Reengineering Sbus At The Haier Group Commerce Essay

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Given the rapid development of economic globalization and the arrival of the era 3C customer, competitor, and change, fast innovation and capacity to meet customers needs have become necessary benchmarks of enterprises' core competitiveness. Haier Group (which, below, I abbreviate as Haier), a notable, Chinese, manufacturing enterprise successfully coordinates its human resource management in its western transnational companies with the frameworks that apply in the Chinese socialistic market economy system. In addition, Haier implements several new methods in human resource management. The most famous among them is the Strategic Business Unit (SBU) reengineering mechanism. This contributes to innovation and improves speed; on account of links between the business process, reengineering, and the market chain. This paper analyzes the practice of SBU reengineering mechanism according to a Haier employee's case and explores its deeper theoretical implications based on the discovery of facts in the cases.

Key words:

Haier Group; business process reengineering; SBU reengineering mechanism



Literature review

Modified proposition

Case analysis

4.1 Case introduction and significance

4.2 Case analysis




1. Introduction

Haier Group was born out of Qingdao Refrigerator Factory in 1984, which was an out-dated manual workshop with inadequate workforce on the edge of bankruptcy at that time. However, after development over more than two decades,

. It has become China's most valuable brand, the largest home appliance manufacturer (Wang and Ong, 2007) and the world's 4th largest white goods manufacturer (Chen, 2008). It has over 240 subsidiaries, 87 trading companies, design centers and industrial parks, and over 80,000 employees around the world. Also it is a diverse company composed of research, manufacturing, trade and finance (Haier's company facts, 2011). [1]

Nowadays, under the market circumstances featured by 3C (customer, competitor, and change), speed and innovation have become the key expressions of an enterprise's core competitiveness. In order to stand out from fierce market competition, Haier focuses on how to innovate products and satisfy customers' demand quickly. As a result, each employee must do their utmost to create the most valuable business orders to achieve competitive advantage. Indeed, Haier is always trying to activate everyone for its whole optimization. Following the business process reengineering program from 1999 to 2001, Haier put forward the theme of "speed, innovation and SBU" for its future development and officially implemented SBU reengineering mechanism in 2002 for purpose of further refining the market chain, namely, to enable each company to face the real market directly and respond to the market as soon as possible. [2]

2. Literature review

SBU reengineering mechanism is Haier Group's exploration and practice for transformation from traditional functional management to process management. The earliest experts, who systematically did research on it are Michael Hammer and James Champy. They proposed the theory of business process reengineering and emphasized a dramatic improvement could be achieved in terms of cost, quality, service and speed under the fundamental rethink and radical redesign to the business process. The basic connotation of this theory is to establish a process-centric system, which can release bondage from traditional functional divisions, promote customer-oriented spirit and empower employees to utilize various resources for adjusting any market change quickly. [3]

In 1996, James Martin, a scholar from Warwick University pointed out in his book "The New Business Revolution" that value flow is the source of the viability of an enterprise. The definition of value flow discussed in this book is coincident with business process. He also believes that most enterprises are built basis on the vertical business structure and it always naturally evolves to be their power structures; therefore, the value flow has no name and is largely unstructured and even out of control. In addition, each enterprise has a series of work activities which can transfer specific results to specific type of customers or end-users. However, such kind of work activities are usually scattered in different departments and functional areas, so they are inefficient and unskillful. Conversely, after business process reengineering, they will become more efficient and immediate. [4]

Another two scholars, Soumitra Dutta and Jean-Francois Manzoni from INSEAD analyzed core process redesign and performance improvement through case analysis method in their book "Process Re-engineering, Organizational Change and Performance Improvement". They positively promote business process reengineering and put forward the principle of how to integrate the business process and then to realize functional specialization. [5]

In order to realize further process integration, American academics Frank Ostroff and Doug Smith put forward the concept of "horizontal structure" in their book "The Horizontal Organization". They realized that some organizations had adopted the business process team instead of the traditional functional divisions to restructure themselves. The main features of horizontal structure is “working mainly operates around few business processes or work flows and it aims to link the business activities of employees, the ability and needs of suppliers and customers together to increase the whole efficiency by performance review, also job promotion is linked with the performance review." [6]

Haier's SBU reengineering mechanism is exactly a brand new management method for reinforcing the achievement of business process reengineering. Chinese scholar Jiao analyzed "vertical subdivision" from the traditional functional management and "horizontal process integration" from business process integration in his book "Organization Change Management". [7]

The columnist Thomas L. Friedman from NYT divides the globalization into three stages: national globalization, corporate globalization and individual globalization. The only road to realize corporate globalization is to transfer from functional management into business process model, this new kind of management model will become an edge tool to achieve sustained competitive advantage. [8]

3. Modified proposition

SBU (strategic business management), namely, "strategic institution", a portfolio of a single business or related businesses, each SBU should have unique mission and competitor in order to develop business strategic independence ,which is different from other unites. [9] In the information era characterized by the customer economy, SBU has irreplaceable impact on enhancing strategic management and enterprise's core competitiveness. For example, both American GE in the 1970s and Japanese Panasonic in the 1980s began to implement the SBU management and achieved success to some degree. [10] During the SBU reengineering practice, Haier divided SBU into three levels, namely, S-level SBU (strategic level), B-level SBU (business level) and U-level SBU (unit level). It extended and deepened the original SBU for delivering Haier's strategy to each employee more efficiently.

The modified proposition: SBU reengineering mechanism is exactly a way that transfers company's grand strategy into specific business rules, then the grand strategy will be an essential part of employees' daily work and doing business becomes a continuous process. Also, each employee is both an operator and an innovator. Haier's SBU succeeded mainly because it made it possible to combine operational control and financial control. [11]

4. Case analysis

4.1 Case introduction and significance

In this paper I choose the archival analysis method to confirm my proposition because despite of this method's weakness, it can give us an open mind to treat numerous, unstructured materials and data. Besides, the source of it is directly from the real business process which is more effective and realistic, especially like Haier's SBU, the sample of which is simple, so maybe the archival analysis is the most feasible method and it is appropriate to observe a corporate transformation process in the long term (Pettigrew, 1990).

Next I will take Haier's SBU reengineering case to confirm my proposition through analyzing how it promotes the SBU reengineering process and how it establishes a process-oriented organization. This case comes from Haier's yearly publication and I also collected some research data from domestic and overseas documentations. So I believe this case is reliable enough to stand for others.

4.2 Case analysis :

The SBU reengineering process of a Haier's purchasing manager -- Yongshao Zhang will support my proposition. Zhang is a purchasing manager who joined Haier in 1999 and initially was responsible for the purchase of non-ferrous metal. In 2002, Haier decided to apply SBU in some departments and the steel plate purchasing position was chosen to have an experiment at first. Eventually through competition, Zhang successfully signed a SBU operating contract with Haier to take charge of whole steel plate purchase in 2002. An ordinary employee suddenly needed to "operate" such a huge company is not an easy thing. Definitely, Haier set several standards for him such as the purchasing price must be fixed at first. Also, if operating expenses can be reduced, the reduced part will be added into his profit -- an earnings-related scheme. [12]

Generally speaking, a company should have three financial statements: balance sheet, income statement and cash flow statement; however, Haier designs a specific personal financial statement -- "SBU Operating Results Checking Statement" for Zhang which includes all above three. For Zhang himself, this sheet is just like a "deposit book", including lots of records, such as operating income, cost and efficiency. To be more specific, the operating cost consists of insurance expense, storage charge, and administrative expense and so on.

Haier refers the concept from deposit book, and the operating result will reflect in it. If a deposit shows positive meaning SBU does a good job; otherwise it meaning SBU operating makes a loss, and related SBU won't get any reward despite the finished products. For example, Zhang must bear the losses once the rejected products are made from his steel plates. Unfortunately, the price of steel plate in Chinese country-wide market soared since 2002, Zhang can completely keep out of the affair before the SBU reengineering, but now as a SBU responsible for purchasing steel plates, he had to operate and conquer difficulties actively. As a result, Zhang tried various ways to cut down costs. For instance, after to be a SBU, Zhang must carry cargo into logistics center promptly, if not to do so, he had to pay more for daily port charge all by himself. Similarly, he had to send out those plates just in time, or he would get fined by storage charge. Furthermore, he proactively cooperated with international suppliers to develop competitive alternative materials for the sake of customers and himself. With SBU reengineering mechanism, Zhang's income doubled compared with last year. The stage achievements encouraged him to activate purchasing business further. As an international company, Haier is able to get high-quality materials from reliable iron and steel suppliers around the world, which brings economies of scale along with price advantage; while these two important advantages are completely attractive to other medium-sized or small companies. Then Zhang began to develop steel plate customers outside Haier as a third party purchaser since 2003. Encouragingly, this strategy did a good job and as a result, annual total orders doubled compared with 2002. Because of increasing orders, Zhang hired another two assistants to handle with purchasing process. To sum up, Zhang created more new resources and extended the business into the whole society based on SBU reengineering mechanism.

We can say that normal employees shift from managing objects to operating subjects. Each SBU can create its market and operate independently. Visually speaking, "everyone can be a boss with self-financing", that is to say, employees can run a business with company's resources in the thinking and behavioral mode of a boss. This kind of independent management pushes everyone -- each SBU to face its clients directly, greatly enhancing the market reactive speed and accelerating the whole company's efficiency.

5. Discussion:

SBU reengineering mechanism provides the opportunity for employees to earn their salaries rather than just get salaries. The motivation to earn salary is to fulfill customer demand and at the same time to achieve better profits by maximizing customer satisfaction. This kind of reward system is according to market authorization and efficiency. In above case, Zhang's operating income primarily depends on three parts: sales revenue, operating cost and personal commission. Among them, operating cost is made up of port charge, insurance expense, storage charge and so on. Personal commission is calculated proportionally based on after-tax net profits. As a result, the income of steel plate purchase manager is: sales revenue - operating cost + personal commission.

In conclusion, SBU reengineering mechanism is a further step of Haier's market chain business process reengineering, it raises higher requirement to an enterprise's market reactive speed and continuing innovation. [13]

Here, I should admit that, this paper only emphasis on the positive parts of SBU and has limitations like how to calculate the performance of "management SBU" which is much more complicate to evaluate. Additionally, as every coin has two sides, it still requires a long time to adjust management method throughout the whole company. We cannot deny the top-down SBU reengineering structure has several inevitable deep-seated problems and weaknesses.

The following are some key points:

After the SBU reengineering process, the pressure and difficulty of internal adjustment became greater. According to economic theories, a corporation is established because it can save the market transaction costs regardless of certain administrative expenses. However, Haier's administrative expense still exists after SBU reengineering, in the meantime, market transaction costs goes up due to internal simulation of market-based operation. On the other hand, although Haier's work efficiency and output did increase a lot, but the future is still indistinct.

2. Employees began to face more stress and motivation simultaneously, even if incomes increase a lot, their whole welfare are likely not the same because of higher risks and more complicated interpersonal relationships. Especially when some potential employees originally prefer the traditional management method, the "SBU hallo effect" may not work very well.

3. Not all positions can be set with specific performance targets and flexibility and elasticity of the targets are questionable. For instance, if uncontrollable objective factors affect job performance, the related SBU employees have to take entire charge of it. What's worse, it may hurt their enthusiasm and put an inordinate strain on them.

4. SBU employees could really utilize and mobilize resources with marketing excellence? Honestly, it is feasible in theory but difficult in practice. And anyhow, the right and interest barriers will exist inside the company. Consequently, SBU reengineering process standard must be made with buffer areas which can mitigate and solve contradiction between managers and employees. Besides, ordinary employees are even harder to mobilize resources and get enough supports than "model employees". In a word, although Haier's SBU did break the traditional management model to a certain extent, the leader-member relation still exists.

5. As the case has mentioned, SBU employee can hire his own assistants to handle other additional business but it may lead to unnecessary conflicts, such as the business conflict between Haier and other clients, company culture or HR system conflicts between the new hired assistants and Haier's formal employees and so on.


Haier's SBU reengineering mechanism is to turn each employee into a SBU and how to be a SBU? Simply put, four essential elements make up it: market target, market order, market effectiveness and market reward. These various SBUs are classified based on different indexes with different contents and lastly to generate a whole SBU operating situation.

Although it is not possible to involve all employees, the concept of SBU is deep in the hearts of Haier people. When it comes to SBU concept, Haier's SBU combines the western core theories with Chinese local characteristics and strengthens the attention to employees in terms of Organization Theory. Also, Haier's SBU integrates the relationship of authority and benefit of managers and employees at all levels, meanwhile the multilevel and multiform SBUs put strategy theory into business operating practice.

There is no doubt of the success of Haier's SBU at least till now; however, Haier Group, as an excellent explorer of SBU reengineering mechanism, it must continually adjust thoughts, improve management in time in the light of the changing market to conquer its weaknesses and prevent potential risks, only this can maintain Haier's vitality.