Five Star Beer

Asian Strategic Investment Corporation (ASIMCO) is Beijing-based investment

group, founded in 1994. Its primary shareholders were Trust Company West, Morgan Stanley
and senior management. In the senior management team were: Jack Perkowski (Chairman
and CEO) – graduate at both Yale and Harvard Business School; Tim Clissold (President) –
graduate at Cambridge University and fluent in both spoken and written Mandarin; Michael
Cronin (Chief Investment and Financial Officer) and Ai Jian (Managing director) – a Chinese
native fluent in English. ASIMCO’s motivation for investing in Chinese beer was twofold.
First, the industry was experiencing high growth rates and secondly, it was highly fragmented
and under significant restructuring. This form of fragmentation was a consequence of China’s
legacy of central planning. Given its increasing adoption of market-driven mechanisms,
China’s central government was encouraging the rationalization of certain industries,
including the beer industry.

ASIMCO’s vision was to help the formerly inefficient state-owned enterprises

transform into market driven and export ready competitive firms. By 1997, this corporation
has entered into 15 automotive parts manufacturing and distribution and 2 beer
manufacturing joint ventures. The Five Star Beer joint venture was the largest single
investment in ASIMCO’s portfolio. ASIMCO had 63% stake in this company and the other
37% belonged to Beijing municipal government. The same government was also a minority
interest partner of 46% in the joint venture with ASIMCO for the other brewing company –
Three Ring Beer Company.

Alliance Brewing Group (ABG) was a management service group which was
specifically established, by the investment corporation, to provide support to both ASIMCO’s
brewery joint ventures, Five Star Beer and Three Ring Beer Company. ABG had different
support functions which included marketing, brewing, financial and quality control and new
business development. The president of ABG was Tom McMullen and this group’s goal was
to help both brewing companies to realize their return on invested capital.

Five Star was one of the oldest brewing companies in China with its origins dating
back to 1915. For years it was only locally served in markets as a consequence of competing
interests from local governments. Over the years Five Star started penetrating the market
through licensing agreements between Five Star and other regional brewers throughout the
country. This market position had developed because it was wholly owned by the Beijing
municipal government. For example, in 1957, Chinese Premier Zhou Enlai decreed that Five
Star was to be the exclusive beer supplied at all State banquets. In the 1990s, Five Star
entered into licensing agreement with his competitive company, Three Ring Beer.

For half a century, Five Star Beer enjoyed a business environment free of
competition, which is not a luxury that most companies have. Its work was supported by the
Beijing municipal government and it dominated the beer market in Beijing and the
surrounding areas. However, the 1993 licensing contract with Three Ring Beer had an
adverse effect on Five Star Beer’s position in the local market. Instead of respecting its
license, and marketing Five Star beer in the northeastern outskirts of Beijing, Three Ring
Beer was purposefully using lower prices for the same beer in order to gain more market
share. Due to the lack of wholesaler and retailer loyalty, Three Ring Beer managed to steal
some of Five Star Beer’s market share in areas where the latter company was supposed to
have exclusive rights. Another factor that contributed to increased competition was the
industry consolidation process which was the result of the Chinese government’s adoption of
more market-driven mechanisms. Consequently, there was an increased joint venture activity
and as a result globally recognizable beer brands, such as Heineken, Becks and Budweiser,
entered the market. Therefore, the era of following old practices and still being the dominant
player in the industry was over. Hence, Five Star Beer needed a complete change of its old
attitudes based on minimum initiative and innovation if it wanted to keep its current position
in the market.

Considering the presented challenges, Five Star Beer was in critical need of changing
its practices, and one of the areas that needed the most attention was quality. In the beer
industry, quality was defined with having consistent taste, clarity, carbonation and packaging.
When ASIMCO formed its joint venture with Five Star, it identified various mistakes in the
production process which no one tried to remedy. So, half-full beer bottles, foreign
substances in the beer or wrongly put labeling frequently reached the final consumer.
However, Five Star’s current management was passive in identifying the problem or devising
a resolution plan. Even though the company’s management might have turned its head to
occurrences like these ones up until now, the increased competition in the industry dictated a
change in working criteria. Therefore, adapting a total quality management practice was a
must if Five Star Beer was to compete with the new entrants in the market.
 Solving the quality problem was at the top of ASIMCO’s agenda, but they needed a
carefully developed plan. The first step they undertook was to hire western experts who
would increase the control of quality in the production process. These experts were faced
with the challenge of achieving higher quality targets by using the existing badly maintained
equipment. Another more difficult challenge was to change the Chinese employees’ view
regarding the importance of having consistent quality. These western experts needed to keep
in mind that western management practices might not have the same effect in China
considering the difference in the business climate. According to one study which examines
the effectiveness of different quality management practices operating in China, there are two
orientations exploration and exploitation (Wu and Zhang, 2013). The study concluded that
companies located in seven areas in China show that exploratory-oriented practices
contribute more to total quality management than exploitative-oriented practices. Thus, it
encourages managers to use fear in order to achieve the necessary quality targets.
Furthermore, the company needs to incorporate other measures in order to achieve consistent
quality, such as clear company policy, written objectives, and clear roles and responsibilities.
Overall, the evidence presents a clear indication that achieving total quality management in
China is substantially different to achieving the same in the western world.

Other than quality, another essential factor for the company’s future development is
its management. In order to develop a strong company that would be able to compete with
world famous brands, ASIMCO needed to implement a change starting from the top. One of
the problems was the CEO, Mr.Xu, who was an old type of manager who did not encourage
innovation and initiative. He felt like the king of the castle and he did not put in any effort in
developing better management practices. Mr. Xu believed that older people in the company
should automatically receive respect from others, regardless of merit. Under his management,
the firm was operating within the secluded environment guided by communist principles
without any view of change. As a result, the previously mentioned problems with quality
were a normal occurrence for the company. However, Mr. Xu never even considered that
these old practices presented as a problem for the company’s future development. Therefore,
if ASIMCO wanted to develop a company strong enough to match its rivals, complete re-
organization and change of company culture was needed.
 The need for new thinking in the company was imminent, so ASIMCO and ABG
came to a conclusion that Mr.Xu had to be changed and they started to look for options. After
some high recommendations from FLIB, they came to a conclusion that the right man for the
job was Zhao Hui Shen. At first some members of the board were a little skeptic about his
abilities to work in a brewing factory since he operated in a completely different industry
before, piano manufacturing. However, Zhao convinced Mr.Clissold when he stated that they
were not hiring him to make the beer, but to manage the people that were making the beer.
The Board was pretty satisfied with Mr.Zhao since he represented a new generation of
Chinese managers. His way of aggressiveness and hands-on approach of management was
something that the company was missing previously. He was a manager who was
implementing a new culture in the company and was changing the traditional way of thinking
into a more modern one. He was trying to make the employees think more on how they
should be innovative and effective, and avoid excuses on how things can’t be done. One of
his most important changes within the company was the implementation of the monetary
punishment system, which would see employees take higher control of their destinies. Even
though Zhao was the type of leader that ASIMCO needed in order to change the company’s
culture, he still needed support in order to better understand the industry and the needed
changes. Thus, ASIMCO’s team needs to be actively involved in the management process,
providing support for Zhao’s further development, but also taking into consideration his
advice on potential changes with regards to Chinese culture.
One of the five key objectives set for Five Star by ABG was “the development of a
system which rewarded good performance and punished bad performance”. As mentioned
above, Zhao had already developed a monetary punishment system, but without ASIMCO’s
involvement. Therefore, ASIMCO was considering whether this system would prove
effective, and also what other changes needed to be undertaken with regards to pay incentives
for employees. In order to understand ASIMCO’s perspective, one needs to better analyze the
system that Zhao implemented. He applied a simple “carrot and stick” policy in order to
address the mistakes in the production process, as well as motivate salesmen to increase sales.
For employees working in production, Zhao’s methods were “more stick than carrot”. The
production employees were well paid receiving double the salary of workers in the similar
position in other wholly owned breweries. Thus, Mr. Zhao devised a series of monetary
punishments to be used as an incentive for better performance. With regards to sales
personnel, it was the other way around. He gave the salesmen low base salaries with the
possibility of earning 10 times more in bonuses if they increased sales. The purpose of this
approach is to reestablish the strong market position of the company, even though the system
invited abuse in the proper recording of sales. The policy applied by the new CEO was met
with contrasting opinions in ABG and ASIMCO and incited a debate about the issue in the
company. Some were arguing that cash payouts were the best way to motivate performance
improvements, while others emphasized the significance of the recognition and reinforcement
of the sense of achievement as strong motivators.

Zhao implemented a monetary punishment system with the view of eliminating

employee mistakes in the production process. However, he failed to develop an incentive
system to reward employees who perform well. The reward system is an aspect that ABG
was more familiar with considering their western view of doing business, which is why they
expressed some form of skepticism regarding Zhao’s harsh monetary punishment. Therefore,
a debate ensued within ABG on whether employees would be better motivated through
recognition or pay. In order to provide a suitable solution to the problem, one needs to
consider the effect of culture on employee motivation. There is contradictory evidence
regarding the effect of performance-related pay within companies operating in China
(Jackson and Bak, 2008). However, the aspect of loyalty and seniority is deeply rooted within
the Chinese culture, as described by Jackson and Bak (2008):

“Although there is contradictory information about the desirability of performance-related

pay, we know that there is a strong tradition of status accorded by ascription rather than
achievement, and often based on age and length of service.”

From the evidence presented, one can conclude that even though pay-performance systems
have proved effective in the West, it is still not clear whether their implementation would
have a positive effect among Chinese employees. Therefore, ABG should use the Chinese
tradition of rewarding loyalty and seniority and implement a system in which there is a much
higher compensation offered to senior and loyal employees. The desired effect of this system
is to provide incentive for employees to stay within the company, follow the rules set by
higher management and, eventually attain the high compensation package reserved for loyal
and senior employees.

With regards to recognition, one needs to focus on’ Mianzi’, which “signifies the
concern for gaining and maintaining ‘face’ by means of achieving recognition within the
group” (Bozianelos and Wang, 2007). This aspect of the Confucian society clearly shows that
recognition is highly valued in Chinese society. Therefore, western companies need to take
advantage of ‘Mianzi’ and incorporate this deeply-rooted aspect of the culture into the
company’s motivational scheme. However, the way in which recognition is carried out needs
to be clearly defined and done on a grand scale so that employees feel truly recognized.
According to Alex Alaminos, CEO at Madison Performance Group in NYC, which
specializes in global workforce recognition and incentive marketing, states that it is
imperative for older Chinese workers to be recognized publicly and annual banquets where
top management will be present and even participate in the award giving ceremony (Patton,
2012). However, he also states that younger workers will get the same satisfaction from an
online recognition program. This evidence suggests that companies should not approach the
management of different age groups in the same manner. Overall, research points out that a
recognition scheme needs to be implemented within companies operating in China, but this
system needs to conform to Chinese norms and values. In this particular case, ABG should
establish two recognition practices, one for older and one for younger employees. The
recognition scheme for older employees should follow the Chinese tradition of organizing
annual banquets and awarding older employees for their loyalty to the company. At the same
time, an online recognition system needs to be developed which should be mostly based on
performance rather than seniority so that younger employees also feel recognized for their
effort.

On the whole, by relating the Chinese cultural aspect to employee motivation, one can
conclude that all three factors presented in the case, monetary punishment, pay incentive and
recognition, need to be incorporated in the company. Addressing the first issue of monetary
punishment, one should note that the “fear of being punished for mistakes seems to be deep
rooted in the mainland Chinese” (Jackson and Bak, 2008). Therefore, McCullen should not
discard Zhao’s pay system, but rather complement it with providing monetary incentive and
recognition for employees who perform well. These systems of pay incentive and recognition
should be based on the evidence presented above. Even though there is previous research that
can assist western companies in their dealings with China, one should keep in mind that
China is a vast country with many different cultural norms and values. Also, the effect of a
more market-oriented economy is starting to affect the culture, as can already be seen among
younger Chinese employees. Therefore, companies need to tread carefully when it comes to
managing older employees, who are more traditionally oriented, and younger employees,
who embrace the western way more as FDI in China increases. Thus, based on current
evidence it seems that future employees in China will respond more to the western practices
of employee motivation. Essentially, top management in China needs to adapt their
management style as younger generations of workers replace the more traditionally oriented
ones.