Perspectives for Managers

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PERSPECTIVES FOR MANAGERS www.imd.org/pfm

LEADING CHINESE COMPANIES ON TO THE INTERNATIONAL STAGE

No. 191 November 2015

Introduction developing a circuit board that would allow IBM- compatible personal computers to process Chinese The Boston Consulting Group (BCG) announces characters. This product was Lenovo’s first major each year a list of 100 companies that it believes are success. Lenovo also tried and failed to market a global contenders to watch. Not surprisingly, nearly digital watch. The company’s founder Liu Chuanzhi a third of these companies are from China. We were is said to have remarked, “Our management team curious to learn how their leaders prepared these often differed on which commercial road to travel… companies to compete on the international stage. We just learned by trial-and-error, which was very We study five of them here – Huawei, Lenovo, interesting – but also very dangerous.”2 Lenovo Haier, Alibaba and Tencent – covering a diverse jumped to prominence much later through several set of industries. The first three have truly global high-profile acquisitions – IBM’s PC business, IBM’s ambitions; the other two have a more regional server business and Motorola’s handset business. focus. All five have achieved tremendous success Ren Zhengfei of Huawei also built his company step- under their respective founders:1 Ren Zhengfei, Liu by-step. He promoted the wolf culture within Huawei, Bala Chakravarthy Chuanzhi, Zhang Ruimin, Ma Yun (Jack Ma) and reasoning that it was important at first to steal food IMD Professor of Strategy and International Management Ma Huateng (a description of the five companies from the tigers. Jack Ma of Alibaba shunned grand and their leaders is provided on page 4). theories and concepts, betting instead on down- to-earth execution – opportunistically adding new A strategy of continuous renewal layers to Alibaba’s business model. Will this approach succeed when battling strong competitors on the global stage? We believe the Logical incrementalism answer is yes. What will be needed to win in a VUCA All five leaders had a clear sense of where they (Volatile, Uncertain, Complex and Ambiguous) world wanted to lead their companies but theirs was is more than a far-sighted vision, the agility to flow not a grand vision, rather a sequence of goals quickly as opportunities emerge – experimenting that were dynamically reset at each stage of the frequently, promptly divesting failed ideas and company’s journey as the environment around it rapidly scaling up investments in successful ones. changed and more opportunities opened up. Logical incrementalism is a winning approach. It Instead of taking undue risks in the early years, would be good, though, to have a more proactive David Yau these leaders identified niches where they could vision to guide these experiments. Alibaba and Independent Consultant get established and grow far from the glare of Haier appear to have such a vision. MNC competitors. Ma Huateng benefited from the Chinese government ban on Facebook and Twitter Building the base competencies in launching WeChat. Haier and Huawei both established their strengths in rural markets before An important prerequisite to being an agile company taking on foreign competitors in urban markets. is to develop new competencies continuously, often Ren Zhengfei of Huawei put it succinctly when he in anticipation of the competition of tomorrow. The oft said: “When trying to capture a city, first capture told story of Haier is informative in this regard. When the countryside.” In building their companies, these Zhang Ruimin took charge of Haier, he recognized leaders were willing to experiment, allowing strategy that the company needed to build international quality to emerge rather than enforcing it with a grand plan. standards, rather than just aiming to be better than Lenovo exemplifies this approach best. When the local competitors. When a customer brought back a company’s first business goal of importing televisions faulty refrigerator, Zhang looked for a replacement failed, it redirected its efforts at conducting quality in the entire inventory of 400 refrigerators. He was checks on computers for new buyers. It then started shocked to find that nearly 20% of the stock was

defective. He lined up the 76 dud refrigerators took its cues from Amazon; Tencent from on the factory floor, distributed sledgehammers WhatsApp, Twitter and Facebook; Huawei from to his employees and invited them to destroy the Ericsson and Cisco; Haier from its German partner refrigerators. The cost of a refrigerator at that time Liebherr; and Lenovo through its acquisition of was two years’ worth of wages for the employee. IBM’s laptop business. However, sustained success Seeing the employees hesitate, Zhang reminded on the international stage calls for innovation. All them: “If we don’t destroy these refrigerators five leaders have shown interest in building an today, what is to be shattered by the market in organization that can nurture innovation. the future will be this enterprise!”3 Zhang steered Zhang Ruimin has done a lot to promote Haier to international quality and a differentiated innovation at Haier. He formally introduced ZZJYT and branded product strategy, important platforms (Zi Zhu Jing Ying Ti, meaning self-organizing when competing with international rivals. Huawei and autonomous operating unit) in 2007 to the and Haier have also ensured that their products are Haier organization. ZZJYT is a nine- to thirty- made to international quality standards, even for the person small, self-managed organizational unit domestic market. These companies realized early that encourages innovation and speedy decision on that short-changing quality was not the best way making. There are three vertical levels of ZZJYTs. What will be needed to to reduce costs; that had to be accomplished by The first consists of manufacturing, marketing win in a VUCA (Volatile, trimming unwanted features throughout the value and R&D functions that face customers. The Uncertain, Complex and chain – value innovation. second level comprises a number of platforms Ambiguous) world is more Another base competence that all of these firms that support the first one, including specialized than a far-sighted vision, invested in early on was customer centricity. The R&D, human resources and finance. The third the agility to flow quickly above story about Haier illustrates the company’s is the executive level, which identifies and as opportunities emerge – early focus on the customer. Ma Huateng spent formulates strategies. The whole organization is experimenting frequently, hours personally testing how his company’s inverted, with the first level ZZJYTs being Haier’s promptly divesting offerings would be seen by users. Simulating point of contact with its external environment. failed ideas and rapidly user experience allowed Tencent to make speedy Alibaba, too, restructured its operations in 2013, scaling up investments in adjustments to its product offerings. Ren Zhengfei breaking the company down into 25 smaller units successful ones. Logical of Huawei focused hard on building customer to improve the focus of each unit and build an incrementalism is a service as a key competence of the company, innovation ecosystem inside the company. winning approach. a differentiator usually reserved for high-price Lenovo restructured its organization in 2012 solutions, not at the price points at which Huawei to force R&D teams to face end-users directly. Its competed. Huawei took great pride in servicing its innovation teams were granted greater autonomy. products even under adverse circumstances, like In a break with tradition, the company chose in the aftermath of the Fukushima nuclear disaster, not to pre-install new software on its PCs. For the earthquake in Chile or civil war in Syria. example, SHAREit is a free app that enables file Quality, service and customer centricity are transfer among smartphones, tablets and personal the base competencies needed to win against computers, even across different operating global competition. The focus on creating the systems, 40 to 50 times faster than with Bluetooth. best value on offer for the price charged is a Only available via app stores, it allows faster user winning approach in most markets. But as these feedback, and products that have low demand will companies grow their international footprint, they be killed quickly. will have to add new competencies, especially to Recognizing that innovation needs corporate serve more sophisticated high-end customers. sponsorship but also distance from corporate headquarters, Tencent did not place the WeChat Building the organizational team under either the Mobile Internet Group (MIG) Quality, service and or the Social Network Group (SNG) but rather under customer centricity are foundations the Corporate Development Group (CDG). WeChat the base competencies The five leaders should be commended for their is a mobile text and voice messaging communication needed to win against approach to strategy – logical incrementalism and a service released in 2011, with features that global competition. The focus on building base competencies. While these resemble WhatsApp, Twitter and Facebook. This focus on creating the may need some tweaking as noted earlier, what best value on offer for organizational arrangement released the pressure the price charged is a is likely to hold some of these companies back is on the WeChat project to produce immediate winning approach in most their failure to build a supporting organization. financial returns. In addition, the WeChat project was markets. moved from Tencent’s headquarters in Shenzhen to Transitioning from imitation to nurturing innovation Guangzhou, 1.5 hours away by train. There is also a growing appetite for external All five companies benefited early in their collaboration to drive innovation. Haier officially development from imitating the ideas and launched in June 2014 the Haier Open Partnership capabilities of their Western competitors. Alibaba Ecosystem (HOPE) to promote open innovation.

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Ren Zhengfei of Huawei was keen to build the Leadership continuity technology capabilities of the company, spending Leadership continuity is important to the long-term 10% of the company’s revenues on R&D. The success of a company. Yet, great leaders find it company has filed more than 50,000 patents and hard to develop equally worthy successors. Ma became the first Chinese company on Thomson Huateng is the youngest of the five leaders we Reuter’s Top 100 Global Innovators List in studied; and succession is not a pressing issue as 2014. Huawei has joint innovation centers with yet at Tencent. But it is for the others. Here, Lenovo customers and partnerships with universities and and Alibaba are ahead of the pack. Lenovo has research institutes to collaborate on breakthrough already witnessed leadership transition from Liu innovations. to Yang Yuanqing. Yang took over as CEO when The challenge now is to persist with these Liu retired in 2001 and has been a key architect of organizational experiments and to expand the the company’s strategy since, including for the IBM firm’s commitment to innovation. R&D does not acquisition. Jack Ma of Alibaba transferred the CEO always deliver quick financial results. Patience is role in 2013 to Jonathan Lu. In May 2015 Alibaba required. The challenge now announced that the post-70 generation will now is to persist with command the troops. Daniel Zhang, born in 1972, these organizational Internationalizing the company is the company’s new CEO. Haier and Huawei have experiments and to struggled with top management succession. In both expand the firm’s This has been a struggle for the companies studied, companies an internal horse race is on to find the commitment to with the sole exception of Lenovo, which benefited next CEO but this has yet to yield a result. Given innovation. R&D does from the two acquisitions that it made from IBM their international growth ambitions, perhaps the not always deliver quick and Motorola. These have helped the company’s successor should come from outside. Regardless financial results. Patience is required. internationalization efforts. The company has two of whether it is an insider or outsider, these two headquarters, one in Morrisville, North Carolina in companies need leadership transition soon. the US and the other in Beijing, China. It also uses English as the company language. Lenovo’s new From paranoia to self-confidence CEO, Yang Yuanqing, did not understand English well when he took over. He relocated his family to There is a story about Ren Zhengfei of Huawei Morrisville in order to improve his language skills that captures the essence of the humble style and to soak up the American culture. Yang has that we see in the five leaders. The thousand- since sent many Lenovo executives to the US for hand Bodhisattva dance was performed at the long postings, essentially for the same purpose. 2005 CCTV Spring Festival Gala by 21 hearing- It is better to cannibalize Lenovo also has several non-Chinese on its top impaired girls and boys from the China Disabled one’s business than management team. People’s Performing Art Troupe. Ren was reported have it destroyed by a Alibaba did hire a number of high-profile western to have been moved by that performance and saw competitor. executives before its IPO, but at its core it remains in it the ideal culture for Huawei: a Chinese company as does Tencent. Both Haier and Huawei have senior non-Chinese managers 1. Work for professional pride and not for the who run international operations, but their core applause from the audience. The dancers senior leadership team is still very Chinese. Opacity could not even hear it. of the holding structures of the two companies 2. Do not let any handicap detract from a high- makes it difficult for them to attract top international quality performance. talent with stock based compensation. But both 3. Find ways to collaborate even when there are have major business operations outside of China, problems communicating. including important R&D facilities. Leveraging The handicapped dancers are, in a broader sense, the capabilities and business insights that these a metaphor for all five companies. Despite their operations offer will call for a more inclusive and Leadership continuity is handicaps they can win on the global stage if their important to the long-term empowering organizational arrangement. employees and leaders can remain humble and success of a company. professional and help each other improve every Yet, great leaders find it Leadership and organizational culture single day. hard to develop equally The five leaders were also paranoid about worthy successors. The biggest challenge for the five companies, success being fleeting. Jack Ma captured it thus: “It especially the three with global ambitions – is cruel today. It will be even crueler tomorrow. But Huawei, Haier and Lenovo – is to ensure leadership it will be nice the day after tomorrow. Most people continuity and to develop an organizational culture will die by tomorrow night.”4 Ren Zhengfei and Ma that is more in keeping with their new-found Huateng also talked about “failure” and danger a industry leader status. lot more than “success” and superiority. Survival

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and success could not be taken for granted; they had to be earned leader. Or, as ardent kung fu fan Jack Ma6 would say, a real kung fu every day. Zhang of Haier believed that companies had to reinvent master must be capable of defeating his enemies without showing any themselves continuously, creating new demand and new clients and “concrete” weapons. making complex things simple. He was quoted as having said, “If you kill yourself, you can be reborn. If others kill you, you will be replaced Conclusion permanently.”5 It is better to cannibalize one’s business than have it destroyed by a competitor. The five companies and their leaders that we studied give us a glimpse Humility and a commitment to learn are wonderful values, of how Chinese companies will perform on a sustained basis on the but instilling these across the international operations of the five global stage. While their strategies may have advanced to v. 3.0, companies can be a challenge. Moreover, the driver for humility has some of their organizations are still at v. 2.0, and in a few cases their to transcend paranoia to the silent self-confidence of an industry leadership is stuck at v. 1.0 – making it difficult to sustain success.

References 1 Zhang was not the founder. He was appointed managing director in 1984 of a bankrupt state-owned enterprise with a weak portfolio of products, and he built it into what is known today as Haier. 2 A. R. Gold, G. Leibowitz and A. Perkins. “A computer legend in the making.” McKinsey Quarterly, Vol. 3, 2001. 3 Wang Yantian and Xuechun Song. “Haier rises through reform and opening up.” en.people.cn, 8 Aug. 2001 (accessed 2 Nov. 2015). 4 Ma Yun. “ 马云清华经管学院 2014 毕业典礼演讲全文 .” sem.tsinghua.edu.cn, 30 Jun. 2014 (accessed 2 Nov. 2015). 5 Ai Feng. “ 海尔张瑞敏：自杀重生他杀淘汰自以为非如履薄冰 yuqingcn.cn,.” 12 Jun. 2014 (accessed 2 Nov. 2015). 6 Wang Ruibin and Cao Kez. “How will Jack achieve a greater Alibaba?” daonong.com, 9 Sep. 2014 (accessed 2 Nov. 2015).

Company Alibaba Group Tencent Holdings Lenovo Group Limited Huawei Technologies The Haier Group Holding Limited Limited Co., Ltd General description An online and Tencent and its A personal technology A networking and A manufacturer and of the company mobile commerce subsidiaries are company. It produces telecommunications distributer of household company in retail principally engaged commercial and equipment and appliances, consumer and wholesale trade, in the provision of consumer PCs, as well services company electronics and mobile as well as in cloud Internet and mobile as servers, workstations that offers a variety of phones domestically and computing and other value-added services and a family of mobile network technologies in most major overseas services. (VAS), online Internet devices, and solutions to markets. Founded by Jack Ma advertising services including tablets and telecommunications Haier has its roots in in 1999 in Hangzhou and e-commerce smartphones. operators. It also Qingdao Refrigerator Co transactions services. Liu Chuanzhi founded provides white-label founded in 1920s. Zhang Founded by Ma the Legend Group in products including USB Ruimin took over as its Huateng in 1998 in 1984 with 10 other and wireless modems, Managing Director in Shenzhen engineers from the and wireless routers. 1984. The company was Chinese Academy of Founded by Ren bankrupt at that time and Sciences. Zhengfei in 1987 in had poor quality products. The company was Shenzhen In 1991 the company renamed Lenovo in adopted a new name, 2003, combining Le Qingdao Haier Group, (from Legend) and novo borrowing from the name for new of its German partner – Liebherr. This was further simplified in 1992 to Haier Group Distinction China’s largest with China’s largest and Global leader in the PC Global leader in ICT World’s #1 major a growing regional most used Internet industry solutions. appliance brand as presence. Biggest service portal with 1st Chinese company on ranked by Euromonitor IPO on New York growing regional Thomson Reuters Top International 2014, and a Stock Exchange presence 100 Global Innovators global leader in consumer List in 2014 electronics 2014 8.6 / 27.5% 12.8 / 31.7% 38.7 / 23.4% 46.9 / NA 33.0 / 26% Revenues $B / ROE Employees 34,985 27,928 54,000 150,000 70,000 Leader MA Yun - Founder MA Huateng - LIU Chuanzhi REN Zhengfei ZHANG Ruimin and Chairman Founder, Chairman Founder Founder Chairman and CEO and CEO Age 51 44 71 71 66 Born Sep. 1964 Oct. 1971 Apr. 1944 Oct. 1944 Jan. 1949 Background Failed in middle Went to the best high- Both grandfathers were Parents were school Father was a tailor and school, failed school in Shenzen; finance professionals; principals; former mother a factory worker; university entrance Graduated from father was a senior engineer in the People’s rose up from the ranks of exam 3 times, Shenzen University executive in Bank of Liberation Army (PLA) a factory worker rejected 10 times by China and then an IP Harvard University lawyer

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