Name: Vatsal Maheshwari

Section E
Roll No. : 23/ 306

Q1. Discuss the process of Haier's diversification strategy from single dominant
business to a diversified portfolio. What do you think were the reasons behind this
diversification strategy?
Diversification process:

 Just as Haier was in debts and losses, this time the same Haier acquired Qingdao Air
Conditioner Factory and Qingdao General Freezer Factory, both of which were in
financial trouble.

 As with Haier, the focus was on Quality, the standards were not compromised and the
results were pretty clear- Within a year, both these ventures were transformed into profits
from a deficit of RMB 15 million

 The blessing in disguise moment came when to fund the cost of land and construction, the
Chinese Govt, froze the credit, they decided to go for an IPO and they were able to raise a
humongous RMB 369 million

 With Govt. pushing to acquire some firms, Haier turned Red Star Washing Machine Co.
into profits in 18 Months. They diversified into different domains too -such as acquiring
Yellow Mountain Electronics in the domain of Television and telecommunications
equipment

 The mantra of acquiring firms with markets and good products but with bad management
worked well for Haier. Their management intent and vision was strong as they had turned
Haier into a strong brand, they were able to do it for other acquisitions too
Reasons

 The management viewed to capitalize the brand reputation they had built via
Refrigerators. They were sure that with Haier as a brand, the new product line will have
an advantage and an upper hand in the market. People trusted the brand and management
wanted to use that for other product lines

 There is well known concept in Finance of portfolio management, where we are taught
that to mitigate risk, you need to diversify. With leadership in Refrigerator segment, the
company could not have depended on Refrigerator for the whole life. With a diversified
revenue stream, chances of damage to one revenue stream will not affect other streams

 Being a leader in one segment, gives you an edge and management must have thought to
capture good market share in other segments too

Q2 How does Haier create value in its Diversified Portfolio?

1. Haier invested around 5-7% of the revenue into R&D and was faring better than its
competitors. Local demands were catered and then only innovation was done. Low cost was
involved due to small modification in production line and hence profitability was maintained
Name: Vatsal Maheshwari
Section E
Roll No. : 23/ 306

2. With a strong service network of 5,500+ service representatives, it service standards met
and exceeded government regulations. There have been instances of servicing for a decade
old product and this trust reaped in huge benefits
3. Own logistics arm coupled with the concept of JIT helped them in reducing the warehouse
size and requirements of keeping the products for a long time. Reduction in carrying costs led
to increase in profitability. They utilised the infrastructure boom of Chinese Government
4. They focused on lot on promoting their own brand rather than being an OEM and this
helped in reaping long term gains

Q 3.  Why does Haier adopt globalization strategy? How does it do so?

Reasons for going global

 The commitment to the WTO by China meant foreign players entering the lucrative
Chinese market. This also allowed many established foreign players such as Electrolux,
Samsung entering the market and vying for the market share

 Foreign players had the wherewithal to re-enter the market after some small failures such
as Whirplool’s comeback by launching 30 products and plus the foreign firms, despite
have some disadvantages, were catching up to the market share quite strongly

 The colour of foreign entry in China was even seen in the retail chain set ups. The WTO
mandated opening of the economy meant that domestic firm’s advantages were to
disappear beyond Tier 1 cities and the real market actually was in Tier 2 and Tier 3 cities
only
Modus operandi for going global

 Attention towards the developed or difficult markets at the first place: The belief was
that this would lead to the highest quality standards, as was the mantra from DAY 1.
Carrying the reputation of being successful in Developed market, capturing developing
markets will be a cake walk

 Start with the Niche products: Focusing on something which no one was seeing in the
developed market. They had high margins too. Took some time but soon chains such as
Walmart started to sell their products. Result- Haier captured 30% market share in
compact refrigerator segment in the USA within 3 years. 

 Staff with locals: Not following the trend of appointing their own people, Haier
appointed local people while setting up their operations as they believed that the native
people kniw about the business conditions better. Better understanding of the customer
needs is there in local people. They tend to prefer experienced people to head the
operations. Only technical staff from China was hired.
Name: Vatsal Maheshwari
Section E
Roll No. : 23/ 306

 Q4. Do you think that Haier's strategy of investing in creating burdensome

manufacturing assets for multiple technologies and that of investing its branding and
marketing have inherent trade-offs. How do you think Haier can materialize Zhang's
vision?

One cannot excel in each and every department. Haier’s strategy of providing the best quality
products comes with less margin. They charged a premium for their quality. The cost of
servicing, innovation all comes with an added cost. Even in international arena, the decision
to go to niche segment meant capturing less market share. The cost of hiring local persons
was also huge. Scaling was there but the set up costs would have been huge as small
modifications would not have been possible otherwise. Promoting their own brand and not
going for contract has its own set of advantages and it created a brand value but the costs
were high. In long term though, it could be seen that high costs justified the brand value
Haier created for itself.

The Zhang's vision was ‘Three thirds’, generation of equal revenue from three components –
1. domestic market sales, 2- exports and the 3 rd- sales of products that were produced and
sold overseas.
By 2004 the proportion from each of these components were 83.4%, 8.3% and 8.3%
respectively. Clearly the company’s products made outside China and sold outside China are
lagging. One thing could be to understand why established brands are not losing the market
share. Reasons to identify the same are important and if there are factors apart from Price,
Haier can have a relook at the same. Replicating Chinese model of adding small modification
without significant costs can help there. What Maruti Suzuki was able to decipher in Indian
context, Haier should do the same for international countries. As in the USA, it got access to
retails chains after an year, while venturing now to other countries, they should see what
channels are pursued and from day 1 try to establish or get them on board as soon as possible.