Haier Case

Introduction
We will answer the group’s assigned question in two main parts; evaluating in the first instance the factors that led to the establishment of Haier’s competitive advantage in China over time followed by an analysis of the sustainability of the current position.

Haier’s Competitive Advantage
It is our view that the Haier company, under the leadership of founder and CEO Zhang Ruimin established a strong position in the Chinese market with respect to its competition. The company achieved this through a continuous evolution of a multi faceted strategy. Focusing firstly on on product quality and building a brand reputation, then adding in exemplary customer service followed by access to the remotest locations in China coupled with product localizations; the company was able to drive a continuous evolution of its value proposition.

In parallel its focus on efficiency of production and operations drove cost advantages as it leveraged process improvements, economies of scale and scope.

In the next section we outline the analysis of the sources of competitive advantage.

Summary of Value Stick
An essential element of the success of Haier in gaining and maintaining its competitive advantage was a deliberate and continuous approach to improving both cost and value drivers in its business. Each of the elements shown in the Value Stick comparison below were built on in key phases over time.
Figure 1 - Value Stick Comparison
Figure 1 - Value Stick Comparison

Sources of Competitive Advantage

Figure 2: Value Chain Activities Analysis
Additional key resources and capabilities for Haier’s competitive advantage include: * Intangible: * Technology licensing agreement with Liebherr gave Haier access to high-quality refrigerator products to build-up product and technology know-how * Joint Venture with Mitsubishi and Merloni brought Haier foreign technology insights and design ideas * Customer intimacy and product design and customization allows Haier to differentiate in the market and create stickiness (customer retention) * Quality and brand: gold medal for quality in national refrigerator competition and customer stories supported brand reputation; quality outperformed Liebherr in blind quality tests

Organizational Capability
With regards to resources one could argue that the liaison between strategy and organization is a key element to understand in assessing the competitive advantage of the company. The concept of the so called “self-managed team” (known locally as the ZZYT teams) served as a pivot to create an innovative organizational structure. Haier built over 2,000 cross-functional ZZYT teams typically ranging between 9 and 30 members each with a degree of autonomy and with P&L responsibility. Turning the traditional pyramid hierarchy of organizations upside down, this model allowed teams to focus on specific customer needs, facilitating rapid response to local market demands, product innovation and development. In addition, it kept the organization agile, leaders alert and created a constant push from bottom up in terms of new ideas.

Furthermore, Haier: * Worked on Talent management making sure it was built with the consideration of team dynamics * Introduced an innovative incentive system rewarding a blend of both teamwork, P&L and individual performance * Established retail centers as rural community gathering spaces where children could come to do their homework created branches, and decide whether individual efforts or group participation is the best method for it to achieve its goals. * Talent Management: required to maintain and manage rapid growth in foreign markets and to develop the next generation of products
Evolving Strategy
While it is clear that the Blue Ocean Strategy did not exist in the early 1980’s it is worth examining aspects of Zhang Ruimin’s strategy and the evolution of his strategy over time that have significant overlap with some of the fundamental principles of the BOS framework.

Redefining the Approach to Quality
His initial plan at start up of the company was to introduce a no compromise approach to quality, almost unheard of in the Chinese market. He believed that in adopting practices related to quality that he had observed in other industries in Germany convinced Zhang that a segment of consumers would increase their willingness to pay in return for a higher quality of product.

Redefining the Approach to Service
In 1990 Haier introduced a revolutionary approach to providing service to its customers in China. Through a service center located in Qingdao and the use of IT systems Haier was able to track of its thousands of customers throughout the nation.

Redefining the Approach to Serving Rural Markets
In 2007 Haier increased its service network building retail centers that provided sales and service to customers in outlying areas. Innovatively Haier staff gave home-design seminars attempting to attract more potential consumers to their stores. By 2011 there were over 19,000 service centers across China that could reach out to any location in the country within 24 hours.

Redefining the Approach to Product Development
After finding issues with machines used to wash vegetables in parts of rural China, the company designed in specific features to cope with the soil deposits. Refrigerators were updated to incorporate specific compartments for pickling Kimchee.

The illustration below shows the Value Analysis Curve of key elements of the innovations Haier brought to the market compared to domestic and foreign competition.
Figure 3 – Value Analysis Curve
Figure 3 – Value Analysis Curve

Sustaining Competitive Advantage

Resources & Capabilities | Superior? | Durable? | Hard to Copy? | Hard to substitute? | Can appropriate value? | Outcome | Technology licensing agreement with Liebherr | Y | Y | Y | N | | Initially competitive but reduced as models changed | Quality management/ system | Y | Y | Y | Y* | Y* | Sustainable competitive advantage over local companies for medium term but not *foreign competitors | Computerized service centre | Y | Y | N | | | Imitable, but difficult to create data base of customers. Medium Term Advantage | Nationwide customer service hotline | Y | Y | N | | | Imitable Temporary Advantage | Factories and equipment | Y | N | | | | Short lived advantage | Production process, 36 days | Y | Y | N | Y* | Y* | Provides competitive advantage over local competition but not *foreign | JIT Delivery System | Y | Y | Y | Y | Y | Sustainable competitive advantage | Local and cultural knowledge | Y | Y | N | | | Imitable but in the medium to longer term | Domestic product diversifications | Y | Y | N | Y | Y | Imitable but should maintain a medium term advantage | Distribution & Service Network | Y | Y | N | Y | Y | Imitable only over a long term – provides sustainable Advantage | Warranty periods covering full repair | Y | Y | N | | | Imitable Temporary Advantage | Internal talent development | Y | Y | N | | | Imitable Temporary Advantage | Team and individual independence | Y | Y | Y | Y | Y | Sustainable competitive advantage | Brand | Y | Y | Y | Y | Y | Sustainable competitive advantage |

Sustaining Competitive Advantage - Conclusion
As seen in the case, Haier became a key player both domestically and in the International market-place. However locally, the opening of the Chinese market following China’s entry to the WTO in 2001 increased the threat to Haier’s market share. For example, we can see that by 2002 foreign competitors increased share in the refrigeration market to 31% from 26% just one year after entry into the WTO.

In the short term we believe Haier has the ability to sustain a strong competitive advantage due to its brand reputation, local knowledge, cultural awareness, well-established production system and extensive sales, distribution and service network.

In the longer term the main sustainable elements of competitive advantage will be: * Brand * The ZZYT team approach driving continuous innovation * Optimal production system with JIT delivery process * Extensive sales and service network throughout China

We can see it may be harder to maintain this position for the longer term without further and ongoing innovation.

With its approach to continuous innovation, its learning curve advantage in terms of production efficiency and its ability to continue to leverage economies of both scale and scope we predict that Haier will retain its current market leadership position for some time to come.