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Emily Ho prepared this case under the supervision of Professor Amy Lau and Dr Jun Han for class

discussion. This case is not


intended to show effective or ineffective handling of decision or business processes.
2007 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwise (including the
internet)without the permission of The University of Hong Kong.
Ref. 07/356C




AMY LAU
JUN HAN

HAIER: MANAGEMENT CONTROL ON A
TACTICAL LEVEL
The Haier Group started out as a refrigerator manufacturer in China in 1984 with imported
refrigerator production technology from the German Liberhaier company. In the following
two decades, Haier grew to become one of the worlds leading white goods home appliance
manufacturers and was constantly regarded as an aspiring, fast growth Chinese global brand
in the international arena.
1
The companys brand recognition was in drastic contrast to the time when Zhang Ruimin, the
current CEO, first took over the company in 1984. The company had been in a poor condition
with a group of low-skilled and undisciplined workers; it had low productivity and inferior
product quality and was a loss-making business. It was a time when China was starting to
adopt a market economy and the majority of the companies were still too handicapped with
poor financial resources and technical capabilities to carry out management reforms. The
workers at Haier also lacked the concept of discipline, tended to ignore rules and did not pay
enough attention to details. Zhang was faced with a tough mission to rescue the company
from its financial burden and management turmoil. Step by step, Zhang established a
corporate culture and rules, and revamped the business strategy to set up an incentive-based
management control system; all of these transformed Haier into a world-class brand name.
2
Haier Electronics Co. Ltd was listed on the Hong Kong Stock Exchange and Qingdao Haier
Co. Ltd was listed on the Shanghai Stock Exchange.
3
In 2005, Haiers global revenue was
US$12.8 billion [see Exhibit 1]. Although Zhang was proud of Haiers growth and well-

1
Haier earned world-wide recognition through many awards, namely a World Climate Award from the United Nations
Development program and the U.S. Environment Protection Administration in 2000; it was ranked first among Chinas Top
Global Brands by the China State Bureau of Quality and Technical Supervision for refrigerators and washing machines in 2005;
it was ranked first among Chinas Top 10 Global Brands by the Financial Times in 2005; it was ranked first among Chinese
brands with the most potential by Glebors Global Financial Reports of China in 2006; it was ranked 83rd among the worlds
500 Most Influential Brands by World Brand Lab in 2007.
2
Zhang Ruimin was ranked 6th among Asias 25 Most [SOMETHING MISSING HERE] People in Business by Fortune
Magazine in 2004 and ranked 26th among the Worlds Most Respected Business Leaders by the Financial Times in 2005.
3
Haier Electronics Co. Ltd. And Qingdao Haier Co. Ltd were subsidiaries of Qingdao Haier Group.
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07/356C Haier: Management Control on a Tactical Level
2
established organisational structure, he believed that one of the imminent challenges facing
the company was how to adjust its structure and processes to confront the ongoing changes in
global markets. Zhang once said that for Haier, every year is like a marathon and every day
is like a hundred-metre dash.
4
For Haier to become a truly global player, Zhang believed it
was essential for its employees to have an enduring drive for sustainable results. In order to
sustain growth in the future, how could Haier motivate its employees to reach higher
performance goals? How could Haier evolve the management control system to adapt to the
companys internationalisation strategies? What was the best way to structure the business
units to obtain optimal operational efficiency? How could Haier co-ordinate its
geographically dispersed workforce, monitor performance and impose control in a global
supply chain?
Haiers Strategy Development
Haier evolved from the verge of bankruptcy to becoming a globally recognised brand in less
than two decades. The companys development could be divided into four stages: brand-
building, diversifying, globalisation and global branding [see Exhibit 2].
19841991: Restructuring and Brand Building
In December 1984, Zhang Ruimin took control of a loss-making refrigerator firm, Qingdao
Refrigerator Factory, Haiers predecessor. Qingdao Refrigerator was a collective-owned
enterprise with sales of US$1.88 million and losses of over US$171,000.
5
On his first day at
work, Zhang received 53 resignation letters from his staffthe workers were exasperated by
the false promises made by the previous management and were waiting to receive their
salaries. Zhangs first task was to get disgruntled workers paid as he wanted to re-establish
trust between the management and staff. When Zhang approached the financial institutions,
however, they rejected his requests for a loan since collective-owned enterprises were not
given priority in financial support from the government. As a result, Zhang had to borrow
money from rural co-operatives.
6
Aside from the financial constraints, Zhang also needed to tackle the poorly disciplined
workers and low quality production in order to steer the crippled enterprise out of its malaise.
When Zhang first came to the company, the workers in the factory came to work at eight
oclock in the morning and left an hour later;
7
the workers had pulled down the window sills
in order to burn them to stay warm, and the sanitary conditions inside the factory were dismal.
Zhang believed the first step in shaping the work ethics was to discipline the workers. He set
up 13 rules, including proper toileting habits and forbidding workers from appropriating the
companys property. These rules successfully disciplined the workers and were an important
first step in increasing workers productivity and product quality.
Next, Zhang imposed strict management control on product quality and after-sales service.
Products that failed to meet the quality requirements were destroyed, which was a rare move
at that time in China when factories cared mostly about output volumes. To increase the
awareness of product quality among workers, Zhang ordered his workers to smash 76 faulty
refrigerators from the stockroom, laying into the first one himself with a sledgehammer

4
Asia Today (4 April 2006) Why China Must Have World-Class Brands?.
5
Figures from 1985, provided by Haier during an interview.
6
In 1984, China was undergoing economic reforms. State-owned enterprises were given the strongest financial support by the
government, while collective-owned enterprises lacked the financial support from banks, and privately owned enterprises were
not fully developed. Chinas economic reforms were started in rural areas and the rural co-operatives had relatively sufficient
cash flows as farmers deposited the money they earned there.
7
Chinese workers at that time were often left without work orders and were not able to get their salaries, which led to low morale
and discipline.
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07/356C Haier: Management Control on a Tactical Level
3
which is now preserved for its symbolism in Haiers museum. To learn from problems and
cultivate an internal learning culture, Zhang encouraged errant workers to stand on red
footprints painted on the factory floor and publicly share their solutions to problems or
knowledge of new practices with other workers [see Exhibit 3].
The reason Haier used learning by lessons rather than best practice was because there was
limited knowledge of best practice in China at that time. Besides, Haier knew very little about
the best practice of other countries. With this kind of learning, Haier was able to gain
knowledge about modern products from Germany when it did not have high-level technical
workers. Later on, Haier started learning best practices and benchmarks from countries such
as Japan and America as more foreign management concepts and systems were injected into
China.
Haiers products resisted the overall price drop in the market during 19841991 since the
company had put a lot of effort into improving the quality of customer service and therefore
had the ability to increase sales even though competitors found they had to resort to price-
cutting strategies to sell their products. By the end of 1991, Haier had become a top-rated
brand in China with sales of around US$200 million.
8
19911998: Diversified Development
From 1991 to 1999, Haier merged with 49 moribund state enterprises and expanded beyond
refrigerators to a range of white goods such as washing machines, air-conditioners and
televisions etc. From 1994 to 1996, the Chinese consumer market was experiencing an
expansive increase in both demand and supply and Haier was enjoying the escalating profits.
Haiers goal during this period was to take advantage of the growing market and develop
more top brands within the diversified sectors. In order to consolidate the acquired enterprises
under the Haier Group, the company focused on allocating resources to the newly acquired
companies to restructure the production and performance evaluation processes.
19982005: Internationalisation
After the success of building the brand at home, Haier aspired to set foot in the international
market. Haier saw the need to sell branded products abroad since the home market was
becoming increasingly competitive and it was experiencing constant price pressures.
Although Chinas cheap labour allowed Haier and its competitors to keep their prices low in
the overseas markets, at home the prices went even lower because of the decade-long price
war that had turned appliance-making into a Darwinian struggle for survival. Chinas entry
into the World Trade Organization intensified competition in the home market. Every
multinational set up in China, said Zhang. Margins are low here. If we dont go outside, we
cannot survive.
9
Haier expected its go abroad strategy to improve awareness of its brand
internationally, increasing innovation and helping change its image as a producer of cheap
goods.
Haier experienced tough challenges in the overseas market at the very beginning when it
wanted to export to Germany. The retail shops in Germany had little knowledge about Haier
and refused to carry the brand. In order to prove that its products were as good as, if not better
than, products from the United States and Italy, Haier arranged and paid for all the costs
required to send its products, along with those of other brands, to a testing laboratory in
Europe for a quality check. The brand labels on the products had been taken off to ensure
objective assessment. Haiers brand received eight points while a top German brand received

8
Financial data provided by Haier during a company interview.
9
The Economist (18 March 2004) Haiers Purpose.
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07/356C Haier: Management Control on a Tactical Level
4
six points. The results shocked the German distributors but gained their recognition; Haier
began exporting soon after that. In order to compete with the established white goods brands,
Haier adopted a Get In, Stay In leadership strategy by first tapping into the niche mini
refrigerator sector, then gradually expanding its product offerings and localising the brand
[see Exhibit 4].
By 1995, Haier was exporting products to 30 countries and regions including Japan, Europe,
Africa, the Middle East and North America. In 1997, Haier posted sales of US$1.2 billion, of
which one-third was generated abroad;
10
its product portfolio had expanded to 26 categories
with over 7,000 kinds of products, and it had an output volume of 6.5 million units.
11
During
19982005, Haier set up 18 overseas trading companies and more than a dozen research and
development centres. Haier was ranked fourth among the global white goods manufacturers in
2004 [see Exhibit 5].
2006 Onwards
As of 2006, Haiers product portfolio had grown to 96 categories and products were sold in
over 100 countries around the world. It had 64 trading companies, 18 design centres, 30
manufacturing plants and 15 industrial parks, with over 50,000 employees throughout the
world [see Exhibit 6]. From 2006 onwards, Haier focused on establishing its brands in the
local markets and on increased utilisation of local design, manufacturing and distribution
networks. At the same time, Haier was keen on acquiring international quality and safety
testing certifications to show that its products were meeting international standards just like
other global brands did.
Overview of the Management Control System
Corporate Culture and Core Values
Zhang believed that for a company to be successful, the intangibles were always more
valuable than the tangibles. Therefore he placed great emphasis on establishing a set of core
values and corporate cultures to sustain employees cohesiveness. One of his favourite
sayings was Gentleness can overcome strength by the Chinese philosopher Lao Tzu; Zhang
felt that only if a company saw its weakness could it overcome any obstacles and become
successful.
12
Innovation was Haiers core corporate culture. There was a saying within the company that
Concept innovation is the pioneer, strategic innovation points out the direction, organisation
innovation makes good protection, technology innovation provides instruments, but market
innovation is the main focus.
13
In order to build a strong team, Haier created an employee
handbook detailing the companys culture and established an enterprise culture division to
educate them.
14
Haiers corporate culture continued to evolve as the company grew: it shifted from a
process approach to a people approach, focusing on nurturing personal achievement and
personal growth within the organisation [see Exhibit 7].

10
South China Morning Post (6 April 1998) Haiers Brand-Name Boldness Sets Pace for Recognition Overseas.
11
Fujian Economic News (5 February 1998) Haier Sells over 10 Billion.
12
Haiers website: http://www.haier.com (accessed 17 February 2007).
13
Haiers website: http://www.haier.com (accessed 17 February 2007).
14
Lin, T.W. (2005) OEC Management-Control System Helps China Haier Group Achieve Competitive Advantage,
Management Accounting Quarterly, Spring, (6), p.3.
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During 19841991, Haier implemented an OEC (Overall Everyday Everyone Everything
Control and Clear) management system with the slogan Improve 1% Everyday to arouse
workers sense of responsibility. Every production line was grouped under smaller production
teams and was given its production target and quality standards. Although the productivity
and quality gaps with the world standard were huge, Haier believed that by tackling the
problems one by one and improving bit by bit, it could achieve the end result eventually.
Under the new scheme, the discrepancies between the target and actual output were calculated
on a daily basis, and each team was required to find ways to improve the process on the same
day. At the end of each work day, if any production team encountered problems in the
production process, it would come together to run through the process once again until it
uncovered the underlying reasons for its failure. This was what Haier called the problem
solving technique which went on to become an important part of Haiers culture.
During the diversification stage during 19911998, Haiers strategic goal was to strengthen
and consolidate the culture and management systems of the acquired companies. An example
was the washing machine acquisition: the acquired company was in the midst of bankruptcy
proceedings and had no systematic approach to carrying out performance evaluations. Haier
sent an assessment team to the washing machine company and found that the companys
management did not take any responsibility for quality control but rather required workers to
bear all the costs for faulty outputs. This was contrary to Haiers practice, which was guided
by the 80/20 rulefor any product or management problems, the management team would
bear 80% of the responsibility and the workers would bear 20%.
15
This method of sharing
responsibility not only promoted teamwork but also encouraged Haiers management to give
clear instructions to workers before production started. Hence Haiers visiting inspection team
advised the washing machine company to adopt Haiers practice in order to revive workers
morale and productivity. Three months after Haier acquired the nearly bankrupt company,
profits were recorded for the first time since the companys inception.
Linking Strategy to Measurement Criteria
Haier adopted a structured and pre-defined way to promulgate its strategy by setting its
strategic goals in terms of numerical numbers. For example, there was the Three one-thirds
strategy, which implied that one-third of the products would be manufactured in China and
sold locally, another one-third would be manufactured in China and sold in overseas markets,
and the last one-third would be manufactured and sold overseas. In the internationalisation
stage, Haier built itself into a global brand and imposed a 10, 20, 30 strategy, which
required its brand value to be worth US$1 billion, its overseas turnover to account for 20% of
total turnover and its overseas profits to account for 30% of total profits. This setting of
specific, quantitative goals was embedded in Haiers managerial culture, and was even
channelled down to the business unit levels. For instance, a production division had a 0-6-
10 strategy, which meant the division had to achieve zero faults in the machineries, Six
Sigma standards and a 10-second assembly roll-off efficiency (the assembly line had to roll
off at least one unit every ten seconds).
Strategic Business Unit
Haier transformed its vertical organisational structure into a horizontal market chain structure
in 1998 [see Exhibit 8]. The order information flow, logistics flow and capital flow were
linked up starting from sourcing, procurement, and manufacturing to marketing and sales. The
new structure served as a foundation for Haier when it launched the Strategic Business Unit
(SBU) system shortly afterwards.

15
The concept of management bears the greatest responsibility was a common one in the Chinese culture.
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Haier called its SBU system a Mini Mini Company (MMC) since employees were either
considered entrepreneurs running their own companies or were grouped as partners.
Under the SBU system, product managers belonged to a profit centre responsible for
generating value for the company and became the companys internal entrepreneurs. In order
for this to work, Haier set up an internal transfer pricing system based on internally negotiated
rates that referenced market prices, performance evaluation systems for each process and job
position, and the assignment system for value contribution.
Under the SBU system, product managers had their own performance report, in which all the
calculations would be linked to the SBUs customers, both internal and external. The
individual report was used to calculate the extra income and values generated by each
manager [see Exhibit 9 for an illustration of the application of the SBU concept and its
effects on individual employees performance]. All the workflows along the market chain
were treated as businesses conducted among employees. In other words, the SBU concept
applied from business units to individual employee levels. Product managers were
accountable for all the costs related to salesas well as returned productsand they would
be rewarded for generating sales of high-value-added products, including sales made to
other divisions. As a result, product managers were motivated to encourage their subordinates
to achieve goals by offering rewards. [see Exhibit 10 for a scenario of running an MMC].
This company-within-company structure showed how Haier motivated employees to be more
proactive in identifying the requirements of the market and in satisfying customers, which
also created a closely knit communication network and healthy competitive workforce. For
Haier, the purpose of setting up the SBU system was to assist the company in fulfilling three
goals:
1. From the employees view, Haier hoped that the SBU system would motivate employees
to become the companys principal means of innovation and value creation.
2. From the companys view, Haier hoped that the SBU system would strengthen Haiers
core competencies, which other competitors would find hard to copy if every employee
became more competent and self motivated.
3. From the customers view, Haier hoped that the SBU system would help to promote
customers loyalty if each employee responded to the market quickly and satisfied
customer demands [see Exhibit 11].
In 1998, Haier also set up an enterprise resource planning (ERP) system to streamline its
entire supply chain, from procurement and production to sales. The ERP system was
especially useful in Haiers overseas businesses, helping to set deadlines for the purchase
orders and customer orders which allowed the production process to be carried out in a timely
and orderly manner. All the changes made to the purchase and customer orders needed to be
approved by the management team in order to maintain consistency.
As Haier expanded to overseas markets, its internal performance evaluation and sharing
systems also extended to its overseas offices, but was adapted to local culture and customs.
Additionally, the emergence of the flow management system also extended Haiers
performance evaluation system to an international level. Every employees performance was
benchmarked against the best practice along Haiers global supply chain, which helped to
improve its performance standards.
Rewards for Value Creation
Haier hoped that every employee within the organisation could create value, even for those
working in the cost centres. Employees salaries were determined using the market rate, and
on top of that, Haier encouraged employees to earn extra income by generating additional
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value for the company. Haier believed that every employee was an owner of the business
the formal title and basic monthly salary only indicated the size and nature of a particular
product sectorand that they should be motivated to create value to earn their bonuses.
Before Haier changed the companys employee evaluation scheme using the SBU system, the
factory workers had a low sense of performance evaluation. After the SBU system was
adopted, the management team would channel down the performance goals (eg, output
volumes) to the division heads, who would then calculate the product output for their own
divisions. All divisions that exceeded the production target were eligible to earn a bonus. As a
result, employees were motivated to generate extra income for the division, which could
translate into their own bonuses.
Within Haier, each product manager was responsible for the market performance of one
product group and was given access to a daily profit and loss statement. Product managers
would be given a profit benchmark based on the shops sales level, promotional costs and
staff costs etc, and the finance division would advise the product managers on sales strategies
(ie, bundle sales, discounting etc) based on margin calculations (see below for a more detailed
description of the role of the finance division). Product managers were motivated to devise
new sales strategies since their incomes were closely tied to product sales. Haier also
encouraged product managers to sell more high-margin products and generate more sales
directly from the factory to reduce warehousing costs. Product managers could obtain extra
commission for selling high-margin products and an extra bonus for each sale made directly
from the factory. By doing so, Haier encouraged product managers to not only focus on
simply increasing sales but also profit margins. The most conspicuous difference between
Haiers product manager role and the standard sales and marketing managerial role was the
active involvement of Haiers role not only in product design but also product supply.
Whereas the standard sales and marketing role would be to sell whatever supply of goods was
given, Haiers product managers would help adapt the product to the market, then manage
supply levels and distribution to maximise direct delivery and minimise inventory.
The performance evaluation system was carried out with high transparency. Division heads
would update their divisions production volume on a blackboard placed in an open area
inside the factory so that everyone could see the results. This created a sense of competition,
which was lacking before then, among not only divisions but also individual workers. There
was a saying among the workers that in the past it was the factory that pushed workers to
perform; now it was the workers who strived to perform the best they could.
Although Haier imposed stringent performance measures on its employees, it was able to
maintain a stable employee turnover and became one of the most popular employers among
university graduates. Haier maintained a 10-10 scheme among all employeesit provided a
series of training programs for the top 10% and laid off the bottom 10%. The human
resources division would also send out a monthly report to all employees indicating their
performance level, benchmarked against a pre-determined set of performance targets.
Haier also adopted a stringent management control system based on a set of pre-defined rules.
The finance division, for instance, acted as the control unit by overseeing all the financial
decisions made by the division heads. It could overrule any decisions made by the division
heads if their decisions did not conform to the set of rules determined by the management
team.
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The Finance Division
The finance division played an important role in managing Haiers business flow by
providing consulting, business support and banking services to the SBUs. The division
provided services to Haiers various business units and market centres around the world.
Haier envisioned building a world-class finance operation along with its global expansion and
it had laid out a growth plan in order to guide the finance division in undertaking process re-
engineering and standardised platforms, and established shared services with an aim to
becoming an industry benchmark by 2010 [see Exhibit 12].
The Culture
Under the corporate vision of innovation and market orientation, the finance division
derived its own divisional culture based on achieving high and value-added service levels.
The division placed great emphasis on human resources and believed the most important step
in retaining staff was to be able to set up a harmonious work environment among the
managers and their subordinates. The divisions culture shaped managers leadership styles as
well as employees value systems so that the desired culture could be promulgated to the
SBUs. The mission, vision and objective of the finance division were as follows:
Mission: Strive for excellence and prudence in service delivery.
Vision: Develop a financial operation that has the best practice in the industry.
Objectives: (1) Develop a synchronised process flow and shared-service global financial
platform; (2) Nurture a quick-response, accurate and value-added service culture; and (3)
Create a powerful global team in terms of leadership and technological skills.
The following guidelines were used in developing the finance divisions culture:
x Create harmony by having a fair, respectful, caring and responsible leadership.
x Nurture a learning organisation by encouraging employees to update their finance and
management knowledge and benchmark themselves against industry leaders.
x Set up a fair performance monitoring system to reward and penalise employees.
x Establish good team spirit by caring for employees as individuals as much as their job
performance.
With these guidelines, the following motto was adopted for each employee in the finance
division: Develop self respect; attain self discipline and abide by the rules; respect others;
focus on your work; look at the big picture; be proactive to provide service; be honest to
others.
In fact, Haier had established 100 ethical rules for the finance division and among them 60
were guidelines for achieving performance goals and 40 were related to various kinds of
violations at work that employees should be aware of. In general, the guidelines were
categorised into nine sections: basic rules, responsibilities, servicing, quality, penalty policy,
budgeting, teamwork, learning and professionalism. The violations were bounded by a three-
class penalty system, in which employees would be penalised based on the type of violations.
The Structure of the Finance Division
There were eight functional centres grouped under the finance division [see Exhibit 13], and
each one was supported by its respective sub-divisions:
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Strategy Centre: Supported the chief financial officer (CFO) in devising development
plans, managed projects and co-ordinated new investment projects.
Budget Centre: Co-ordinated and prepared the companys mid- to long-term budgets,
tracked the monthly key performance indicators, devised the budget plan and measurement
criteria, organised the analyses of the business units business activities, and provided
assessment reports.
Shared Services Centre: Prepared accounting and tax reports, maintained accounting records,
provided expense reimbursement services, devised tax planning, provided tax and legal
consulting, and set uniform accounting policies for the entire corporation.
Financial Services Centre: Provided budgetary consultancy, business support, internal
control, and performance management and decision-making support to production, sourcing,
and domestic and international marketing units.
Treasury Centre: Managed corporate capital fund, provided financing services to business
units and centres, established corporate companys financing strategies and processes,
reduced cost of capital fund, enhanced return values of working capital and invested funds,
assisted in financing of large overseas investment projects, and managed credit and currency
risks.
Internal Control Centre: Established internal control systems, assessed business risks,
performed internal operation audits, co-operated in carrying out the external audit, and
monitored financial IT infrastructure and process re-engineering.
One important position within the finance division was the business finance officer (BFO),
whose principal role was to assist business units in achieving their strategic targets and to
implement internal control. The BFO worked under the supervision of the division manager
and the CFO. He or she was responsible for supervising and leading the financial planning
and implementation for the business centres, including assisting business units to come up
with their own budget planning based on the corporate budget plan. BFOs were also
responsible for recruiting and training finance staff in the business units, and implementing
accounting policies based on the corporate accounting policies. They acted as advisors to
business units to provide advice on generating additional profits by means of cost cutting,
resource optimisation and risk analysis etc. Aside from planning and analysis, BFOs also
played a role in bridging communication between different business units. Since they were
exposed to a lot of trade and financial information on a daily basis, they were expected to
abide by the finance divisions ethical codes to keep information confidential.
The Role of the Finance Division
Under the SBU system, the finance division assumed new and additional roles and
responsibilities, compared to those it would have in a traditional company. Under the new
daily reporting mechanism, finance staff members were increasingly focused on the planning
and consulting services in advance rather than on data analysis afterwards. The installed ERP
and accounting systems allowed the finance division to carry out detailed allocation of
revenue and costs to individual employees in order to calculate their bonus or loss tied to their
performance.
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Budgeting and Benchmarking
Every year in around August and September, Haier would conduct the budget review and
strategic planning for the coming year. Each product division as well as functional division
would have representatives to participate in the corporation-wide budget meeting. When the
goals and budgets were determined by the management team, the BFO in each product group
would advise his or her respective division (manufacturing, sales, after-sales etc) about its
benchmarks and targets, derived from the top level. The general manager in each
geographical market would also communicate the budget plan to his or her subordinates,
down to each sales person in each retail store, and each model in each category. As a result,
the corporate budget plan trickled down to the individual level covering the marketing plan,
product models and sales target [see Exhibit 14].
On top of the corporate budget plan there was an internal monthly review for each division to
review the actual vs the budget and forecast for the coming three months. The internal
divisional budgeting forecast was formed at the individual level by looking at a three-level
model: industry trends, benchmarks and current situations. Employees were given a
benchmark, which was set with reference to the industry benchmark.
16
For example, workers
in the refrigerator manufacturing division would set their benchmarks with reference to
Whirlpools (a competitor) performance. For a product manager in Beijings Gome stores
17
,
he or she also needed to benchmark the products against a similar industry performance. At
the same time, Haier would closely monitor industry trends to fine tune performance targets.
For instance, the current ratio and quick ratio had gone through drastic changes in the last 20
years. Haier had been monitoring these changes in order to evaluate and adjust its own
performance standards. It had set up a competitive measuring system by using a set of
benchmarked margins as the bottom line measure. Each employee had to achieve certain
percentage points above the benchmarked margins to be regarded as competitive. If they
failed to achieve it, they would need to understand the reasons for their failure and to devise
ways to overcome it.
Value-Based Management
In the past, the role of Haiers finance division was simply to review business performance
and provide budgets for subsequent fiscal periods. After the launch of the SBU system, all the
staff in the finance division changed from being police
18
to becoming consultants by
proactively providing advice to business units on ways to improve their performance on a
daily basis. The finance division focused more on doing the right things in the right way to
create maximum value for the company.
Being an internal financial institution, the finance divisions services included auditing,
financial planning and asset management. It would sign contracts with other divisions just
like any other normal business transactions, and receive fees from the divisions for providing
services to them. If the divisions used the services and obtained benefits in return (eg, lower
cost), the finance division would get service revenue according to the contract. On the other
hand, if the finance division failed to create value or incurred losses, it would be penalised.
Each employee in the finance division had an account to keep track of his or her share of
bonus or penalty throughout the year. By the end of the year, employees could take out a pre-
determined share of the cash bonus or use the points to exchange for training courses while
keeping a balance in their accounts. This bonus system applied to the product managers as
well as their subordinates.

16
These benchmarks were obtained by purchasing from suppliers, the internet and conducting interviews with benchmarked
companies, their suppliers, clients and consulting companies.
17
Gome was a electronical appliance retail chain based in Beijing.
18
This referred to having the main task of monitoring performance.
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Impact on Internal Reporting System
Shorten Accounting Period
Contrary to the traditional monthly, quarterly or yearly reporting mechanism, Haiers SBU
system utilised a daily reporting mechanism, which closely reflected the daily operational and
financial changes so that evaluations or decisions could be made in a timely manner. The
finance division believed that it was its critical responsibility to provide timely and relevant
reports to support managers day-to-day decision making.
Adopt Accrual Accounting and Matching Principles
Traditionally, cash basis reporting was primarily used for internal reports. Under the SBU
system, to provide timely and relevant reports for internal decision making and performance
evaluation, Haier adopted the accrual and matching principles for internal reporting. The
finance division needed to carry out detailed allocation of revenues and costs to individual
employees on a timely basis in order to calculate their bonuses or losses, which were tied to
their performance.
Remove Cost Centre
Haiers MMC market mechanism modified the traditional definition of a companys
responsibility centres. Centres which were traditionally considered cost centres were changed
to either revenue centres or investment centres. Haier believed that every responsibility centre
managed a business operation and created value, even though the value might not be actual
currency values. Therefore, the finance division needed to provide reports to show each
centres profit and loss.
Increase Responsibilities
The finance division was the main impetus in restructuring the business processes to ensure
cost and operation efficiency and performance. Finance managers put more time into
providing financial services to internal customers and played a more important role in the
achievement of preset targeted performances of its internal customers.
Managing for the Future
In October 2006, Haier once again headlined the Wall Street Journal Asias reader survey of
Chinas most admired company. This was by no means solely related to its financial strength
and had more to do with its ability to offer outstanding products and customer service. Earlier
in the year, Haier had announced that it would review its brand strategy to boost sales in
foreign markets. It also signed an agreement in 2005 with the Beijing Organising Committee
for the Olympic Games to become the official home appliances sponsor of the 2008 Beijing
Olympic Games. The Olympic tie-up would be a critical part of Haiers plan to advance its
brand name in the international arena. Haier also became the first home appliance brand in the
world to sponsor the NBA.
Facing the trends of worldwide mergers and acquisitions and global competition, an
increasing number of global companies were changing from a manufacturing enterprise to a
service provider and brand operating entity. Haier was also preparing for the change in order
to be competitive in the global market.
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On a macro level, Haiers management control development process demonstrated how to
align company strategies and management objectives with its management control systems.
On a micro level, Haier illustrated how a company could design systems and processes that
energised its employees to execute company strategies effectively. As Haier continued to
grow and expand in the international markets, would its management control system be
sufficient in complementing its global moves? In what ways could Haier revise the various
aspects of its control measures, ie, action controls, results controls and people controls?
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EXHIBIT 1: A GROWING COMPANY






Source: Haiers internal information.
1984 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Average Annual Growth
68%
2005 Sales Turnover
US $12.8 B
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EXHIBIT 2: HAIERS DEVELOPMENT STAGES






Source: Haier internal information.

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EXHIBIT 3: ON-SITE 6S FOOTPRINT





Note: The six Ss were derived from the Japanese total quality management concept: seiri (well organised),
seiton (putting things in order), seiketsu (neatness), seisoh (cleanliness), sasoh (manners), shitsuke (discipline),
and Haier added a sixth, safety.
Source: Haier internal information.

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EXHIBIT 4: HAIERS OVERSEAS EXPANSION STRATEGY

Source: Haier internal information.
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EXHIBIT 5: HAIERS RANKING IN THE GLOBAL WHITE GOODS SECTOR


Source: Euromonitor Data 2004, Haier presentation document.
6.13
9 9. .6 65 5
11.52
12.17
12.82
Year 2003
6.07 GE 5
8 8. .5 59 9
H Ha ai ie er r 4 4
11.10 Panasonic 3
11.02 Whirlpool 2
13.69 Electrolux
1
Year 2002
Sales TurnoverBillion USD White Goods Company Rank
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EXHIBIT 6: GLOBAL ORGANISATION





Source: Haier internal information.

Europe
5
1
3

15100
West
Asia

3
Africa
4

2520
America
3
1
3

2
12260
East Europe
1
2
2390
Medit.
1
1
3
2660
Southeast
Asia
2
7
Australia
2
610
South
Asia
1
1
6

3560
China
45
12
10

13000
East Asia
4
3
1

1650
56137 43137 Distribution Centre
15 3 Industrial Park
37 30 Manufacturing
18 8 R&D Centre
64 19 Marketing Centre
G Gl lo ob ba al l O Ov ve er rs se ea as s W Wo or rl ld dw wi id de e N Ne et tw wo or rk k
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EXHIBIT 7: EVOLVING CORPORATE CULTURE



Source: Haier internal information.
Competition mode for
Haier success in overseas
is: Individual-goal
combination; Person
is innovative SBU;
Order is competitive
market target
Content OEC is a tool
that guarantees
target achieved
Content: Establish person is
primary before re-establishing
process
Content: One person
one order
Push total quality
management, and
standardization,
insisting in famous
brand, high quality
Everybody have own
responsibility, and
every responsibility is
managed by one
person. Everyday,
everything is clear,
Destroy two walls in
and out of company,
everyone faces market
directly; perform SBU
philosophy and the
object management
systems for all
employees
1984.12-1991.12(7Y) 1998.12-2005.12(7Y) 2006
Total quality management
Individual-goal Combination
Management system
1991.12-1998.12(7Y)
OEC management system
Market-Chain
process reforming
Content: 1% quality
defects will bring
100% disaster to end
users
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EXHIBIT 8: HAIERS MARKET CHAIN PROCESS MODEL
Source: Haier internal information.
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EXHIBIT 9: PRODUCT MANAGERS SBU PROFIT/LOSS STATEMENT

Item Definition
Sales Unit price volume
Product cost Pre-determined purchase price
*
volume
sales cost All the sales-related costs, business costs, payroll and
retailer reward programs
advertising cost Cost of new product promotion
Fees
logistics cost Inventory management and delivery cost
price-cutting Loss related to price reduction and those related to the
321
#
principle
warehousing Cost of funding
^
Loss
quality Returned products from the retailers
Value-adds Sum of sales of high-value added products royalty rate
Profit/Loss Sales product cost fees loss + value-adds
*
Purchase price was normally pre-determined with the product development division.
#
Products that were out in the market for three months, two months or one month would be required to impose price reduction
based on a pre-determined set of rates.
^
The interest imposed on the cost of inventory exceeding 20 turnover days.
Source: Haier internal information.
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EXHIBIT 10: THE RUNNING OF A MINI MINI COMPANY (MMC)
The Transformed Role of a Sourcing Manager
Zhang Yongshao joined Haier in 1999 after graduating from university. He started working
in the non-ferrous metal sourcing team and later switched teams to join the steel plate
sourcing team. Zhang was soon promoted due to his good performance.
In early 2002, Haier launched the SBU pilot project in the logistics division and picked the
steel plate sourcing team as a starting point. Zhang was selected to lead an SBU for steel
plate sourcing, and he was responsible for the profit and loss of all steel plate sourcing within
Haier in 2002. Under the SBU program, Zhang went from being an operational employee to
being the boss of an RMB 1 billion Mini Mini Company.
19
With his new responsibilities,
Zhang started to make plans on how to optimise sales and minimise costs so as to
maximise his profit margin. He ran the MMC just like a normal company and was required
to submit a balance sheet, and profit and loss and cash flow statements to Haiers
management regularly. Zhang earned royalties based on the margin from the purchase orders
minus all the expenses including port fees, insurance fees, office administration fees and the
interests etc.
Since the price of the steel plates sold within Haier was fixed, Zhang needed to figure out a
way to optimise profits. Zhang also needed to deal with the rising sourcing price of steel
plates. In the past, Zhang did not have to worry about the external factors but now he needed
to find ways to lower the costs to counteract the rising sourcing price. Zhang decided to
improve the efficiency along the supply chain in order to cut costs. When the steel plates
arrived at the port, Zhang would try to arrange for them to be transported to Haiers
warehouse on the same day to avoid paying additional port fees. Zhang also cut down
inventory and warehousing fees by imposing just-in-time delivery to internal users. Aside
from cutting costs, Zhang also contacted international suppliers and distributors to source
new types of material, so that he could offer new product choices to his customers as well
as decrease the risk associated with a price rise.
At the end of 2002, Zhang turned a money-losing business into a profitable one and his
salary had also doubled. The initial success boost Zhangs confidence and he made plans to
expand his business. The move made sense as Zhang had been sourcing from international
suppliers with high quality and the consolidated sourcing for the whole company allowed
him to receive good prices from suppliers. Zhang realised that Haier had the advantage in
both the price and quality of steel plates, so he made an attempt to distribute to third parties.
Zhang made his first third-party sourcing deal in January 2003. Zhang was becoming more
and more excited with his expanded business. My order volume in 2003 had already
increased 50% and my turnover had exceeded RMB 1 billion. Third-party orders comprised
a considerable share of sales this year.
Zhang was very pleased with his new entrepreneurial role. To cope with rising sales and
expanded business scope, he had to start hiring new staff for his team.

19
The MMC was not a legal entity but a virtual company within Haier.
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EXHIBIT 11: HAIERS STRATEGIC BUSINESS UNIT (SBU)
Source: Haier internal information.

Client Manager
(SBU)
Strategic target
Product Division Customer
satisfaction
& earning of money
Supporting platform
to accomplish
target
Evaluate
monthly
salary
Evaluate
annual
salary
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EXHIBIT 12: THE DEVELOPMENT PLAN OF THE FINANCE DIVISION



Source: Haier internal information.
Process
Reengineering
Standardised
Platforms
Shared
Services
Industry
Benchmark
200607 200708 200709 2010
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EXHIBIT 13: STRUCTURE OF THE FINANCE DIVISION


Finance Division
Asset Management
Committee
Budget
Management
Committee
Shared Services
Centre
HR Centre
I
n
t
e
r
n
a
t
i
o
n
a
l
Risk Management
Committee
Budget
Centre
Financial
Services Centre
Tutuu'
Couto' Cut
P
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t
i
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^
u
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!
^
u
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t

?
Treasury
Centre
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Centre
C
o
:
t
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u
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Internal Control
Committee
B
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EXHIBIT 14: HAIERS TOTAL OPERATING AND FINANCIAL BUDGET SYSTEM



Source: Haier internal information.
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