Recommendations for Change at Red Star
An Analysis of the Haier Group (A) Case

As Haier Group looks to Acquire Red Star, Zhang Ruimin must consider the strategy for change that he must implement. While the changes that need to be made may be obvious on the surface, the method he chooses to invoke change is critical to the initiative’s success. Zhang faces an organization that has suffered years of poor management, where no motivation exists throughout the business. Careful consideration of the circumstances at Red Star must be analyzed before employing Theory E, Theory O, or a synthesis of the two. The most effective conclusion to the method of change to be used as Haier Group acquires Red Star is a synthesis between Theories E and O; specifically, a focus on cultural change using a very programmatic plan. To be successful in his change effort at Red Star, Zhang must first consider what has worked well for him in the past. He has been through several campaigns for change while at the helm of Haier Group, originally known as Qingdao General Refrigerator Factory. His first effort started in 1984, on his first day at QGRF. Zhang chose to lead the organization because he saw it as a challenge. The company was suffering from poor quality and increased competition. Zhang saw the potential for a star in the industry and knew he was the right person for the challenge. The changes he made were both structural (Theory E) and cultural (Theory O) in nature. After successfully changing the organization Zhang focused on two more, the purchases Qingdao Air Conditioner Factory and Qingdao Freezer Factory. In both of these transactions he used both Theories E and O; however, more of the emphasis was on Theory O. How he used each of these strategies successfully holds the key to conquering integration of Red Star into the Haier Group. Theory E and Theory O can be broken down into six distinct aspects according to Beer and Nohria (2000): purpose, leadership, focus, planning, motivation, and consultants. While my recommendations will address primarily focus and planning, analysis of all six aspects is necessary to understand thoroughly the nature of the issues since they are so intertwined. The purpose of Theory E change is to maximize economic value while the purpose of Theory O change is to develop organizational capabilities. Both in the turnaround of Qingdao General Refrigerator Factory and in the acquisition of Qingdao Air Conditioning Factory and Qingdao Freezer Factory, Zhang to the primary view of Theory E, maximization of economic value. Usually, economic value is maximized for the shareholder (2000); however, as a collective enterprise in China, QGRF was state run and employee owned. Zhang used the increase in economic value to focus on growth. He set forth a long-range plan to improve QGRF and use the financial gains to finance acquisitions such as QACF, QFF, the Haier industrial park, and the possible acquisition of Red Star. Additionally, some of the increased economic value was passed on to the employees, yet this was not the main issue for Zhang. The purpose of change was also to develop organizational capabilities, namely quality. Zhang saw the demand for refrigerators and knew that QGRF would be very successful if it could increase the quality of its products, and thus compete on quality rather than price. He used this same idea at QACF and QFF. He believed that through the improvement of quality he would be improving organizational capabilities, which would lead to economic value growth. It is very clear is the case that this purpose of economic value growth and total quality management was communicated from the top down. Zhang spearheaded the change efforts. While he did receive some input from others, this input did not come from the bottom. Zhang saw it as his responsibility to communicate the change strategy. In this regard, Zhang’s top-down approach was based on Theory E (Beer and Nohria, 2000). Theory O change is based on input from all responsible parties, not just top management. Zhang’s change focus when he took over QGRF was first on culture, then on structure and systems. Zhang recognized that the major change he needed to make was in the quality of the products QGRF was producing. He needed to instill in the minds of each production employee that quality was the highest priority. Early in his tenure at QGRF Zhang took seventy-six defective refrigerators out of inventory and had the employees destroy them, even if the defects were minor, such as paint scratches. This got their attention. He made it clear that quality was the first priority and that no defective products would be tolerated. He did some of the quality control work himself. To further enforce this, Zhang implemented an accountability program. In this program employees were financially penalized for defects and they were required to publicly state why they failed in their job performance. Holding employees accountable for their work was a drastic change in the company’s culture. He also attempted to instill discipline through leading by example. He often worked long hours. He also had his managers wear specific uniforms that complemented the uniforms of the factory workers. All of these are examples of cultural changes that Zhang made at QGRF. Theory O is very focused on changing the culture of an organization in order to generate change (Beer and Nohria, 2000). Once he succeeded in changing the culture of QGRF, Zhang began to focus on the structure and systems of the organization. Zhang led his team to review every process and procedure of the company to either validate it, change it, or eliminate it. Once procedures had been streamlined, Zhang sought out new technologies and processes, employing many of the processes from other successful appliance companies, such as West German company Liebherr-Haushaltsgerate. Theory E is very focused on systems and structure changes to an organization (Beer and Nohria, 2000). When Zhang acquired QACF and QFF, many of the systems were already in place. One of Zhang’s objectives was to acquire companies that already have the technology and systems in place. This would force changes to be cultural in nature, as modern systems would not need to be brought in. This made the acquisitions of QACF and QFF cultural change Theory O efforts. Zhang did not have a well-developed plan for implementing change. He knew that he wanted to improve quality and profitability; however, he did not have a set plan for making these changes. He was much more reactive than proactive, at least in the turnaround of QGRF. A good example of this is the impulsive move to get the worker’s attention by having them destroy seventy-six defective refrigerators. He knew he needed to do something to get their attention since he was failing to do so. Had he had a well-developed plan he would not have had to figure out how to get their attention impulsively since he would have incorporated a way to gain awareness in the infancy stages of the implementation of change. However, when he acquired QACF and QFF he had already figured out a strategy that worked at QGRF, making he change strategy more programmatic than emergent. Again a pattern can be seen where Zhang’s efforts start out as theory O, emergent and gravitate towards Theory E, programmatic (Beer and Nohria, 2000). To motivate change, Zhang looked to financial rewards. These incentives were rolled out after he had made major strides in changing the employees. His financial rewards system was quite different from most in that it both rewarded and punished employees. Rewards were tied to performance; however, the case does not elaborate on how performance is judged. Good performers received higher wages and were promoted into more respected positions. Poor performers were actually punished financially, losing up to half of their wages for poor performance. Theory O followers let financial rewards lag (Beer and Nohria, 2000). Zhang followed a more O approach in that he did not roll out his reward system until after he had implemented most of his change efforts. He used the rewards to reinforce change measures that were already in place. There is no mention in the case of financial rewards playing a major role in Zhang’s change efforts following his takeover QACF and QFF. Thus, it is my assumption that they did not play a major role in the transformation but played a similar role as they did in the change campaign at QGRF. Zhang chose to follow a Theory O approach in his change efforts prior to Red Star. Had financial rewards been introduced in the beginning as a major component of his change plan, his approach would have been more compatible with Theory O standards. When Zhang went into Qingdao General Refrigerator, he did not bring a large consulting force. What he did, however, was bring in a few key people, such as Mrs. Yang Mianmian, who left her secure position at Household Appliance Division. He relied on his team to help him with the implementation of his change plan. This small force of consultants was not as knowledge driven as they were process driven. This made his first change effort more consistent with Theory O (Beer and Nohria, 2000). When he took over the operations of QACF and QFF he brought in a team on consultants from Haier’s consulting and certification center, an institution Zhang had developed during the transformation of QGRF. While this force could be considered a large-scale effort, their focus was on primarily process change. This team of engineers went through every process in place and streamlined them as appropriate. Being primarily process centered, Zhang’s efforts at QACF and QFF align themselves with Theory O. Had they been more knowledge-based Zhang would have been using Theory E. In analyzing Zhang’s approach with each respective change effort it is clear that he has shifted a little from being more Theory O to being more Theory E. His methodology seemed much more organized when he acquired QACF and QFF than it was in the initial takeover of QGRF. It is likely that he has learned from each of his experiences and can take what he has learned and apply it in a more structured manner at Red Star. I would recommend that Zhang consider his successes and failures in each of the six aspects considered and formulate a change plan that takes the best of what worked in past efforts. To clarify his approach, I will break down both focus and planning. Zhang’s focus at Red Star must be cultural in nature. There are many issues at Red Star that impede its success. Red Star has been in a state of flux since its founder had been jailed for misappropriation of funds. There are unclear lines of responsibility at the management level. Sales people have no motivation to work with the failing distribution channels to improve business or enforce existing agreements. Managers feel no obligation to discipline poor performers, adding to the poor quality and lack of caring throughout the company. Overall, the organization seems to have become lazy. As this has been ongoing for years, this is a critical area of focus. Instead of focusing on culture, Zhang could focus on structure and systems. While the company’s management will likely need to be restructured, such restructure will not motivate change throughout the workforce. Restructuring is often a byproduct of change. A change in culture often leads to a change in organizational structure, such as to decentralize decision-making. While this will play a role in the change effort at Red Star, restructuring the company will not bring about the fundamental change required for success. Systems could be another focal point. While introducing new technology may assist in bringing about change, it will not go as far as focusing on the culture of Red Star. Red Star is technologically up to date and does not require a complete overhaul of its manufacturing technology. One thing that will occur when Zhang takes over is the facility will be moved to the new Haier industrial park, which is a change in the system. While Zhang will be addressing a change in Red Star’s system, namely the relocation of the facility, this should not be the main focus of the effort. Zhang can choose to focus on culture, structure, systems, or a combination of the three. While Zhang should address all three to some extent, structure and systems must take a back seat to cultural change. Structure and system changes can be made in the absence of cultural change; however, without cultural change Red Star will not reach its full potential and will likely continue to be a failing organization. To be successful in changing the culture of Red Star, Zhang must have a clear plan of attack. As Zhang has progressed through his change efforts he has learned a lot about what works and what does not. His approach has evolved into a more programmatic format. His plans at QACF and QFF were much more clear than his plan at QGRF. With hindsight, his plan should be that much clearer when he assumes responsibility for Red Star. With the amount of change he is facing and the dire straits Red Star is experiencing, Zhang has no choice but to act quickly. His failure to do so could lead to the failure of the company, something all stakeholders desire to avoid. A clear and decisive plan is the only way to invoke change as quickly as is required. Should Zhang choose a more emergent approach, employees would have more freedom and input in the change plan. In many cases this decentralized format is preferable; however, Red Star is not yet in a position where it can reap the benefits of such a flexible system. There are no clear lines of responsibility; therefore, it is likely that there exists no respect for the chain of command, the company, or any of the personnel. I clear and consistent plan that is not open for discussion would avoid conflicts that may arise in the current state of chaos at Red Star. While there may be little respect for management, a clear plan being flowed down from management coupled with a restructure of management has a much better chance of success in the short run than does a plan that requires significant employee input. The employees are unclear about what is needed and the time it would take for them to develop a change plan would be detrimental to the company. A programmatic plan for change at Red Star has a much better chance for short-term success at Red Star. A very specific course of action should be taken. First, while the company needs to instill the need for cultural change in its employees, Zhang would be wise to move Red Star into the Haier industrial park. A change in venue will throw the employees out of their comfort zone and should make them less resistant to change. In their new location they will see that it is not business as usual and this will be a change in itself. Prior to the move, Zhang should have all management compete with outsiders for the positions that will be available at the new facility. He did this with great success when he took over QACF and QFF. All changes in management structure should be made prior to the move. Doing so will provide a signal to the workforce that changes must be made for Red Star to move forward. Even though the focus of change must be primarily on culture, management structure changes will be necessary to cultivate the new culture of quality at Red Star. Although Zhang should not focus on system changes, the relocation of Red Star is a perfect opportunity to reorganize the workflow. There is no mention of kaizen in the case so it is uncertain if there are opportunities for improvement in manufacturing processes. However, it can be safely assumed that since there has been a lack of strong leadership for years that there are opportunities for improvement. These opportunities should be exploited when setting up the new factory. Consultants from Haier’s consulting and certification center should be brought in before the transaction, if possible, to review the manufacturing processes. Any potential improvements, such as cell manufacturing or one-part flow, should be considered in the layout of the new facility. Since the new facility will have to be laid out anyway, now is the best time to make any necessary major changes in the design of the facility. While process changes are systematic in nature, they must not become the main focus of change. The new processes and facilities coupled with management changes will be an excellent platform for cultural change in the workforce. They will see that their environment has changed, as has the hierarchy of the company. This will be a clear signal that change is taking place. With them out of their comfort zone, the timing will be ideal for changing their habits and making them more quality focused. First, they should be given the necessary training where training is lacking. It is not realistic to expect change if the workforce lacks the necessary training. Once their skills are up to the standards set by Zhang and his management team, the employees should be introduced to the accountability system Zhang uses within the Haier Group. Showing employees that quality is their responsibility and that there are rewards for good quality and punishments for bad quality should prove to be as effective as it was throughout the rest of the Haier Group. One strong caution is that this accountability and incentive program should not be rolled out until employees have the necessary training and tools to do their jobs consistently within the accountability system. Once this plan has been fully implemented, Zhang would be wise to introduce the employees to the decision-making process in the change drive. Such a plan will help obtain further buy-in from the workforce as well as introduce different points of view on what needs to change. In the long run, if employees are empowered and trusted the organization will be a success. It is clear that Zhang has quite a task ahead of him should he choose to take on the challenge of Red Star. Red Star is a firm that is great need of cultural change. Given the weak status of the company, it is imperative that swift action be taken to save the firm from ruin. Zhang has a proven track record of turning around companies that are on the brink of failure. Success at Red Star is certain if he takes what he has learned from past efforts and applies the most successful steps to his strategy at Red Star. Zhang must develop a strong, clear plan for cultural change at Red Star. Its culture is very weak and nonproductive. Any change plan that does not address culture primarily is unlikely to succeed. To implement Zhang’s programmatic cultural change strategy he must be the clear top-down leader since the current leadership of the firm is failing. He would also be wise to bring in some of the consultants from the consulting and certification center at Haier. As the plan progresses, financial incentives can be added to reinforce the changes that take place. With a clear plan for cultural change, Zhang will be able to see the company through this tough time to a better, more economically prosperous time.
Works Cited

Beer, M. and Nohria, N. (2000) Breaking the Code of Change. Boston: Harvard Business School Press.