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WHARTON LEADERSHIP DIGEST
March,
2005, Volume 9, Number
6
CONTENTS
Leadership Conference: Wharton on Creativity and
Conviction
Decision Making in Banking: Using Diverse Networks for
Greater Intelligence
Learning
Program: Leadership and Management in Southeast Asia
Leadership in China: Haier’s Zhang Ruimin
Leadership
Conference: Wharton on Creativity and Conviction
The ninth Annual Wharton Leadership Conference in
Philadelphia will be held on June 9, 2005. An intense
one-day exchange on how great leadership is developed and
applied in the private, public, or non-profit sectors, the
conference is focused on how leaders inspire and turn
obstacles into opportunity, both requiring great creativity
and conviction.
The conference is co-hosted by
  Maria
Bartiromo, host of CNBC's "The Wall Street Journal
Report with Maria Bartiromo" and "Closing Bell with Maria
Bartiromo," frequent contributor to NBC's "Today Show," and
author of Use the News: How to Separate the Noise from
Investment Nuggets and Make Money in Any Economy,
and Todd S. Thomson, CEO of Wealth
Management Sector (Smith Barney, Equity Research, and the
Private Bank) at Citigroup, former Chief Financial Officer
of Citigroup.
 Newly
confirmed as a speaker is Marcus Buckingham, former
leader of The Gallup Organization's Strengths Management
practice, co-author of First, Break All the Rules: What
the World's Greatest Managers Do Differently and Now,
Discover Your Strengths, and author of newly published,
The One Thing you Need to Know.
The conference agenda is described
here, and online registration
is available
here. An early-bird registration discount is
available through April 20.
Decision Making in
Banking: Using Diverse Networks for Greater
Intelligence
Researchers Mark S. Mizruchi and Linda
Brewster Stearns studied how managers at a large
commercial bank used their
informal networks within the bank to close deals with their
corporate customers. Completing such deals is subject to
considerable uncertainty, and the researchers expected that
the strength of a banker’s relations with his or her
colleagues would affect the likelihood of doing a deal.
Working with some 1,400 multinational
corporate customers, the bankers offered four products:
commercial lending such as lines
of credit and project finance; trading including derivatives
and currency exchange; capital market services such as stock
syndications; and transactional services including cash
management. The bankers faced competition from other banks
in all four areas, and they also faced an internal hurdle:
they needed final approval for a deal by at least three bank
officers, including a senior credit officer. The bank had
imposed this approval process to ensure that a deal would
meet the bank’s criteria for an acceptable rate of return.
The researchers evaluated the
uncertainty factor in a given deal by asking the responsible
banker to assess the risk to the bank’s capital and whether
the banker trusted a customer’s key executive. When
uncertainty in a deal was high, the researchers expected
that the banker was more likely to turn to colleagues with
whom they had already established strong working
relationships. With complete data on 137 deals, the
researchers found the expected:
the greater the uncertainty in a deal, the greater the
reliance of a banker on colleagues whom he or she already
knew well.
But the researchers then discovered an
ironic outcome: The greater the reliance of a banker on a
familiar circle of contacts within the bank, the more likely
were those contacts also to know one another. And because
of that, the banker received a less diverse range of views
and feedback on a deal before proposing it for approval –
and as a result was less likely to obtain final approval.
The research points to the importance
of seeking input from trusted associates before making a
decision when uncertainty is high. Yet at the same time, it
suggests that decision makers need to consult a diverse
range of associates if they are ultimately to have the right
information to ensure a binding decision.
Source: Mark S. Mizruchi and
Linda Brewster Stearns, “Getting Deals Done: The Use of
Social Networks in Bank Decision-Making,” American
Sociological Review, Vol. 66, October, 2001, pp.
647-671.
The program is offered in English at a
resort hotel southwest of Bangkok, and it draws participants
from the Asian region, including Australia, Indonesia,
Malaysia, Myanmar, New Zealand, Singapore, Thailand, and
Vietnam. Wharton and Kellogg faculty
provide instruction in economics, finance, leadership,
marketing, organizational behavior, logistics & supply chain
management, and strategic management.
For information on the
Senior Executive Program, contact Sasin's Manager of
Executive Education, Patcharaphorn Phantarathorn at
patcharaphorn.phantarathorn@sasin.edu,
or see the program website with
online registration
here.
Leadership in
China: Haier’s Zhang Ruimin
 Haier
Group is China’s biggest white goods maker, and the fifth
largest in the world. Incorporated in 1984 as a producer of
refrigerators, Haier makes household and electrical
appliances around the globe, spanning 15,100 varieties of
items in 96 product lines, and exporting products to more
than 100 countries. Chairman and CEO Zhang Ruimin, who has
been at Haier’s helm for some two decades, has overseen the
company’s transformation from a small factory into a global
corporation with annual revenues of $12.1 billion in 2004.
Last year Fortune magazine ranked him No. 6 among
Asia’s “most influential business leaders.” In a recent
discussion for China Knowledge@Wharton with Wharton
management professors
Michael
Useem and Marshall W. Meyer, Zhang spoke about
his globalization strategy and other issues.
Useem:
What leadership skills were most essential for building the
company in its early years, going back now almost two
decades? Could you also describe the distinctive leadership
skills required by the company in more recent years?
Zhang:
Twenty years ago, when Haier started, it was a small factory
on the verge of bankruptcy, and it had only 600 people. At
that time, the top priority for the leaders was to make
quick, tough decisions and ask subordinates to execute them
accurately. Our management style had to be militaristic: We
worked like marshals and generals and asked people to carry
out our instructions. This was because our biggest concern
was to boost the confidence of our workforce. As leaders we
needed to hold ourselves accountable for all our decisions,
which we required our people to execute very quickly. We
followed Frederick W. Taylor’s theory of scientific
management in those days because the technology and morale
of the workers were low and often disrupted.
As Haier
developed, it evolved from 600 to more than 50,000
employees. The company’s market has expanded from being
local to global. It is impossible today to rely upon a
single person or just one management team to make decisions
responding to the challenges in the global market.
Therefore, we have made multiple efforts to enhance our
position. The first is flattening our organizational
structure. With this, we will be able to adapt more quickly
to the evolving markets and respond more efficiently to
changes. The second approach has been to build small
operating teams within the company, which we call MMCs (Mini
mini corporations). These MMCs can respond more swiftly to
the needs of their respective markets and win more customers
by independent innovations.
Useem:
You have made thousands of decisions over your career…could
you identify the most difficult decision made during your
nearly two decades at the helm of Haier. And could you
identify the single most important decision you’ve made
during your entire career?
Zhang:
At Haier, we have made many decisions but the toughest one
is the “next” one. We think the most challenging decision is
the follow-up decision you have to make after having made a
decision. Since the marketplace is changing so fast,
companies are often tied, or constrained, by their own
previous “right” choices. This could, however, lead to
failure if your next big decision were to be based on the
mindset of the previous one.
According to
statistics, the average lifecycle of a company is only three
to four years in China. Once a company has achieved good
results, often it tends to grow complacent and doesn’t move
any further. Its previous decisions constrain the next ones,
but my view is that in this information age with a
fast-changing marketplace, your decisions have to be able to
keep up with change. To take an analogy from boxing, you
can’t beat your rival with a single attack; you have to win
through with a combined strategy. We ought to break through
our self-restrictions, to conquer ourselves, not be chained
by our own previous victories and old mindset. That explains
why the most challenging decision for us is the next
decision after the right decision.
As for the
most important decision in my career, that took place in
1991 to 1992, when we decided to build an industrial park to
produce multiple products. Before that, the refrigerator was
our only product – and it was a bestseller. Many consumers
had to buy our products in the black market by paying extra
1,000 yuan on top of the original 1,700 price. We made huge
profits in those days. Lots of people expected us to stay in
that mode, but we anticipated that the market would be
saturated one day. So in 1991 we made a very important
decision: To set up an industrial park to expand our product
range from refrigerators to washing machines, air
conditioners and other home appliances.
The budget
required for that was 1.5 billion yuan. We had only 80
million yuan in our coffers at the time, and the government
would not finance us, because Haier was not a SOE
(state-owned enterprise. If we had not done what we did at
the time, we would have lost a huge opportunity. So our
decision was made. That decision was risky, but it came at
the right time as well.
In 1992,
Deng Xiaoping’s speech during his visit to Southern China
had accelerated economic reforms in China and the capital
market in China had also begun to develop. We tried to get
listed in the Shanghai Stock Market. With the funds raised
there and other profits from some successful projects, we
were able to build and finance the industrial park which
paved the way for our years of rapid growth. Today we have
13 industry parks across the world. For Haier’s development,
that decision was a key step.
Useem:
As Haier has been in the U.S. and other markets beyond China
for some time, doesn’t it require a different kind of
leadership capacity for people, especially the ones who
report to you —to be able to manage on a more global basis?
Zhang:
It’s true that the company is growing very rapidly. Haier’s
footprint today spreads across every continent. As such, the
company has realized that employment has become a major
bottleneck. The approach we have employed is to localize in
Manhattan by hiring a local manager to run the business. In
the factory in South Carolina, too, we employ a local
manager. On the other side of the coin, Haier has also sent
people from its headquarters to its overseas corporations.
Our charge to these Chinese managers is to enhance their
capabilities in a global environment, and we also encourage
them to be independent and innovative in a different market.
For example,
the target we gave the manager who runs our American
business operation is that he has to be able to compete
head-on with the home appliance giants in the American
market such as GE and Whirlpool. He has to make Haier
popular among American customers in the U.S. market.
Therefore, they have to make every detailed decision
themselves. That is to say, we don’t want Chinese managers
to keep coming back and asking questions about why and how
they should do something. We want them to find about
solutions that can increase our competitiveness in that
market. In other words, we set up a target, but they have to
decide themselves in their context on how to reach there and
by what innovative approach.
Meyer:
Now that the Haier CCT listing (in Hong Kong) has been
approved, will this listed entity be Haier’s flagship-listed
company? What additional assets will be injected into
Haier-CCT (renamed Haier Electronics Group)? And finally,
does the Hong Kong listing imply any lack of confidence in
Chinese capital markets?
Zhang:
Although we produce a wide range of home appliances, we have
a relative advantage in white goods, where our business is
ranked No. 4 worldwide. Our target is to become No.3 and
eventually to be No.1 in the global market. To achieve this
goal, we have to be in an international capital market. In
terms of the above, the Haier CCT listing in Hong Kong is
the flagship company for Haier China. In addition, the newly
listed company, in which we own 50.3% of the shares, has
been renamed the “Haier Electronics Group”, one signal for
our vision to make it a flagship company.
We have
injected 100% of the operating assets of Haier’s mobile and
turbo-machine business into the new company to give us a
holding position. Our next step which is awaiting approval
from regulators will be transferring the assets of our A
shares Shanghai listed company of white goods to the new
corporation.
The reason
we chose to list in Hong Kong is not because we have no
confidence in the mainland capital market but due to its own
limits. As you may recall, back in 1991 to 1992, we gained
significant funds and support from the Shanghai stock
market. However, Haier’s vision is to become an
international company with a global brand. Just as our
product markets are global, so must our capital markets be.
The Shanghai A share stock market could not meet this
demand. So we moved to Hong Kong in order to make our
stockholder structure more international, which will be very
helpful for our corporate governance and operations. Our
goal is to globalize both our product and capital market
that supports each other and ultimately make Haier a
well-known global brand.
Meyer:
As Haier goes about building a global Chinese brand, what
are the lessons learned? And will other Chinese firms learn
these lessons? And can U.S.-based business schools like
Wharton learn and teach these lessons?
Zhang:
The cultural gap or the communication problem is actually
the greatest challenge for Haier when it expands overseas.
Although we have localized our management team, we feel that
cultural differences still make a big difference. For
example, when we aimed to be one of the top 10 retailers in
the U.S., our American managers thought it would be
impossible to get there in such a short time. However, we
managed to find a very good approach and worked only in
niche markets with niche products. For instance, we
introduced one product tailored for students and another
appliance for the use in the living room. These niche
products have won the recognition of consumers, and our
reputation has been growing. The point here is that though
localization is very helpful, the communication and cultural
gap issues need to be resolved along the way.
As for your
second question, the issue isn’t what other Chinese
companies can learn from Haier. In fact, Haier has learned
from the experience of other Chinese companies. In the early
days, lots of Chinese corporations moved overseas with
relatively prudent steps, first setting up a branch office;
then sending a team there; and assessing the market
gradually. However, during the time they try to understand
the market completely and build the business, lots of
opportunities have already been missed. So Haier decided on
another approach: We hire local managers who make the
company more adaptive and faster in building up our
operations.
Further,
many Chinese companies in the early days moved to developing
countries first and then to the wealthier markets. For
Haier, in contrast, our strategy was to go for the advanced
markets first, i.e. U.S. and Europe. We think that our
competitors are very strong in the developed countries, and
if we put ourselves in that backdrop we can see our problems
more clearly. It’s like competing in the Olympics: if you
want to improve yourself, you put yourself in a pack of best
competitors and compete with them.
Regarding
the benefits that Wharton and other business schools in the
U.S. can derive from the Haier case not only are there lots
of challenges for Chinese companies moving overseas, the
same is true of any multinational that happens to move to a
new market such as China. Some of these companies come to
Haier for help in finding out why, unlike Haier, they cannot
benefit from the Chinese marketplace. I believe the main
issue is that they are too complacent. They took for granted
that their original business model would be as effective in
Chinese markets. But it’s a different story, as the rules of
the game are different from their home countries. Let me
give you an example: Many MNCs have followed their home
practices of hiring: huge compensation for professional
managers. But in reality it doesn’t generate good results in
China, as some of the managers they hired are not as
qualified as they might have expected. Therefore I think
that for Wharton and other business schools, the lesson may
be that a successful business model in one marketplace may
need to be adapted to fit in another marketplace.
Meyer:
Haier would like almost every manager to be a profit center
as part of the SBU (strategic business unit) system, or what
you just called the MMC model—the mini-mini corporation.
Could you please comment on the feasibility and progress of
the initiatives directed toward making every manager
responsible for the bottom line?
Zhang:
It is true that at Haier we have beaten the odds for a long
time. In this information age, you have to be vigorous and
swift to thrive. For Haier, we initiated the BPR (Business
Process Redesign) program in September 1998 and we plan to
take 10 years to achieve our goals. For the first five years
from 1998-2003 our goal was to flatten the organizational
structure. That means we will break apart the silos in our
company: the previous superior-subordinate relationships
have been changed to a market-oriented relationship. For
example, the sales and marketing unit used to have more
power than the production unit. But since we introduced BPR,
the two are in an equal position. If the production capacity
is 10,000 units and the sales team will be blamed for taking
in orders less than the full capacity; the sales unit may
ask the production unit for compensation if the latter
cannot deliver the goods on time.
The second
phase of our journey from 2003-2008 will be to convert
everyone in the company to an independent and innovative
manager with their own balance sheet. These efforts involve
three more steps: (1) Set up a target for every individual;
(2) Provide the necessary resources and support to the
individuals; and (3) Establish individualized balance sheet
includes information like input and output. For example, if
the person takes in 10 products, each worth 10,000 yuan, he
will have a deficit if selling them for only 90,000 Yuan or,
earn profit for the company if he can sell at a price higher
than 10,000. With this program, we expect everyone to become
a profit center instead of always asking for resources from
the company.
Our main
challenges in implementing this initiative are, first, that
it is difficult to define targets for each individual; the
IT applications in our business processes are not
sophisticated enough to count profits and losses for each
individual; and finally, though people are willing to
execute our strategy and increase their skills, so far their
competence is still inadequate.
Knowledge@Wharton:
Where does Haier want to be five years from now? What are
the principal risks that might prevent the company from
reaching those goals? How is Haier dealing with those risks?
Zhang:
Where does Haier want to be five years from now? To build
Haier as a competitive global brand with a strong position
in the international market. However, from the depths of my
heart, what I really think is important is to make everyone
in Haier an independent and innovative entity who brings his
full potential and value into play. If people are just
staying there taking orders, the company will be as cold as
a machine. As Peter Drucker, the father of management
studies, once commented, the purpose of an organization is
to help an ordinary person make extraordinary contributions.
Everyone is commonplace, but the organization offers you a
platform to make you extraordinary.
What is our
principal risk in reaching those goals? I think the biggest
problem is in our own minds. Some executives in Haier have
become complacent because of the company’s good performance.
Haier is not a big name internationally but in China we are
doing pretty well. So lots of people are too slow in
responding to the market change or they just expect
yesterday’s model will work today. The other challenge is in
the BPR system, which requires a high level of capability
from our employees but many of them can’t follow it. We
believe this will be a major challenge in the long run.
Note: The interview can also be
found on
China Knowledge@Wharton.
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