Global Strategy: The Internationalisation Path of Haier Company - Assignment Example

Section A This section is based on the world Consumer Electronics industry and is worth 70% of the marks available (approximately 750 words Identify the internationalisation path of Haier and critically analyse the 'internationalisation' triggers and methods used by them in their development. What are the main benefits (negative aspects) of internationalisation to Haier' (40 marks) MNE are defined as enterprises that operate in more than two countries. The early model of an MNE was by Vernon (1966) who argued from a product life cycle perspective. In this theory a company develops a product in its home country and once the product is mature it starts manufacturing in low-cost off-shore locations. The other major model by Dunning's (1977) model of MNE has four dimensions of an MNE. These are ownership, location and internalization. Ownership is analogous to Porter's competitive advantages and is concerned with ownership of "such things as proprietary technology, superior marketing skills, economies of scale in production, superior management skills, and other firm-specific capabilities". Location is ability of a company to use location advantages in reducing manufacturing costs. Finally internalisation deals with whether activities are performed in the company or outside the company. This case study done by Liu, H. and Li, K. (2002) discusses Haier, a leading Chinese company specialising in home electronics. This company in its short time has grown from a small enterprise employing 600 people to its present status as a leading multinational enterprise (MNE) which is in the Fortune 500. Haier's path to internationalisation has been unique and highly effective. According to Liu, H. and Li, K. (2002) the analysis of its internationalisation strategy can be viewed in terms of the environment - strategy - performance framework. The environment being classified into two classes of positive factors collectively referred to as the impetus and the negative factors collectively referred to as constraints. The end of the cold war which came as a result of collapse of communism in Europe created an international environment with reduced polarisation. At the same time China was liberalising and opening its market in the 1990s. China has had the longest sustained economic growth since the 1980s. The annual average growth rate has been more than 8% for more than 20 years. Haier's history of growth started in 1984 with the appointment of current CEO Zhang Rulmin. At that time China's economy was drastically changing. Competition among the domestic producers of home appliances was hotting up. Liberalisation of the economy brought foreign players to compete in an already saturating market. The admittance of China into the World trade Organisation (WTO) in 2001 opened the floodgates. Many companies from developed countries were rushing to enter the Chinese market. Not willing to compete using a price war Haier was forced to look outside China for further growth in its business. The external constraints on Haier in its internationalisation strategy were lack of financial resources. The company was under-equipped and under-financed. For the company to expand it had to develop innovative strategies for financing its overseas expansion. The Government was supportive of Haier and allowed them to form a bank and use it as a vehicle of financing its own expansion abroad. The Japanese firms which internationalised followed two generic paths as shown in the diagram below. Figure 1 Internationalization paths for Japanese Companies, Liu, H. and Li, K. (2002) The Type I path was popular as it allowed the company to use the ventures in developing countries to acquire skills for international operation. These skills are used to enter developed countries. This strategy also favors a low cost strategy where the lower costs of manufacturing in developing countries are used to service the market in developed countries. The Type II strategy which starts with entrance into developed markets and then expansion into developing nations. In this case the MNE uses the entrance of a developed market as an initial phase for internationalisation of its brand. Once the brand is accepted in developed countries it is easier to expand to developing countries who tend to follow the trends in developed markets. Haier introduced their own model for internationalising their business. This model is shown below. Figure 2 Haier's internationalization path, Liu, H. and Li, K. (2002) Haier's strategy was a hybrid of the earlier two. They initially entered the developing countries as a way to gain confidence in international maintenance. Once that was acquired Haier entered in the United States and Germany. There was a conscious decision to locate their plants in developed countries. The rationale was to build a First World brand and marketing the brand. Once the brand got accepted in major developed countries it became easy to promote the brand in developing countries. It would seem that one of the key drivers for internationalisation is its leader Zhang Rulmin. Rulmin led the company from near bankruptcy to its present position of being a leading world brand in home electronics. Under his leadership the first objective in internationalising the company was to earn foreign currency which was scarce under the controlled economy of the time. This was required to enable them to access foreign inputs so vital since some components in their products such as chips were imported. Rulmin had already a burning ambition to create a large international enterprise and make Haier's "brand names famous internationally." This was a critical motive force and as a result the company realised the importance of fostering quality standards quite early. Rulmin's foresight in linking quality to workers compensation by rewarding quality performance and penalising workers for poor quality rapidly internalised quality standards within the firm. Gross (2004) has extended the theory of the MNE firm by noting that it is not only firm capabilities (Dunning's ownership dimension) that drive internationalization. He observes that also "the ability of the firm to succeed in domestic and international competition requires management of institutional relationships". Haier was greatly supported by the government in its endeavors. Once it became a foreign exchange earner the government offered it privileges that were not generally extended to other firms. It was allowed to form a financial institution and given several other concessions. It became perceived as a national flag bearer. One of the advantages of Haier's internalization strategy was to use its location in a developed country such as the United States to acquire advanced technology. Unlike Japanese firms who already had advanced technology Haier did not have such an advantage. Its key advantage was the resources of organization and vision within the company and the financial backup coming from being a major player in its home market. The shrewd strategy of locating some R&D facilities in the United States enabled the company to overcome the technology handicap and harness advances in technology in the host country. Development of the product in the United States enabled the company to understand and be able to meet customer demands for high quality local products. A demanding market has always been seen as an aid to an MNE's quest for leading international brand. The success in the United States enabled the funding of expansion to other countries because the firm in the United States benefited from the more liberal laws for foreign investment than would be possible for an entirely Chinese company. The key problems emanating from Haier's strategy have been the lack of resources and technology. The location of their R&D in a developed country has mitigated that weakness. However it has resulted in a non-typical Chinese company. Issues of the dislocation along culture lines arise where sometimes they even find difficulty brainstorming due to linguistic problems. In summary, Haier's internationalization path was by way of first entering the adjacent Asian countries. Once it had gained successful experience it targeted entrance into the American market. The American venture brought key advantage of added capacity in terms of R&D and capital resources. This was then used as a springboard to enter developed markets in Europe and developing markets elsewhere. The key drivers for internationalization were the saturation of domestic market and Mr. Rulmin's vision of making this company a global player in home electronics. 2. To what extent has Haier's national environment contributed towards its success as a MNE' (30 marks) Management of Haier USA is entirely in the hands of Americans with Chinese providing strategic directions. It is not clear how much influence this subsidiary has in changing the character of Haier. Tavares (2002) has argued for an approach towards studying MNEs as networks of subsidiaries. Every subsidiary has exogenous as well as endogenous drivers. It is conceivable that subsidiaries themselves by virtue of being in different environment and culture from the parent MNE can have "exogenous" impact on the parent. It would have been interesting if the case study explored this angle and thereby answered the question to what extent the success of this company has benefited from strategic pull of the subsidiaries in developed countries. In the absence of this information we will treat as if the critical strategy impacting environment is the Chinese environment not the American environment. Haier's has benefited from a national environment that was highly competitive. This enabled Haier to aggressively look for other markets. It was clear to them in the 1990s that their home market was saturated. This was inline with the product cycle theses of an MNE that as the product matures, demand in the domestic market becomes saturated. This necessitates seeking out of new opportunities for profit in foreign markets which may prompt the firm to invest in local production for such markets. Therefore Haier had the choice of whether they needed to aggressively fight for increased share at low margins or maintain existing market share and look for their expansion elsewhere. A competitive market forces an enterprise to innovate and improve its products. The key feature of the Chinese environment is the capability to have very low cost production arising from the high volumes that give economies of scale and also from the cheap labour available. Haier's strategy is to use the low cost advantage by producing a third of its goods in China for export. Another environmental factor has been the rapid growth of the Chinese economy. By just maintaining its market share in this huge market Haier is able to grow at phenomenal rates domestically. On the back of a strong performance on the home market Haier has been able to sustain its expansion abroad. The source of Haier's initial funding was the farmers. Unlike strong institutions such funding does not come with strings in terms of constraining the strategic direction of the firm. This gave Haier a free hand in terms of developing their strategy towards internationalisation. It is important to take into consideration the changes that the Chinese market has experienced as the economy is liberalised. It has become a very attractive market to outside companies and many foreign companies have entered the market creating stiff competition. Haier was able to cope with competition internationally because they had been exposed to competition on the domestic front. That competition forced them to innovate and create products that were suitable for their different markets. The relationship between Haier and its government where it was regarded as a flag bearer enabled the company to expand internationally. The government gave Haier generous concessions that enabled it to compete internationally. Being the first Chinese company to internationalise meant that Haier had to learn through trial and error. It could not benefit from experience of other Chinese companies. This came at a cost as some of its initial ventures were failures and the company lost considerable sums of money in such failed ventures. In summary, Haier was driven by competition pressure in its domestic market to look abroad for growth. The changes in the Chinese economy especially the opening up to international competition gave another impetus for Haier to attack these companies' base markets. The relationship with government where Haier was seen as national flag bearer enabled it to get special concessions from government that enabled the company to avoid regulatory roadblocks and thereby be able to succeed in its international ventures. Section B This section is based on your own experience and is worth 30% of the marks available (approximately 750 words) 1. Managers in multinational enterprises have to work with, buy from and sell to people of different nationalities and cultural backgrounds. In the context of your own personal experiences, reflect upon the extent to which cultural diversity in the workplace has helped your organisation (past or present) deal more effectively with its environment. (30 marks) The challenge of an MNE is how to meld a company with people from different backgrounds and cultures into a single entity that has shared goals, aspirations and vision. At Cisco Systems, the leading maker of networking equipment in the world, the company has managed to effectively evolve a unique culture that cuts across differences in nationality and cultural backgrounds. Success in a diverse environment can only be achieved through a strong leadership that communicates its vision for the company effectively. It is important that in an international organization every employee be clear about the company's strategies. There has to be a meeting of minds regarding the key objectives of the company. It has to be understood that performance is neutral; good performance within the company is recognized regardless of culture or background. This is fostered by regular meetings that include face-to-face meetings as well as virtual meetings using video and audio conferencing. Cisco operates a global technical assistance centre which is physically located in different countries. Using a follow-the-sun approach the technical support for the whole world is handled by one centre at any one time. For instance, during normal business hours in the Asia-Pacific region a centre in Sidney will be providing support for the whole world at that particular point in time. At the end of their day they pass that control to a centre in Brussels. The immediate challenge of international operation is the operation in a multi-lingual environment. One call may be in English, the next in Chinese, the next in Hindi, and so on. The diversity in the team enables the different language customers to be served by a person familiar with their language. Since all the agents are fluent in English the wider knowledge of the team can be exploited by the agent seeking help from a worldwide team and translating the result automatically to the customer's language. This enables better communication with customers and faster solution of problems. Communication is not only about speaking the language but understanding the culture and communicating with the customer in their language in an inoffensive way. Cultural awareness also involves knowing how to treat someone politely, and being able to change your style of communication depending on who you are speaking to and which country they are calling from. The sales force is also sensitive to nuances in different cultures. Having a world wide multicultural team it is always easy to invite the right expert to tackle problems in culturally sensitive places. It is easy for a Muslim to expert to close a deal in a Muslim country. Managing people of different cultures is a challenge. It is important that the company although it is American, reflect that diversity even at the very top echelons. Performance management is a cornerstone of the company and every employee needs to be appraised once every quarter and remunerated based on performance. For example, when working with people from Asian cultures, it can be considered rude to be as direct as people tend to be in Australia. As a manager, I need to be aware that many employees from Asian cultures may prefer to be given feedback as a team rather than individually. Globalization has drawn nations of the world together in terms of trading interactions but it is fatal to assume that culture is being homogenized. Training of all workers in inter-cultural interactions is important to avoid unnecessary conflicts. Cisco provides a program of cross-cultural training and education through e-learning. Some of the training is web based and sometimes there are videos available to employees. After each training employees are asked to undergo a self-assessment. There are also instructor-led courses on cultural training, and there is even Diversitoons - an educational comic strip to provide awareness about differing cultures and their customs. The cross-cultural training has enabled the company to have flexibility in deploying management staff. For instance a European person can be heading an operation in Korea and a Chinese person can be heading an operation in Australia. When other nations see that the company is genuinely a global company with different nationalities at the top of the company it creates trust. One of the challenges of global companies relates on how to handle hostilities between nations when employee loyalties may be split along national, religious and even ethnic lines. Where the company has engendered a spirit of togetherness as a company first it has a tendency to diffuse such potential problems in the work place. References Boddewyn, J.J. (1998). Political Aspects of MNE Theory. Journal of International Business Studies, Fall 1998, pp. 341-363 Dunning, J. (1977). Trade, location of economic activity and the MNE: A search for an eclectic approach. In: B. Ohlin (Ed.), The International Allocation of Economic Activity New York: Holmes & Meier. pp. 395-418. Gross, R. (2004). Theories of the Multinational Enterprise: Diversity, Complexity and Relevance. Advances in International Management, Vol. 16, pp. 83-97 Liu, H. and Li, K. (2002). Strategic Implications of Emerging Chinese Multinationals: The Haier Case Study. European Management Journal Vol. 20, No. 6, pp. 699-706, December 2002 Tavares, A.T. (2002). Strategic Management Of Multinational Networks: A Subsidiary Evolution Perspective. Journal of Industry, Competition and Trade Publisher:'Springer Netherlands, Vol. 2, No.3, pp 195 - 213, September 2002. Vernon, R. (1966). International trade and international investment in the product cycle. Quarterly Journal of Economics, Vol.80, pp. 190-207 Read More