984, who yelled: ―I can‘t do this job anymore. Please send a new director to the factory in one week, or I won‘t take the responsibility for anything that happens‖

(Interviewee 5). He was the third director to quit in a single year. As the supervisor of the

Qingdao Refrigerator General Factory, it was part of his responsibility to get the factory back on track. Therefore, Zhang Ruimin began to look for a new director. He tried his best to mobilise people to take the position. But no one wanted to take over the mess.

Under pressure from his superior and in order to fulfil the commitment he made to NDRC to introduce the German production line to the Qingdao Refrigerator General Factory,

Zhang Ruimin made the decision to take over the job of director of the Qingdao

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Refrigerator General Factory himself. When asked about the assignment of Zhang Ruimin in 1984, some employees also recollected:

Zhang was the deputy manager of the Qingdao Home Appliance

Company. As the superior of Qingdao Refrigerator General Factory, he

paid a lot of attention to the development of the refrigerator industry.

He‘s the one who introduced the German program to the factory.

However, even when the purchase contract was already signed, he

couldn‘t find any one who was willing and capable to take over the

project. The refrigerator factory changed 3 directors in a single year in

1984 and no one wanted to deal with the mess anymore. Therefore,

Zhang Ruimin was forced to take the job himself (Interviewee 5).

Another interviewee also expressed the view that Zhang Ruimin was in a dilemma when he took the job:

Zhang‘s appointment was not totally voluntary. When he introduced the

German project to the factory, he thought he just needed to sign the

contract and the factory will do the rest. However, no one wanted to

take the responsibility, so he had no choice but to take it himself. In one

sense, he was forced to this position (Interviewee 1).

The decision was not easy for Zhang Ruimin, the factory was in serious debt and notorious for its disarray. Despite all the concerns, Zhang Ruimin was assigned as the new director of the Qingdao Refrigerator General Factory on 26 December 1984. This decision was not only important for him, but also for his future career and family, so he also notified his wife of his appointment:

He made a call to his wife the day he took over the job, saying: ―I‘m

going to work in the refrigerator factory this afternoon. You need to be

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prepared. Even if I can change it, it won‘t get much better, but if I failed,

I might be stuck there forever‖ (Interviewee 5).

Luckily his wife showed her support at that time by telling him: ―Just do what you need to do. Even if you fail, I can still raise our family‖ (Jie, 2009). As Zhang Ruimin‘s biography stated, when he came to the factory, his original intention was to help the people in the factory to regain their faith and after that he could go back to his old job.

Zhang wrote of his ambivalence about the decision:

[In the beginning] I planned to help them to get back on track so that I

can go back to my own job in the Home Appliance Company. But the

more I helped them, the less they would like to cooperate. As a result, it

ended up to be my responsibility to save the factory… I took many

photos and videos of the factory when I first came here and kept them

for many years. People thought I was planning to build some

monuments for myself in the future, but in fact I just want to leave some

evidence in case things didn‘t work out, then I can show them to people

and tell them: no one can solve such a mess (Zhang, 1999b).

Clearly Zhang Ruimin was not the only one who thought he was just taking the job temporarily. When the workers in the Qingdao Refrigerator General Factory heard they were going to have a new director, they were not surprised. Zhang Ruimin was already the fourth director in a year. Moreover, when they heard this 35-year-old man voluntarily took up the directorship from the position of deputy manager of the Qingdao

Home Appliance Company, they were more assured that this young leader was here to gain some grassroots work experience to add weight to his promotion in the future. They predicted the new director would leave soon just as the others did. Therefore, the workers still behaved the same, not expecting any changes. However, Zhang Ruimin issued a series of management rules and implemented them immediately (this is further discussed

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in Chapter Five), showing his intention to change the situation in the factory. Zhang

Ruimin‘s appointment as the director of the Qingdao Refrigerator General Factory was a critical turning point, therefore, for both him and the factory. After he took over the factory, he strived for loans from the local government and banks and successfully purchased the production line from Liebherr. At the same time, he also made efforts to rectify the internal order in the factory. With this endeavour, he resurrected the factory from bankruptcy and went on to implement a series of changes to adapt to the open environment. After 30 years, Haier developed into a top brand in the Chinese home appliance industry and later became a famous brand worldwide.

4.4 Zhang Ruimin’s Leadership Style

Zhang Ruimin has been recognised as a distinguished leader due to his unique leadership.

As mentioned in Section 4.3, Zhang Ruimin applied a different leadership style to the previous directors as soon as he took over the factory. He set new regulations for the factory, which were named ―The 13 Rules‖, which will be outlined later in this section.

These rules were strictly adhered to by the new leader. The workers at the factory soon realised that Zhang Ruimin was determined to bring about change. Zhang Ruimin built his authority as a strong-minded and assertive leader. In the following years, he stuck to this charismatic and tough leadership style and implemented a series of changes in the company. But what are the key characteristics of Zhang Ruimin‘s leadership style? The following sub-sections outline three main characteristics that characterise Zhang Ruimin as a leader.

4.4.1 Charm and charisma

Zhang Ruimin is described as a leader whose personality was highly influential. Some of the interviewees mentioned his vigour, courage and strong persistence, which assured the

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employees of the factory‘s future in the beginning of its development:

Without support from the government, the previous directors of the

Qingdao Refrigerator General Factory didn‘t have the faith to get the

factory back on track. A courageous leader was needed then and Zhang

Ruimin was the right person (Interviewee 1).

Another interviewee described how:

He was a courageous and persistent person. When he applied for

permission for a refrigerator production line for the factory, he went to

Beijing to talk to people who were in charge of the allocation of the

home appliance production in the National Development and Reform

Commission. He didn‘t know anyone there, but he moved the people

with his persistence and the charm of his personality (Interviewee 8).

Zhang Ruimin‘s courage and persistence helped him to fight for the Qingdao

Refrigerator General Factory when others had already lost faith in it. Therefore, the first thing Zhang did after he took over the factory was to help the employees to regain their faith in the factory. He did this in two ways: the hard way and the soft way. The hard way established internal order by strictly conducting the 13 rules and emphasising the importance of quality.

Conducting the 13 rules was a trial case that Zhang Ruimin implemented to rectify the order in the factory. Before Zhang Ruimin was assigned as the director, Qingdao

Refrigerator General Factory was infamous for its chaotic internal order. Due to the poor performance of the factory, most of the employees lost confidence in the factory. Without incentive, many workers began to slack off in work. Consequently, the absence of internal discipline became a more serious problem in the factory than economic loss. Many employees signed in at 8am and then left at around 9am since there was no work to do.

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Leaving early had become a custom in the factory; when the current CEO Zhang Ruimin first took charge of it, he described what he saw in the factory as ―if you drop a bomb in the workshops at 10am, no one would get hurt‖(Lu, 2010). Stealing and damaging company property was also quite common in the factory. Some workers used to take production materials from the workshops; some windows were even torn down and burnt as firewood (Lin, 2009). This problem was also common in other public-owned or stated- owned factories. As an employee in Haier stated:

The internal management of the refrigerator factory was chaotic, in

other words, there was no order in the factory. There was a management

system, but no one obeyed it. The management people felt helpless too.

Since it was not allowed to fire workers in public ownership enterprises,

there was little they could do even if the workers broke the rules. This

situation was quite common in public ownership factories. The jobs in

public ownership companies were called the ―iron rice bowl‖, which

means once you got the job, it‘s a lifetime guarantee and the factory

would have to pay even if the workers did not do any work. It is also

one of the reasons why many of the old factories didn‘t last long

(Interviewee 5).

Zhang noticed the poor work discipline displayed by the workforce. Workers were just showing up but not doing any work. He determined to change this situation by establishing discipline within the factory, where the rules were not only set in the company, but also obeyed by all employees. In order to achieve this goal, he drafted a list of new rules for the factory, which are known as 13 rules now (see Table 6).

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Table 6: 13 Rules (Source: Archive of Haier culture centre)

13 Rules

1 Initiate and finish work timely, absence from work without a reason is prohibited.

2 Signing in for others is prohibited.

3 Playing cards, chess, knitting and doing personal works during work hours is prohibited.

4 Leaving one‘s workstation during work hours is prohibited.

5 Drinking during work hours is prohibited.

6 Sleeping during work hours is prohibited.

7 Gambling during work hours is prohibited.

8 Damaging equipments in the factory is prohibited.

9 Stealing materials from the factory is prohibited.

10 Urinating or defecating in workshops is prohibited.

11 Damaging public assets in the factory is prohibited.

12 Making fire with cotton yarns and diesel from the workshop is prohibited.

13 Bringing children or outsiders into the factory is prohibited.

It can be seen that some of the rules, such as ―urinating or defecating in workshops is prohibited‖ and ―knitting during work hours is prohibited‖ seem a little unnecessary. But they were actually made according to what happened in the factory. The establishment of rules was the first step and the next problem was how to implement them.

Before Zhang Ruimin took over it, there were already some regulatory rules in the factory, some of which were also listed in documents. However, these rules were never conducted and the workers did not take them seriously either. As some of the employees recollected:

Before that, we had many rules in the factory too, but none was actually

executed (Interviewee 3).

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And another interviewee explained:

There was a huge stack of documents with management rules, which

were only taken out when dealing with the inspection from superior

department (Interviewee 11).

One of the old employees explained the cause of this situation:

This situation (not obeying the rules) was quite common in public-

owned factories. The jobs in public-owned companies were called the

―iron rice bowl‖, which means once you got the job, it‘s a lifetime

guarantee and the factory would have to pay even if the workers did not

do any work. It is also one of the causes that many of the old factories

didn‘t last long (Interviewee 5).

The interior rules then had no effect on workers since punishment was never implemented. Seeing this situation, Zhang realised the documents were as useless as waste of paper if they were not executed. Therefore, unlike the previous regulation documents in the factory, which was never taken seriously nor actually carried out, the 13 rules were implemented immediately.

When a worker was caught stealing materials from the factory, the

punishment decisions were posted on the factory bulletin board within 1

hour. The worker was charged a 30 yuan penalty, which equalled his

monthly wage and was placed on probation (Interviewee 5).

This incident made the employees in Haier believe that the new boss was going to do some real work rather than just talking about it. In recollecting this, Zhang explained:

My main purpose, however, in establishing strict discipline was not to

punish those who made mistakes…Far from frightening employees,

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stronger discipline in the factory endowed them with confidence and

hope (Zhang, 2007:143).

An interviewee also emphasised the importance of the establishment of discipline in Haier‘s early stage:

Haier has developed from a near-bankruptcy factory to a world-known

brand now. The first step it took forward was attributed to the specific

management in the early years (Interview 3).

This story was witnessed by most old employees in Haier and has been passed down to the new employees. A copy of the 13 rules was exhibited to the public in the culture centre of Haier. The story was also quoted by different articles and books to establish the image of Zhang Ruimin as an ―iron leader‖, who was also a commander, according to Dunphy and Stace‘s (2001) model. These gestures conveyed the information to the employees that this leader intended to do practical things to bring about change.

The hard way of Zhang‘s leadership approach was most exemplified by the shocking event of smashing defective refrigerators. The story of Zhang Ruimin smashing defective refrigerators with a hammer in front of his employees was recognised as the most well-known anecdote about Zhang Ruimin. He was even labelled as ―the hammer leader‖ because of this event. This incident happened in 1985, when the factory received a complaint letter from a customer about the fault of their refrigerator. Seventy-six defective products were found in 400 refrigerators from further inspection. According to the grading standard, refrigerators were classified into first-grade products, second-grade products, third-grade products, off-grade products and disposed products. Even defective products could also be sold. However, instead of selling these defective refrigerators or giving them to employees as welfare, as some people suggested, Zhang Ruimin made an unexpected decision to smash all the defective refrigerators in front of the staff. Each

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refrigerator was labelled with its problem and the name of the person who was responsible and then smashed by the responsible workers. Zhang Ruimin started the smashing with a sledge hammer, followed by the responsible workers (Lin, 2009). This scene was shocking to the employees, as one old employee described:

The cost of a refrigerator then was almost equivalent to 2 years‘ salary

of an ordinary worker in the factory. Some of the workers even burst

into tears when smashing the refrigerators (Interviewee 5).

Through this event, Zhang Ruimin was able to convey his concept to all the employees that quality is the life of a company, as well as to rebuild customer confidence in Haier products. This story was soon spread by the media. The photo of Zhang Ruimin smashing the refrigerators is displayed in Haier culture centre now and the hammer he used is in the possession of the National Museum of China.

Besides the hard way mentioned above, Zhang Ruimin also used some gentle approaches to show his care for the employees, which motivated the enthusiasm of the workers. Two key examples emerged from the interviews, which highlight the soft way he developed the motivation of the employees, which was in accordance with the image of a coach in Dunphy and Staces‘s (2001) model. The first example happened in the first year when Zhang Ruimin was appointed as the director of the Qingdao Refrigerator General

Factory. The factory was in serious debt when Zhang Ruimin was appointed as the director. The factory‘s debt amounted to over a million RMB, which might seem a meagre amount now. But in 1984 when the per capita GDP of China was merely around RMB

700, the debt put the factory‘s fate in the balance when Zhang Ruimin took the job of director. Zhang described how bad the situation was in his interview published in the

Harvard Business Review (Zhang, 2007:142):

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The factory‘s net debt stood at RMB1.47 million... More than 800

workers were anxiously awaiting pay that was several months in arrears.

Not surprisingly, the turnover rate was high. An additional 51 workers

applied for a transfer to a different company when my appointment was

announced.

Under this situation, the factory was not able to pay salaries to the workers for several months. As a result, employees‘ salaries became Zhang‘s first concern when he went to the factory. As a collective enterprise, Haier could not get funds from the government like state-owned enterprises. Some cadres in the factory suggested borrowing money from the bank. However, given the factory‘s financial station and its obsolete equipment, it was also impossible to get loans from the bank. Under that situation, Zhang

Ruimin had to figure out another way to solve the problem. During those years, some of the people in urban-rural areas accumulated some money benefiting from the earlier opening-up policies. Zhang Ruimin decided to borrow some money from the farmers in the rural areas near Qingdao. At that time, farmers in rural areas formed production brigades as basic accounting and farm production units. Zhang Ruimin rode dozens of miles to one of the nearby production brigades on a cold winter night. When he arrived at the brigade secretary‘s home, the secretary was drinking in the dining room. He warmly greeted Zhang and invited him to join him. After Zhang Ruimin explained his purpose, the secretary said to him: ―I can lend money to you, but you have to drink with me. For every bowl of wine you drink, I will lend you 10 000 yuan.‖ Zhang was not good at drinking, but he ended up drinking up five bows of wine. The secretary was moved by his sincerity and finally lent him 50 000 yuan. Zhang Ruimin was able to pay off the employees‘ salaries. As Chinese New Year was getting close, Zhang went to the secretary‘s home again and borrowed more money to buy each worker five catties of fish

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(2.5 kg), as Chinese New Year gifts. His effort was soon spread in the factory and the workers were encouraged (Zhang, 2007). One of the interviewees told me the story he heard during the interview:

People all knew about the factory‘s financial situation then and no one

expected any end of year benefits. So when they heard they not only got

the unpaid salary but also got 2.5 kg fish for New Year, they were

surprised. After hearing about how their leader got the money for their

salaries and New Year gifts, the workers were all moved by the leader‘s

consideration (Interviewee 9).

It was a small change by today‘s standards, but it had a real impact on morale. This gesture conveyed a signal to the workers that the factory is getting better and developed their confidence in the new leader as well as the industry (Zhang, 2007).

Another example told by Zhang Ruimin (Zhang, 2007) in his article was when

Haier built their industrial park for diversification development in 1992. Many people questioned the necessity of building this facility. In order to ensure the workers confidence on the project, Zhang Ruimin went to the construction site on Chinese New

Year‘s eve and shared a meal of dumplings with the construction workers. His gesture showed the workers his confidence in this project and his care for the employees. As a result, the confidence and morale of workers was uplifted and the construction of Haier industrial park was conducted smoothly (Zhang, 2007).

Zhang Ruimin‘s personal charisma not only helped him to inspire his followers, but also got him support from the authorities. As discussed in Section 4.3, when Zhang

Ruimin went to Beijing to apply for the permission for the refrigerator production, he had no leverage. The only way he could persuade the authorities was his persistence and personal influence, which successfully got the permission granted. Later after he took the

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job as the director of Qingdao Refrigerator General Factory, he faced the problem of raising the money to purchase the production line from Liebherr. As mentioned before, the introduction of the Liebherr production line would cost RMB 9 million. To solve this problem, Zhang Ruimin turned to the local government and banks of Qingdao, as Yang

Mianmian, the former president of the Haier Group (2006:3) described:

The project was not fully accepted by most of the related departments in

the government and banks. They were not assured that a small factory

without any money could handle a foreign production line and make

profits. Zhang Ruimin invited the people from the government and the

banks to dinner. During the dinner, he elaborated the prospects of the

production line with detailed numbers. In the end, even though some are

still suspicious about the feasibility of the program, they were still

moved by Zhang Ruimin‘s passion and vigour and decided to invest this

program (Yang and Shu, 2006:3).

As can be concluded from the accounts presented in this section, Zhang was both a charismatic leader and at other times an ―iron leader‖ with a strong influential personality, which helped him to build trust between the leader and employees, to inspire the morale of the workers, as well as to gain support from the authorities. The second key characteristic of his management style is described next.

4.4.2 Control and authority

Zhang Ruimin had absolute control over the whole company as a commander according to Dunphy and Stace‘s (2001) contingency model. His authority was built from the beginning when he led the company out of trouble. Once his authority was built in the first stage, it became pervasive in Haier ever since. As one of the interviewees summarised:

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The style of Zhang Ruimin‘s leadership was of the typical northern

genre, with the characteristic of tough control over the company. This

style was commonly reflected in most corporations in Northern China,

where the company was led by a spiritual leader. While in many

southern China companies, the case is different. Some leader‘s

management was quite free and loose. He only shows up in the

company a few times in a year to set goals for senior management. Then

the rest of work is done by the management level to achieve the goals.

In the same time, he also gives the management people adequate power

to gain the resources they need. As long as they can achieve the goals,

they have total freedom to acquire any resources. In Haier it‘s different;

the leader controls all the resources and directly manages the production

(Interviewee 10).

This interviewee described how Zhang Ruimin had the power of final approval over the board of directors:

He is a hands-on leader. He‘s already 64 this year, other CEOs in his

age might already retire, but he still holds a management meeting every

week and attends production planning meetings every month. The board

of directors also hold two meetings every year and all the decisions

made by the board must be approved by Zhang (Interviewee 9).

From the interviewees‘ description, it is easy to draw the conclusion that Zhang

Ruimin is a tough leader who built his absolute authority in the company and has control over all company business. This characteristic accords with the traits of a commander, with a high level of dominance (Dunphy and Stace, 2001:182). Furthermore, Zhang‘s control and authority over the company helped him to conduct continuous changes in the

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company over the years. One interviewee, a manager who has worked in Haier for nearly

20 years, contributed the success of Haier‘s changes to the absolute authority of the leader:

One of the primary reasons why the changes were implemented

smoothly in Haier is the executive power in the company. In Haier,

Zhang has absolute control of the company. Every order of the CEO

would be conducted without questioning, but such centralised power

can hardly be found in other companies. In my opinion, centralisation is

still indispensable for Chinese companies. Sometimes democracy is not

controllable. To implement the changes, this kind of authority is

necessary. In Haier we believe that Zhang‘s strategy is the company‘s

strategy. If you don‘t agree, Zhang can decide whether you should still

work here (Interviewee 2).

As discussed above, Zhang Ruimin is described as a tough leader both by the employees in Haier and the media. The circulation of narratives about Zhang Ruimin has been central to the development of a cult of personality surrounding him. The cult of the leader ensured that despite distributions or doubts, Zhang Ruimin is still the only one who makes all the major decisions for the company. Moreover, the authority he built in the early years ensured that all his decisions could be conducted immediately from top to bottom within the company, which distinguishes Haier from other companies in terms of executive power. In the past years, Haier has received countless delegations from companies all over China, who wanted to learn the successful experience of Haier‘s management changes and innovations. Most of them went back with the theories and stories of Haier‘s management history, however, few of them succeeded in copying

Haier‘s practice. One of the primary causes is the lack of executive control and power in those companies, as is surmised in the following interview with a manager who has been in charge of the reception of visiting delegations for years:

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We received countless delegations from other Chinese companies in

these years. A common response we got from them was: Haier‘s

management system is quite good, but they can‘t copy it. One of the

reasons is their leader don‘t have enough authority in the company.

Even if the head wanted to change the company, the order is not always

agreed nor conducted by the employees (Interviewee 5).

Therefore, it can be concluded that Zhang Ruimin‘s behaviour as a commander ensured him to successfully lead some organisational turnarounds when radical changes were required but his change approaches could not be totally understood by the employees, which confirm Dunphy and Stace‘s (2001:183) assumption about the leadership style adopted for turnarounds.

4.4.3 Sight and vision

The third key characteristic of Zhang Ruimin‘s leadership style is that he is commonly described as a visionary and far-sighted leader by his followers. This trait enabled him to foresee the upcoming changes in the market and in the policy environment in order to position the company to make corresponding adjustments before their competitors could.

In Haier‘s early development period, when the Chinese home appliance industry was still in a sellers‘ market, Zhang Ruimin foresaw the importance of quality and focused on the quality control of refrigerators. This was also viewed as the key factory that brought Qingdao Refrigerator General Factory back to life, as outlined in the following interview with a manager who has been working in Haier for more than 10 years:

Zhang‘s vision was critical to Haier‘s success in the first stage. Back to

the 1980s, Chinese home appliance industry just entered its embryonic

stage, when many home appliance companies had adequate hardware

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such as buildings, equipments and money but lacked proper technology

and management. From the demand side, the demand of home appliance

products already began to expand with the increase of people‘s income

and living standard. Zhang Ruimin clearly understood this situation and

realised that what the market needed was a systematically managed and

sizable factory. That‘s why he took over the factory and introduced the

German production line (Interviewee 10).

Another interviewee from Haier also emphasised the important role that the leader‘s vision played in the initial stage of the company‘s development:

In the company‘s brand building phase, the leader‘s vision played an

important role. Zhang Ruimin believed that quality is the life of a

company and the basis of a company‘s long-term development.

Therefore, he was really strict with quality control from the very

beginning, which helped Haier to establish the reputation for its

products. Then when the competition got fierce in the 1990s, Haier was

able to beat other competitors with its reputation (Interviewee 8).

In the interviews, this researcher noted that the employees commonly believed that the leader‘s vision was the most important factor that brought the Qingdao

Refrigerator General Factory back to life. The foundation of Haier‘s later successes in the following years was achieved by gaining customers‘ loyalty through the quality of its products.

Towards the early 1990s, Zhang Ruimin made the unexpected decision to export products abroad, which was criticised not only by people in Haier, but also by his peer competitors in the industry, as stated by an overseas product manager who has worked more than 10 years in Haier:

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The comment about Haier‘s going out strategy then was that:‖ Why

would anyone bother going abroad to have leftover soup when you

can have meat at home.‖ (Interviewee 3)

At the same time, Zhang Ruimin also saw the opportunity from Deng Xiaoping‘s

South Tour Talk and, hence, facilitated the construction of Haier Industry Park for the development of diversified businesses. Both the decisions of going abroad and diversification was questioned at that time. But as time passed by, it was proved that the leader‘s far-sighted decisions enabled Haier to act before their competitors could react to the market turnaround in early 1990s, which protected Haier from failure in the battle with both domestic and foreign competitors.

In Haier‘s global brand building phase (which will be examined further in Chapter

Five), Zhang Ruimin introduced the practice of ―zero inventory‖ in Haier. This decision caused some misunderstanding among the employees, as explained in the interview with an overseas product manager who had worked for 15 years in Haier:

When we first heard that we are going to eliminate all inventory, most

of the people couldn‘t understand. We‘ve been in this industry for years

and no one can imagine how a manufacturing company could do its

business without any inventory. However, in 2010, many other home

appliance companies suffered huge losses and had to close down

factories and lay off people; one of the reasons was over inventory. It

seems that they‘ve sold a large amount of products, but most of them

are actually backlogs at their sales end. Once the market had

fluctuations, these backlogs became a big problem (Interviewee 3).

Zhang Ruimin‘s decision to eliminate inventory reflects his vision. Although not understood by most people, when the market went through fluctuations after 2010, Haier

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did not experience backlog problems as some other companies did and survived the layoffs, which spread among other home appliance companies, such as one air- conditioner manufacturer which suffered serious problems over inventory after 2010.

Towards 2012, many of its branches had been closed for more than half a year and a large number of its employees were laid off (Luo and Zhang, 2011).

Drawing on the cases outlined above, it can be concluded that Zhang Ruimin is seen as a far-sighted leader with a broad vision and a precise ability to predict changes in the market. Many of his decisions were made based on his own understanding of the current situation and future development of the market. Some of the decisions were not fully understood by the employees, but in most cases, they turned out to be critical and saved Haier from market changes. Zhang Ruimin‘s control and authority also ensured that even though not all were in agreement by, his decisions were still implemented by the company. In these cases, Zhang Ruimin played the role of a captain, who, according to

Dunphy and Stace‘s (2001) model, sets a clear vision for the employees and ensures that the tasks are finished by his authority.

A clear image can, therefore, be drawn of Zhang Ruimin‘s leadership and management style. He was viewed as a charismatic leader who can encourage and affect his followers with his own charm, a tough leader who has control and authority over the company‘s business all through the years, a visionary leader who can precisely foresee changes in policies and market situation and make responding decisions which helped

Haier to avoid strategic mistakes. Zhang Ruimin‘s traits conform to the definition of a charismatic leader, based on particular traits described by House (1977).

(1) Extremely high levels of self-confidence (House, 1977:385).

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Zhang Ruimin showed a fairly high level of self-confidence according to the description of the interviewees. It was first shown when he took over the job of the director of Qingdao Refrigerator General Factory, which no one had the courage to do.

Although he did not offer to take the job at his own initiative, but without enough confidence that he could lead the factory out of difficulty, he would not have accepted the job. His confidence was also reflected in the decisions he made for Haier, such as quality control, importing products, building Haier industrial park and implementing BPR. These decisions was not totally accepted nor understood by most people, but Zhang Ruimin had the confidence that these decisions suit the development of the company and the changes of the environment. As one employee stated:

It usually takes several years for us to understand Zhang‘s strategic

decisions. Zhang Ruimin‘s management concepts are up to date with the

latest management theories, which we cannot always understand in the

beginning. But he is always confident that the decisions are good to the

company‘s development, and they also turns to be right (Interviewee 2).

(2) Dominance (House, 1977:385).

Zhang Ruimin‘s trait of dominance was reflected in his control over the company‘s business. He showed high level of dominance in his leadership style, which ensured that the decisions he make for the company can be conducted successfully.

(3) A strong conviction in the moral rightness of his/her beliefs (House, 1977:385).

As a charismatic leader, Zhang Ruimin held strong beliefs and stuck to them. In the early years of his education, his belief in the power of knowledge encouraged him to keep learning even during the Cultural Revolution when gaining knowledge was disdained. When he decided to smash the defective refrigerators, he also confronted resistance from the employees, who believed that defective products can still be sold. But

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Zhang Ruimin held onto his belief that the factory should not sell defective products to their customers. He insisted on the rightness of his approach and this enabled him to make critical decisions for the company. As one employee in Haier explained:

At the bottom, Haier‘s management philosophy is actually Zhang‘s

personal management beliefs. He is quite firm on his own decisions

even if others can‘t understand. At last his decisions turned out to be

right vital to the company (Interviewee 2).

Zhang Ruimin contributes his confidence to the time he was born and educated:

I think it is a common phenomenon among the generation that lived

through the Cultural Revolution (I was still a high school student when

it began) that we learned not to recoil at the sight of difficulties. It isn‘t

that we became arrogant – or, much less, that we were blinded by

optimism. Rather, we gained a different perspective on life and the

prospect of failure. The things that happened during that period made us

reflect more deeply on human nature and society. We learned that

everything can turn for the better and all kinds of challenges can be

overcome. There is no crisis that cannot be resolved (Zhang, 2007).

Ruimin was described as a leader with the three traits of a charismatic leader according to House‘s definition. Interviewees clearly identified him as a charismatic leader who, by the sheer force of personality, was capable of having profound impact on followers.

One of the most important effects of charismatic leadership agreed by most scholars is that the followers are inspired enthusiastically to give unquestioned obedience, loyalty, commitment and devotion to the leader and to the cause that the leader represents

(House, 1977). The findings from the interviews show that Zhang Ruimin established his

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own prestige among his followers in the past years. ―Loyalty‖ and ―absolute authority‖ were the most frequently used words to describe Zhang‘s influence in the company by the interviewees:

Haier was created by him (Zhang Ruimin) and he is the leading figure in

the company. He was worshiped by us as Mao in the old times in China.

He‘s got his absolute authority over the company (Interviewee 2).

Zhang has a team who have been working with him for more than 20

years. They are absolutely loyal to him. It‘s been a traditional in Haier

that every order from Zhang be conducted without any doubt or delay

(Interviewee 3).

This loyalty and authority was built through his behaviour and achievements throughout his tenure, especially in the early years. In the first period of his tenure in

Haier, Zhang Ruimin made some efforts to change the difficult situation of the company, which accord with the typical behaviour of charismatic leaders.

(a). Role modelling

It is suggested that charismatic leaders express, by their action, a set of values and beliefs to which they want their followers to subscribe (House, 1977). The key value

Zhang Ruimin conveyed to the employees in this period was the importance of quality.

This belief was firstly articulated in the company‘s development strategy as ―brand building‖. Then, the value was clearly conveyed to and accepted by employees though the famous and shocking ―smashing refrigerators‖ event. As a result, Zhang Ruimin successfully ―role modelled‖ the value system of ―quality first‖ to his followers.

(b) Goal articulation, high expectation and confidence

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Leadership research shows that charismatic leaders are more likely to articulate ideological goals to their followers and communicate high performance expectations for subordinates and exhibit confidence in their ability to meet such expectations (House,

1977). Zhang Ruimin articulated the development goal as ―pursue excellence and race to the top‖. Guided by this thought, the specific goal of Haier‘s quality improvement was set as to win the first place in refrigerators quality. This goal was achieved in December 1988;

Haier refrigerator won the first gold medal in the national appraisal contest of refrigerator quality. This achievement greatly inspired the morale in Haier then. However, Zhang

Ruimin was not satisfied with just one medal:

When the employees knew that we won the first quality gold medal of

refrigerator in China, everyone‘s expecting a big celebration. However,

Zhang Ruimin held a critic meeting instead of a victory ceremony to re-

examine the remaining problems in our quality control. Through that

meeting, Zhang conveyed a thought to the employees: never be satisfied

with what you achieved and work harder for better (Haier tour).

Except for high expectation and strict requirement to employees, a charismatic leader also communicates messages that arouse motives to his/her followers, which creates emotional appeal of the leader (House, 1977). As described in 5.2.2, in order to pay the employees‘ salary, Zhang Ruimin rode a long way to a production brigade to borrow money from the secretary. With the money he borrowed twice from the secretary,

Zhang Ruimin paid off the overdue salary to the employees and also bought New Year gifts for them. This gesture was a motivation to the employees‘ passion to work, not only materially, but also emotionally, which showed the employees that the new leader really cares about their welfare.

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With regard to the relationship between leaders and organisational change, research in leadership and sociology believes that charismatic leaders are better for non- routine situations due to their capability to bring about rather radical change by virtue of beliefs and values that are different from the established order (House, 1977, Bass, 1985,

Eisenbach et al., 1999).

Based on the analysis, it can be concluded that Zhang Ruimin was mostly a charismatic leader. However, Zhang Ruimin also played the role of a coach, a captain and sometimes a commander in different contexts. Through his dominance and control can be viewed as a commander, through his morale building activities he can be viewed as a coach and through his vision he can be seen as a captain (Dunphy and Stace 2001).

The leader is clearly a critical factor which helped Haier to develop from a collective enterprise to a globally competitive company. Zhang Ruimin‘s traits enabled him to change Haier from a near-bankrupt factory to a profitable refrigerator manufacturer. Firstly, as a visionary leader, Zhang Ruimin was able to get a visionary view of the development of the market and the company.

Zhang‘s decisions are usually prospective. In the 80s he foresaw the

change from a sellers‘ market to a buyers‘ market and implement Total

Quality Management. Then after 1998 he realised the importance of

going abroad. Those are the cases of his foresight (Interviewee 3).

Secondly, the authority he built thought his charismatic leadership is also a critical factor that in the process of Haier‘s change initiatives, the order from Zhang Ruimin can be conveyed down and conducted by his subordinates:

If those changes didn‘t happen in Haier, they couldn‘t be so successful.

We have received visiting groups from all over the country. After their

tour in Haier, many of them admit that our management is truly cutting

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edge, but it‘s impossible for them to copy. The primary cause is lack of

executive force. In Haier, every decision of the CEO can be conducted

without doubt. This kind of absolute authority doesn‘t exist in other

companies. Centralisation of power is still necessary in Chinese

companies, especially for implementation of changes (Interviewee 2).

A similar statement was also made by another interviewee, that Zhang possesses absolute control over Haier in these years. It‘s been a tradition in Haier that every order from the CEO should be conducted immediately (Interviewee 3). Depend on his power and control over the company, which was formed through his charismatic leadership,

Zhang Ruimin was able to convey his thoughts and decisions of changes to his followers and get them understood.

To sum up the interviews with Haier employees: most of them attributed the success of Haier in its brand building phase to their leader:

In the first stage, a courageous leader was the key to save Haier from

bankruptcy. The German project made the profits for Haier to pay off all

the debts and build its brand name. Zhang Ruimin played a major role in

the introduction of the production line (Interviewee 8).

Another interviewee addressed the importance of Zhang‘s role in quality control and management reform in this period and described him as the saver of the factory:

Zhang Ruimin was the one who saved the company in the first years.

The two factors that changed the fate of Haier in the first phase were

management and quality control. Both were conducted by the leader

(Interviewee 3).

Therefore, it may be concluded that the leader played a significant role in leading successful changes in Haier. With regard to the leadership style, Zhang Ruimin‘s traits

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conform to the definition of a charismatic leader, but at the same time, his behaviour in leading different types of changes varied according to the context. As discussed above, except for charismatic, Zhang Ruimin also played the role of coach, captain and commander based on Dunphy and Stace‘s (2001) model. This observation confirms Grint,

Tourish and Barge‘s (Grint, 2008; Tourish and Barge, 2010) view that leadership is a situated emergence and the leader‘s role is to make sense of the situations and systems

(wicked problem) and take corresponding action. This unique case of Haier reflects the pattern of leadership evolution in Chinese public-owned corporations. Unlike in Western companies, where leadership changes frequently, in Chinese public-owned corporations leadership is relatively stable and consistent over a long period of time, three decades in the case of Haier, which mirrors the stability in Chinese political leadership. Under this situation, a successful leader is required to have the ability to make sense and adapt to the continuously changing environment during the social and economic reform and make responding decisions for the company.

4.5 Zhang Ruimin’s Unique Management Philosophy

Zhang Ruimin‘s management philosophy derived from his own management concepts. In the 30 years of Haier‘s development, there have been many management concepts brought about by Zhang Ruimin. Some of them are popular management theories or practices learnt from the West – for instance, Total Quality Management (Feigenbaum,

1991), Scientific Management (Taylor, 1911), Management by Objectives (Drucker, 1975) and Business Process Reengineering (Hammer and Champy, 1993). Others are the innovation of Zhang Ruimin by combining Western management concepts, Chinese traditional management philosophy and his own understanding, such as OEC, 6S footprints, SBU and ZZJJT. These unique management practices will be explained in details in chapters Six, Seven and Eight. One of the interviewees, a senior manager in

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Haier who is in charge of the publicity of Haier‘s organisational culture and management system, explained the sources of Zhang‘s management concepts:

The formation of management concepts of Haier and Zhang Ruimin can

be generated into three words: inheritance, learning and developing.

Inherit means the management thinking he adopted from traditional

Chinese culture. Learning refers to those Western management concepts

he learnt from the books and the Western management masters he met.

Developing means making these concepts into our own management

system in accordance with the situation of Haier. This includes the

effort of our leader as well as all the ordinary employees in Haier

(Interviewee 5).

With regard to the Western management concepts, Zhang Ruimin played the agent who brought them into Haier and conducted them in practice. As mentioned before in his early life experience, Zhang Ruimin was eager to learn and has kept the habit of reading since his childhood. He also got most of the Western management ideas from management books. As is witnessed by one of his employees:

He (Zhang Ruimin) reads a lot of books on the cutting edge

management theories. Some of the ideas are got from discussions with

other management experts when he went out for international meetings.

As he concluded, at first he went abroad for their technology, then to

sell Haier‘s products, now to communicate and exchange management

ideas (Interviewee 2).

Zhang Ruimin commenced his management change within Haier with learning from the role models in developed countries. In the first stage of Haier‘s history, he referred to the popular management practice in Japan, Total Quality Management. Later in the 1990s he adopted the scientific management system from Ford and then developed

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a new management concept called OEC, combining scientific management with traditional Chinese management philosophy. GE was another model that Zhang Ruimin referred to by learning from its flexibility in management. As some of the interviewees stated:

In the early ages we learnt the management practices of Ford and then

Toyota. We also learnt six sigma management from Japan. Then we

realised Japanese style didn‘t suit us any more, not to mention Ford

model. So we are also trying to seek a model that works for Haier in the

new age (Interviewee 1, Interviewee 2).

Throughout the years of Haier‘s history, Zhang Ruimin has been exploring the management system that fits the development of Haier. By absorbing both Chinese traditional philosophy and Western management ideas, Zhang Ruimin managed to create his own management philosophy. As concluded from the interviews, among all of Zhang

Ruimin‘s management ideas, the core theme is change and innovation, as is exemplified in the following interview with a financial manager in Haier:

His (management) philosophy is innovation, which, from my

understanding and experience, means that no one should expect for an

easy and comfortable life, but should be prepared to fight any time and

do your work with passion. Haier has been constantly changing, what

we call process reform happened every two or three years (Interviewee

2).

Zhang Ruimin‘s passion for constant change and innovation was also passed down to all the employees in Haier as a requirement. One of the interviewees, who has worked in Haier for 15 years, described his experience:

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Some people feel tired working in Haier, since they are required to keep

high morale and adapt to the changes all the time. The structure of the

company almost changed every other year and our leader came up with

new management ideas frequently. It is hard but necessary for the long

term development of the company (Interviewee 2).

The requirement of innovation was also supported by an incentive system. In the

1980s, Haier used to name the inventions by the inventors names to encourage the innovation of frontline workers. Some inventions like Qiming welding gun and Xiaoling wrench were named this way. At the same time, there are also some prizes set for technological inventions and management suggestions, including Haier Prize and

Employee Suggestion Prize (Culture Center of the Haier Group, 2006). Stimulated by the leader‘s passion and incentive, change and innovation has already become an importance part of the company‘s organisational culture.

With regards to Zhang Ruimin‘s management philosophy, it was recognised that he highly praised change and innovation and has implemented constant change in Haier ever since he took it over. It‘s different from the commonly held presumptions for

Chinese leaders. Affected by traditional Confucian and Taoist thoughts, Chinese people tend to advocate harmony and stability (Zhuang and Whitehill, 1989). It was commonly believed that most Chinese leaders hold the same thought and take stability as the primary concern in management rather than change. While Zhang Ruimin‘s showed a different case with his personal management style which embraces instead of resists changes, which is also one of the primary reasons that distinguished Haier from its peer companies.

4.6 Conclusion

This chapter discussed the emergence of Zhang Ruimin as a leader who changed the fate of Haier and led it down a path of success. The chapter started with a biography of Zhang

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Ruimin‘s, early life and showed that Zhang was a passionate learner even in an environment when knowledge was not respected, which helped him to accumulate the requisite knowledge for the management work he did in the future. The second part of this chapter focused on the assignment of Zhang Ruimin as the director of Haier‘s predecessor, the Qingdao Refrigerator General Factory, which was the turning point for both Zhang Ruimin and the factory. As shown in the interviews and Zhang‘s biography,

Zhang Ruimin was forced to take this job when no one else wanted it. The third part of

Chapter Four discussed Zhang Ruimin‘s leadership and management style. Three characteristics of his leadership style were generated from the interviews, ie, charm and charisma, control and authority, and sight and vision. Therefore, Zhang Ruimin was described as a charismatic, visionary and tough leader who possesses strong influence on his followers as well as the authorities. These traits are in accordance with the definition of a charismatic leader in the literature (House, 1977). His traits not only helped him to gain trust and loyalty from his followers, but also enabled him to obtain recourses from the authorities. However, his behaviour in leading different types of changes varied according to the context. In additional to charismatic leadership, Zhang Ruimin also played the role of coach, captain and commander, which conforms to Dunphy and Stace‘s

(2001) model. This confirms Grint, Tourish and Barge‘s (Grint, 2008; Tourish and Barge,

2010) finding that leadership is a situational and the leader‘s role is to make sense of situations and systems (wicked problem) and take corresponding action. As to his management system, it can be concluded that he highly praised change and innovation, which was also implied in the constant management and organisational changes he implemented in Haier from 1984 to 2013. The influence of Chinese culture values were also reflected in his leadership styles, for instance, his control and authority as an ―iron leader‖ conformed to the high power distance assumption of Hofstede‘s culture value

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model (Hofstede, 1993). The following chapters will discuss the development of the company and the management changes implemented in Haier‘s during each phase of its development. The next chapter will start with the first period, the brand building phase from 1955 to 1991, and illustrates how Haier developed from a nearly bankrupt factory into the top refrigerator manufacturer in China in the early 1990s.

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Chapter Five

From Rags to Riches: The Role of TQM in the

Brand Building Phase (1984-1991).

5.1 Introduction

The years from 1984 to 1991 were the brand building phase in Haier‘s development history, when Total Quality Management (TQM) was introduced into the company. This chapter examines the key management initiatives that were undertaken by Haier from

1984 to 1991 and analyses the interaction between institutional factors, the industrial context and organisational factors to illustrate how Haier made sense of competitive pressure and conducted corresponding change management initiatives. This chapter addresses the sub-research question: ―How was Total Quality Management (TQM) implemented at Haier and to what extent were Haier‘s management practices influenced by management fashions?‖. Section 5.2 summarises the changes in industrial policy in

China from 1981 to 1991, as well as the competitive pressures faced by the company during this time. Section 5.3 analyses the changes within the company by examining organisational culture. Section 5.4 discusses how Haier implemented its brand building strategy through the adoption of TQM. A conclusion is then drawn on the key factors affecting Haier‘s success in its brand building phase.

5.2 Industrial Policy from 1980 to 1991

As reviewed in Chapter Two, organisational theories argue that the environment imposes constraints on organisations that affect both their structure and practices (DiMaggio and

Powell, 1983; Meyer and Rowan, 1977; Pfeffer and Salancik, 2003; Thornton and Ocasio,

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2008,). New institutional analysis proposes that institutional logic is the basis of the institutional environment and shapes the action of organisations and organisational actors and businesses tend to perform more efficiently if they receive the institutional support

(Scott, 2004; Thornton and Ocasio, 1999). Therefore, industrial policies, as an important form of institutional effect, are a critical factor which influences the development of individual organisations (Scott, 2004). The industrial policies, which had a significant impact on the Chinese home appliance industry, can be divided into three major shifts over three periods. Firstly, from 1980 to 1985, when the Sixth Five-Year Plan was introduced, and industrial policy shifted to focus on economic development and the development of light industry, which together with the Open Door Policy, led to the initial development of the Chinese home appliance industry. Secondly, from 1985 to 1988, during the first stage of the Seventh Five-Year Plan, the overheating economy caused the bogus boom in the Chinese home appliance industry. Thirdly, from 1988 to 1990, the government‘s price reform measures caused a consumer rush in late 1988, which pushed the consumption of durable goods, including home appliance products to a climax, but also stored up potential problems of pre-consumption of durable goods, which caused the shrink in the home appliance market in the early 1990s.

As discussed in Chapter Three, the Chinese government adopted the Soviet economic development approach of five-year plans in the 1950s. Five-year plans were a series of social and economic development initiatives shaped by the state government and the First Five-Year Plan of China was launched in 1953. The period from 1981 to 1990 was the time when the Sixth and Seventh Five-Year Plans were conducted by the Chinese government. Therefore, the implementation of the Sixth and Seventh Five-Year Plans were a key change in industrial policy at the time.

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The Sixth Five-Year Plan was initially drafted in 1975 and 1977, when the

Cultural Revolution was still in progress and ultra-left thoughts remained dominant in the central leadership. Therefore, the first drafts of the Sixth Five-Year Plan turned out to be unrealistic and impractical. In December 1978, the Third Plenary Session of the 11th CPC

Central Committee was held and it was made clear that the practice of putting politics before the economy should be abandoned in favour of greater attention to the economy.

To make the plan in line with the requirements of social and economic development in

China, in February 1980, the State Council decided to redraft the country‘s mid- and long- term plans. It convened a seminar to discuss the compilation of the Sixth Five-Year Plan.

To that end, the State Planning Commission, and related departments, also carried out extensive research and calculation work on the compilation of the Sixth Five-Year Plan and organised related experts to conduct scientific appraisals. The 1982 national planning meeting was again mainly focused on the drafting of the Sixth Five-Year Plan. It was only in December that year that the fifth meeting of the Fifth National People‘s Congress officially ratified the Sixth Five-Year Plan.

Compared with the previous draft, the final Sixth Five-Year Plan was more comprehensive and aimed to adjust and set national economic development onto a more stable and healthy track. It was made clear in the Sixth Five-Year Plan that the objectives of economic development included keeping the supply and quality of consumer products in line with the growth of social purchasing power and changes in the structure of consumption and to keep market prices stable. This was a turning point from the period of the Cultural Revolution when class struggle was the central task of communist China and the development of heavy industry (State Planning Commission of the People's

Republic of China, 1982). Under guidance to develop light industry, the government issued a series of support policies to encourage the development of the home appliance

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industry, including increasing relevant infrastructure construction investment, allocating idle workshops and equipment from heavy industry to the home appliance industry and increasing lines of credit to the home appliance industry (Liu, 2008). Policy support played a crucial role in the early development of the Chinese home appliance industry.

Wan Derun, the former director of the Bureau of Home Appliances of China‘s

Department of Light Industry, explained the situation of the Chinese home appliance industry at the time in an interview with the China Appliance Journal:

It was impossible for the Chinese home appliance industry to start in the

early 80s without the government‘s support policies. Given the weak

industrial foundation in China then, even basic raw materials needed for

home appliance manufacture, such as steel plate had to rely on import.

Therefore, we couldn‘t assume that we could just import some core

components and assemble them together to make our own home

appliance products (Liu, 2008:20).

Towards the end of the Sixth Five-Year Plan, symptoms of an overheating economy began to appear in China, manifested as fixed asset over-investment and the over-issuing of currency. Therefore, the first period of the Seventh Five-Year Plan (1986 to September 1988) showed some unstable characteristics, due to the overheating of the economy and the next stage (September 1988 to 1990) was to readjust the economic order

(State Planning Commission of the People's Republic of China, 1986).

The overheating of the economy was also reflected in the home appliance industry, with the rush to introduce production lines, regardless of the actual production capacity and market needs. On the other hand, the readjustment of the economic order from 1988 onwards also influenced the demand for the home appliance market through price reform.

The Chinese government implemented a dual price system in an attempt to make a

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smooth transition from a planned system to a market-oriented system. Towards the end of the 1980s, the problem caused by the dual price system, such as speculation, bureaucratic corruption and enterprises‘ deceptive behaviour, began to emerge (Hay, 1994). Therefore,

Zhao Ziyang, the General Secretary of the Central Committee of the Communist Party of

China (CPC), proposed to make a quick breakthrough in price liberalisation at the meeting of the Standing Committee of the Politburo in May, 1988, which attempted to rationalise the chaotic price system over a short period and move the economy towards normalisation. There was a huge gap between input and output prices under the dual price system, which made the rise of price inevitable after price liberalisation. The expectations of a price rise caused a rush of panic buying in early 1988 (Sun, 2009). Towards the end of August 1988, the rush reached its climax. One newspaper described it as: ―People have totally lost their senses. They are hoarding all kinds of products, whether they are durable goods or basic consumer goods or even unsaleable goods‖ (Wu, 2010).

The rush resulted in large-scale consumption of durable goods, including refrigerators. This created an illusion of prosperity in the home appliance industry, but also caused the consumption of durable goods, like refrigerators, to be two to three years ahead of its normal consumption cycle, which resulted in a fundamental shift in the home appliance market in the early 1990s.

The Open Door Policy, as discussed in Chapter Three, was another major shift in institutional logic in China. Aside from transferring the party‘s work focus from class struggle to economic development, another decision made by the Third Plenary Session of the 11th CPC Central Committee was to reform and to open up the Chinese economy.

Guided by the principle of opening-up, the Sixth Five-Year Plan outlined that one of the objectives of economic development in the next five years was to strenuously develop foreign trade, make effective use of foreign capital and actively introduce advanced

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technology to meet domestic needs. With regard to the home appliance industry, the State

Planning Commission allocated special foreign exchange funds to the home appliance industry to import equipment and technology (Liu, 2008). These policy support measures offered an opportunity for the Chinese home appliance industry to start up by importing equipment in the early 80s, which will be further discussed later in this section.

According to organisational theories, lower level institutional logic is mediated by the upper level logic (Thornton and Ocasio, 1999). Therefore, I propose that the changes in the Chinese home appliance industry during this period were largely affected by changes in government policy, which were summarised above. As discussed in Chapter

Three, the Chinese home appliance industry went through its initial development stage during this period. Given its late start compared with other countries, it was unrealistic for the Chinese home appliance industry to start by developing its own technology and equipment. Therefore, the Chinese home appliance industry took the first step by importing equipment. The supporting policies from the government played a critical role in helping the Chinese home appliance industry to start from scratch. However, the lack of market regulation also caused problems of irrational expansion among Chinese home appliance producers. Towards the end of the 1980s, the problem of over production began to emerge and the market switched from a sellers‘ market to a buyers‘ market. The key shifts in industrial level logic can be summarised as followed:

1. The home appliance industry‘s initial development started by introducing

production lines from foreign countries.

2. This was encouraged by incentive policies and local government support

3. The problem of over production began to emerge.

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5.3 Changes in Organisational Culture in Haier

The key change in Haier in this period, building on the discussion in Chapter Four, was the critical role the government played a in assigning the new leader to the Qingdao

Refrigerator General Factory. Zhang Ruimin was the deputy manager of the Qingdao

Home Appliance Company before 1984. When the Qingdao Refrigerator General Factory was in trouble, the leaders of the Qingdao Home Appliance Company and the Qingdao

Bureau of Second Light Industry decided that Zhang Ruimin was the only person who could save the factory and Zhang Ruimin was appointed as the director under the order of the Qingdao Bureau of Second Light Industry.

The new leader brought about new management initiatives, which created a totally different culture in Haier. As discussed in Chapter Four, the situation of Qingdao

Refrigerator General Factory was serious, not only because of its economic deficits, but more importantly, its chaotic management environment and the habitual behaviour of its workers:

The factory was a total mess then. No one cared about the rules. The

workshops were filled with the smell of urine because many workers

didn‘t want to bother waking to the bathroom and just urinated where

they worked. Some windows of the workshops are torn off and burned

by the works to keep them warm in winter. Those were the situation I

saw in the factory. I realised the underlying problem was the workers‘

lack of faith to the factory. They don‘t believe the factory would get any

better (Li, 2009).

According to this description, there was no order in the factory, not to mention any management culture. Therefore, Zhang Ruimin commenced his change management strategy for the Qingdao Refrigerator General Factory by creating a positive vision for the

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workers. Scholars in leadership (Heifetz, 1994; House, 1977; Manning and Curtis, 2002;

Pierce and Newstrom, 2000) were of the view that charismatic and visionary leaders could successfully change the status quo in their organisations by displaying the appropriate behaviours at the appropriate stage in the transformational process. When there is a realisation that the old ways no longer work, such leaders may undertake the task of developing an appealing vision of the future (Eisenbach et al., 1999). As was shown in Chapter Four, the first problem Zhang Ruimin solved, after his designation, was borrowing money to pay unpaid salaries to the workers and buy them Chinese New Year gifts. He then upgraded the commute trucks in the factory to shuttle buses. Zhang Ruimin himself was confident about the factory‘s future, because he already knew about the introduction of the new production line:

I knew it was just about installing a new production line that would

improve quality and efficiency. I knew this because it was I who had

pushed the new line as a manager at the factory‘s governing body, the

Qingdao Home Appliance Company (Zhang, 2007).

All his efforts aimed to convey the information that the new leader was confident the factory would have a better future. The employees then realised that the new leader, unlike the others who resigned not long after their designation, was determined to save the factory from the predicament. Zhang Ruimin‘s effort to motivate the workers by providing a good vision is consistent with researchers‘ view that leaders create change by providing a vision that is attractive to followers, rather than creating dissatisfaction with the status quo (Ford and Ford, 1994).

In sum, the change of leadership in this period brought a new management style and organisational culture into the Qingdao Refrigerator General Factory. The major

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changes at the organisational level were the creation of a positive vision and the establishment of internal order and discipline, as was shown in Chapter Four.

5.4 Brand Building through Total Quality Management at Haier

The management practice Haier adopted in this period was Total Quality Management. As discussed in Chapter Four, Zhang Ruimin quickly changed the situation in the Qingdao

Refrigerator General Factory and brought the company back to life and also built up the employees‘ confidence in the company. But as a manufacturing company, the profits came from the products. Therefore, after a basic management system was created within the factory, Zhang Ruimin moved on to address the core of the company‘s fate: the products. As reviewed in Chapter Three, the Chinese home appliance industry started from the end of the 1970s and experienced rapid development in the 1980s. From the middle to late 1980s, China was still in the early stages of reform and opening the market and was still relatively centrally controlled. The demand significantly exceeded the supply and Chinese firms generally set sales targets based on production capacity. The home appliance industry still held the characteristic of a sellers‘ market. As a result of the

Open Door Policy, people had more money and their living standards were higher than before. One of the interviewees described the market situation then:

Home appliance products were of popular demand then. People even

needed coupons to buy refrigerators. There was a saying then, which

meant that as long as you can make a refrigerator, even a paper

refrigerator, there will be a person willing to buy it (Interviewee 3).

Under this circumstance, many producers only focused on expansion and production (Haier Co., 2008). However, Zhang Ruimin realised that the high market demand was not caused by the competitiveness of the products, but was rather a by- product of a closed system (Haier Co., 2008). Once the market situation changed, the

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companies would not be able to rely on production, only those products with competitiveness would survive in the industry. Therefore, Zhang Ruimin decided to obtain a foothold in the enormous potential market with high-quality goods. As a result, he decided to adopt a "brand building strategy", to build up the brand name of Haier, by producing high- quality refrigerators. In order to achieve this goal, he established the

"zero defects" quality standard, based on Total Quality Management (TQM) approaches

(Crosby, 1979:198-204).

As reviewed in Chapter Two, according to the findings in management fashion research, TQM became a dominant management fad from the 1980s to the 1990s, which coincided with the time of Haier‘s adoption of TQM. Some interviewees mentioned the influence of Japan in this period:

In the beginning Haier learned from Japan and used their concept of

Total Quality Management (Interview 1).

Another interviewee also explained how Haier rephrased the concept of TQM into their own words:

What we used in the first stage was Total Quality Management. We

learned the concept of quality control from Japan in the brand building

phase and rephrased it into our own words as ―overall, everyone and

whole process quality management‖ (Interview 5).

The influence of the German company, from which the Qingdao Refrigerator

General Factory imported the refrigerator production line in 1984, was also emphasised by some interviewees from Haier:

We imported some equipment from Germany in the early 80s, which

included the management and control of quality within its production

process (Interviewee 2).

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Another employee also explained how the quality control system was brought into

Haier together with the production line:

Haier focused on quality management from 1984 to 1989. In the first

stage, Germany had some deep influence on Haier. The company

imported a production line from Liebherr, a German refrigerator

manufacturer. Their technology was also introduced to Haier together

with the equipment, which included their requirements and system of

quality control (Interview 3).

From the above, one may conclude that Haier‘s adoption of TQM in its first development phase was influenced by two major factors: the popular management theory from Japan and the influence of Haier‘s German partner. As indicated in the interviews, and in the literature review in Chapter Two, the dominant TQM fad in Western countries in the 1980s affected Haier through a normative process, by which management theories were set by gurus, theorists and consultants and then disseminated by publication. The influence of Liebherr, Haier‘s German partner, clearly worked through a mimetic approach, in which Haier copied the practice of a successful company in the industry. The leader, Zhang Ruimin, acted as the agent who brought the Western management theories into Haier during this period, as one of the employees mentioned:

Those Western theories Haier used were introduced by our CEO. He

(Zhang Ruimin) read many books about Western management. The

organisational culture was formed as time went on, but those

management practises were learnt from books (Interviewee 5).

Zhang Ruimin took three steps to implement the quality management project. The first step was to propose the concept of ―quality first‖. As mentioned in the beginning of

Section 2.5.2, TQM was brought into China in the 1980s and in 1986. Total Quality

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Control (TQC) was carried out in all large and medium-sized state owned enterprises

(SOEs) under government orders (Li et al., 2003:1230). Some government officials claimed that:

It took Japan 10 years to implement TQM throughout the country. We

can use even less time to carry out TQM in Chinese state-owned

enterprises since we‘ve got experience in national-wide movements (Hu,

2003:71).

In less than five years, TQM was conducted in all large and medium-sized state- owned enterprises in China. However, most of the implementation of TQM was superficial. The criterion of quality control was passed down to the companies, printed out and hung on the wall of every office and workshops, but in reality, none of these rules were actually implemented (Hu, 2003:72). This kind of formalism was a common phenomenon among Chinese companies. Influenced by the Great Leap Forward and the

Cultural Revolution, people were more passionate about creating the illusion of prosperity of movements, rather than focusing on the actual results. Zhang Ruimin went through the

Cultural Revolution and witnessed how the companies cheated their superior authorities by such pro forma actions:

There‘s one thing that impressed me was when an optimisation method

was promoted by the government during the Cultural Revolution.

Training classes were started all over the country to teach the method

and all factories were encouraged to use the method and required to

report immediate results by the method. My factory reported

―remarkable improvement‖ just a few days after the method was

conducted. It seemed like a joke to us that the superiors were cheated

like this (Zhang, 1999a:20).

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From his own experience, Zhang Ruimin realised that the key to implementing successful quality control was not the rule or numbers, but to change peoples‘ perceptions about quality. Therefore, the first step he took to implement TQM in Haier was to put forward the concept of ―quality first‖. This concept was first reflected in the introduction of the production line from Germany. As discussed before in Chapter Four, when the

Qingdao Refrigerator General Factory got permission for refrigerator production in 1984, there had been 40 refrigerator manufacturers throughout the country. The quality of refrigerators was rated in stars and most of the other manufacturers were producing three or two star refrigerators. By not following other companies‘ path, Zhang Ruimin decided to import a ―four-star‖ production line. One of the employees explained the leader‘s decision:

The difference between Haier and other companies, which also

introduced production lines, was that Haier had a clear aim, which was

to produce top quality refrigerators in China. Therefore, Zhang Ruimin

decided to introduce a four-star production line from Germany, which

was the first four star production line in China, even in Asia

(Interviewee 10).

As discussed before, compared with those companies who imported production lines blindly, Haier took a further step. When Haier introduced the production line from its German partner Liebherr, the strict quality control concept was also introduced in the factory, along with the machines, which laid the foundation for Haier‘s quality management and ensured its product‘s competitiveness when the market went through a turnaround in late 1980s. Before the production line was imported into Haier, the factory sent a delegation to Germany to investigate the technology and the machines for refrigerator production there. The delegation was led by Yang Mianmian, who later

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became the president of the Haier Group. Under her leadership, the delegation put extra effort into learning the technology, including quality control skills. As one employee from

Haier stated:

When Haier introduced the production line, many companies also sent

delegations abroad to learn new technology and introduce production

lines. But most of them just listened to the introduction provided by

foreign producers and then spent the rest of the visit travelling around.

But people from Haier listened to lectures in the day and then organised

and reviewed the notes they took at night. Their spirit also moved the

trainers in Germany, who realised those people from Haier were there

with an intention to learn their technology rather than travelling

(Interviewee 3).

Another employee in Haier also described how Haier introduced the technology with the production line:

When Haier imported the production line from Liebherr, it also signed a

five-year technology cooperation contract with Liebherr. While other

companies only purchased the machines. Therefore, even with the same

production line, Haier‘s products were still better than others

(Interviewee 10).

Besides the influence of the factory‘s German partner, the leader Zhang Ruimin already realised the importance of quality and foresaw that once the market situation changed, quality would be the core of competitiveness for Haier products, which would help the factory to win the market share in the industry. Therefore, quality was made the first priority by him. In order to ensure the quality of Haier products, he even went against government regulations. Zhang Ruimin described how he stood up to the pressure from the government and made his own decisions in one of his biographies:

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When we first started the production of refrigerators, the government set

a target for the local components of refrigerators. But we were aware

that if we made our refrigerator at that rate, the quality would be much

lower. Therefore, we didn‘t follow the rules, but used 90 per cent of

imported components in our refrigerators. Our conduct was criticised by

the authority. But we value the market more than the authority and it

turned out that we made the right decision (Zhang, 1999a:22).

Zhang Ruimin also wanted to pass his principle in quality control down to the employees. Therefore, based on the management philosophy he got from the factory‘s

German partner, Zhang Ruimin developed his own concept of quality that ―defective products are waste products‖ and then implemented the managerial approaches of zero defects and set the requirement of zero complaints from customers.

When Zhang Ruimin first brought up the concept of quality first, it was only an abstract concept. This concept was soon illustrated in practice in a well-known event. In

1985, the factory received a complaint letter from a customer about a refrigerator fault.

Seventy-six defective products were found in 400 refrigerators after further inspection.

This was not an individual case. One interviewee, a scholar who has done research on

Haier as well as other Chinese home appliance companies, explained that:

When Haier imported production lines, many Chinese companies did

the same. But many companies also didn‘t know how to operate the

machines, as a result, most of them just ended up in the factory without

running a single time. Haier also came had the same problem, that‘s

why they smashed many refrigerators (Interviewee 4).

Although Haier‘s delegation made great efforts in learning the operation techniques of the new equipment, the production line still could not guarantee the quality

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of the end products. Nonetheless, under the grading standards of the time, the refrigerators could still be sold after a slight repair, as one interviewee explained:

According to the grading standard then, refrigerators are classified into

first-grade products, second-grade products, third-grade products, off-

grade products and disposed products. As long as an end product still

functioned, there would be ways to sell it (Interviewee 11).

Therefore, some people suggested selling those defected refrigerators to employees as welfare. But Zhang Ruimin rejected this proposal.

If I allowed them to sell the 76 defective refrigerators today, then we

would produce 760 or even 7600 defective products in the future (Zhang,

2007).

Then he made an unexpected decision to smash all the defective refrigerators in front of the staff, as was discussed in Chapter Four. Each refrigerator was labelled with its problem and the name of the person who was responsible and then smashed by the responsible workers. A refrigerator of this type cost RMB 800, equivalent to two years‘ salary for an ordinary worker in the factory. Some of the workers even burst into tears when smashing the refrigerators. By this shocking event, the employees developed an understanding that defective products are waste products.

―Smashing defected refrigerators‖ was considered a milestone, not only in Haier‘s quality management history, but also in the overall development history of Chinese corporations‘ concept of quality. The hammer Zhang used to smash the refrigerators is even on display at the National Museum of China.

The event did not stop at the point of punishing the responsible person. In the following month, Zhang Ruimin held several meetings on the topic of quality control.

The concept of zero defects was widely recognised and understood among employees

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through discussion. With the landmark event, most employees had accepted the new quality concept. However, there were still some people who could not understand the new value. In such circumstances, a management mechanism became necessary to ensure the right action would be conducted by employees. During the execution of the mechanism, the new concepts and values were internalised and became employees‘ own values.

TQM is a management concept for the continuous improvement of the quality of goods and services through the participation of all levels and functions of the organisation, as outlined in Chapter Two. The key point of TQM is that everyone in the organisation plays a part in the production of quality goods and services (Evans et al., 1984). Guided by this principle, Haier set up the ―zero defects‖ management system. In the production process, the products would go three phases of quality inspection: self inspection, peer inspection and specialist inspection (Zhu, 2007). Every product at Haier had a quality trace sheet attached. Workers in each process would record it once they found a defect generated from the previous process. At the terminal of each production line in Haier, there was a special worker who would record and fix all the defects and whose salary came from the fines for the defects. Moreover, if the passing rate was above the standard, the specialist would also receive some bonus (Zhou, 2002). By this encouragement and punishment system, Haier was able to systematise and institutionalise the concept of

TQM within the organisation. As a result of the strict quality management which Haier conducted in this period, the quality of its refrigerators was rated higher than the competing products in the industry. In 1988 Haier‘s refrigerator won the gold medal in the quality competition for domestic refrigerator brands, which was also the first quality award in the refrigerator industry in China. The gold medal was a remarkable achievement for Haier, but Zhang Ruimin did not get complacent and he intended to carry on with the improvement of the quality of Haier product‘. As one employee recollected:

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When Zhang came back from the award ceremony, everyone in the

factory was expecting a celebration. However, instead of praising the

achievement, Zhang Ruimin held a meeting to find further fault in Haier

products. From this meeting, he made the employees realise that quality

control was not once and for all but rather a continuous improvement

(Interviewee 5).

Owing to the high quality of Haier‘s refrigerators, Haier was soon recognised by

Chinese customers. After building up the brand name of Haier in China, Haier decided to export its refrigerators. Unlike most Chinese producers at the time, who began with original equipment manufacturer (OEM), or started their exports with developing countries, Haier began its exports with the most difficult market, the European market.

Among all the European countries, Haier picked Germany as its first target for export. In

1990, a Haier refrigerator passed the quality certification of Germany, but the German distributors still did not accept Haier‘s products. To convince the German distributors,

Haier suggested that they peel off the labels from the refrigerators and mix a Haier refrigerator with three German brand refrigerators. The distributors were asked to pick the best one from the four refrigerators. It turned out that the German distributors picked the

Haier refrigerator. By this experiment, Haier successfully persuaded the German distributors and got a purchase contract from a German distributor for 20000 refrigerators

(Hu, 2003:69).

Summarising the implementation of TQM in Haier during this period, Zhang

Ruimin took three steps: firstly, he identified the importance of quality and proposed the concept of ―zero defects‖; secondly, he conveyed this concept to employees by smashing the defective refrigerators and finally, he built up the system to ensure the quality of its products. These steps conform to Deming (1986) and Crosby‘s (1979) key concepts in

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TQM implementation such as top management involvement, employee commitment, a quality control system and quality culture. The ―zero defects‖ concept Zhang Ruimin proposed was also influenced by Crosby (1979:198-204).

With the brand name built in this period, Haier benefited from TQM at the end of the l980s, when the market situation changed abruptly and the market was flooded with refrigerators. In the second half of 1989, refrigerator producers tried to salvage the situation by reducing their prices, but failed. By the end of the year, two million refrigerators ended up in backlog storage. Therefore, many people described the year

1989 as the last summer of the Chinese refrigerator industry (Hu, 2003:71). Not until then did refrigerator producers realise that the time when the market was regulated by government had passed and the market itself would determine their fate (Qin, 1992).

Many suppliers had no choice but to reduce their prices. Under this situation, Haier made an unexpected decision to increase their prices by 10 per cent. It was risky since refrigerators were the only product Haier produced then. Once the sales dropped due to the price rise, the company would suffer a great loss or even face the danger of bankruptcy again. Fortunately, the customers‘ recognition of Haier products was already built due to the strict quality management. Therefore, despite the glut, Haier's products remained consistently popular. Even after Haier increased the price, people were still lining up to buy Haier refrigerators.

During the brand building phase, by focusing on a single product, the refrigerator,

Haier was able to accumulate valuable business and management experience. This experience allowed the company to build a management model, which could be used for future business units. In this period, Haier adopted the strategy of Total Quality

Management to achieve incremental development. By this effort, Haier was able to transform itself from a small factory, operating at an annual loss of nearly RMB 1.47

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million into a company delivering substantial profits (see Table 7) and became one of the best refrigerator brands in China.

Table 7: Sales income and profit of Haier, 1984-1991 (Source: adapted from Haier corporate reports)

Year Sales income (million RMB) Profit (million RMB)

1984 348 -147

1985 1820 107

1986 8026 705

1987 14335 1388

1988 26702 2293

1989 41163 3213

1990 53562 3505

1991 59105 3045

In sum, Haier‘s history of development shows that from a nearly-bankrupt factory in serious debt, it turned into a successful refrigerator producer in the early 1990s.

Analysing the driving forces of changes in this period, there are two key factors which influenced Haier: industrial policy changes and organisational change within Haier. Using pattern matching to compare the findings from Haier to the research questions drawn in

Chapter One, a diagram can be created to illustrate the development and adoption of change in Haier in this period.

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Government policy change (Chapter Three and Section 5.1): Encouragement of the development of light industry Coercive Open Door Policies Industrial policy change (Chapter Price reform Two and Section 4.1): Blindly introducing production lines from other countries Coercive Mimetic Coercive

Competition environment (Chapter Two and Section 4.1): Emergence of over production Organisational level change (Chapter Three and Section 4.2): problem Change of leadership — change in organisational culture

Management fads The popularity of TQM in western countries in the 1980s and 1990s

Normative and mimetic

Haier TQM in brand building phase (1984-1991)

Figure 9: The influential factors to Haier’s development in the brand building phase

As illustrated in Figure 9, the institutional factors which affected Haier in this period were those policies oriented by the five-year plans, including encouragement of the development of light industry, the Open Door Policy and price reform. Those policies influenced the development of the home appliance industry through a coercive process, which then caused the shift in dominant logic in the Chinese home appliance industry.

The key shift in industrial policy during this period was the wave of introducing production lines and the subsequent problem of overproduction. The shifts within the

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organisation included the change of leadership and the change of management culture initiated by the new leader. Management fads were also a critical factor which brought

Haier into the practice of Total Quality Management. The changes in government policies affected the competition environment in the Chinese home appliance industry through a coercive process.

Unlike the literature on institutional logics (Thornton and Ocasio, 2008; Thornton and Ocasio, 1999), the changes in industrial logic did not influence the practice of Haier.

On the contrary, Haier did not follow the dominant trend in the home appliance industry, which had a high emphasis on production and an ignorance of quality control. Thanks to the change of a new leader, who foresaw the importance of quality, Haier went on a different path from its peers and implemented Total Quality Management. The quality control concept Haier adopted was influenced by the popular management fad from Japan and quality control was introduced together with the production line it imported from

Germany.

5.5 Conclusion

This chapter examined the development of Haier from the Qingdao Refrigerator

General Factory during its brand building phase from 1984 to 1991. The factors which affected the company‘s change management strategy and the successful adoption of Total

Quality Management (TQM) were analysed. As a result, Haier developed from a near bankrupt factory into a top-brand refrigerator producer in China. Concluding from the findings, the policies oriented by the five-year plans, including the encouragement of the development of light industry, the Open Door Policy and price reform influenced the development of the home appliance industry through a coercive process, which then caused a shift in the dominant logic of the Chinese home appliance industry. Stimulated

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by the policies, a trend of introducing production lines became dominant in the Chinese home appliance industry and the subsequent problem of overproduction began to emerge.

However, the irrational trend in expanding production did not affect Haier as assumed.

Rather, the key factor contributing to its success in this period was the charismatic and visionary leader, Zhang Ruimin. Therefore, it can be concluded that the key driving force behind Haier‘s development from 1984 to 1991 was the new leader, who made sense of the institutional factors and was the agent of change by introducing TQM into Haier. Thus, in its first development phase, the key factor that determined Haier‘s success was the change of leadership. The next chapter will examine the second phase of Haier‘s development, the diversification phase, by focusing on the adoption of OEC management, the role of competition and the expansion of the company.

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Chapter Six

OEC Management, Competition and

Expansion in the Diversification Phase (1991-

1998)

6.1 Introduction

This chapter illustrates the development strategies and management approaches adopted by Haier in the period from 1991 to 1998. As concluded in Chapter Five, by the early

1990s Haier had built its brand name in refrigerator production and was recognised as one of the best producers in the refrigerator industry. However, the market situation in the refrigerator industry began to reverse from a seller‘s market to a buyer‘s market at the beginning of 1990s. In response to the changes in the market, Haier adopted a diversification development strategy to expand its business scope through merger and acquisition (M&A) with 18 companies. With regard to internal management, Haier created its own management system called OEC (overall, every control and clear) management (Liu, 2005:109). This chapter addresses the sub research questions: ―How did Chinese cultural values influence Haier‘s management practices and to what extent were Haier‘s management practices influenced by management fashions?‖. Section 6.2 examines the shift in Haier‘s development strategy in this period, including diversification and service improvement. Section 6.3 analyses the main forces affecting

Haier‘s success in this period, including policy support, market shifts and organisational strategy. Section 6.4 discusses the introduction of OEC into Haier. A diagram is then

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drawn from the findings to illustrate the factors which led Haier to adopt new leadership and management practices.

6.2 Haier’s Development Strategies from 1991 to 1998

As discussed in Chapter Three, the price reform implemented by the Chinese government in 1988 caused a rush of panic purchasing in 1988 and 1989. The snapping up rush resulted in the pre-consumption of durable goods, including refrigerators, which caused the consumption of refrigerators two to three years ahead of the normal consumption circle. By the end of 1980s, the consumption of refrigerators in big and medium cities had reached a threshold. Towards the end of 1988, the household ownership rate of refrigerators had reached over 60 per cent in big and medium cities in the coastal areas and nearly 60 per cent in the inland areas. The marginal demand of the existing class of consumers began to decline, while new consumer classes had not developed yet, which caused a decrease in the volume of sales of refrigerators (Haier Group, 2012). As a result, by the early 1990s, the refrigerator market situation had reversed. A buyers‘ market for refrigerators had taken shape, where the supply of a large quantity of products had exceeded the demand. To deal with the market shift, Haier adjusted its development strategy in this period by expanding its business scope through merger and acquisition

(M&A). With regard to the focus of products, after the strict quality control in the brand building phase, Haier put more effort into service improvement in this period to distinguish itself from its competitors.

6.2.1 Diversification and development through merger and acquisition

As shown in chapters Three and Five, when confronted with the severe market situation, many refrigerator manufacturers chose to reduce the price of their products, which provided occasional short-term market gains but reduced their capacity for further

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innovation and corporate development. However, benefiting from the quality of its products and brand reputation, allowed Haier to push through the difficulties, without reducing the price of their products. After gaining brand recognition from refrigerators,

Haier formulated its diversification development strategy to expand the Haier brand beyond refrigerators, adding washing machines, air conditioners and other items to its product line. As discussed in Chapter Three, the leading home appliance companies started expanding their business through diversification after the restructuring of the industry around 1995, however, Haier made its move ahead of its counterparts. In

December 1991, Haier started to branch into other home appliance areas other than refrigerators. The first areas of Haier‘s diversification were freezers and air-conditioners.

Zhang Ruimin explained how he made the decision to diversify in one of his articles:

When we first started to do air-conditioner production, the public

opinions on diversification was still negative. People thought Chinese

corporations were not ready to start diversification yet and should stick

to a single core product. However, my thinking was that we should

think about how to be successful in diversification rather than whether

we should do diversification (Zhang, 2001:46).

As mentioned in Chapter Three, many companies failed in their endeavour to diversify. One of the causes of their failure was that most companies held a misperception of diversification, which can be described with a Chinese proverb: ―When the east is not bright, the west can be bright‖. Holding this belief, these companies believed that if they suffered a loss in one business, they could always make up for it with the profit they made in other businesses. This was also the original motivation to diversify their businesses for many companies. However, it turned out that many companies made a loss, both their

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new and old businesses (Hu, 2003). Haier, on the other hand, had a different view regarding diversification, as Zhang Ruimin explained:

We stick to two principles in the diversification development. First,

before we enter a new business, we should make sure the previous core

business was strong enough. Second, we don‘t believe that when the

east is not bright, the west can be bright. Once we have developed a new

business, after the first phase of starting, we will strive to get into the

top three in the area (Zhang Ruimin, cited in Hu, 2003).

One employee in Haier also explained the importance of brand recognition and explained why Haier expanded its business only after its core business already became a top brand in China:

Haier‘s diversification was based on the brand building strategy it

implemented in the previous phase. After the first phase, the customers

had endorsed our products and the brand name was also built. On this

basis, other products of Haier would be easily accepted by the

customers too. Therefore, diversification wouldn‘t be achieved without

brand recognition. If one product was not accepted by people, multi-

business wouldn‘t solve the problem (Interviewee 8).

These two principles were reflected in Haier‘s development in the 1990s. From

1984 to 1991, Haier focused on refrigerator production and became one of the most well- known brand names in China. Then it entered other areas such as freezer, air-conditioner and washing machine production. One scholar also compared Haier‘s diversification strategy with other companies and explained its successful strategic choice:

Business diversification became popular among Chinese companies in

the 1990s. Many companies used diversification to spread risks. There

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was a heated discussion about how companies should start their

business expansion then. Haier‘s strategy was what we call concentric

diversification in marketing. It started from related businesses in the

same area, such as the washing machine, the air-conditioner and so on.

From my point of view, I think the strategy of diversification should be

in accordance with a company‘s core competence. In this sense, Haier

made the right decision in its second development phase (Interviewee

12).

The expansion of Haier‘s business scope was achieved by means of a series of merger and acquisition (M&A) deals between 1991 and 1998. In November 1991, the

Qingdao Refrigerator General Factory unified with the Qingdao Freezer General Factory and the Qingdao Air Conditioner Factory. The Qingdao Haier Co. Ltd was founded through this merger. On 19 November, 1993, the Qingdao Haier Co. Ltd was listed in

Shanghai stock market. In the following years, Haier conducted merger and acquisition with 18 companies. Some representative capital operation cases of Haier are listed below

(Haier annual reports, 1994-1998):

1. July 1995: Acquired the Qingdao Red Star Electric Company, one of the top

three washing machine manufacturers.

2. December 1995: Took over 60 per cent of the shares of the Wuhan Baybo-

Sedor Ltd,

3. March 1997: Invested 60 per cent of the shares to establish the Shunde

Haier Electric Company in Guangzhou,

4. April 1997: Bought 80 per cent of the shares of the Qingdao Third Pharm

Plant,

5. August 1997: Annexed the Shandong Laiyang Iron Factory,

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6. September 1997: Invested 60 per cent of the shares to establish the

Hangzhou Haier Electric Company with the Hangzhou West Lake group.

7. December 1997: Invested 60 per cent of the shares to establish the Guizhou

Haier Electric Company,

8. December 1997: Annexed the Huangshan Electric Company.

Haier‘s M&A took place in three forms. The first was through administrative allocation by the government. One typical case is the merger with the Red Star Electric

Company, a loss-making state-owned enterprise (SOE). Red Star Electric Company used to be one of the three biggest washing machine manufacturers in China and had over

3500 employees with an annual production of 700 thousand washing machines. As a well- established washing machine manufacturer, the Red Star Electric Company had an advanced production line and technology, as well as a team of skilled workers. However, during this period of market turnaround, the company stuck to its old management and operation style, which was not oriented to the new market conditions. Consequently, it went through a serious problem of chronic staff redundancies and it produced only a single type of product. Its profit began to drop rapidly after 1995. By July 1995, it suffered a total loss of RMB133 million. On July 5 1995, the Qingdao government incorporated the Red Star Electric Company into Haier, with both its assets and debts

(Haier annual report 1995). Since the merger was orchestrated by the government, Haier annexed the Red Star Electric Company without any cost (Zhong, 2005).

The merger with the Red Star Electric Company also benefited Haier, as it allowed it to diversify. Haier introduced a production line for tumbling-box washing machines from Italy and launched its washing machine manufacture in 1993. The Haier washing machine brand was rated one of the top ten best-selling brands in China in 1995

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(Zhong, 2005:89). By contrast, Red Star Electric Company had a bad reputation for its products. However, the Red Star Electric Company owned the cutting-edge technology for producing agitator washing machines, which were more popular in the Asian markets, but Haier was not able to produce them (Yang and Zhang, 2008). The merger of Haier and

Red Star turned out to be a win-win game for both parties.

The first step Haier took was sending a delegation from the Haier Corporation

Cultural Centre to the Red Star Electric Company. The delegation conveyed the mission to pursue excellence in the company. OEC management, which was conducted in Haier, was then introduced into Red Star. Guided by Haier‘s concept that ―all the results of our work are reflected by the market‖, the reform work in Red Star was embarked on with a market-oriented character, which was missing in Red Star before. Some of Haier employees recollected the process:

I came to Haier in 1993 and witnessed some of Haier‘s M&A during

that period. In 1995 Haier incorporated Red Star. I remember that Haier

only sent three people to Red Star. It was these three people who

changed the management environment in Red Star (Interviewee 8).

Another interviewee from Haier also explained how Haier finalised the merger with Red Star:

Management and organisational culture was the core problem in Red

Star then. Therefore, Haier sent a group of three people there to change

the management practice, including a general manager, a financial

manager and a marketing manager. By these three people, the whole

management system in Red Star was taken over (Interviewee 1).

Guided by liberalisation, a series of reforms were carried out in Red Star. A quality control system was established to ensure that products met the needs of the market.

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Red Star‘s 34 offices were condensed into five departments and middle management personnel were cut from 105 to 45. A new promotion system was also introduced into the company, through which new talent was discovered through competition rather than judgement. When the new culture was brought into Red Star and the new management system was established within the company, the sales of its washing machines began to rise and returned to profitability within three months of the merger (Wang, 2011).

The second form of M&A at Haier was an investment holding. The establishment of the Shunde Haier Electric Company was conducted through investing shares from the company. The target company Haier incorporated this time was the Aide Group in Shunde,

Guangdong. Similar to Red Star, the Aide Group was also a washing machine manufacturer, which used to have a sizeable market share. But confronted by severe competition, especially from foreign competitors, the Aide Group went through a decline over two straight years and, in 1996, the production of washing machines ceased due to bad performance (Wang, 2011). Drawing on the experience from the case of Red Star,

Haier again sent a delegation to promote the culture of Haier at the Aide Group. Then the reform within Aide took a similar path to that of Red Star (Zhong, 2005:93).

The difference between these two M&A cases was that the merger with Aide was cross-regional. Therefore, the attitude of the local government plays a critical role in both the process of negotiation between the two parties and its subsequent development after the merger. In this regard, the Shunde government showed full support for the merger.

In 1997, Shunde had already finished its capital accumulation and entered the second phase of industrial development, with the target of accelerating economic restructuring by eliminating labour-intensive and pollution-intensive industries and, instead, developing technology intensive industries. The merger between Aide and Haier, a national-wide well-known home appliance manufacturer, was clearly in compliance

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with the economic adjustment strategy of the local government. Therefore, the Shunde government offered preferential support on credit and taxation and all government tax and part of value-added tax was reimbursed to the Shunde Haier Electric Company. There were also some preferential policies in the price of land, water, electricity and labour recruitment (Zhong, 2005:93).

In the cases of Haier‘s M&A with both Red Star and Aide, Haier incorporated the companies at a very low capital cost, but mainly focused on changing the company‘s organisational culture and management environment. This type of M&A was described as

―Activating Shock Fish‖ by Zhang Ruimin. ―Shock Fish‖ is a metaphor for those well- equipped, but financially and managerially unsuccessful companies, which can be activated by introducing a scientific management system and shifting the organisational culture (Hu, 2003). A manager who worked in Haier for more than 10 years explained what a ―shocked fish‖ is like:

All of the companies Haier incorporated in the 1990s were public-

owned corporations. Some were state-owned enterprises, like the

Huangshan Electric Company. Others, such as Red Star are collective

enterprises. The feature these companies had in common was that they

all have adequate hardware facilities, like machines, land and

workshops. But it was the lack of management that lowered their

efficiency. It was a common phenomenon in public-owned enterprises

then. Before 1984, Haier also had a similar problem. Under the chaotic

management system, the quality of the products was very poor. The

washing machines Haier used to produce before 1984 couldn‘t even go

through the transport from Qingdao to Jinan [a city 350km away from

Qingdao]. When the washing machines were sent to Jinan, most of them

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were already broken. This was one of the disadvantages of the ―iron rice

bowl‖ (Interviewee 1).

In the Haier Culture Centre, they explained why Haier chose to incorporate those

―shocked fish‖ companies. The M&A between companies usually happens in three forms.

When a company on a larger scale acquires a smaller one, the merger is like a big fish eating a smaller fish. When a company with a noticeably stronger technological advantage incorporates a technologically inferior company, it‘s like a slow moving fish being swallowed by a fast moving one. A new type of merger since the 1990s is the incorporation between two powerful players, where both parties are strong ―sharks‖

(Culture Center of the Haier Group, 2006). But in the economic system of the 1990s, the lack of motivation resulted in a situation where both small and slow fish did not have the motivation to conduct merger and acquisition with other companies. As this interviewee explained:

Under the economic system, it‘s impossible to eat any live fish and

eating dead fish is not good for the company. We had no choice but to

deal with shocked fish (He, 2007:3).

As is illustrated above, Haier‘s countermeasure to the shocked fish was to reactivate them with fresh management and organisational culture. One senior manager recollected how the management and culture team from Haier dealt with resistance when they conducted the merger with the Huangshan Electric Company:

When Haier conducted the merger with the Huangshan Electric

Company, they confronted a large-scale strike from the employees.

Because the merger challenged some interest groups within the

Huangshan Electric Company, so these groups instigated the strike.

Facing the strike, the delegation from Haier decided to cut off the salary

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and told the employees that they wouldn‘t get paid until they start

working again. This was new to them since workers used to get paid in

public-owned enterprises all the time even if they did not work. But the

Haier people showed them the new management style. Under the

pressure of no salary, most of the workers went back to work and the

merger was successfully finalised at last (Interviewee 1).

The Red Star Electric Company, the Aide Group and the Huangshan Electric

Company were all viewed as ―shocked fish‖ by Haier. In its diversification phase, Haier reactivated several companies in a similar state by introducing management and cultural changes. Through ―reactivating shocked fish‖, Haier managed to expand its scale and business scope at low costs.

The last pattern Haier adopted to conduct M&A was cooperation between powerful players. As stated above, incorporation between successful companies became a relatively popular way to undertake M&A internationally. In the early stage of expansion,

Haier had no choice but to incorporate companies with a bad performance and, by 1997, the core businesses of Haier still remained in the domain of white goods. In 1997, Haier announced its plan to establish a TV manufacturing company in Hangzhou with the

Hangzhou West Lake Group. Unlike the companies incorporated by Haier previously, the

Hangzhou West Lake Group was a well-operated company and enjoyed a considerable market share in the TV industry. The market for TV sets had already reached saturation.

Therefore, development had become more difficult for the Hangzhou West Lake Group.

As for Haier, it did not seem to be a good time to enter the brown good market.

However, Zhang Ruimin believed there was still great potential in the market for TV sets, especially high tech digital televisions. Furthermore, Haier aspired to become one of the

Fortune 500 companies as its long-term goal. Diversification from white goods to brown

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goods was viewed as the first step on the path to becoming an internationally competitive corporation. In September 1997, the Hangzhou Haier Electric Company was joint-funded by Haier and the Hangzhou West Lake Group. The new corporation was critical to Haier, because this pattern meant that Haier had passed the stage of just taking over badly operated companies.

Concluding Haier‘s diversification development in this period, the company‘s shift in development strategy was the primary driver of change. Besides this, the government policies also played an important role in supporting Haier‘s merger and acquisition with these public-owned companies. From the interviews, it seems that most of the companies Haier incorporated in the 1990s were allocated by the government to

Haier at a very low cost or even with no cost. An interviewee from the top management of

Haier explained the supporting policies that helped Haier to finalise M&As in the 1990s:

The expansion of Haier in the 1990s benefited from Deng Xiaoping‘s

South Tour Talk. Some factors which slowed down the pace of reform

in China began to emerge within the state leadership then. Seeing this,

Deng Xiaoping made a tour to some cities in southern China and made

the speech calling for further reform and opening up. The top leadership

was shocked by his speech and followed his order to issue the talk as a

state document immediately. Guided by his principle of reform, the

government issued some policies to encourage merger and acquisition

among public-owned enterprises. There were also some preferential

policies too. For example, the government would pay off the debt for

the merged enterprises so as to release the burden from the merging

enterprises. Haier also merged some companies in this way. Red Star

was a typical example (Interviewee 5).

Another Haier employee also mentioned the support of local government:

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The preferential offers that the local government offered Haier was to

pay off the debt for those merged companies and allocate the property

of the companies to Haier at a low price or even for free. Haier merged

18 companies in the 1990s. Most of them were given to Haier for free

by the local government (Interviewee 1).

The local governments did this mainly aiming to solve the problem of unemployment in those companies. As discussed before, many public-owned enterprises suffered from the problem of mismanagement. Some of them were the backbone of the local industry and their collapse would cause serious problems of unemployment for the area. Therefore, the local government was happy to have a successful company who could save these companies and prevent the potential problem of unemployment. Some of the interviewees also explained why the government supported Haier‘s M&A:

The governments‘ purpose was to integrate resources and to alleviate

the employment pressure on them. Haier‘s M&A in the 1990s offered

thousands of jobs. Without these jobs, the unemployed people would be

a serious problem for the government (Interviewee 8).

Another senior manager further explained that Haier was actually forced to accept some of the companies through administration orders by the government:

In some sense, the ―benefit‖ to us was actually a burden. Many of the

companies Haier accepted during this period were in serious debt. There

financial problems were not reflected in their report. But most of their

financial reports were fake and the debts were hidden in the documents.

The government‘s ultimate aim was to settle the employees in these

companies. The employees were actually the biggest burden. Therefore,

the government made Haier accept these unsuccessful companies and

paid the debts for Haier (Interviewee 1).

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In the process of selecting the right company to take over the loss-making public- owned companies, Haier‘s brand name and the leader Zhang Ruimin‘s fame played an important role in gaining the governments‘ attention. One employee stated this point of view in his interview:

The government picked Haier to incorporate those companies, because

of the fame of Haier and the leader. Haier already became a famous

brand in China by the 1990s. Therefore, the government intended to

reactivate the merged companies with Haier‘s brand name. Moreover,

they also witnessed how Zhang Ruimin led Haier to develop from a

loss-making factory to a successful brand. This assured them that he can

also save the other companies in similar situations (Interviewee 1).

Supported by the government policies, Haier implemented merger and acquisitions with 18 companies from 1991 to 1998. The M&A enabled Haier to expand both its scale and business scope. By the end of 1997, Haier evolved from a single- product company to a manufacturer with multiple product lines and expanded its brand to include both white goods as well as brown goods.

6.2.2 Market-oriented service improvement

As discussed in Chapter Three, the Chinese home appliance market went through turmoil in 1989 and most producers were forced to reduce their prices in order to maintain their sales. Haier managed to go through the downturn of the market without reducing prices, because of the brand recognition it built in the first phase of its development. Through the trend of price reduction, Zhang Ruimin realized that market competition was less about achieving annual sales quotas than winning customers. The reduced demand did not mean the market had reached the limit of its potential, but rather that products did not meet the expectations of increasingly savvy consumers. At the same time, Haier did extensive

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consumer research, listening to customers regarding complaints as a valuable tool for refining their corporate strategy. The research showed that, with the improvement of people‘s living standard, quality was no longer the only standard for their choice of products. Service began to emerge as a key factor affecting customers‘ choices. A manager from Haier mentioned the shift of focus:

By the 1990s, other companies also realised the importance of quality.

As a result, quality was no longer the only competitiveness to win the

market share. So Haier had to find another focus to distinguish itself

from its competitors (Interviewee 9).

As a result, when the industry followed Haier's example by also focusing on product quality, Haier once again forged ahead of the competition, by extending its emphasis on quality to customer service, a move which further bolstered customer loyalty to the Haier brand. A senior manager in Haier described how Haier came up with the strategy of service improvement:

Haier has always been acting ahead of its competitors. After the market

decline of the refrigerator industry in 1989, other companies also began

to pay attention to quality control, which lead to the homogenisation of

refrigerator products. Then Haier turned to its second phase when

profits were made through outstanding services (Interviewee 1).

In the year 1994, when Haier just finished its first decade of development, a new round of reform was embarked on within the company, by focusing on improvement and innovation in service. Haier‘s service project was named Star Service and its aim was for

Haier‘s service to meet all of the needs of customers. To comply with the principle of Star

Service, a whole system was needed. To achieve this goal, Haier began to establish its own customer information system. Call centres were built in major cities all across the

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country, a hot-line telephone service was also established and all customer information was recorded in the Haier customer management system. The system ensured that Haier could offer immediate service to customers. Haier‘s Star Service was reflected in the details of the after-sales customer service, as one employee explained:

We established five standards for our after-sales service staff, aka the

five ones standards. When offering home repair services, every after-

sales employee were required to take one name card, one pair of shoe

covers, one cover mat, one cleaning rag and offer one-stop service to the

customers (Interviewee 13).

Haier‘s concept of Star Service, which was based on the principle that the customers are always right, also inspired the innovation of its products. In 1996, a customer from a rural area in Sichuan province complained that the drainage pipe of his washing machine was frequently blocked up. Haier‘s serviceman went to find out that that the farmer used the washing machine to wash sweet potatoes and the dirt washed off and blocked the drainage pipe. Haier‘s service staff helped the customer to enlarge the drainage pipe, which solved the problem. This incident was told as a joke by the department manager. But the story enlightened the manager that there might be a potential market for washing machines, which could wash sweet potatoes. He then reported the idea to the headquarters and after market research; they found out that it was a common practice to wash sweet potatoes with washing machines in some rural areas in southwest

China. Under instruction from the CEO, Haier‘s R&D group began to develop a new type of washing machine and multi-functional washer, which could wash sweet potatoes and it was launched in only half a month. A senior manager described how this innovation affected Haier‘s development:

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The sweet potato washer was also developed in that period

(diversification phase). Most people who heard about the complaint

only thought that those village people are unreasonable instead of

viewing it as a new potential market. But we managed to develop the

new washer which turned into be big seller later. That‘s how we

satisfied our customers, by differentiated products when the market was

homogeneous (Interviewee 1).

During this period, Haier obtained success in multiple businesses through diversification, development and service improvement. The key drivers for its achievement in business expansion were the adoption of the right development strategies and policy support. The policy effect will be discussed in detail in Section 6.4, showing how the company responded to policy changes.

6.3 OEC Management

The management concept adopted by Haier during this period was defined as ―overall every control and clear (OEC)‖. Overall as in all dimensions, every as everyone, everyday and everything and control and clear, as in keeping things in control and clear (Liu,

2005:109). It was a unique concept brought about by Zhang Ruimin, which means that everyone complete his/her responsibility every day and improved his/her work day by day.

As a senior manager explained:

OEC actually evolved from all-round optimisation management we

brought up in 1989. In 1995 we defined it as OEC.O means overall, E

means everyone, everyday and everything, C stands for control and

clear. The core point of OEC is to clarify each one‘s responsibility and

make sure everything is under control (Interviewee 1).

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The OEC approach was developed to solve the problems of momentum in a company‘s development. Zhang Ruimin proposed a corporation development model named the ―ball-on-a-slope‖ hypothesis. He likened the position of a company in the market to a ball on the slope, which faces the pressure from both the inertia of employees and resistance from the external environment. Zhang argued that two forces are needed to move the ball uphill: one to keep the ball from rolling back down the slope (business management) and the other is the force necessary to keep the ball moving upwards (the company's capacity to innovate). These two forces are the key to a company's continuous success (Hu, 2003:55). OEC management was designed to offer the momentum for a company‘s development by extending management. The purpose of the "OEC Approach" was to achieve each day's plan, evaluate that plan, and improve upon those daily accomplishments 1 per cent better than the day before (Haier Co., 2008). As a management philosophy and control system, OEC incorporated the principles from TQM

(Total Quality Management), Taylorism (scientific management), MBO (Management by

Objectives), as well as classic Chinese management thoughts from Confucianism and

Taoism (Hu, 2003:8). Taylorism emphasises achieving efficiency through a scientific and standardised management system (Taylor, 2003). Haier‘s OEC management is a reflection of the concept of Taylorism. One employee in Haier described how OEC evolved:

Before OEC, Haier once used Management by Objectives (MBO),

referring to the practises of some US companies. Then we mirrored

Japanese companies by learning TQM. The key focus of MBO is to set

the objectives. In Western countries these objectives are used to satisfy

shareholders, and then executives, regardless of employee and customer

satisfaction. While Japanese style is to satisfy employees and customers,

but the result is not necessarily good. So, based on the two styles, Haier

created our own concept, called OEC. OEC actually evolved from all-

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round optimisation management we developed in 1989. In 1995 we

defined it as OEC (Interviewee 1).

Unlike the adoption of TQM in the first phase, Haier‘s adoption of Western management philosophies was not in line with their popularity in Western countries in this period. The basis of OEC management was derived from Taylorism, which was developed in the beginning of the 20th century (Brindle and Stearns, 2001). Taylorism was subject to considerable criticism in the past century, due to its treatment of employees as production factors and its exploitative nature. In order to justify choosing Taylorism as the basis of OEC, Zhang Ruimin argued:

There are obvious differences in the organisational culture of Chinese

companies and Western companies. The ball-on-a-slope hypothesis was

brought up based on the reality of Chinese companies. The biggest

problem within the management of Chinese companies was the

continuous implementation of rules. In Chinese companies, employees

don‘t necessarily obey the rules. For instance, if you tell a Japanese

employee to wipe the table five times a day, he/she will do it every day.

But for Chinese employees, they might follow your order the first day,

but may reduce it to three times the very next day. Therefore, we need a

scientific system to ensure that everyone does the right thing (Zhang,

2009).

Therefore, the influence of Western management philosophy did not work in

Haier through spreading popular practices, but by the rational choice of the CEO.

Through OEC management, a new evaluation and incentive system was built.

When we were using OEC, everyone had a clear target and plan, and we

had an evaluation system which is still in use today (Interviewee 1).

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The OEC management system consists of three basic frameworks. Firstly, it is a target setting system. As an enterprise objective system, it refers to the direction of business development and sets goals to achieve. Each December, Haier headquarters sets the next year‘s guidelines and goals for each division. The goal setting takes past performance, market demand forecast, long-term goals and each division‘s input on specific market-development needs into consideration to ensure the target meets the reality and the corporation‘s development plan (Lin, 2005). Thus, one senior manager from Haier explained:

MBO focused on target setting. However, the target should be realistic

and specific. It‘s like a high jump, there‘s a bar up there, but if we can‘t

jump that high. Then the bar is useless (Interviewee 1).

In the implementation of objective management, Haier divided the general objective of the corporation into detailed objectives for different departments. The departments then refined those objectives to make them into specific and quantifiable goals for individuals (Niu, 2009). Li (2007) argued that objectives should have three main characteristics:

1. Objective should be specific and quantifiable.

2. Make clear responsibilities to individuals.

3. Objectives should cover every aspect of business affairs (Li, 2007:15).

Apart from the headquarters‘ annual plan, each division also needs to submit a divisional action program form, including specific annual goals, specific targets, action programs, deadlines, responsible divisions, quality criteria, evaluation method and frequency. Furthermore, every employee is required to complete a daily activity control clearing account called an employee management account. It consists of task items,

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evaluation criteria (benchmark, past-period performance and the goal for this period), values, name of the responsible employee, daily actual results, evaluation results, actual compensation and reviewer (Lin, 2005).

The second main framework was the daily clear and 6S system. The concept of

OEC can be interpreted into two aspects: one is to finish each day's plan. To achieve this goal, every employee needs to analyse and solve every problem that appears in the day to prevent the problems from piling up and to ensure the achievement of daily objectives.

The other aspect of the OEC concept is to evaluate daily plans and improve upon them, in order to make the new plan better than the previous one. The corporation required the employees to make their work 1 per cent better each day, so that work quality could ideally be doubled in 70 days (Niu, 2009). Haier followed two means to achieve this goal.

The first one was the daily clear system and the second one was 6S workplace management.

In the daily clear system, Haier used 3E cards for performance evaluation, which means everyone, everyday and everything. Employees were required to fill in a 3E card after work every day, evaluating his/her own work from aspects of production, quality, cost, technique, safety, production ethics and labour discipline. The card was then handed over to the team leader, who would announce the daily wage of each employee according to the 3E card (Yue, 2004). This interviewee, who has worked as a senior manager for more than ten years in Haier explained that:

Everyone needed to complete a daily check form and hand it in to

his/her superior. The superior then decided how much he/she got paid

based on the grade of his/her work. The results would be graded into

different categories of A, B, C and D. If you got an A, then you can get

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1.5 time of salary. B gets normal salary and C gets half. If you got a D,

then there‘s no payment for your work that day (Interviewee 1).

Figure 10: OEC Evaluation Worksheet (3E Card A) for Monthly Evaluation (Source: Lin,

2005:9).

The 6S management system was used to manage the workplace and evolved from

5S management in Japan, which stands for five Japanese words: seiri, seiton, seiso, seiketsu, and shitsuke, which mean sorting, set in order, systematic cleaning, standardising, and sustaining. A sixth S, safety, was added to 5S (Hirano et al., 1995). To ensure the implementation of 6S standards, detailed standards were established. Part of the 6S standard is listed below:

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Table 8: Part of Haier 6S management standards (Source: Haier internal training program)

Category No Examination standard Deduct Individual responsibility point responsibl team manag e leader er individual Seiso 1 The floor is clean -1 -10 -5 -5 Seiketsu 2 The fans and fire -1 -10 -5 -5 control devices are clean 3 The workbench is clean -1 -10 -5 -5 4 No stick tape or sponge -1 -10 -5 -5 bar on tools 5 Boards and sighs are -1 -10 -5 -5 clean 6 Do not open the door -1 -10 -5 -5 without permission 7 Material cases are clean -1 -10 -5 -5

One employee explained how the daily clear system worked:

When we implemented OEC, everyone was required to fill in an

evaluation form every day. The formats of the form varied in different

department, but the content was similar, with the target, the result and

future target. The form was first filled in by individuals and hand in to

their superiors for grading. In the end of the month, there would be a

general evaluation of his/her work in the whole month and a

corresponding salary would be paid based on the grading (Interviewee

9).

The incentive system is the third framework for OEC. Haier adhered to the principles of fairness, openness and impartiality in setting incentive policies. The corporation mainly adopted incentives on the spot. Each employee was given a handbook

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of quality tickets, listing all the problems that had occurred during production and a penalty was applied if any of them was found in their work. Managers used yellow and red quality tickets in patrols and inspections. Yellow tickets were used as a positive incentive and red tickets were a negative incentive. At the end of each month, the finance department would measure each worker‘s 3E cards and quality tickets to calculate his/her wage for the month (Niu, 2009). As one employee explained:

The work was classified into four grades according to the 3E cards.

People who got an A can get 10 per cent more than the normal salary

and B meant the normal salary. Those who got C or D got less than the

normal salary (Interviewee 2).

Through the OEC management approach, the corporation achieved some management improvements. The first achievement is that the OEC approach required that management work should be detailed to reduce economic losses due to time and cost, through which management blind spots were eliminated and efficient and effective management was achieved. The second achievement was the self-awareness and self- control of employees. The OEC approach required employees to evaluate their own work every day. Through self-reflection, employees could build their responsibility to the company and self control ability. Last but not least, through OEC management Haier enhanced process control. Under the daily clear control system, inspectors in every department patrolled on a regular basis to discover potential problems and ensure that every process was under proper control. By doing this, the corporation could prevent problems proactively rather than fixing them after a loss had been caused (Liu, 2010).

Despite the achievements through OEC management, the system was not totally accepted by the employees at first. Under the OEC system, the workers were paid on the

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basis of their performance, instead of by fixed salary, as was the case previously, which deprived some of them from getting paid without hard work. As one employee described:

At first many people could not handle the change in the salary system.

As a result, some people quit. But most of those who stayed, stuck with

the company till now. Workers in Haier bear great pressure every day

and the personnel mobility has been high since 2000 (Interviewee 2).

At the same time, he also explained that:

These changes were basically a shared concept. When the ideas were

conveyed down to different departments, it varies in the requirements.

For most departments it‘s only a requirement for management people.

As to OEC, we filled in the forms everyday in the beginning. In recent

years, we only need to fill it online. In fact, when checking the forms in

the end of the month, they won‘t examine every form you filled in

(Interviewee 2).

In this period, Haier evolved from a single-product company to a manufacturer with multiple product lines and expanded its brand to include both brown goods as well as white goods. Internally, the company restructured operations to maximise latent corporate potential, using intangible assets to get the most out of existing tangible assets.

By doing so, Haier was able to quickly grow the scope of its business, while enhancing the company's overall strength and position. From being a top producer of refrigerators,

Haier became the number one home appliance brand in China (Haier Co., 2008).

6.4 Making Sense of the Policies: the Third Eye Theory

The ability to correctly interpret the policies and make the right response was one of the key reasons for Haier‘s success in this period. The years 1992 to 1998 were also the transitional period for the Chinese economy from a planned to a market-oriented system.

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Regarding the effect of policies, Zhang Ruimin proposed his own theory called the third eye theory, as his biographer quoted in his book:

Under the planned economic system, corporations only need one eye to

see what the government wants and following the orders from the

government in order to bring about profits. In a well developed market

economic system, corporations need two eyes: one on the employees to

ensure high work efficiency and the other on the market and customers

to earn more market share. While during the transitional period from a

planned economy to a market economy, a third eye is needed to see the

direction of adjustment of macro-control policies and seize the potential

opportunities (Hu, 2003:137).

With his ―third eye‖, Zhang Ruimin foresaw several opportunities as a result of government policies and made use of them for Haier‘s development. The construction of the Haier industrial park is an example of how Haier seized the opportunity from policy adjustment. After Deng Xiaoping‘s south tour speech in April 1992, Zhang realised it was a good time to build Haier‘s own industrial park. In June the same year, Haier applied for a loan from the Qingdao Industrial and Commercial Bank of China for the land. Only one month after the loan, a policy was issued to forbid the purchase of land with bank loans.

If Haier‘s application was submitted any later, they would not have received permission for the construction of the industrial park. Haier went through serious problems with the loan later when the bank rejected a further loan after providing 240 million yuan, while the whole project required RMB1.6 billion to complete it. However, the listing of Haier‘s stocks in 1993 raised enough money for construction. By the end of 1996, all the debts from the construction of the Haier Industrial Park had been paid off and it is still recognised as one of the biggest production bases for home appliances in China (Hu,

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2003). Some employees also mentioned the importance of the third eye in foreseeing policy changes:

One of the key factors attributing to Haier‘s success in these years was

the accurate anticipation and reaction to the policies. In the first stage

we made use of the open door policy and in the diversification phase we

seized the opportunity from Deng Xiaoping‘s south tour talks. The

leader saw the chance to expand Haier‘s business from the policy to

support merger and acquisition and made the decision of diversification

development strategy (Interviewee 5).

In conclusion, the main shift within the organisation in this period was the change of development strategy from brand building to diversification. The leader‘s interpretation of key government policies was also an important factor for Haier‘s success in this period.

Matching the findings with the research questions proposed in Chapter One, a model is outlined below to illustrate the interaction among different forces, which led Haier into new business and new management practices.

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Trade policy changes: Industrial policy changes: Further opening-up of China‘s From planned economy to economy and trade market economy

Inburst of foreign Marketisation of the companies

Coercive home appliance industry

Supply growth Monetary Policy: Price reform

Chinese home appliance market: From seller‘s market to buyer‘s market Pre consumption Demand decline of durable goods

Coercive

Industrial logic changes: Joint ventures with foreign partners Merger and acquisitions Industrial restructuring Policy level changes: Leading brands starting diversification Policies switched from supporting to controlling regarding home appliance industry (Chapter Three)

Mimetic

Haier Normative Diversification through M&A Western management thoughts Service improvement OEC management

Figure 11: Analysis of the influence of institutional and management factors

from 1991 to 1998

As illustrated in Figure 11, the key policy shifts in this period were the transition from a planned economy to a market economy, the reform in the government-enterprise

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relationship and the opening-up of China‘s economy and trade. As for the home appliance industry, as was argued in Chapter Three, the government policies switched from supporting to controlling the sector. These policy shifts were motivated by the marketisation of the Chinese home appliance industry and further changes in the market situation in the home appliance industry from a seller‘s market to a buyer‘s market. The market turnaround brought about changes in the practices of the Chinese home appliance companies. The main trend among the Chinese home appliance manufacturers to deal with the market situation was joint ventures with foreign partners and merger and acquisition (M&A). After the introduction of competition, the Chinese home appliance industry went through a restructuring, after which production and market share was concentrated in several leading brands. The successful leading brands, which survived the industrial restructuring, started to expand their business scope though diversification.

With regards to Haier, the main changes in the organisation, as shown in this chapter, were expanding businesses through M&A and conducting OEC management. The process of business diversification was affected by both the company‘s development strategy and by supporting policies from the government.

6.5 Conclusion

This chapter discussed the diversification of Haier in its development phase (from 1991 to

1998) and analysed the institutional and organisational factors influencing the success and management of Haier in this period. Concluding from the findings, the key factors driving management change in Haier in this period were its expansion through diversification.

The management innovation Zhang Ruimin implemented in this period was the establishment of the OEC management system, through which the work of the company was organised in a scientific way. OEC is a unique management philosophy brought about by Zhang Ruimin, which aimed to achieve systematic internalised control. The core

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of OEC management was derived from Taylorism. However, Zhang Ruimin improved on both the TQM and Taylorism, by creating his own management philosophy by drawing on Chinese culture and philosophy to create the OEC system (Liu, 2005:109). OEC management was a breakthrough in Haier‘s management innovation. Through the OEC management system, part of the responsibility was passed onto workers, through a process of internalisation of control and through docking pay for poor performance.

Indeed, the principle of daily clear would form the basis of Haier‘s management approach for the next two phases of the company‘s development. Concluding the findings, therefore, this thesis argues that the key driver of development in this period was the interaction between policy support and the visionary leader who made clear sense of the policy context, which enabled Haier to conduct a merger with 18 companies. This conclusion presents the unique situation Chinese companies, especially public-owned companies faced during the time of economic transitions. As Zhang Ruimin proposed in his the third eye theory, during the transitional period from a planned economy to a market economy, except for the eyes on employees and the market, a third eye is needed to see the direction of adjustment of macro-control policies and seize the potential opportunities. However, the M&A during this period was not all smooth sailing; some problems also began to emerge when the company grew. The next chapter will discuss how Haier dealt with the

―corporate obesity‖ problem by introducing Business Process Reengineering (BPR).

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Chapter Seven

Business Process Reengineering (BPR): The

Solution to Company Obesity (1998-2005)

7.1 Introduction

This chapter analyses the shift in the development strategies of Haier and the corresponding change approaches it adopted in the period from 1998 to 2005. The

Chinese home appliance market faced problems of serious over-production and fierce competition from foreign companies with the further opening up of the Chinese economy after China‘s accession to the WTO. In response to international market pressure, Haier set the target to internationalise its exports and attract foreign investment. In accordance with its internationalisation strategy, Haier implemented a series of changes within the company, including the introduction of Business Process Reengineering (BPR) (Hammer and Champy, 1993; Hammer, 1990; O'Neill and Sohal, 1999; Zairi and Sinclair, 1995), which enabled Haier to overcome some of the key challenges in this period. Section 7.3 analyses the drivers of Haier‘s BPR adoption and evaluates its actual results based on performance data and employees‘ satisfaction. Section 7.4 further discusses management innovation in Haier during this period by analysing the strategic business unit (SBU). A conclusion is then drawn on the key factors driving management change in this period.

Though the analysis, this chapter answers the sub-research questions: ―How was Business

Process Reengineering (BPR) implemented at Haier and to what extent were Haier‘s management practices influenced by management fashions?‖.

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7.2 Internationalisation and Avoiding a Price War

As discussed in Chapter Three, the Chinese home appliance industry faced pressure from both a shrinking domestic market and international competition towards the end of the

1990s. Haier also recognised the market situation and stated in its annual report:

Affected by the sluggish economic situation, the purchasing power of

the Chinese refrigerator market collapsed rapidly in 1998, which

exacerbated the problem of oversupply (Haier Annual report 1998:15).

As illustrated in Chapter Three, under pressure from declining domestic market demand and the influx of foreign competitors, a lot of Chinese home appliance manufacturers panicked and attempted to retain their market share by reducing the price of their products. Guided by the principle to ―sacrifice profit for market share‖, most

Chinese home appliance companies chose to join the price reduction tide. What the home appliance industry refers to as ―the price war‖ started from the late 1990s and reached a climax at the beginning of the 21st century (Zhao, 1999). Haier articulated the serious state of price competition in its corporation reports:

The home appliance market was subject to fierce competition in 2000 in

the form of redundant production and malignant price competition

(Haier Annual Report 2000:10).

And in 2001:

The domestic refrigerator and air-conditioner market was confronted

with severe challenges in 2001. A number of companies slid into loss

due to the vicious competition among brands in the industry (Haier

Annual Report 2001:16).

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In 2001, China joined the WTO and the changes in trading policies and tariffs also affected the competition environment in the Chinese home appliance industry. This was also reflected in Haier‘s public report:

With China‘s accession into the WTO, many foreign investors sped up

the pace on entering the Chinese home appliance market. Some of them

even proposed the slogan ―capture the market share at the cost of three

years loss‖, which caused increasingly irrational price reduction within

the industry. Together with the rising prices of raw materials for home

appliance products, the industry went through a tough time in 2002

(Haier Annual Report, 2002:15).

After the competition and price war, the Chinese home appliance industry went through a round of restructuring and the resources were concentrated into some major manufacturers. Haier described this change in its 2003 and 2004 annual reports:

The home appliance industry went through major consolidation and

restructuring in 2003. The industry concentration rate was reduced as a

result and industry polarisation was further aggravated (Haier Annual

Report, 2003:14).

The 2004 and 2005 the annual reports stated:

The vicious competition in the home appliance industry continued to

increase in 2004 (Haier Annual Report, 2004:13).

The home appliance industry already reached its mature stage now. The

fierce competition and material shortage increased the operation cost for

the home appliance companies (Haier Annual Report, 2005:14).

Apart from the price war, the needs of customers also showed new characteristics during this period. In a sellers‘ market, manufactures don‘t need to worry about whether

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their products meet the customers‘ needs and the customers also have no impact on the development of new products. However, when it turned to a buyers‘ market, manufacturers have to take into account the different needs of individual customers, especially when more foreign home appliance manufacturers were rushing into the

Chinese market. Chinese corporations needed to adjust their competitive strategies to meet the personalised demand of an internationalised market (Zhang, 2006). Therefore, by the end of 20th century, market demand was dominated by the individualised needs of customers (Zhang, 2006). As a result, Haier‘s target for product development was: ―to make product development consistent with market development and its market impact should be the primary criterion in the development of a new product‖ (Haier Annual

Report, 1998:15). This meant that new products were developed to meet market requirements, so that Haier could keep its leading position in the market. The focus of product development in this period was to strengthen its differentiated advantages from other competitors (Haier Annual Report, 1998). Facing the growing pressure from the price war in the industry, Haier did not drift with the tide, but proposed a concept to compete with the products‘ value, rather than the price. Guided by this principle, Haier focused on improving the products‘ technology content and promoted the innovation of its products to satisfy the personalised needs of customers (Haier Annual Report, 2000).

Except for the improvement in the core competence of its products, another way

Haier adapted to deal with the market change, was to instigate an international expansion, known as ―going out strategy‖, to explore foreign markets. At the beginning of 1999,

Zhang Ruimin made it clear that 1999 would be the start of Haier‘s internationalisation towards becoming a well known global brand and set the target to become one of the

Fortune 500 companies (Culture Center of the Haier Group, 2006). In view of this vision, the company came up with three milestones in order to achieve the internationalisation

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objective. Firstly, reform the organisation‘s structure from a function based linear structure, to a market chain-based process structure. Secondly, shift the market focus from the domestic market to the international market and thirdly, transform the corporation from a manufacturing enterprise to a service-oriented enterprise. The first transition was accomplished through management and organisational change, which will be illustrated in details in Section 7.2 and 7.3. The transition in market focus was achieved through exports and foreign investment, including building a production base in the USA.

Many Chinese companies also started to expand their business to foreign countries from the late 1990s (Cui and Jiang, 2012; Cui and Jiang, 2009; Kang and Jiang, 2012) and most of them took the form of original equipment manufacturer (OEM). In the mid

1990s, foreign home appliance companies began to pour into the Chinese market. Some major home appliance manufacturers like GE, Whirlpool, Panasonic and Samsung began to invest in China. Many Chinese home appliance manufacturers used this opportunity to cooperate with foreign companies. The cooperation between Chinese and foreign home appliance companies mainly took the form of acquisition. Many well-known Chinese brands like Snowflake, Xiangxuehai and Yangzi were purchased by foreign investors (Qi,

2002). In 1996, the air-conditioners produced by joint ventures took up 35 per cent of the market (Liu, 1997). Towards the beginning of the 21st century, China‘s Open Door Policy and globalisation provided opportunities for Chinese companies to earn foreign exchange by leveraging lower production costs and functioning as an original equipment manufacturer (OEM) for multinational corporations (MNCs). A lot of Chinese companies accepted OEM to cooperate with their foreign partners. Haier began to export its products to Europe in 1990. By the late 1990s, Haier‘s products were sold in Europe, America and

Asia, including a portion of OEM products. But as China developed economically, rising labour costs meant that China's time as the world's 'factory floor' would soon be coming

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to an end and many MNCs shifted their production facilities to countries such as Vietnam, which offered a cheaper source of labour. Those Chinese manufacturers who continued to rely on cut-rate production to attract business soon found themselves abandoned by their international partners (Hu, 2003). As one of the interviewees stated:

Haier used to do OEM in the beginning, like other companies. But as

time passed by, we realised the core competitive advantage lies in our

brand. Therefore we needed to produce our own brand-name products.

Many old Chinese brands which relied only on OEM have disappeared

now, but Haier has become a well known Chinese brand (Interviewee 3).

When most of the competition focused on making profits through M&A with foreign companies or OEM, Zhang Ruimin foresaw that, in the age of globalisation, only those MNCs with their own proprietary intellectual property and strong brand identities would be competitive in the world business arena (Dong et al., 2006:107). Therefore, at the end of 1998, Zhang Ruimin put forward the distribution of Haier‘s global market layout (the 3 x 3 structure), which meant one third made and sold at home, one third made at home and sold abroad and one third made and sold abroad (Culture Center of the Haier

Group, 2006). Under this guidance, Haier built its first home appliance manufacturing base in the US, in South Carolina in 1999. Haier‘s boldness aroused doubts from its competitors:

When we first went abroad, many other Chinese companies couldn't

understand. They questioned why we were going abroad to have

leftover soup when you can have meat at home. Haier foresaw the

possible risks of going abroad, but we had our own thinking. We

believed that no matter how well you are doing in the domestic market;

you couldn‘t call yourself a really famous brand. Only if you can gain

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reorganisation from the international markets, you are a well known

brand (Interviewee 3).

Haier‘s choice of its target county of foreign investment also attracted some criticism from economists. According to the general laws of economics, it is irrational behaviour to make foreign investment in another country with higher labour cost than one‘s own country. With regard to this, Zhang Ruimin explained to his biographer:

Foreign companies invest in China because they lack low-cost labour in

their home country. But for Haier, what we need is not cheap labour, but

core technology and professional technical personnel. Chinese

companies have labour advantage now, but when more foreign

companies come to China and occupy the same advantage, we can‘t

compete with them without our own technology and professionals (Hu,

2003).

To make its way into the US market, Haier started with discovering a niche market:

We adopted the strategy to discover a niche market when we made

foreign investment. For example, we pushed our way into the US

market through starting with the student customers. After market

research into student refrigerator users, we designed a new mini

refrigerator with a small computer desk on top, which can easily fit into

the dormitory and save space. Through this we managed to squeeze into

the US market. Many of our competitors couldn‘t understand us; they

would prefer to eat meat at home rather than drinking soup in foreign

countries (Interviewee 1).

Through its investment in the USA, Haier obtained the advanced technology and technical personnel they needed. Haier‘s internationalisation strategy turned out to be the

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right decision. When a group of Chinese home appliance companies shut down under the shock of foreign competition, Haier gained a solid market share both domestically and abroad. As mentioned before in Chapter Three, China joined the WTO on 11 November

2001, which was both a challenge and an opportunity for Chinese companies. This point of view was also interpreted by Haier. As stated in its annual report:

On the one hand, more foreign investment will pour into the Chinese

home appliance market. Foreign companies will be localised and have

lower operation costs, which means Chinese home appliance companies

will face stronger competitors. On the other hand, China‘s accession to

the WTO also offered more opportunities for Chinese companies to go

abroad and participate in fair competition on international markets.

Under the conversion of the WTO, the price of imported components

and the shipping costs and tax for exported products will be reduced,

which is a good opportunity to increase the company‘s competitive

advantage and market share internationally (Haier Annual Report

2002:14).

A senior manager who has worked in Haier for more than 15 years also mentioned the influence of China‘s entry into the WTO and viewed it as an opportunity:

After 2000, Haier seized the opportunity of China‘s entry into the WTO.

After the entry into WTO, the market success in foreign countries was

eased and China‘s passive position in international business was

changed. Haier made use of these policies. Before 2001, Haier‘s foreign

business mainly focused on exporting products, while after the entry

into the WTO, Haier began to expand its business by building overseas

factories and focusing on local design and production (Interviewee 5).

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Generally speaking, China‘s accession to the WTO was viewed as an opportunity by Haier, because the company had already gained its brand reputation on the international market. Zhang Ruimin described Haier‘s competition with foreign competitors as ―dancing with the wolves‖:

When you are placed in an internationalised economy, you have no

choice but to follow the trend of internationalisation. That‘s the problem

every Chinese company has to confront. The competition with foreign

companies is like dancing with wolves, if you can‘t beat the wolves,

you‘ll be eaten by them (China Central Television, 2002).

Guided by its internationalisation strategy, Haier expanded its business to most of the countries in the world. By 2003, Haier had exported its products to more than 160 countries and built production bases in 13 countries, which made it one of the first companies to enter the international market with the most export countries and product types (Hu, 2003:217).

7.3 The Introduction of Business Process Reengineering (BPR)

As discussed in Section 7.2, confronted with pressure from foreign competitors, Haier chose to go abroad and ―dance with the wolves‖. But in order to beat the wolves, Haier needed to turn itself into a wolf and transform the company into a globally competitive player. Despite the reform it had implemented to improve efficiency, there was still a huge gap between Haier and those international corporations in terms of staff quality, innovation capacity, brand recognition, operation scale, market share and degree of internationalisation. The underlying problem was the disjunction between organisational scale and staff quality (Haier Annual Report 1999). To catch up with the standard of an internationally competitive company, Haier introduced a major organisational change,

Business Process Reengineering (BPR), within the company from 1998, which is

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regarded as the key to its success in its internationalisation phase (Lu, 2004; Zhang, 2006;

Zhao, 2004).

As discussed in Chapter Six, Haier completed merger and acquisition (M&A) with many companies and expanded it business scope in the 1990s. With the expansion of the company‘s scale, some problems also began to emerge, referred to as company obesity.

Company obesity was a concept originally put forward by the CEO of Omron

Corporation, which refers to the low efficiency caused by the discrepancy between traditional organisational structure and changes in the market situation (Hu, 2003:227).

With the growth and globalisation of the company, low efficiency problems within the company began to emerge. Previous experience shows that many Chinese corporations became stagnant or even stepped backward when their sales revenue reached RMB 20 billion. Haier‘s sales revenue were as much as RMB 16.8 billion in 1998 and some low efficiency problems began to emerge within the company (Zhang, 2006). Some Haier employees also explained the problem of company obesity, which Haier faced in the late

1990s:

After the diversification phase Haier began to realise the problem of

company obesity, which showed up as overstaffing. In some big

companies, stability is their first priority. They don‘t care about profits.

Like in some old state-owned enterprises, if you are not willing to make

big money, you can just take a fixed salary and do a comfortable job

(Interviewee 2).

A senior manager who has been working in Haier for 20 years also explained that some problems began to emerge after Haier‘s M&A with other companies in the 1990s:

After the extensive M&A in the 1990s, the scale of Haier was much

larger than before. It‘s like we only had one child in the 80s, but then we

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had 18 more. The management of the company became more

complicated. Therefore, the old system no longer worked for the new

businesses and that‘s the primary cause of BPR (Interviewee 1).

Besides the employees, some researchers also observed problems with the development of Haier during this period, as one scholar who conducted research on

Haier‘s management changes stated:

After the previous stage of expansion, Haier hit a bottleneck period

when some company obesity symptoms began to appear. Haier got a

little confused about its development direction. The first problem that

existed in Haier was the mismanagement of the functional divisions,

which caused ambiguity in the responsibilities of the departments.

Another problem was redundant staff (Interviewee 12).

In order to fix the problem of company obesity, Zhang Ruimin decided to adopt

BPR to change the management system and organisational structure. As reviewed in

Chapter Two, BPR was developed in the US in the 1990s and was widely spread across the developed countries by the late 1990s (Brindle and Stearns, 2001; O'Neill and Sohal,

1999; Stebbins et al., 1998; Zairi and Sinclair, 1995) and was conducted by many Western companies and supported by business consultants. The concept of BPR was first brought to Haier by an American consultancy company, Kotler Marketing Group. One of the interviewees, a researcher who has conducted some research on Haier and did some training courses for Haier, described how Zhang Ruimin came to the decision to conduct

BPR following the suggestion of a consultant:

Zhang Ruimin was interested in marketing and Philip Kotler‘s books on

marketing were also very popular in China at the time. Zhang Ruimin

read some of Philip Kotler‘s works, in which Philip Kotler mentioned

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the concept of BPR and emphasised the necessity of establishing

business units within the company. Zhang Ruimin decided to conduct

BPR in Haier under the suggestion of Philip Kotler‘s brother, Milton

Kotler, who owned a consultancy company in the US, Kotler Marketing

Group. Philip Kotler‘s management theories were also incorporated into

the company‘s intangible assets. Before the reform, Zhang Ruimin hired

Kotler Marketing Group as a consultant and Milton Kotler suggested he

use BPR. Therefore, Zhang made the decision to implement BPR in

Haier (Interviewee 12).

On 8 September 1998, in a meeting with senior managers at Haier, Zhang Ruimin announced that Haier was going to implement BPR. To make it more clear, Zhang Ruimin described the change as simulating the market, which means to bring market pressure into the company. The relationship among individuals and departments within the company should go beyond employee-management and be extended in order to marketise relationships within the company (Chen, 2005):

Market chain reform means to bring the external market into the

corporation. Before the reform, all the departments like finance and HR

didn‘t have to face the market directly. But Zhang then proposed that

there should be markets among different departments. Take the finance

department for instance, it used to be remotely related to the market, but

after the reform, the finance department is part of the market chain too.

The value it created also needs to be evaluated (Interviewee 2).

BPR in this period was conducted based on the market chain by introducing a benefit-adjusting mechanism into the organisation on the basis of organisational culture and OEC management. Under the macro control of the organisation, the relationships among processes and operating posts were no longer hierarchical administrative relations,

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but were equal contractual relations. Through those relations, external orders were converted into a series of internal orders. People in every process got their benefits directly from the market they served (Lu, 2004).

The key point of BPR in Haier was to convey customers‘ satisfaction with every process and position, so that every process directly faced customers and the market. The mechanism Haier used to create an internal simulated market chain is called SST, which are the initials of three Chinese characters:

1. S (索酬 Suochou) means requiring payment. In the SST system, every party in the

company receives its payment from the market by offering satisfactory services to the

downstream activity party.

2. S (索赔 Suopei) means asking for compensation in Mandarin. In the SST system, if

any process or position cannot offer proper services, the other party can claim a

penalty from the responsible process or position.

3. T (跳闸 Tiaozha) is used here simply to refer to stop, which means that if any

problem occurs in the market chain, a third party can come out and solve the problem.

Regarding Haier, the third party refers to the arbitration court within the Haier legal

centre.

Through the SST mechanism, orders from external customers were refined into a series of internal orders, according to the new processes. Contractual relationships were built among processes based on those internal orders. Zhang Ruimin describes this change as breaking the walls within the company, which means changing the relationship between departments in the company from a functional relationship into a market-like one.

One employee in Haier, who experienced the BPR reform himself, explained how the

SST system works:

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The market chain reform aimed to adjust the coordination among

different departments within the company, namely breaking the internal

walls. Before the reform, our external account was clear, but the internal

finance was not reflected in the account. Therefore, during the market

chain reform the company proposed that the relationship among

departments within the company were also market relations. Before that,

only those departments like sales and marketing faced the market

directly, while administration departments like human resources (HR)

and finance were not related to the market. However, under the SST

system, those departments were also included in the market chain. For

instance, the department, which needs employees, is the market for the

HR department and the HR department has to satisfy their needs by

recruiting capable employees. If they get a good comment from the

market, they will get more profit (Interviewee 9).

To comply with the requirements of the market chain based on BPR, Haier also made radical changes to its organisational structure. Haier‘s structure had changed several times in accordance with its development strategy, as this interviewee explained:

Before 1991 the company had a linear structure. Since the company was

pretty small then, any order from the boss can be passed on to

employees immediately. From 91 to 98 we used a functional structure.

After 1998 we adopted a matrix structure. (Interviewee 1)

From 1984 to 1991 Haier (then the Qingdao Refrigerator General Factory) had a linear or pyramid structure, with the hierarchy descending from the top leader to the bottom workers, as shown below in Figure 12:

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Director

Manager Manager

Workshop Workshop Workshop manager manager manager

Worker Worker Worker Worker Worker

Figure 12: Linear organisational structure of Haier (Source: Zhang, 2006:19).

The linear structure suits small-sized companies. In Haier‘s first development phase, this structure enabled the leader to quickly control the chaotic situation. However, from 1991 to 1998, Haier‘s organisational chart took the form of a typical functional structure with three layers. The first layer consisted of the planning centre, finance centre, human resource centre, legal centre, marketing centre, technology centre, culture centre and security centre. The second layer was divided into six business departments based on different products. Each department was further divided into more specific product divisions. The third layer contained the material, planning, finance, insurance, marketing, legal, Research and Development (R&D), culture and other functional offices under each product division, as illustrated in Figure 13(Yang, 2003).

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Haier Group

Finance HR Market- Legal Techno- Planni- Culture Secur- Centre Centre ing Centre logy ng Centre ity Centre Centre Centre Centre

Refrig- Freezer Washing Air - Inform- Tech- Internat- erator Head- Machine conditioner ation nology ional Head- quarters Head- Head- Product Devel- Business quarters quarters quarters Head- opment Depart- quarters Depart- ment ment

Mitsu- Wuhan Air- Electric Super- bishi Haier condit- Heating market Heavy ioner Business Busi- -Haier Business Department ness Depart- Departm ment ent

Plan- Mat Sales Fin- Labour Legal Res- Quality Equip Ins- ning erial Com- ance Person- Of- earch Control ment pectio Of- Of- pany Offi nel fice Instit- Office Of- n fice fice ce Office ution fice Office

Figure 13: Functional organisational structure of Haier (Source: Zhang, 2006:24)

Compared with a linear structure, the functional structure was decentralised and

flattened. However, the subunits within business departments still showed some features

of centralisation, as each department only focused on a single product. But when the

business became more diversified, further improvements in the organisational structure

were required, as an interviewee and manager at Haier explained:

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Under the functional structure, the headquarters took charge of all the

specific business of the factories, which worked well when the company

was small. But when the company grew into a big group with hundreds

of factories, the problem of duplicated construction began to emerge.

Every department had its own functional offices, such as financial, legal

and marketing offices, and each factory had its own logistics department,

which was a great waste of resources (Interviewee 3).

Another interviewee, an employee who worked for more than ten years at Haier, also explained the conflict between the old structure and the new diversified company:

From the 1990s, Haier expanded its business from a single product to

washing machines, air-conditioners and freezers. The production of

different products was also distributed among branch factories all over

the country. Before 1998, these branches ran their businesses separately.

This worked well, if there were only one or two branches, but by the

late 1990s Haier had nearly 20 branch factories. The old mode no longer

fitted the scale of the company anymore and the functional structure was

inefficient and had the potential problem of wasting resources too

(Interviewee 9).

Besides the inefficiency of the functional structure, reducing the devolved power of the branch leaders was another driver of the reform. As discussed before in Chapter Six,

Haier incorporated 18 companies in the 1990s and sent a management team to build branch companies based on the merged companies. After the branches were established, the managers, which Haier sent to these companies, became branch leaders. Under the old structure, these branch leaders had absolute control over the business of these branch companies. With the growth of the company‘s scale, the branch leaders‘ power also increased and the problems of power abuse and corruption appeared among some of the

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branch leaders. Some employees in Haier also described these problems as the driver of

BPR in this period. One senior manager recollected the problems in the branch factories:

Haier conducted M&A with many companies in the 1990s. Towards

1998, after four or five years‘ development, the branch managers Haier

sent there had already built their groups, with their own followers in the

factories. As their power grew stronger, some risks began to emerge,

including reckless loading and bank guarantees. As a result, the head

quarters had to centralise the power to avoid these illegal acts of the

branch leaders (Interviewee 1).

Another employee also mentioned the re-centralisation of power as one of the reasons for the reform of the organisational structure during this period:

Balancing the power between headquarters and branches was one aim of

the reengineering in 1998. Before 1998 the branch leaders had the

decision-making power, which caused the problem of power abuse.

After the BPR in 1998, the decision-making power was taken aback by

the top management (Interviewee 3).

Therefore, the purpose of Haier‘s organisational change was to readjust the structure by re-centralising the purchase, sales, R&D and logistics functions to the headquarters. Haier took two steps to achieve this target. First, the finance, purchasing and marketing offices were separated from the product departments. These were then integrated into the business promotion headquarters, the logistics promotion headquarters and the capital flow promotion headquarters, took charge of company-wide sales, purchase and finance (Yang, 2003).

The second step was to separate the human resource, technology, quality control, information management and equipment management departments from the product

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divisions and unify them into a financially independent service company. These functional departments then became supporting processes (Yang, 2003). This was explained further by a manager from Haier:

After the change, the duplicated departments were unified together.

Every process had a standard on how to conduct their work. The

factories were only in charge of production and other departments

supported the production departments by offering the services they

needed (Interviewee 3).

The processes at Haier were then grouped into core processes (production processes) and supporting processes (service processes). As shown in Figure 14, the departments within the product headquarters belonged to core processes and the functional institutions and the promotion headquarters were supporting processes. The two groups worked together and also supervised each other. All the functional departments needed to offer adequate support to the production processes, or they might face a claim from these production departments according to the SST system.

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Haier Group

Functional Institutions Product Headquarters Promotion Headquarters

HR Development Refrigeration Product Logistic Promotion Centre Headquarter Headquarter

Security Centre Washing Machine Product Headquarter Business Promotion Headquarter

Legal Centre Information Product Headquarter

Planning and Technology and Overseas Development Equipment Promotion Centre Headquarter Headquarter

Technology Kitchen Appliance Capital Flow Centre Product Headquarter Promotion Headquarter Culture Air-conditioner Product Centre Headquarter

Air- Mitsubishi Wuhan Commercial conditioner Heavy- Haier Air- Business Haier conditioner Department Business Department

Supporting processes Core processes

Figure 14: Process-based organisational structure of Haier (Source: Zhang, 2006:25)

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As discussed in Chapter Two, according to Hammer and Champy (1995), the changes that occurred following Haier‘s BPR fell into the four dimensions outlined: business process, jobs and structures, management and measurement system and values and beliefs. With regard to business process, after the BPR, some departments such as marketing, logistics, procurement and R&D were taken out from the branches and reorganised into supporting processes in the headquarters, which solved the problems of duplication and the waste of resources. The next dimension in the business system diamond concerns jobs and structures. Haier reformed the organisational structure during the BPR process. The previous function based structure was changed into a process based one. The organisational structure was further streamlined. As to measurement systems,

Haier created the SST system to evaluate employees‘ performance and determined their wage level on this basis. The company also proposed that employees were the foundation of the company and empowered the employees to encourage their responsibility and creativity. Value and beliefs were also changed together with the organisational change.

Haier‘s BPR was based on the market chain, which meant that everyone should directly face the market and it was his/her responsibility to meet their markets‘ needs. To achieve this goal, each employee became a strategic business unit, which will be further explained in Section 7.4. These new concepts were conveyed to employees through an education

(Zhao, 2004:30).

Zhang Ruimin described this structural change as ―tearing down two walls‖ (Hu,

2007:135). The first wall referred to the walls between companies. Tearing down this wall meant changing the relationship between Haier and its upstream and downstream companies into a cooperative rather than competitive relationship. The second wall referred to the lack of communication between different departments within the company

(Hu, 2007:136). Before the reform, different departments did their job separately and

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aimed at different goals. Once this wall was torn down, the departments had to work together, with each other, to achieve a common goal. By tearing down these two walls, the new business processes would run solely according to the customers‘ needs, from the time of the order, to purchasing, production and delivery. Under this process, all the products would meet the customers‘ need and payment was made on delivery.

As a result, Haier achieved ―three zeros‖, which referred to: zero inventory, zero distance and zero working capital. Zero inventory was the requirement under the order- oriented process. Before the reform, the purchasing of materials was made according to the production plan, which was not necessarily in accordance with the actual needs of the customers. Within the new structure, all processes ran according to orders. Purchasing was also based on orders and was concentrated in the headquarters. As a result, the inventory was remarkably reduced. The second goal was ―zero distance‖, which meant meeting the customers‘ needs and making the required products to fulfil the needs in the shortest time. In this way, the distance between the company and the customer was minimised. ―Zero working capital‖ was last but not least. Zero working capital meant that no cash flow was needed for the company‘s business. To achieve this goal, the company had to be able to collect the payment from the customers before it paid the material supplier. Under the market chain process, all the products were made according to the customers‘ order, which enabled the company to collect the payment beforehand. Since

1998, Haier set the rule of cash on the spot and would not offer credit to the customers.

As a result, all the sales agents did not accept business at first and some of even stopped their business with Haier. Consequently, the sales of Haier products kept dropping in the first months of BPR. But Zhang Ruimin did not back down, because of the drop off in sales, he insisted that if the sales agents did not pay, Haier would not provide the products either. After several months, the orders were back to normal at Haier. After 2000, all the

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products sold by Haier received payments on the spot. One employee from Haier explained how trading was undertaken at Haier:

Haier‘s cash flow circle is minus six days now, which means that we

can collect the payment from the distributors six days before we pay the

material suppliers (Interviewee 17).

Haier‘s brand name played an important role in this business model. As a business owner who has done business with Haier explained:

Haier required cash for goods from its sales agents, but they can buy

raw materials on credit. Therefore, the business receives no cash flow

with Haier. They are able to do this because of their brand name.

Haier‘s the top white good producer and these sales and suppliers are

eager to do business with Haier. So they can accept these terms. And

with its brand name, the suppliers end and the sales end also do not

worry about default. So they can do business with Haier in this way

(Interviewee 18).

Haier has benefited from ―zero working capital‖ since 2000. Some of its competitors, which used to make remarkable profits, had serious problems of bad debt in

2000. Based on their accounts, large amounts of products were sold, but the payments were not received. As one manager who worked at Haier for more than 10 years recollected:

When the leader first brought up the requirement of zero inventory and

zero working capital, most of the employees in Haier couldn‘t

understand it. However, only after two years of our reform, some of our

competitors suffered huge losses and had to close down factories and

lay off people; one of the reasons was over inventory and bad debt. It

seems that they‘ve sold a large amount of products, but most of them

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were actually backlogs at their sales end and the payments were not

made to the companies. Once the market had fluctuations, these

backlogs became a big problem (Interviewee 10).

Although the market chain based BPR prevented Haier from the potential danger of losses in the following years, the implementation of BPR was not all smooth sailing. In the beginning, Haier came across resistance. As mentioned before in Chapter Two, empirical studies by Western scholars (Guimaraes and Bond, 1996; Hammer and Champy,

1993; O'Neill and Sohal, 1998) identified three kinds of companies undertaking BPR: companies that were in deep trouble, companies that were not in trouble but whose managers can see trouble coming and companies that were in peak condition and saw an opportunity to develop a lead over their competitors (Hammer and Champy,

1993).Among the three types, Haier clearly belonged to the second one. The company was making good profits, especially from the air-conditioner business. But Zhang Ruimin saw the underlying problems that might limit the company‘s development. When talking about his initial motivation for BPR, Zhang Ruimin stated:

The media has been asking me about my successor all the time. Frankly

speaking, I don‘t think anyone can successfully lead Haier. Even if I can

be the CEO forever, I can‘t make sure that Haier‘s always successful.

The company‘s expanding day by day. I don‘t think anyone can control

a company with tens of thousands of employees from dozens of

countries in the future. The only way is to make everyone share

responsibility for the company (Chen, 2005).

A manager in Haier who has worked there for more than ten years, summarised the achievements of BPR in 1998:

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The first benefit was that the centralised procurement after the reform

increased the scale of procurement, which enabled the procurement

department to get a better deal with the supplier. More importantly, the

BPR solved the problem of duplicated investment in logistics and R&D

and avoided the waste of money and resources (Interviewee 3).

However, most people could not understand the leader‘s decision, especially the department managers, who felt their power was weakened. With the adjustment of the organisational structure, some departments were reduced or even eliminated from the company. The previous managers of these departments became ordinary employees all of a sudden. Some of them reacted with rage and had a negative working attitude or even abused the company and the CEO online. As mentioned before, the sales income of Haier kept falling off in the first five months after Haier conducted BPR, partly because of the cash on the spot policy, but also because of the resistance from some management staff

(Hu, 2003:251). Seeing these problems, Zhang Ruimin was aware that the drop of sales was the cost they must pay to achieve the final success. Therefore, he did not stop his efforts to implement this fundamental change. Instead of panicking, he held regular meetings with the management staff to solve the problems. Since October of 2000, Zhang

Ruimin has meeting with all middle and senior managers in Haier every Saturday morning. This custom has lasted until today. During the period of BPR, Zhang Ruimin set the change target for the next stage and discussed with the managers in every meeting how to achieve the goal. The result of the discussion would be conducted in practice and evaluated in the next meeting. Through these meetings, Zhang Ruimin conveyed the message to the management that BPR was necessary and the only way they could survive the change was to make their own efforts to adapt to and to produce a better performance

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within the new environment (Hu, 2003:250). Those who could not meet the target during the BPR reform were either demoted or fired, as a manager from Haier recollected:

During the years of the market chain reform, the structure of Haier went

through dozens of changes and a lot of managers were demoted or

transferred. The cost was high, but it was necessary for the company‘s

development (Interviewee 3).

With the constant training and adjustment, Haier managed to overcome the decrease of sales and get the business back on track. The change to the market chain process finally took effect in the long term. As shown in the performance figures of Haier

(Xiao, 2009:44):

1. The purchase cost reduced by 0.5 billion dollars in 1999 and a further 1

million decrease was seen in 2001 compared with 1999.

2. The floor space of storage was reduced by 0.32 million square metres. The

stock time reached as low as less than seven days for raw materials and

only 24 hours for end products. Obsolete materials were reduced by 90 per

cent.

3. The cash cycle period of raw materials was reduced from more than 30

days to less than 10 days and that of liquid assets decreased from 118 days

in 1999 to 79 days in 2001.

4. The sales personnel were reduced by 30 per cent despite more than 2000

sales networks national wide.

5. After BPR, Haier only took 10 days to finish the process from receiving

the order from customers to purchasing, producing and dispatching, while

the average time for the whole process was 36 days in the industry.

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7.4 Management Innovation: The Strategic Business Unit (SBU)

OEC (overall, every control and clear) management was still used as the basis of the new business processes to ensure the implementation of the market chain mechanism. The

SST system built the price system within the company; while OEC offered a platform to evaluate the performance through 3E cards, as shown in Figure 15.

Personalised customer needs Business

Material Production flow flow Personalised

products Resources

Organisational OEC

culture External Market External

Figure 15: Haier BPR workflow (Source: Xu, 2005)

Besides OEC management, Zhang Ruimin adopted a new management concept during this time, called SBU, which stands for strategic business unit. This concept was originally proposed by H. Igor Ansoff (Ansoff, 1980), was then put into practice by GE and Panasonic and achieved considerable success. Zhang Ruimin proposed that the ultimate goal of the market chain based BPR was to make every employee into a SBU. A senior manager explained why SBU was brought into Haier:

After MBO (Management by Objectives) and OEC we realised just

satisfying the superiors is not enough, then we brought up SBU, which

was learnt from the Japanese company Kyocera‘s concept of mini mini

company. It breaks down a big company into many small companies

and each person works as a small company. It is also in accordance with

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Jack Welch‘s theory of the dancing elephant. We tried to gain both the

scale of a big company and the flexibility of a small company. SBU

originated from MMC, but also included OEC, so it‘s like an advanced

version of OEC (Interviewee 1).

Haier borrowed SBU management from its model companies and then made further improvements to SBU by dividing SBU into three levels, i.e., S level SBU, B level

SBU and U level SBU. The S level referred to senior management, the B level stood for heads of product business departments. The other employees who do not belong to either

S or B level fell into the category of U level under SBU. Through this diversification,

Haier extended SBU management to all employees (Su and He, 2008:54). Guided by the new principle, it is required that everyone become a SBU in Haier, which meant that under the SST mechanism, every employee has to deal with the market directly and become their own CEO.

The core concept of SBU was based on OEC management, which was that everyone takes clear responsibility of his/her work. SBU made further improvements to

OEC with respect to employees‘ responsibilities. Under OEC management, the employees worked as a segment of the production line and were required to accomplish their own work. But to achieve the goal of SBU, every employee should work as the boss and his/her co-workers were the market and the customers. As one senior manager in Haier explained:

The difference between OEC and SBU lies in the answer to the question:

who are you working for? In OEC, the employees only needed to fulfil

the request of their bosses, once the work the bosses assigned them was

finished, their tasks were accomplished. But with SBU, you are not only

working for the boss, but also for the customers. The customers refer to

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both the real customers who bought Haier products, as well as to the

people you work with within the company. In this way, everyone

became a CEO (Interviewee 19).

SBU formed the basis of Haier‘s management ideas during this time. After the market chain reform was accomplished, the requirement of SBU remained the target of

Haier‘s management innovation. In the next phase of Haier‘s development, Zhang Ruimin brought up new management concepts and adopted new evaluation systems, but SBU was still the ultimate goal of his reform initiatives. This will be further discussed in Chapter

Eight.

7.5 Conclusion

This chapter analysed the development of Haier from 1998 to 2005. This period was

Haier‘s internationalisation phase, when the company expanded its foreign business holdings by building local factories in other countries. With the expansion of the company‘s scale and business scope, some problems of low efficiency began to emerge in the company, which was referred to as ―company obesity‖. In order to solve these problems, Zhang Ruimin adopted Business Process Reengineering (BPR) as the solution.

The influence of international consultants was a key factor in the adoption of this organisational change. The management system Zhang Ruimin proposed in this phase was the strategic business unit (SBU), which was developed based on OEC, but shifted the responsibility for the company onto every worker. In conclusion, BPR was the key factor driving management change in Haier‘s during this period, which readjusted the company‘s structure from a functional structure to a process-based structure and enabled the company to overcome the danger of company obesity. Although the leader was still critical in making the strategic decisions for the company, the influence of management fads played a more significant role in the adoption of BPR and this influence was

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conducted through the advice from external experts and consultants. As proposed in

Chapter Two, management fads influence a company‘s adoption of certain management practices, which are spread through training and education (, Abrahamson, 1996; Newell et al., 2001; Thornton and Ocasio, 1999). The influence of consultants in this period confirms the literature on the normative mechanism for the dissemination of management fads. In the next chapter the analysis of the process of internationalisation will be extended to examine how Haier emerged as a global brand after 2005.

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Chapter Eight

The Emergence of a Global Brand (2005-2013)

8.1 Introduction

This chapter examines the organisational and management changes conducted in Haier from 2005-2013, by examining how Haier carried on with its efforts of constant change and improvement in order to become an internationally competitive brand. The chapter starts with an overview of the shifts in the market and the policy context for the home appliance industry in China, which has under gone severe fluctuations since 2005. With the urban market reaching maturity, the rural market became a tempting target for home appliance companies. The introduction of a home appliance subsidy program for rural areas offered home appliance manufacturers a good opportunity to develop the potential rural market. Haier won the bid as one of the first producers for the new program and managed to maintain its leading position in the third and fourth level markets. As to organisational change, Haier implemented a reform called the ―1000 days process reengineering‖ in 2007. Zhang Ruimin tried to solve internal problems with the help of external experts, however, and the second BPR program ended with the resignation of the experts and frequent changes of executives. Despite the unsatisfying result, the BPR program was not a total failure though. A new IT system was installed for performance evaluation and internal communication, which led to a process of informatisation. On the other hand, management innovation moved onto a new level in this period. The new concepts of integrating order with personnel, T mode and ZZJJT were brought in by

Zhang Ruimin and became the new cutting edge practices. After 30 years of development,

Haier has grown into a leading brand internationally for white goods. This chapter asks,

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therefore, the sub question: ―How did Haier expand into international markets and how successful was this global expansion of the firm?‖.

8.2 Market and industrial policy changes since 2005

As discussed in chapters Three and Seven, the Chinese home appliance market entered a mature stage by the beginning of the 21st century, while the urban market had reached saturation. According to the research report on the Chinese urban home appliance market issued by the Development Research Centre of the State Council, the Ministry of

Information and the State Information Centre, the market saturation rate for TV sets and refrigerators for urban households in China had reached 99.1 per cent and 85.4 per cent respectively by the year 2001 (The United Study Group of Chinese Urban Home

Appliance Market, 2001). By contrast, the rural market still held great potential. The penetration of the home appliance products into rural areas was still notably lower than that of urban areas. By 2006, the penetration rate of refrigerators in rural areas of China was only 22.5 per cent, compared with 91.2 per cent in the cities. The ownership of TV sets was also remarkably lower in rural areas than in urban areas (Fang, 2008). Despite the immense potential of the rural market, some obstacles still remained in the development of this potential market. Relatively lower income in rural areas was the primary cause of insufficient purchasing power. Underdeveloped infrastructure, especially an unstable power grid and high electricity prices in rural areas hindered the purchasing for home appliance products (Yan, 2006:13).

After 20 years of development, the Chinese home appliance manufacturers had made their way into the international market by exporting products, joint ventures or

OEM (Original equipment manufacturer). By 2005, export products accounted for a third of all home appliance production in China. Most of the exports are OEM products for

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foreign companies. The export of self-owned brand goods only represented 5 per cent and

10 per cent of the total exports of white goods and brown goods respectively in 2008

(Fang, 2008). The exported Chinese products mainly attained their share of the international market through the advantage of low labour cost, rather than technology.

However, with the introduction of a new exchange rate mechanism by the People's Bank of China on 21 July 21, 2005, the RMB started to appreciate in value, which weakened the price advantage of Chinese home appliance products (Yan, 2006:12). Moreover, the price of raw materials for production, such as copper and steel, also was rising constantly.

The price of copper rocketed from less than RMB 30,000 per tonne to RMB 80,000 per tonne in the first half of 2006 (China Household Electrical Appliances Association,

2007:37). As a result, the cost advantage of Chinese home appliance products and their profit margin faced a serious challenge after 2005 (Yan, 2006:12). The outbreak of the

Global Financial Crisis (GFC) in 2008 caused a worldwide economic slide, which seriously influenced export-oriented industries, like the home appliance industry, by shrinking external and domestic demand (Xu and Chen, 2009). Consequently, the

National Bureau of Statistics of China (Xu and Chen, 2009:55) reported that the industrial cycle index of the home appliance industry declined from 100.85 to 99.77 in the first three quarters of 2008.

While market demand kept shrinking, the production of home appliance products still maintained an upward trend. In the first 10 months of 2005, the production of washing machines showed a yearly growth of 15.4 per cent, while that of air conditioners reached 12.7 per cent (Yan, 2006:12). The mismatch between demand and supply caused the serious problem of an inventory backlog. According to the data from the National

Bureau of Statistics, 11 out of 15 home appliance products showed an increase in their inventory rate (Xu and Chen, 2009:56). In order to stimulate consumption in the rural

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areas and expand domestic demand to deal with the crisis, the Ministry of Finance and the

Ministry of Commerce introduced a home appliance subsidy program for rural areas, under the instruction of the State Council, which was called The Home Appliance to the

Countryside Program. Under this program, the government offered a 13 per cent subsidy to rural residents for purchasing home appliance products including TV sets, refrigerators and mobile phones (China's Ministry of Finance 2007). The products sent to the countryside as part of this program had to meet energy efficiency standards and prices were set within a certain range. The urbanisation of the countryside during this period offered the basis of the infrastructure for the program, as one employee of Haier explained:

The government has been investing in the urbanisation of the

countryside before stimulating home appliance consumption in rural

areas. Some programs upgraded the power grid, the water supply system

and installed Internet connections in rural areas throughout China.

Without this basic infrastructure, the home appliance products could not

be used in the countryside. The improvement of the overall environment

enabled the implementation of The Home Appliance to the Countryside

Program (Interviewee 8).

The program was conducted in three pilot provinces: Shandong, Henan and

Sichuan from 1 December 2007 to 31 May 2008 and 15 production enterprises were chosen to be the first product producers. Haier won its bid and its products were then sent to sales terminals within 10 days (Haier Annual Report, 2007:23). Haier‘s reaction time was much faster than other manufacturers in the program. A manager, who worked in

Haier for more than two years, and took part in the program, explained:

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After solving the problem of inventory, Haier had been investigating the

rural market since 2007 and sales terminals were also built after that.

When the program commenced, it was too late for other companies to

fight for the market against Haier. Therefore, although there were 100

manufacturers in the program, Haier‘s products grabbed a big part of the

market share (Interviewee 10).

Besides the reaction speed, Haier‘s brand recognition was another factor, which allowed the company to gain a greater share of the market share than other designated manufacturers, as an employee from Haier stated:

When people chose the products sent to the rural areas, brand name was

an important consideration. Haier has been recognised as one of the top

brands of home appliance products; therefore, people were happy to buy

Haier‘s products (Interviewee 8).

The pilot implementation of the policy achieved primary success in the three provinces. On 26 May, the Ministry of Finance and the Ministry of Commerce announced they would extend the deadline of the pilot program to 31 December 2008 (China's

Ministry of Finance and China's Ministry of Commerce, 2008). After one year of experimentation, the policy obtained remarkable results in the three pilot provinces; 3.5 million home appliance products were sold in the first year and the total sales of home appliance products increased by 40 per cent in these provinces. The Home Appliance to the Countryside Program not only stimulated consumption and economic growth in the rural areas, but also solved the over supply problem in the home appliance industry. As a result of the success of the subsidy program, the government decided to expand the program to a national scale and the range of subsidised products was extended to include

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motor cycles, air-conditioners, PCs and water heaters in 2010 (China's Ministry of

Finance et al., 2010:1).

Haier, in particular, benefited from The Home Appliance to the Countryside

Program. Firstly, the subsidy program offered Haier a good opportunity to expand into the rural market, including into rural towns and villages (Haier Annual Report 2007). The rural market had always been occupied by the domestic manufacturers and was tempting for the home appliance companies. As discussed before, Haier had already been moving into the rural market before its competitors. Despite its great potential, the cost of developing the rural market was relatively high. Most companies relied on the local vendors for access to rural markets, who expropriated most of the profits in the process.

The Home Appliance to the Countryside Program made it possible for these manufacturers, including Haier, to enter the market with the help of the government (Lu,

2009:23). As one employee in Haier explained:

The subsidy goes directly to the consumers in rural areas. But for the

manufacturers, the government offered a direct channel to sell their

products, so Haier gained more profit from the increase in sales. For the

customers, all the products were certified by the government and they

could get the subsidy, which offered them high quality products at a low

price. Therefore, The Home appliance to the Countryside Program was

a win-win game (Interviewee 6).

In addition, small and medium-size enterprises used to hold a remarkable share of rural markets due to their low price. However, under the subsidy program, rural residents were able to buy those products from the bigger brands at a similar price, which deprived

SMEs (small and medium-sized enterprises) of their price advantage. Consequently,

SMEs which were not capable of bidding for the subsidy program were gradually

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eliminated from rural markets, solidifying the leading position of larger companies like

Haier (Lu, 2009:24).

By the end of 2010, Haier had become the leading company in The Home

Appliance to the Countryside Program. Haier‘s sales accounted for more than 30 per cent of the total amount of all the products sold by this program (Tuo, 2011:1). The sales from the program helped Haier to get through the Great Financial Crisis in 2008, as one manager in Haier recollected:

Despite the serious economic situation caused by the financial crisis,

Haier still maintained its increased rate of sales. Owing to the Home

Appliance to the Countryside program, Haier‘s sales increased by more

than 60 per cent in 2008 (Interviewee 10).

Through the development of the rural market, Haier maintained its leading position, which enabled the company to resist competition from foreign competitors, as a scholar who has conducted research on Haier‘s marketing strategy argued:

I think Haier actually doesn‘t worry too much about its foreign

competitors. They focused on different markets. Haier predominates in

the lower level markets, like those in the countryside and towns. As

long as it can retain its position in those markets, the sales won‘t fall

down (Interviewee 7).

8.3 Organisational Change: A New Round of BPR

According to Haier‘s development history, thus far, each phase of Haier‘s development has been accompanied by a fundamental transformation throughout the organisation. As discussed in Chapter Seven, in 1998, in order to support the transition from the diversification development phase to the internationalisation phase, Haier implemented its first market chain reform, based on Business Process Reengineering (BPR), in order to

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achieve integration with international criteria and to avoid the problem of ―company obesity.‖ This transformation is regarded as a great success and is used by lecturers and researchers as a representative case of BPR (Lu, 2004; Zhang, 2006; Zhao, 2004). A new system, based on a market chain, was established after the BPR and the new management concept of SBU was introduced and put into practice throughout the company. However, the reform effort did not stop there. After 1998, Haier had reformed its organisational structure constantly, as one of the interviewees described:

The structure of Haier has changed countless times. We have never had

a break since 1998 when we went through reengineering the first time

(Interviewee 1).

After 2005, however, Haier‘s development entered a new phase: global brand building. The strategy adopted in this phase was a globalisation strategy. Globalisation is another term for internationalisation used by some researchers, which implies a growth of international exchange and interdependence (Scholte, 2005:16). However, there are, in fact, differences between globalisation and internationalisation. With regard to the strategy of companies, internationalisation focuses on creating international brands with the company‘s own resources, while globalisation refers to making use of global resources to create its own competitive advantage (Hu, 2008:156). In the Internet era, the customers‘ needs have become more diversified and personalised. A manager of Haier explained the changes in customers‘ needs in the new era:

In the 1980s, people bought home appliance products to satisfy their

basic needs like storing food and washing clothes. Home appliances

were still a luxury then and normal families could only afford one or

two home appliance items. While towards the 1990s, most families

could afford more home appliance products. Nowadays, the customers‘

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needs have become more diversified and consistency also became an

important factor in their consideration of home appliance consumption.

Therefore, the companies can make more profit if they can offer a

complete solution to the customers‘ needs. For example, Haier can do a

customised set of home appliance products, according to the customer‘s

requirement, which would make more profit and attract more customers

(Interviewee 14).

In order to satisfy the diversified needs of customers, companies need to adjust their production and marketing strategies. The mode of traditional enterprises, which focus on ―production-storing-selling‖ (Haier Co., 2008), can no longer satisfy the tailored needs of consumers. The enterprises must shift from the enterprise-centric sale of products to the user-centric sale of services. That is, they should shift to the ―demand manufacturing and delivery‖ mode (Haier Co., 2008). To achieve this goal, some organisational adjustment was needed. The balance of power was another motivation for

Haier‘s BPR during this time. As discussed in Chapter Seven, one purpose of the organisational change in 1998 was to centralise the power to the headquarters. After the first round of BPR in 1998, Haier‘s managerial power was centralised in the top level, as a manager who has worked in Haier for more than 10 years argued:

[Before the change] any problem had to be reported to the top leaders

like Zhang Ruimin or Yang Mianmian, so that the middle management

didn‘t possess too much power and the role of the leaders can be

emphasised. But when the company grew bigger, he (Zhang Ruimin)

realised the role of management is not as crucial as before and what

keeps the company in operation is the self-motivation of every

employee. Therefore, he decided to make a thorough change to the

company in 2007. Before that we had gone through dozens of

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organisational restructures since 1998, but this [the second round of

BPR] is the first time Zhang used ―process reengineering‖ (Interviewee

3).

This type of process worked well between 1998 and 2006. However, the problem of slow turn around began to emerge as the company went through further expansion and the competition became more furious. The rigidness of this structure was not only reflected in the leadership, but also in some departments. As discussed in Chapter Seven, in the first round of market chain based BPR, Haier integrated the purchasing, marketing and logistics departments of the company into the headquarters, which helped the company to regulate the process and avoid the waste of resources. However, this unification also caused another problem, which was the dominance of some departments.

For instance, after the reform, the power of the logistics, purchasing, and finance department grew significantly and some of them began to abuse their power and lost their flexibility in relation to the market. A manager provided an example to show the problem caused by the delayed reaction to the market change:

Before 2005, Haier was first place in China for their share of the air

conditioner market. But, between 2005 and 2008 their sales fell to third

place. One of the primary causes was the slow reaction to the market

caused by the complicated procedures under the old system. The price

of copper went through a rapid increase in 2005. Before the price rise,

many Chinese air conditioner manufacturers hoarded large amounts of

copper. Haier also got the message about the upcoming price rise, but

under the structure, the decision for purchases had to go through a

complicated reporting process (Interviewee 9).

Besides the need to loosen the control of the CEO, the conflict of interest among different departments also began to emerge from the process-based structure. As

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illustrated in Chapter Seven, the aim of the market chain reform was to transform the relationship among departments into a market-oriented one, which introduced competition from the external market into the company. However, at the same time, the cooperative relationship among departments and co-workers was also changed into a more competitive relationship. As a result, some departments began to game for their own interests, as a manager from Haier explained:

After the market chain reform, the core processes like purchasing,

marketing, logistics and sales were concentrated to the departments in

the headquarters. As these departments grew, they began to have their

own interest too. Their profits came from different channels and their

performance was evaluated by different criteria. Therefore, some

conflicts began to appear among these departments. The purpose of

structural change this time was to separate the power among some

horizontal departments (Interviewee 9).

Hu (2008), who has written a biography of Zhang Ruimin, wrote in one of his books of the gaming between different departments after the market chain reform:

The managers of overseas branches might accept low-profit or even no-

profit orders to accomplish their quota of sales. The purchasing

department refused to publish the cost of materials to producing

departments to ensure their own profit. Financial and HR departments

would impose their service on other departments to get the service fee,

regardless of the actual needs of those departments. Under this situation,

the more profits these individual departments got, the more loss was

caused to the whole group (Hu, 2008:61).

Therefore, after 2004, Zhang Ruimin had been thinking how to get everyone in the company to work cooperatively again towards a common goal. On April 26 2007,

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Zhang Ruimin announced a new round of Business Process Reengineering (BPR) called the ―1000 days BPR‖. Compared with the first market chain based BPR in 1998, Haier faced a more complex environment this time, especially in the period of a global economic recession. Therefore, Haier adopted different strategies this time.

Firstly, the market chain reform in 1998 focused on integrating marketing and purchasing, to avoid the separate operation of different branches. However, this round of reform did not complete the linkage between employees and the market and the problems of information distortion and resource waste still existed. As a result, the new round of

BPR in the Internet age aimed to make an information management revolution, involving restructuring organisational frameworks, processes and people (Hu, 2008:49). Haier's design centres, manufacturing bases and trading companies in over 30 countries would be able to share global resources through a single information platform. Secondly, the role of external experts was different from the BPR in 1998. Zhang Ruimin believed in self- dependence and relied on people from the company. Even in the market chain based BPR in 1998, the external expert only worked as a consultant who suggested solving the problem of company obesity with BPR. However, with the development of the company, opinions from a subjective perspective would be helpful to discover the hidden problem of the company. As discussed before, the problem of gaming and competition between different departments emerged as a result of the market chain reform, which made Zhang

Ruimin realise the importance of power and profit balance. Therefore, one of his purposes in hiring the external consultants was to reorganise the relationship among different departments in Haier, as one manager of Haier stated:

The company had been looking for a way to balance the power between

different departments since 2005, but it was difficult to do since there

were too many interested parties involved. So the CEO tried to balance

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the power within the company with the help of some external force

(Interviewee 10).

Therefore, unlike the previous changes, Haier introduced consultant companies and hired external experts to make the plan for BPR and monitor the implementation in every department. Haier called this ―1+1+N mode‖. A manager from Haier described the

1+1+N mode in his interview:

It is required that each department should have an external expert. We

call it 1+1+N and the two ones refer to the person in charge of the

department and the external expert respectively. N means the team.

Some of the experts worked as consultants, while others take the lead of

the department directly. In some departments, all the decisions need to

get the experts‘ permission before they were sent to the superiors.

Experts had to be present when the head of departments reported to our

CEO and their advice was taken on the spot (Interviewee 2).

Under the requirement of 1+1+N, every department hired consultant experts with high salaries, as these manager stated:

Either the department or the company found the consultants. For

instance, the refrigerator department might find an expert who was

famous in the refrigerator industry through head-hunters (Interviewee 2).

With regards to the external experts, Zhang Ruimin required that every expert who was hired should come from the top companies in their area and that every department should find a role model in their own industry. For example, the white goods group adopted Whirlpool as their role model and set as their target to emulate Whirlpool. One manager who has worked in Haier for more than 10 years explained how they found the experts for the 1+1+N mode:

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In the 1+1+N mode, the CEO decided that every department should set

the leading company in the industry as its role model and hires one

expert from that company as the external consultant. Therefore, the

department started with finding the role model and then contacted the

experts in these companies. Many of the experts were recruited through

head-hunters with a high salary (Interviewee 9).

The experts hired for the top management positions were from HP (Hewlett

Packard) and IBM. Zhang Ruimin explained his consideration in choosing consultant companies and experts in an interview with Hu (2008:95):

We did some research on the Chinese companies who used consultant

companies for internal reform, especially those failed cases. We found

that most of the consultant companies involved were pure consultants

with little practical experience in business. What we are after is [sic]

those who have extensive business experience and have gone through

similar problems as Haier. That‘s why we chose HP and IBM. HP

experienced a fatal crisis when it merged with Compaq but managed to

fix the problem. IBM was described by Times as a giant dinosaur,

which was too big to move. We wanted to learn how they dealt with

their crisis (Hu, 2008:95).

This mode was new to Haier. As discussed before, Haier used to be famous for its exclusive internal talent development system, which rejected external consultants. The new mode broke this rule. Regarding this change, Zhang Ruimin‘s view was that the old talent system worked well in the early stage of the company‘s development, but with the expansion of the company‘s scale, especially with the globalisation strategy, a broader view was necessary to help Haier solve the potential problems from an outsider‘s perspective (Hu, 2008:65). Therefore, the experts hired by Haier not only played the role

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of consultants, but also participated in the actual implementation of the change programs.

In some departments, the head even passed the authority to the experts and the experts took full charge of the department‘s management.

Chen Guangqian, the expert hired from HP, made a report to Zhang Ruimin on the key aspects that needed reform in Haier as soon as he got into the company. He pointed out that the lack of strategy on an operational level was the key problem existing in Haier.

Although the leader himself had a clear understanding of the development strategy of the company, this strategy was not fully passed down to people on the operational level. As a result, all the leaders of the business units only cared about production rather than managing the whole chain from supply to sale. The lack of strategy was caused and reflected in the information system. Chen Guangqian described that:

Haier has been reforming its information system and has achieved some

success, but still did not realise the integration of external and internal

information. The existing information system in Haier is like 600

separate information islands, which are not connected with each other.

Once the business model of the company is changed, these separate

systems will all be invalidated (Hu, 2008:48).

Therefore, he made the suggestion to reform the processes of the company and build an information system to connect all the processes throughout the whole company.

Guided by the suggestion from the experts, Zhang Ruimin proposed that the whole BPR program should consist of three parts, including organisational reform, process reform and employee education. With regard to the organisational reform, guided by the experts from HP and IBM, Haier conducted a fundamental change to its organisational structure.

The reform of the organisational structure resembled that of HP. Business units of the group were divided into 6 groups including WGG (White Goods Group), DPG (Digital

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Products Group), CSG (Customer Solution Group), EPG (Equipment Product Group),

BCG (Business Circulation Group) and FSG (Finance Service Group). These six groups constituted the vertical axis of the matrix structure, taking charge of operation businesses like technology, production, marketing and sales. While other supporting units like

Finance, HR, IT and Strategy were grouped into seven departments, i.e. CMI

(Corporation Marketing Innovation), GO (Global Operation), CST (Corporation Strategy and Technology), HR (Human Resource), FIN (Finance), Legal and the newly established department PSI (Process and System Innovation) (see Figure 16, see also (Hu, 2008:62).

W D C E B F CMI GO CST G P S P C S Customer Indirect- Strategy G G G G G G service purchase and Brand and corporation marketing logistic developme Communi Customs nt Sales & marketing cation clearance Technology & Quality Production line

HR: HR strategy; HR service and operation; payments and benefits; construction of enterprise culture; employee satisfaction; internal communication among HR branches

FIN: financial planning; budget planning; internal and public reports; decision support; fund management; foreign exchange management; international trade rules; investment relationship

Legal: legal strategy and planning; legal operation; legal action; intellectual property protection; contract management; internal auditing

PSI (Haier University included): Value chain process reengineering; sales support operation and order management; IT strategy and planning; IT application development; IT service operation; data centre

Figure 16: Matrix structure of Haier (Source: Hu, 2008:63)

This structure was described as ―Parents Mode‖ by Sun Zhenyao, CEO of HP

China (Hu, 2008:62). He likened the business units to the father, who is in charge of

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resource allocation, technology and product support, while functional units are described as the mother, who provides management and environment care.

The adjustment of the organisational structure was the first step in Haier‘s BPR.

As mentioned earlier in this chapter, one of the main goals of Haier‘s BPR during this period was informatisation. The term informatisation was inspired by Marc Porat‘s categories of the ages of human civilisation: the Agricultural Age, the Industrial Age and the Information Age (Porat, 1978). Informatisation is defined as the process by which new communication technologies are used when a nation becomes an information society

(Rogers, 2000:71). With regard to the company, informatisation requires an information- based reform by using a computer or telecommunication system. A professor, who has conducted research on Haier‘s process of reform since the 1990s, concluded that the focus of Haier‘s BPR in the new phase was to build an information system throughout all the processes:

Back in 1998, the changes in Haier mainly focused on marketisation.

After the market chain was built within the company, the new round of

its reform aimed to complete the information system throughout all the

processes (Interviewee 4).

Under the requirement of informatisation, a new department, the Process and

System Innovation Department, was set up within Haier and Chen Guangqian was assigned as the Chief Information Officer to lead this department. The old IT department was also merged into the new PSI department. Liang Xu, Head of the IT Department, worked together with Chen Guangqian to establish a process system containing 2000 to

5000 processes, which integrate every department and factory in Haier, offering a platform for information sharing. On January 1st 2008, Haier‘s own Enterprise Resource

Planning (ERP) system, Haier Global Value-adding System (HGVS), was put into

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operation. This system covered 35 business departments, 42 industry and trade companies with all the products in Haier. With the help of HGVS, Haier managed to combine orders, logistics, information flow and capital flow all into one system (Hu, 2008). The information system offered a platform for all the departments to share information. With the new system, Haier achieved visualised management, whereby instantaneous information was available on the business of the company as a whole. The visualisation of information enabled the management to understand the operation of business and find out the problem in the first place and react without delay.

This round of BPR did not progress as smoothly as other reforms in Haier. In

December 2008, the external experts hired for the reengineering resigned from the company one by one. Later in the same month, Haier issued an internal document on the decision to recall six vice presidents, who were promoted to assist the implementation of the BPR. These six leaders were removed and sent back to their original departments, before the reengineering was completed. This was the biggest management reshuffle since the BPR commenced in 2007. The resignation of the experts and the adjustment of the management structure were viewed as a symbol that Haier‘s reengineering came across impediments and the leader began to rethink the entire change strategy. One employee from Haier concluded that:

The BPR program in 2007 was not quite successful. The experts stayed

in the company for only two years, they saw some problems and

proposed some solutions. But after two years, the reform did not achieve

significant improvement. Therefore, the experts quit from Haier

(Interviewee 21).

Some interviewees assessed which obstacles hindered the BPR program the most, with one employee arguing that:

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The intentions of the experts were quite good and the solutions they

proposed were practical too. Zhang‘s original plan was to balance the

power in the company with the help of these experts, but at the same

time, the department leaders were trying to get rid of the experts since

the change plan may harm their interests. Once interests were involved,

the reform became more complicated. After a while, the experts realised

it was quite hard to change anything here, so they gave up (Interviewee

16).

Another employee also described what happened when the experts were in the company:

During that time, the experts did bring into the company some new

management concepts. But at the same time, the climate was to trust the

experts blindly. Some people didn‘t even care about what the view was

in the departments. Some of the experts were quite good, but some of

their work wasn‘t really worth the high salary they received. Moreover,

some experts couldn‘t adapt to the environment in Haier either. Their

lack of adaptation to the organisational culture was a key cause of their

resignation (Interviewee 19).

Opinions from the media and among researchers confirm the arguments listed above (Brand & Standardization Editorial Office, 2009; Zhu, 2009). The ultimate cause of the unsatisfactory outcome of the BPR was, therefore, the organisational culture:

It was commonly believed that the organisational culture of Haier is

relatively strong, closed and exclusive. If the company doesn‘t change

its culture, process reengineering cannot solve the problem (Zhu,

2009:91).

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Even one of the experts who left Haier made some comments on Haier‘s corporate culture:

The key problem Haier needs to solve is culture instead of process.

There are some unhealthy aspects in the company‘s corporate culture,

such as the defiant attitude of some senior managers, lack of respect for

others and the habit of only reporting good news. Haier‘s management

structure worked in the early years, but in the new age, some of their

ideas are out of date and low in efficiency (Zhu, 2009:90).

Besides their organisational culture, some researchers also criticised the personnel system in Haier, as one researcher argues in this interview:

The changes in Haier‘s management personnel are quite frequent. In

Haier, the promotion and demotion solely depends on the performance

numbers. Once a manager doesn‘t achieve the goal, he will be demoted.

This is right in theory. But the development of a company can‘t rely

only on performance numbers. It also needs a loyal team to lead the

company. The average age of Haier‘s management strata is getting

lower and lower now. On the one hand, it is good to keep the company

active, but on the other hand, it also saps the older employees of loyalty

to the company (Interviewee 4).

Except for those who believe that the resignation of the experts and the demotion of six vice presidents indicated the failure of Haier‘s BPR in this period, others have different opinions. One employee of Haier quoted the leader‘s declaration regarding the

BPR program:

In 2009, the CEO announced that the company would suspend the

implementation of BPR, which did not mean the change would stop at

that point. Rather, it brought Haier into a new stage of constant

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improvement. He claimed that in the new era, the only thing that does

not change is change (Interviewee 9).

Some other researchers (Hu, 2008; Lv, 2010; Pang, 2009) also supported this argument by explaining that the decision to suspend the change was a wise reaction to the changes in the environment. They argued that the worldwide economic crisis and the competition in the Chinese home appliance industry became fiercer. Under this situation, it was a bad time to carry on with such a fundamental change. Therefore, it was wise to replace the big program with incremental adjustments.

In sum, Haier‘s BPR in this period hit some obstacles and was suspended earlier than planned. However, the result of this BPR was not completely unsuccessful. The information system built by the experts remained in the company and helped informatise its management system, as a manager of Haier stated:

After the experts left, the information system is still in use. The system

made the management of the whole company clearer and more

systematic. The new management ideas brought about by the experts

also kept inspiring the management in Haier (Interviewee 2).

8.4 Management Innovations: Integrating Order with Personnel to achieve SBU, T Mode and ZZJJT

As discussed in Section 8.3, the change in organisational structure and the establishment of the new information system provided the hardware for the company to compete in the information age. The third aspect of the reform in this period was to transform the staff, which was achieved through the introduction of a new management concept. As discussed in Chapter Seven, the goal was ―to make everyone into a strategic business unit (SBU)‖ and the implementation of SBU was still the ultimate goal in the period under

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consideration in this chapter. In practice, the concept of SBU was conducted by

―integrating order with personnel‖ (Hu, 2008:27), which refers to the one-to-one relationship between orders and individuals. One employee who began to work in Haier in 2008 recollected how he learnt about ―integrating order with personnel‖ during the training for new employees:

When I came to Haier, the management concept we used was

―integrating order with personnel‖. This is still the core of the

management system now. All new employees get training on the history

and culture of the company when they come to Haier and the concept of

―integrating order with personnel‖ is explained to everyone. Here ―order‖

means the market and ―personnel‖ means all the SBUs in Haier. By

integrating order with personnel, everyone will take responsibility for

the market and react to market changes immediately (Interviewee 15).

The concept of ―integrating order with personnel‖ was brought in by Zhang

Ruimin at the annual meeting of Haier‘s worldwide managers and was put forward as the development mode for the globalisation era (Hu, 2008:26). Under the principle of

―integrating order with personnel,‖ every employee must take full responsibility for his/her own orders. In the concept of ―integrating order with personnel‖, order refers to the customer and the connection between orders and employees is actually the connection between the market and employees, which reflects the market chain reform. By doing this, every employee becomes an independent strategic business unit. One senior manager in

Haier explained how the purpose of SBU was reflected in ―integrating order with personnel‖ in his interview:

SBU tends to clarify the question: who are you working for, your boss

or your customers? Therefore, by integrating order with personnel, we

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break the company down into small units so that every unit knows who

the customers are they are dealing with (Interviewee 1).

The ―integrating order with personnel‖ system was conducted in the form of a closed circle, which starts with the order from customers. This order was then passed among the Marketing Department, Shipping Department, Assembly Department,

Producing Department, Purchasing Department and Financial Department. Each department, after receiving the order, will disassemble it into sub orders and assign specific people to take charge of these orders. These people then become SBUs and take full responsibility for his/her own order. The circulation of orders is illustrated below in

Figure 17:

R&D Depart ment

Marke Assem Produc Purcha ting bling ing sing Customer Supplier Depar Depart Depart Depart tment ment ment ment

Accounting Department

Figure 17: The circulation of orders (Source: Hu, 2008:50)

As shown above, the Marketing Department communicates with the customer or potential customer to get the required information. The order and information is then passed to the R&D Department, who will then design the product. During the process of designing, the R&D Department also communicates with Marketing Department. The design is then passed down to the Assembly and Production departments and they work together on the production and then to the Purchasing Department to order the material

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needed for production from the supplier. The purchase information is then sent to the

Accounting Department who will then pay the supplier. At the same time, the Marketing

Department will pass the order to the Accounting Department, who will then collect the payment from the customer. Then, the supplier will inform the Purchasing Department to collect materials and the Purchasing Department will inform the Production Department to get the material for production. When the parts are finished, the Production Department will tell the Assembly Department to assemble the parts and finalise the product. The

Assembly Department will then notify the Marketing Department who send the product to the customer. A closed circle is completed and will start again when the new order arrives.

Within this circle, everyone‘s order and sub- order will be assigned to a specific person and the relationship between different people in the company is also market-oriented.

Through communication and the clear responsibility of every SBU, the production cost, accounts receivable and inventory is minimised.

Haier divided this long process into three main steps, the first step was designing the order, the second was the direct delivery of products and the third was collecting the payment. These three steps formed a closed circle and the whole circle was under the control of an SBU, as shown in Figure 18:

Production according to the order Getting order from the SBU market Market

Supply Direct delivery to the customer and collection of payment

Figure 18: Three steps to integrate order with personnel Source: (Hu, 2008:53)

As discussed in Chapter Seven, the market chain reform aimed to achieve the goal of ―three zeros,‖ which stood for zero inventory, zero distance and zero working capital.

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In this period, Zhang Ruimin stuck to the three zeros as the criteria for ―integrating order with personnel‖. Therefore, in this sense, ―integrating order with personnel‖ was an evolution of the market chain and the basis for SBU. The goal of ―integrating order with personnel‖ and SBU was realised through the information system built in this period. As discussed before in Chapter Six, Haier established an evaluation system with 3E cards under OEC management. In the globalisation phase, the daily clear process was conducted with the information system, as one employee at Haier explained:

In the beginning, everyone was required to fill in the daily clear form. In

the 1990s, every employee was given a notebook with daily clear forms,

called daily clear notebook. After 2000, these notebooks were not used

anymore. Instead we filled in the electric forms on the computer and

printed them out or just sent them by email. Now with the information

system we can login to the system and the performance information will

be uploaded to the system automatically (Interviewee 20).

The daily clear system enabled the company to obtain real information on the employee‘s performance. For instance, with the paper daily clear form, the employees filled in the numbers for their work themselves and it was possible to make up false numbers. But under the new system, all sales were input into the computer and this eliminated the possibility of falsifying the statistics.

While ―integrating order with personnel‖ formed the basis of Haier‘s management philosophy during its globalisation development phase, the most recent management concept in Haier is ZZJJT, which are the initials of the Chinese phrase for ―self managed operation units‖. One senior manager of Haier explained the meaning of ZZJJT:

Under the concept of ZZJJT, we have new names for different

functional departments. The Marketing, Planning and Manufacturing

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Departments are called Market Operation Units, Model Operation Units

and Production Line Operation Units. When the plan is created, the

team manufacturing products are the Production Line Operation Unit.

Before, people in the Manufacturing Department only took charge of

production, regardless of the market demand. The new system requires

that all production must meet market demand. Sometimes the demand

can‘t be satisfied; then it‘s time to push back to operation units on

higher levels. Therefore, our organisational structure is an inverted

triangle now. Customers are on the very top, Market Operation Units

take charge of meeting customers‘ needs, they then push back to Model

Operation Units, which will further push back to Production Line

Operation Units. These three are on the same level. If they have any

difficulties in meeting market demand, they can further push back to

Secondary Operation Units like the supply chain (Interviewee 1).

From the description above, it can be seen that ZZJJT still reflected SBU and

―integrating order with personnel‖. The ultimate goal of these management ideas was to make an immediate connection with the market, as this senior manager stated:

The goal of the company now is to arrange production according

to market demand. We call it zero inventory with on demand

manufacturing and delivery, which is a paradox itself. Zero

inventory makes it almost impossible to meet the demand on the

spot. But we‘re trying to achieve the two goals together. We must

investigate the market needs beforehand and bring up different

proposals for different needs, rather than wait for the market to

respond (Interviewee 1).

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In practice, the requirement of SBU and ZZJJT was realised by a new system called T mode, which was proposed by Zhang Ruimin after the informatised daily clear was introduced. A manager at Haier explained how T mode works:

T is actually a means of budgeting. T means the day you finish your

work you need to make a plan for every day backward from day T. For

example, I plan to finish a task in one year, then today is the day of T-

365. I need to map out what I will do on day T-200, T-100, etc. The key

point of Haier‘s T mode is that it doesn‘t finish on T. After you finish

your work, you still need to make a summary on what you learned from

the work. If any mistake was made, you need to improve it next time, to

avoid making the same one (Interviewee 9).

It can be seen that the T mode ensured that every step to fulfil the order was well planned beforehand. Therefore, the T mode was the assurance to achieve the goal of zero inventory.

It can be seen that, while the management innovations in Haier during this period changed the names given to the new approaches, they still shared the same underlying basis of prior management concepts, which attempted to achieve autonomous management and reflected Kunda‘s (1992) concept of normative control by strong culture

(refer to Section 2.4). Haier attempted to achieve this goal by making a direct linkage between the employee and the market. Thus, the goal of management was to achieve on demand production and delivery with zero inventory and Haier made a remarkable improvement in the reform of inventory and capital flow. By the end of 2008, Haier had eliminated most of its storage houses throughout China, only retaining the main storage house in Qingdao. This reform was viewed as the key reason the company successfully rode out the economic downturn in 2008, as a manager from Haier explained:

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The economic crisis in 2008 mainly affected the capital flows of

companies. Haier had no problem with capital flows since the reform of

zero inventory. Many home appliance companies suffered from over

inventory after 2008, but Haier was not affected, which can be attributed

to the reform we carried before (Interviewee 10).

8.5 The Emergence of a Global brand

As discussed earlier in Chapter Eight, Haier experienced difficulties in both the external environment and due to internal reforms, but these obstacles did not hinder Haier from developing into a globally competitive brand. Despite the difficulties it faced, Haier still retained its leading position in the Chinese home appliance industry, especially in white goods. With regards to its development strategy for the global market, Haier‘s development strategy was known as ―global brand building‖. One area where globalisation promotes changes in the operations of capitalism is in the organisational conditions for capital accumulation (Scholte, 2005:177). Scholte (2005:177) argued that this change is reflected in two developments: the growth of offshore centres and the proliferation of transnational companies. In accordance with the feature of globalisation, the goal of Haier‘s development strategy during this period was not only to export Haier products, but also to build Haier‘s brand name all over the world. Zhang Ruimin explained that ―a real multi-national corporation should be able to meet the local customers‘ needs in different areas all over the world and obtain the brand recognition of local customers (Hu, 2008:131).‖ To achieve this goal, Haier adopted a localisation strategy in every country it entered. As discussed before in Chapter Seven, Haier had been building factories in other countries since the late 1990s. After China‘s entry into the

WTO, Haier sped up the pace of ―going out‖. One senior manager at Haier explained the internationalisation and globalisation strategy of Haier:

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Before 2000, we built some factories in other countries, but the main

sales were still from exports. After China‘s entry into the WTO, Haier

began to expand the production bases all over the world. Through these

production bases, we achieved localised design and production. The

internationalisation of Haier‘s business was divided into three stages.

The first stage we call ―going out‖, when we only focused on exports.

The second stage we call ―going in‖, which means entering the local

market by localised production. And the third phase is ―going up‖,

which aims to establish the brand name of Haier in the local markets of

these countries. That‘s also the goal of our global brand-building phase

(Interviewee 5).

The evolution of Haier‘s overseas strategy was concluded as three stages: get in, stay in and take the lead. As the senior manager explained:

Get in means to gain a foothold in the mainstream market. Haier

adopted this strategy in the early stage of its ―going out‖. From 1990 to

1999, Haier entered the mainstream markets of other countries mainly

through export. The second step, stay in, means to consolidate its

market position in foreign countries through local production and design.

The final stage, take the lead, aims to become a popular brand

recognised by the local consumers (Interviewee 5).

In order to explain these three stages, I will take the US market as an example to illustrate the development of Haier‘s overseas strategy. As discussed in Chapter Seven,

Haier exported its first refrigerator to Germany in 1990 and started to export refrigerators to the US since 1991. The strategy it adopted to enter the US market was developing the niche market by designing a type of mini fridge with a study desk on top. As an overseas manager from Haier explained:

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When we started to develop the US market, we designed a mini fridge

aimed at college students, because we found that most of the fridges in

the US market were big for families. But the mini fridge we designed

had a study desk on top. The size fitted the dormitory those students live

in and the desk on the fridge offered an additional function and helped

them to save space. By developing the niche market, Haier products

entered the US (Interviewee 4).

From 1991 to 1999, the first batch of Haier products exported to the US were produced through OEM. In later years Haier insisted on exporting with Haier‘s brand, but the trade barriers became more and more strict, which were unfavourable for Haier‘s exports to the US (Song, 2005:1). Therefore, Haier moved to the second step and decided to build a production base in the US. On April 30th, 1999, Haier commenced the construction of its first production base in North America and the first batch of Haier refrigerators were made in America in March, 2000 (Hu, 2007:104). Since then, Haier has been exploring to consolidate its position in the US market with good product quality and localised design. By 2005, Haier‘s sales in the US had increased from US$30 million in

1999 to US$650 million. After gaining the market share, Haier has been aiming to get recognised by the US customers. By 2008, Haier products had entered the top ten retail chain shops and were rated as ―the best suppliers‖ by US retailers. In 2008, Haier won the

American Golden Hammer Award, which is viewed as the highest honour in the home appliance industry (Hu, 2008:158). By 2013, the sales of Haier air conditioners took up more than 18 per cent of the US market and ranked within the top three of all the brands in America (Hu, 2008:159).

Haier‘s success in the US market is the triumph of their global brand building strategy. By 2013, Haier has made remarkable progress in its global brand building

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strategy and built more than 30 production bases, 22 trade companies and 8 R&D centres in North America, Europe, East Asia, Africa and Southeast Asia. The sales of Haier products took up a remarkable portion of these local markets (Hu, 2008:157).

8.6 Conclusion

In conclusion, the key feature of Haier‘s development in this period was constant change.

Although Haier had been changing its management structure and system constantly since the 1980s, the changes from 2005 to 2013 were especially frequent. The major organisational change conducted during this period was called the ―1000 day process reengineering‖. Unlike the previous changes, Zhang Ruimin brought in external consultants to work in the company under the ―1+1+N‖ model. On the one hand, the introduction of experts helped the company to find the underlying problems, which hindered its development. On the other hand, the experts‘ lack of familiarity with Haier‘s organisational culture caused conflicts between the experts and Haier‘s management, hence the unsatisfactory outcome of the BPR after the resignation of the experts and the major reshuffling of Haier‘s senior management. Despite the unhappy ending, the BPR reform still achieved some success in information system building and inventory reform.

The management innovations during this period revolved around a unified theme of integrating employees with the market and the development of on demand production and delivery with zero inventory. These organisational and management changes enabled

Haier to weather the economic crisis in 2008 and maintain its fast pace of growth. The policy support from the Home Appliance to the Countryside Program was also a key factor, which helped Haier to retain its sales during the economic downturn. As result of its reforms in the area of inventory and cash flow, despite the difficulties, Haier evolved into a global brand of home appliances by 2013. The globalisation strategy was achieved through building production bases in 30 countries, while their performance in the US

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market was particularly strong. However, the leadership of a globalised company became a major challenge, hence, the shift towards ‗integrating order with personnel‘, which shifted responsibility for meeting customers‘ demands onto every worker.

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Chapter Nine

Conclusion and Discussion

9.1 Introduction

This study answered the central question, ―What were the factors driving the management of change in the Haier Group during the four phases of its development from 1984 to

2013?‖. Furthermore, the study investigated the role of leadership, policy, culture, management fads and globalisation. By drawing on Dunphy and Stace‘s (2001) contingency model of leadership and organisational change, the dynamics between these two processes were investigated across the four key phases of Haier‘s development. As shown in chapters Five to Eight, the development of Haier between 1984 and 2013 was driven by a combination of internal management imperatives and the integration of China into the global economy. This study finds, however, that there were three key factors driving the management of change in Haier: the role of the leader in decision-making, the introduction of government policies which encouraged the marketisation of the corporation and the introduction of Western and Japanese management fashions. Among these three factors, however, the role of the leader, Zhang Ruimin, emerges as the central driver of change throughout all of the phases of Haier‘s development, because he made sense of the competing forces facing the company and implemented particular change management strategies during each critical phase in Haier‘s development. While strong and stable leadership clearly benefited Haier throughout the period under consideration, the problem of leadership succession will be a challenge facing the company in the near future and hence, is a particular weakness the company will be forced to address.

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9.2 The Key Findings across the Four Phases of Haier’s Development

This thesis started with an analysis of the economic and industrial context in China both before and after the introduction of the Open Door Policy in 1978. Haier‘s development follows the opening up of the Chinese economy after the 1970s. Following the introduction of the Open Door Policy, as outlined in Chapter Three, China began the transition from a central command economy to a marketwise economy, referred to as market socialism. The key policy changes included the Open Door Policy from 1978 to

1992, the establishment of a socialist market economy after 1992 and China‘s entry into the WTO in 2001. These changes created China‘s unique economic and industrial context, which played a strong influence throughout the development of Haier, as examined in chapters Five to Eight.

Meanwhile, Zhang Ruimin inherited a faltering factory in 1984 and turned Haier around. Chapter Four examined the role he played in changing the factory. Based on

House‘s (1977) definition of charismatic leaders, Zhang Ruimin emerged as a charismatic leader and became the key change agent over the following years. However, by drawing on Dunphy and Stace‘s (2001) contingency model of leadership and organisational change, it is possible to extend House‘s framework and discern how Zhang Ruimin actually demonstrated a range of leadership styles, depending upon the context. While he was certainly a charismatic leader when he used his personal charisma and role modelling to affect his followers, such as implementing the 13 rules and smashing the defective refrigerators, he was also a coach when he interacted with employees from lower levels in the organisation in order to gain their commitment, such as buying fish for the employees, sending dumplings to the construction site and hiring external consultants for the BPR program in 2007. Zhang Ruimin was also a captain when he established his vision for his followers and focused on the tasks, such as constructing the Haier industrial park and

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implementing the ―going out‖ strategy. He demonstrated the role of commander when implementing the BPR programs and drove through this change program in the face of employee inertia. Sometimes these roles merged with one other and occurred simultaneously. But Zhang Ruimin‘s presence at the helm of the company was a constant feature of the development of the company from 1984 to 2013.

Haier‘s development can be divided into four phases, as outlined in chapters Five to Eight: the Brand Building Phase; the Diversification Development Phase; the

Internationalisation Phase; and the Global Brand Building Phase. Each phase was accompanied by leadership, organisational changes and management innovations, as summarised in Table 9:

Table 9: Haier's four development phases and management changes

Development Brand Diversification Internationalisatio Global Brand Phases Building Phase Development n Phase (1998- Building Strategy (1984-1991) Phase (1991- 2005) Phase (2005- 1998) 2013) Management Total Quality OEC BPR based on BPR based on Approaches Management Management market chain informatisation (TQM) O:overall SBU Integrating order E: every(one day Management with personnel thing) (Strategic T mode C: control, clear business units) ZZJJT Leadership Charismatic Captain Commander Coach Style Coach

The period from 1984 to 1991 was Haier‘s Brand Building Phase and the organisation implemented Total Quality Management (TQM) to improve the quality of its management processes. During this period, Haier developed from a nearly bankrupt factory into one of China‘s top-brand refrigerator producers. Stimulated by government

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policies which supported light industry, production lines became more commonplace in the Chinese home appliance industry and the problem of overproduction began to emerge.

However, the trend of ever-expanding production did not affect Haier because of its focus on quality control under Zhang Ruimin, who was appointed to the position of director in

1984. He demonstrated a charismatic and coaching leadership style in this phase, which enabled him to save the factory, make sense of the changing policy context and act as the agent of change by introducing TQM into Haier in a top down fashion.

The second phase of Haier‘s development, the diversification phase, was from

1991 to 1998. During this period, as discussed in Chapter Six, Haier evolved from a single-product company into a manufacturer with multiple product lines and expanded its brand to include both white goods as well as brown goods. The management approach

Haier adopted in this period was called OEC management, which stood for ―overall, every control and clear‖: overall as in all dimensions, every as everyone, everyday and everything and control and clear, as in keeping things in control and clear (Liu, 2005:109).

It was a unique concept brought about by Zhang Ruimin, whereby every employee completed their responsibilities and improved their work day by day. Zhang Ruimin played the role of a captain during this period by creating a vision for employees and focusing on the tasks to be finished. The key feature of the management of change in this period was Haier‘s expansion through diversification. Government policy played an important role in supporting Haier‘s merger and acquisitions (M&A), while the leader still remained critical in this phase of changing market and policy contexts. The key factors driving the management of change in this period was the interaction between policy support and the leader, which enabled Haier to expand through merging with 18 other companies.

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The period from 1998 to 2005 was Haier‘s Internationalisation Phase. Haier adopted an internationalisation strategy by building factories in other countries, including the USA. With the expansion of the company‘s scale and business scope, some problems of low efficiency began to emerge, referred to as ―company obesity‖. To solve these problems, Zhang Ruimin introduced Business Process Reengineering (BPR). The influence of international consultants was a key factor in the adoption of this change process. The management system Zhang Ruimin proposed was the creation of strategic business units (SBU), which were based on OEC, whereby employees were incorporated into the market chain. Haier‘s structure was redesigned from a functional structure to a process-based structure, to enable the company to overcome the dangers posed by

―company obesity‖. Although the leader was still critical in making the strategic decisions for radical change, which conforms to the role of a commander in Dunphy and Stace‘s

(2001) model, the influence of management fashions played a significant role in the adoption of BPR. Haier paid for advice from external experts and consultants.

Management fashions influence the adoption of certain management practices through training and education and this process was termed a normative mechanism

(Thornton and Ocasio, 1999, Newell et al., 2001, Abrahamson, 1996). The influence of consultants in this period confirms the literature on the normative mechanism for the dissemination of management fads. Haier adopted the suggestion of Milton Kotler, head of a US consulting company Kotler Marketing Group, to implement BPR. Haier‘s most recent development phase was from 2005 to 2013. This period was referred to as the

Global Brand Building Phase, discussed in Chapter Eight, and this period was notable for the focus on constant change. Although Haier had been changing its management structure and systems since the 1980s, the changes between 2005 and 2013 intensified, with the major organisational changes conducted during this period referred to as the

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―1000 day process reengineering‖. Unlike the previous changes, Zhang Ruimin brought external consultants to work in the company under the ―1+1+N‖ model. During this period, his leadership style was more aligned with that of a coach according to Dunphy and Stace‘s (2001) model. On the one hand, the introduction of experts helped the corporation to identify underlying problems that were hindering its development. On the other hand, the experts‘ lack of familiarity with Haier‘s organisational culture caused conflicts between the experts and Haier‘s management. This gave rise to unsatisfactory outcomes following the implementation of BPR, resulting in the resignation of the experts and a major reshuffling of Haier‘s senior management.

Nevertheless, the BPR reform still achieved some successes in improving Haier‘s information and inventory systems. The management innovations during this period involved the development of on-demand production and delivery with zero inventory.

These organisational and management changes enabled Haier to weather the economic crisis in 2008 and to successfully maintain its fast pace of growth. The policy support from the Home Appliance to the Countryside Program was also a key factor that helped

Haier to maintain its sales levels during the economic downturn. As result of its reforms in the area of inventory and cash flow, Haier evolved into a global brand for home appliances by 2013.

9.3 The Role of Zhang Ruimin as the Key Change Agent

What role did leadership play in the management of change in Haier? Zhang Ruimin‘s leadership style conforms to the characteristics of a charismatic leader, with extremely high levels of self-confidence, and a strong conviction in the moral rightness of their beliefs (House, 1977:385). Theorists in leadership and sociology believe that charismatic leaders are better for non-routine situations, due to their capacity to bring about radical

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change by virtue of beliefs and values that are different from the established order (House,

1977, Bass, 1985, Eisenbach et al., 1999). Therefore, charismatic leaders tend to play the role of the change agent in bringing about radical changes within organisations. With regard to the case of Haier, it can be concluded that the leader, Zhang Ruimin, was the key agent who led organisational and management changes in response to environmental changes throughout the four phases of the company‘s development.

Zhang Ruimin also demonstrated a situational leadership style. For example, when he saved the factory from bankruptcy in 1984, this established his role as the firm‘s charismatic leader. Therefore, the subsequent changes in the company were all conducted under his orders. Zhang Ruimin was successful in foreseeing changes in the market and in the policy environment and in positioning the company to make adjustments to its production strategy before its competitors. In the Brand Building Phase, Zhang Ruimin foresaw the importance of quality and he issued and conducted strict internal quality controls. In the diversification phase, Zhang Ruimin saw an opportunity arising from

Deng Xiaoping‘s South Tour Talk and facilitated the construction of Haier Industry Park for the development of the firm‘s diversified businesses. At the same time, he also made the decision to export Haier‘s products. This decision enabled Haier to react to the market turnaround in the early 1990s, which protected Haier from domestic and foreign competitors.

Therefore, it can be discerned that the leader was the key change agent who directed the process of change within Haier throughout the 30 years of its development.

Zhang Ruimin‘s vision and foresight, as a charismatic leader and captain, enabled him to make decisions at critical points. This conclusion confirms Grint, Tourish and Barge‘s

(Grint, 2008; Tourish and Barge, 2010) view that leadership involves the leader making sense of the situation and taking corresponding action.

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Furthermore, Zhang Ruimin was also critical to Haier‘s success because of his ability to access resources for the company‘s development. According to resource dependent theories, organisations are dependent on external sources for the resources they need, including financial, physical and information resources (Pfeffer and Salancik, 2003;

Salancik and Pfeffer, 1989). Therefore, the success of a company not only relies on its internal management, but also on the resources it can acquire from outside. In the Chinese context, government allocation and support is an important source of resources. The

Qingdao Refrigerator General Factory was in serious debt before Zhang Ruimin was appointed director. The key to turning the fortunes of the factory around during this period was the production line it imported from Germany. Zhang Ruimin played a critical role in getting approval for the loan from the banks to purchase this production line.

In the Diversification Phase, the government allocated resources to public-owned enterprises for merger and acquisition (M&A). As outlined previously, Haier obtained 18 factories during this period, which was the key to its expansion and diversification.

However, the leader‘s reputation played an important role in helping the company get the resources for this expansion. Therefore, this study finds that that the role of the leader was critical to Haier‘s development, not only because he was able to direct internal management, but also because he was able to access external resources, which according to resource dependent theories (Pfeffer and Salancik, 2003), are essential to an organisations‘ development.

Due to its ownership structure, Haier‘s development reflected the characteristic of other

Chinese public-owned enterprises where government support and allocation played an important role in the company‘s‘ access to resources. This finding combines leadership theories (Barge and Fairhurst, 2008; Dunphy and Stace, 2001; Grint, 2008) and organisational theories in terms of resource dependence (Pfeffer and Salancik, 2003), by

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examining the specificities of the case of Haier. Unlike Western companies, whose leadership can change frequently, leadership in Chinese public-owned corporations is relatively stable and consistent over a long period of time, three decades in the case of

Haier.

9.4 The Influence of Policy Changes

How did government policy changes influence the development of Haier? Institutional theory (Scott, 2000; Thornton and Ocasio, 2008; Thornton and Ocasio, 1999) shares common views with resource dependence theory (Pfeffer and Salancik, 2003) regarding the emphasis on the social environment. Both resource dependence theory and institutional theory assume that the environment imposes constraints on organisations, which affects their structure and internal management practices. Institutional theory also emphasises the role of social rules and norms in forming environmental pressures that organisations conform to (Meyer and Rowan, 1977; Thornton and Ocasio, 1999). In addition, government policies also belong to the category of social rules and norms. In the case of China, however, the key changes in government policy between 1984 and 2013, which shifted China from a central command to a market economy, formed the institutional environment in which Haier as a corporation operated during the period under consideration. Therefore, it can be argued that, in the case of China, institutional theory can be used to explain government policy, particularly industrial and trade policies, as key elements of the shifting institutional environment.

Haier‘s development phases align with the opening up of China, starting with the

Open Door Policy in the early 1980s, the further opening up of the economy in 1992 and

China‘s entry into the World Trade Organisation (WTO) in 2001. In each of Haier‘s four development phases, government policies had a significant influence on the

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organisation‘s success. Firstly, the situation of the Qingdao Refrigerator General Factory was turned around following the importation of a German production line. Equally important was the supporting government policy that encouraged the importation of production lines.

During the diversification phase from 1991 to 1998, the Chinese government further opened up of the economy and established what it referred to as a ―socialist market economy‖. During this time, a round of public-owned enterprise reforms was conducted whereby mergers of poorly managed public-owned enterprises were encouraged by the government. With the support from the government, Haier was able to acquire 18 companies with little cost, which was the key to its success in this period.

The third key policy that affected Haier‘s development was the aftermath of the

Global Financial Crisis (GFC). After the 2008 financial crisis, a worldwide economic slide began to spread, which seriously influenced export-oriented industries, like the home appliance industry by shrinking external and domestic demand. In order to stimulate consumption in rural areas and expand domestic demand, the Ministry of

Finance and the Ministry of Commerce introduced a home appliance subsidy program for rural areas under the instruction of the State Council, called The Home Appliance to the

Countryside Program. Under this program, the government offered a 13 per cent subsidy to rural residents who purchased home appliance products, including TV sets, refrigerators and cell phones. Benefiting from its brand reputation, Haier won the bid to become a producer for the program and expanding its sales to rural markets. Owing to the sales from The Home Appliance to the Countryside Program, Haier managed to overcome the downturn of the home appliance market caused by the Global Financial Crisis and retained a high rate of sales and profits.

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As indicated above, government policy created the social and industrial environment for the company‘s development. Zhang Ruimin had his own understanding on the interaction between policy changes and the company‘s strategy: