Case study of Haier: cultural diversity, foreign market entry mode selection and technological innovation

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Executive summary

 

In this study we have chosen Haier, one of the most successful Chinese brands that specialize in the domestic appliance sector, and the analysis will be unfolded along three major fields: diversity, globalization and rapid change. And also in order to provide an in-depth understanding of the issue, we have picked up three topics in the three fields: cultural diversity (cultural shocks), foreign market entry mode selection and technological innovation and these three problems have all been experienced by Haier during its development history and even still have not been resolved perfectly by the Haier people. And at the end of the study there are some recommendations given to offer some alternatives about how Haier could handle the problems in the new business environment.

List of figures, charts & tables

Chart 1 The R&D expenditure of Haier Group from 1997 to 2005…………………. 7

Figure 1 Foreign market entry mode choices………………………………………………… 5

Figure 2 Factors that influence the selection of foreign market entry mode……… 6

Figure 3 Haier’s three-door refrigerator that won Germany’s IF Design Award. 12

Content page

Executive summary………………………………………………………………………………………….. 1

List of figures, charts & tables…………………………………………………………………………… 2

Case study: The Global Haier……………………………………………………………………………. 4

  1. Background of Haier…………………………………………………………………………………. 4
  2. Culture diversity……………………………………………………………………………………….. 4

2.1      Relative theories………………………………………………………………………………. 4

2.2      Case study………………………………………………………………………………………. 5

  1. Haier’s globalization through FDI……………………………………………………………….. 6

3.1      Relative theories: foreign market entry mode selection…………………………. 6

3.1.1     Foreign market entry options……………………………………………………. 6

3.1.2     Factors that influencing the selection of foreign market entry mode 7

3.2      Case study- Haier’s “crack the hardest first” strategy…………………………… 8

3.2.1     Less significance of the high labor cost……………………………………… 9

3.2.2     Span of control and business consistency…………………………………… 9

3.2.3     Prompt response to the market demand……………………………………… 9

3.2.4     Access to advanced technology and avoid non-trade barriers…….. 10

  1. Technological innovation………………………………………………………………………….. 10

4.1      Relative theories…………………………………………………………………………….. 10

4.2      Case study…………………………………………………………………………………….. 11

4.2.1     External technology acquisition through license contract production, strategic alliance & joint venture…………………………………………………………………………………………… 12

4.2.2     Joint R&D efforts and Haier’s own inventions…………………………. 13

  1. Concluding remarks…………………………………………………………………………………. 14
  2. Recommendations……………………………………………………………………………………. 15

6.1      Balance the exploration and exploitation…………………………………………… 15

6.2      Cultivate subcultures to increase internal harmony……………………………… 15

Reference……………………………………………………………………………………………………… 17

Case study: The Global Haier

 

1.        Background of Haier

 

Haier had its origin in 1955 starting from a group of people who formed a handicraft-producers’ cooperative. And it was renamed as “Qingdao Home Appliance Factory” and the major product was washing machine in 1979 and later in 1984 it was again renamed as “Qingdao General Refrigerator Factory” and switch to refrigerator business which it was famous for producing (Bell 2008, p.159). Since then, following the reform and opening up policy and supported by the local government together with its continual innovation strategy and being adaptive to the market demand, Haier’s has become the world’s second largest white good brand and by 2007 Haier owned 64 trading companies, 29 manufacturing plants, 8 design centers and 16 industrial parks worldwide (Haiereurope.com 2009).

 

2.        Culture diversity

 

2.1    Relative theories

 

The term culture diversity in the company refers to the presence within one organization of a number of different cultural dimensions: linguistic, creedal, racial, etc (Lynch, Modgil & Modgil 1992, p.8). Culture diversity could cause a number of problems when managers and staffs over generalize organizational practices and processes from one culture to dissimilar countries and cultures and try to reach a single agreement (formal or informal) within a culturally diverse group (Adler & Gundersen 2008, p.103). Frequent problems include company political conflicts, resistance to changes and increased complexity and difficulty of developing company-wide policies and procedures. Though cultural diversity in the companies could represent a challenge, but if well dealt with it could present an opportunity rather than a restriction. The major benefits that a well managed cultural diversity could represent include cost saving, resource acquisition, marketing edge, business flexibility, creativity, problem solving and bilingual skills (Pride, Hughes & Kapoor 2008, p.254). Take the marketing edge as an example, with insightful and cultural sensitivity that members with roots in other countries enable companies to catch the marketing opportunity which represents the future market.

 

2.2    Case study

 

Haier as a Chinese firm, though it officially announced itself as a collectively owned enterprise rather than a state owned company, its history of development had can’t be complete without the involvement of the continual government support (Tipton 2007, p.208). By understanding the development background of Haier, it is more reasonable to apprehend the fact that Haier would have a rather autocratic management style and which was reported to be “something of a culture shock” to the American workers and what’s more what made a real cultural shock was the fact that the Chinese were surprised at the American’s surprise (Yi & Ye 2003, p.222). As one of the factory president commented, in China employees are expected to follow the decision made by the leaders but in the US staffs will respond with questions and recommendations. On the other hand, another sign of cultural differences come from the employee relationship as Haier had introduced the family concepts into the global business which is a rather collective focus culture and it has closed relationship with its long history as being a collective owned enterprise but in the US it well known that the individualism is prevailing.

 

To deal with the cultural difference Haier has adopted two major ways to avoid the cultural shock which can be costly to any firm since it often results in the premature return of businesspeople working overseas (Chaney & Martin 2003, p.285). Firstly, Haier encourages learning from each other with respect to the local culture. On one hand the concept of family has been widely promoted in its US manufacturing center and also in the “some of the two-way management style” has also been taken back to China” in order for employees from two different cultures to understand the core value and nature behind their business behaviors which could not be easily understood by the other party at the beginning. And secondly, the running a local company by the local way is used as a strategy by the management of Haier to deal with the cultural differences by showing respect the distinctive culture in the US factory (Ichinamag.com 2009).

 

3.        Haier’s globalization through FDI

 

3.1    Relative theories: foreign market entry mode selection

 

3.1.1            Foreign market entry options

 

An entry mode is “an institutional arrangement through which the entry of a firm’s products, technology, human skills, management or other resources into a foreign market is made possible (Root 1987). Hill (2005) concluded six major entry modes that a firm could use to enter a foreign market which include: exporting, turnkey projects, licensing, franchising, joint ventures and strategic alliance or setting up a wholly-owned subsidiary. Hollensen (2007) classified these major entry modes into three major types which are export, contractual and FDI (Foreign Direct Investment) and also ranked them in three major dimensions (Resource commitment, control and risks) as seen from the figure below.

Figure 1 Foreign market entry mode choices

Source: Hollensen 2007

 

It is important to select a suitable foreign market entry mode because an inappropriate entry mode may block opportunities and substantially limit the range of strategic options open to the firm (Ekeledge & Sivakumar 2004). Below we will check the factors that determinate the major criteria in the process of the selection of foreign market entry mode.

 

3.1.2            Factors that influencing the selection of foreign market entry mode

 

There are different advantages and disadvantages of using each entry mode in different particular foreign market entry practice within which a number of factors need to be taken into consideration.

Figure 2 Factors that influence the selection of foreign market entry mode

Source: Hollensen 2007, p.298

 

As seen from the figure above and also with the help of the previous figure, we can see that there are 10 major factors that could lead to the increase of the trend of internalization which will prefer a FDI entry mode; these factors are transaction costs, tacit nature of know-how, control, firm size, international experience and so on. And two most obvious driving factors to turn to a FDI entry mode are resource commitment and the provision of control as Domke-Damonte and Levsen (2002) suggested that “Foreign Direct Investment (FDI) (joint ventures, acquisitions, mergers, and new, wholly owned subsidiaries) with substantial equity participation provide the most control.

 

3.2    Case study- Haier’s “crack the hardest first” strategy

 

As Haier’ top management realized that Haier could not add more value to the assembled products and the company could find a way out by creating its own R&D capacity and sales force (Zhang 2006, p.61). So that FDI was chosen as one of the priority options in Haier’s globalization strategy and the most representative event was in April of 1999 when Haier initiated a project to build its US manufacturing center in South Carolina with the industrial park taking up to the area of 445,000 square meters that could achieve the production capacity of 500,000 refrigerators annually. It is believed that four actual reasons that jointly determined the decision to set up a manufacturing base in the US rather than exporting from the “low cost” countries where most of its manufacturing centers were located.

 

3.2.1            Less significance of the high labor cost

 

In a traditionally understanding that the largest competitiveness that Chinese products have is the low price derived from low production cost, and this also the most frequent reason why people would doubt the necessity to build up an oversea manufacturing center in a developed countries like the United States. Two factors that contribute to the less important of the high labor cost in the United States: 80 percent of Haier’s total cost was the cost of purchasing from an outsider and availability of Haier’s international network which allowed the direct purchase of the major components from China and other developing countries and thus reduced the significance of the high labor cost in the US production (Zhang 2006, p.61).

 

3.2.2            Span of control and business consistency

As mentioned above, upmost control over the new market could be obtained through the FDI which is an equity entry method compared to other entry options, the decision of focusing on the control over the new business, the new subsidiary could play a critical role in the group’s strategic consideration and also it could help keep a high degree of business consistency in the foreign market.

 

3.2.3            Prompt response to the market demand

 

One major advantage of manufacturing FDI which involves the establishing of a new manufacturing plant in the foreign market is that it will enable the company to tap the market demand in the market provide customer service there (Organization for Economic Co-operation and Development 2007, p.26). And the establishment of the manufacturing plant in the US enables Haier to meet with the consumer habits and market demand in a prompt manner which helps create leadership advantage.

 

3.2.4            Access to advanced technology and avoid non-trade barriers

 

On one hand, by setting up the US based manufacturing center, Haier was not only enabled to get access to the market information more easily and promptly it could better obtain the access to the advanced technology and enjoy the technology spillover effect better. And on the other hand, the localized production could help Haier to avoid increasingly eminent non-trade barriers such as restriction from the high technical standard by locating the production in the US market and exposed itself to the stricter environmental regulation and safety standard. This strategy greatly helps Haier to avoid the similar non-trade barriers which are more common after China’s entry into the WTO (Zhang 2006, p.62).

 

4.        Technological innovation

 

4.1    Relative theories

 

Technological change is an increase in knowledge measured as an increase in output for a given quantity of inputs or it will decrease the inputs required to produce a given amount of output (Hartmann, Kraut & Tilly 1987, p.188). Technological changes and innovation to the whole society may be very beneficial but to a single business unit, technological changes represent both incentives and constraints. According to Coombs, Saviotti and Walsh (1987, p.49) part of these incentives and constraints are from the company’s nature and characteristics which derive from its past development history and some are from the external technical and economic factors. As we know changes could be classified into radical innovation and incremental changes and accordingly technological innovation could also be differentiated into radical innovation and incremental innovation. As proposed by Herzog (2011, p.48) that companies that focus only on radical innovation would be prone to failure due to the chance to get the return of the innovative efforts are low and on the other hand those solely rely on the incremental innovation would not be sustainable as well because external technological changes may render the current technologies as out of date. What’s more technological change could also have its influence over the labor demand. It is generally believed that it will change the demand and configuration of certain inputs such as labor. For example, with the development of the mass production technologies with the various new machines and production procedure, in many industries there is a decreasing demand for labor in term of total numbers but the demand for talents and skilled workers together with the development of the new technology will increase.

 

4.2    Case study

 

While technological innovation is a core aspect of the competitive advantages to most industries especially the industrial leaders, it is also crucial in the domestic appliance sector where innovative breakthroughs are rare (Liu 2005, p.177). And because of the important of the innovative technologies in maintaining the core competitiveness but these technologies tend to be under control by the MNCs (multinational corporations) in the developed countries, it was used to believed by the Chinese domestic appliance manufacturing companies that it was extreme difficult to close the technological gap by imitation and subcontracting services which they used to focus on. To build up its own core business competitiveness there are two major methods that Haier used to help bring about a number of major radical and incremental changes to the industry in its road toward a global brand that it is today: external acquisition of technology and self innovation.

 

4.2.1            External technology acquisition through license contract production, strategic alliance & joint venture

 

At the last century, the major source of advanced technology was from external in term of the construction of strategic alliance, license contracting with technology transfer agreements and direct buyout of the advanced technology. One of the most successful examples in Chinese firms to integrate the leading industrial technology happened in Haier in 1984 when it decided to go into a seven-year license contract with German appliance maker Liebherr to shift its business into the more profitable refrigerator manufacturing. While Haier obtained the advanced refrigerator manufacturing technology and equipments, it also introduced German DIN standard and ISO standard and the number of these standard totaled 1942 (Sun 2009). The successful integration of the German technology through the license production and technology transfer agreement and contribution to the domestic refrigerator manufacturing standard enactment, as early as in the 1980s Haier had paved its way toward the No.1 in the refrigerator sector in the domestic appliance industry in China especially in the standard enactment contribution which brought long term advantage to Haier as the industrial leader. What’s more because of the lack of homegrown R&D in the earlier time and the large gap between the domestic R&D level and the international average R&D level (Liu 2005, p.118), another source of obtaining advanced technology was through the building of strategic alliance and joint venture establishment. In 1996, it set up a joint venture with a Japanese design company to keep abreast of the new international trends at that time and in 2002, Haier set up multinational cooperation relationship with international rivals such as Sanyo and SAMPO which proved to be a win-win decision (Fernández & Stembridge 2007, p.22). What was quoted from Zhang (CEO of Haier) best described this strategy:

 

4.2.2            Joint R&D efforts and Haier’s own inventions

 

Entering into the new century, as commented by the CEO of Haier Group, Zhang Ruimin, that Haier could only keep its competitiveness against the MNCs’ superior technology by higher speed in product development and a quicker innovation-to-market time. And this seems to be the well known secret of Haier’s business philosophy that leads to its current success. The first strategy used by Haier to speed up the technology innovation was the joint R&D efforts through building up close tie with the research institutions by the forms of cooperative projects. It is said that in the beginning of the new century, Haier had invested jointly with 120 domestic universities and relative research institutions to develop the joint R&D plans.

Chart 1. The R&D expenditure of Haier Group from 1997 to 2005

Source: Liu 2005

 

We can see the increasing efforts being invested in the R&D field and besides investment in the external joint R&D projects part of the increasing R&D spends was used in the homegrown R&D efforts through the construction of its own R&D team. Information collected in the market will be directly sent to the product development team to improve the current model and create new models in term of product design, usability and user interface. For example, in 2006 after the Haier’s three-door refrigerator was developed by its R&D team, the model had been widely tested between its major competitors such as Panasonic and LG and when it had won a better customer preference it was sent to Germany to participate that year’s IF Design Competition from in which the model won the award (Jacko 2007, p.592).

Figure 3 Haier’s three-door refrigerator that won Germany’s IF Design Award

Source: Jacko 2007, p.592

 

5.        Concluding remarks

 

Above we have discussed the three problems, foreign entry mode selection, cultural diversity and technological changes, we can conclude that Haier have well managed these three problems and the successful handling of the issues have contributed greatly to Haier’s success is has today. But with the fast changing social, technological, cultural environment and management skills and theories, Haier have to watch the problems closely and indentify the challenges that may appear. Below stated are two recommendations to offer some alternatives about how Haier could handle the problems in the new business environment.

 

6.        Recommendations

 

6.1    Balance the exploration and exploitation

 

As mentioned above companies that focus only on radical innovation would be prone to failure due to the chance to get the return of the innovative efforts are low and on the other hand those solely rely on the incremental innovation would not be sustainable as well because external technological changes may render the current technologies as out of date, so that a general suggestion provided to Haier in forming its technology innovation strategy is to balance the exploration and exploitation. When Haier needs to continuously rely on the incremental innovations to strengthen its leading position in the current technology that it has mastered at the same time it also need use exploration by investing on the radical innovative technologies R&D though such changes are rare.

 

6.2    Cultivate subcultures to increase internal harmony

Subcultures are groups of individuals who, although members of a larger cultural group, have shared characteristics that are not common to all members of the larger culture (Maurer & Smith 2005, p.221). To Haier, as mentioned because of the distinctiveness between the Chinese culture and the other cultures in the foreign manufacturing centers such as what happened in manufacturing center in the United States, there is a cultural shock issue. To better deal with this issue, on one hand the company could try to integrate these two cultures and make each party more compatible to the new culture and way of getting things done, but it is still difficult in developing company-wide policies and procedures while these two cultures are still relatively independent. To deal with this problem, one solution could be used is to cultivate a subculture within the larger corporate culture to relieve the culture shock in the particular group of people who are largely exposed to different cultures.

 

 

 

Reference

 

Adler, N. J. & Gundersen, A. 2008, International dimensions of organizational behavior. 5th edition, p.103

 

Bell, S. 2008, International brand management of Chinese companies: case studies on the Chinese household appliances and consumer electronics industry entering US and Western European markets. Essen: Physica-Verlag Heidelberg, p.159

 

Chaney, L. H. & Martin, J. S. 2003, Intercultural business communication. New York: Routledge. p.285

 

Coombs, R., Saviotti, P. & Walsh, V. 1987, Economics and technological change. New Jersey: Rowman & Littlefield. p.49

 

Domke-Damonte, D. & Levsen, V. B. 2002. The effect of internet usage on cooperation and performance in small hotels. SAM Advanced management Journal, 31-38

 

Ekeledge, I. & Sivakumar, K. 2004. Interntional market entry mode strategies of manufacturing firms and service firms: A resource-based perspective, International Marketing Review. London: 2004, Vol.21, Iss, 1; p.68

 

Fernández, J. A. & Stembridge, L. F. 2007, China’s state-owned enterprise reforms: an industrial and CEO approach. New York: Routledge. p.22

 

Haiereurope.com 2009. Haier Group Company Profile. Accessed on 12th May 2011 [online] available: http://www.haiereurope.com/en/contents/haier-group-company-profile3

 

Hartmann, H. I., Kraut, R. E. & Tilly, L. 1987, Computer chips and paper clips: technology and women’s employment. NW Washington, DC: National Academy Press. p.188

 

Herzog, P. 2011. Open and Closed Innovation: Different Cultures for Different Strategies. 2nd edition, Germany: Gabler Verlage, p.48

 

Hill, C. W. L. 2005. International business. 5th edition. Boston: McGraw-Hill

 

Hollensen, S. 2007, Global marketing. 4th edition, New Jersey: Prentice Hall, p.298

 

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Jacko, J. A. 2007, Human-Computer Interaction.Interaction Design and Usability: 12th International Conference, HCI International 2007 Beijing, China, July 2007 Proceeding, Part I. Germany: Springer. p.592

 

Lynch, J., Modgil, C., & Modgil, S. 1992, Human Rights, Education, & Global Responsibilities. Philadelphia: The Falmer Press. p.8

 

Liu, L. 2005, China’s industrial policies and the global business revolution: the case of domestic appliance industry. New York: Routledge. p.177

 

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Pride, W. M., Hughes, R. J. & Kapoor, J. R. 2008, Business, Mason, OH: South-Western Cengage Learning. p.254

 

Root, F. R. 1987. Entry strategies for international markets. Lexington, MA: DC Heath.

 

Sun, M. F. 2009, The Haier Sample (海尔标本). Accessed on 12th May 2011 [online] available: http://www.gototsinghua.org.cn/wenku/guanlianli/mba_3439.html

 

Tipton, F. B. 2007, Asian firms: history, institutions and management. Cheltenham: Edward Elgar Publishing Limited. p.208

 

Yi, J. J. & Ye, S. X. 2003, The Haier way: the making of a Chinese business leader and a global brand. 1st edition, Dumont, NJ: Homa & Sekey Books. p.222

 

Zhang, K. H. 2006, China as the world factory. New York: Routledge. p.61