Strategies for the Multinational Corporation –

Final Individual Report

April 8th 2022

Word count: 2000

Question 1: (50 points total – 1000 words)

(a) Why was Haier so successful in China? (20 points – 400 words)
The major catalysts that enabled such exponential growth in the company’s domestic market can
be grouped into two main categories, namely market dynamics and company strategy.

From a market perspective, the release of rural labour resulting from the increase in agricultural
productivity led to an increase in supply of cheap labour to newly established TVEs. In addition, as
a former employee, Zhang could benefit from the support of the local municipal government
that, despite not having any claim on the enterprise’s assets or profits, could help the TVE
“influencing, directly or indirectly, the allocation of key resources”. Furthermore, the industry
vertical was highly fragmented without the presence of any one dominant player selling high
quality products, thus opening the doors to potential new players with a competitive edge.

From a company perspective, Haier strategy revolved around a strong focus on quality and brand
value. To overcome the lack of high-quality products among Chinese manufacturers, Zhang
pursued technology licensing agreements and JVs with incumbent players from developed market
allowing him to work with and understand the best technologies and designs available. Haier
management also strived to align all the company’s stakeholders on a common vision and culture
around intense focus on quality, most notably even pulling “74 refrigerators off the line for minor
flaws”. As domestic manufacturers focused on the production of cheap outputs, Zhang’s quality-
focused strategy allowed Haier to enter an under-represented niche and pursue a premium pricing
strategy by charging a 15% markup. In addition, Haier focused on building up its brand equity
value by spending 10% of its revenues on marketing, almost double the industry average. The
combination of high-quality products and strong communication efforts allowed Haier to quickly
become a household name in China. Furthermore, Haier also focused on customer centricity
based on speed and differentiation, willing to make small product adjustments to satisfy
customer needs. For example, when service technicians found that rural customers used washers
to clean vegetables, the engineers modified their design to accommodate the market segment.
Haier’s design centres enabled rapid product development and prototyping, as sales agents
reported directly to designers. For instance, when the need for a new 2 doors freezer was
presented, designers were able to present a prototype after only 17 hours. Haier also employed a
flexible and horizontal organizational structured based on self-managed teams and a
standardized incentive system, allowing each team member to climb the corporate ladder purely
based on a set of pre-determined KPIs. In terms of logistics, Haier pioneered JIT purchasing,

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delivery, and distribution in China, effectively streamlining the company’s operations and ability to
quickly develop new products based on customer needs.

(b) Was Haier’s decision to globalize into developed markets early on a good
strategy? (10 points – 200 words)
The rationale behind this decision was the assumption that, if the company was able to establish
itself as a dominant player in difficult markets such as the US and Europe, capturing share in less-
developed markets would become much easier. However, I believe that Haier management made
a mistake in following such strategy.

For starters, the white goods western market was already consolidated and dominated by large
players characterized by a strong brand identity, including GE, Whirlpool, and Electrolux. Such
mature market structure could be an extremely challenging one for a market entry by a foreign
and unknown brand due to both competition and regulations. In addition, the western world
perceives Chinese goods to be cheap and low quality, making it even more difficult for Heier to
establish itself as a premium and high-quality brand.

However, Haier was ultimately able to overcome these challenges and establish itself as an
affordable independent brand in the west. The decision to stop exporting products in these
markets under an OEM client brand allowed the company to maintain independence and continue
to grow its brand globally. In addition, Haier was able to penetrate western markets by focusing
its strategy on the company’s adaptability to local culture by hiring the local workforce and
continuous innovation rather than duplication of existing products (e.g, introduction of the
compact dorm refrigerators).

(c) Which type of international strategy is Haier following? Please justify your
answer. (20 points – 400 words)
Haier’s decision to develop an international strategy was driven by internal and external market
forces, necessity to build a globally recognizable brand identity, and the company’s “three thirds”
objective. As mentioned in the previous section, Haier international strategy of initially entering
difficult markets supported investment and operations in the other developing regions.

To best understand Haier’s international strategy, we can use the CAGE model to gain a high-level
understanding of the cultural, administrative, geographic, and economic distance between the
domestic and foreign geographies:

Cultural: Large cultural distance between Haier and foreign host countries. The company had to
adapt its international branches to local customs, norms, languages, and other peculiarities. This
was achieved through the employment of local staff for the company’s international branches and
a product-focused strategy.

Administrative: China and foreign countries are characterized by strong political and legal
differences. If Haier could benefit from strong governmental support from the Chinese
government in both internal operations and international expansion efforts, the company had to
understand and adapt to the different administrative scenarios of host countries. As a result, Haier

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used local resources to penetrate its target markets in terms of workforce, distributors, company
culture, and capital.

Geographic: China is obviously geographically distant from the America and EMEA region. For such
reason, Haier could rely uniquely on exports for international sale but eventually focused on
distributing globally its R&D centres, manufacturing plants, industrial parks, and sales networks.

Economic: From an economical perspective, Haier had to understand local peculiarities and adapt
its pricing strategy to the needs of each region. In China, the company could leverage on its high-
quality product to charge premium prices. In Asia and Europe, Haier could still position its
products as high-end but would have to settle for a lower margin. In America, the presence of
dominant incumbent players pushed the company to opt for a high quality but affordable pricing
position.

The CAGE framework above provides a good understanding of the main differences across regions
and Haier’s response to each challenge posed in its international expansion efforts. In terms of
AAA model, Haier focused on Adaptation to local market peculiarities. Despite the high physical
and cultural distance, Haier was able to enter developed markets and build a strong international
reputation in the USA and Europe. Haier was able to satisfy its international customer segments
through a strong focus on product personalization and adaptability based on local preference. For
example, in the USA, the company developed a freezer with a lower temperature department to
allow for softer ice cream. Haier also spent a large share of revenues in advertising to build a
consistently stronger international brand identity.

Question 2: (50 points total – 1000 words)

(a) Which entry modes has Haier followed in its international expansion? Has there
been a priority mode of expansion for Haier (and a rationale for it)? (30 points –
600 words)
To expand internationally and reach its “three thirds” goal, Haier leveraged on a wide range of
entry-mode strategies. Despite governmental incentive to pursue outward FDI investments, we
can use the OLI model to gain a comprehensive understanding of Haier decision to pursue an
international strategy and the mode of expansion that was prioritized as well as understanding the
degree of liability of foreigners.

Ownership advantage: The strong cultural differences and presence of incumbent players in
developed markets suggest that an owner-specific advantage is not applicable to Haier. Thus, the
company had to develop connections with local players through a “borrow” strategy and staff with
locals to gain the capabilities required to compete in these radically different markets.

Location advantage: The main location advantage that led to a market entry into developed
countries was the global reputation resulting from penetration into complex markets such as the
USA and Europe. In addition, these regions were characterized by under-served niche segments
that served as an entry point for Haier, most notably compact refrigerators for students or for
offices.

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Internationalization advantage: Haier could leverage on its know-how and superior quality
products to produce in-house and sell globally through international partnerships and
establishment of global production plants and distribution centres.

The OLI model provides a high-level understanding of the motives behind a particular mode of
expansion and liability of foreigners applicable to the Chinese manufacturer. Below is the BBB
framework, which shows the different market-entry strategies pursued by Haier:

Borrow:

- At the beginning of its international strategy, Haier was involved in the indirect export of
its products.
- Enter alliances with established players in foreign markets and export products under
OEM client brand. For instance, Haier was able to generate sizeable sales in Germany by
marketing its refrigerators under the Liebherr brand.
- Haier international strategy was also highly reliant on Joint Ventures in Indonesia, New
Zeland, Nigeria, the Philippines, and Yugoslavia.
- In the USA, Haier looked for alliances with downstream players in the company’s supply
chain to reach local consumers through several agreements with major chain retailers,
including Home Depot, Best Buy, Office Depot, and eventually even Wal-Mart.
- For the Indian market, Haier pursued an alliance with a major local player to jointly
produce and market refrigerators nationally.
Build:

- The company’s management eventually decided to develop its brand globally by

establishing the firm as an independent player rather than selling under incumbent foreign
companies’ names.
- Under the “build” dimension, the company’s objective shifted towards building brand
reputation overseas, following the footsteps of successful Japanese and Korean firms such
as Sony, Samsung, and LG.
- In 1999, Haier established the Overseas Promotion Division to grow its international sales
through direct exports and foreign production.
- In the USA, after finding suitable agreements with local stakeholders, Haier decided to
grow its brand by moving its headquarters in a landmark New York building and
establishing a large industrial park and refrigerator factory in South Carolina.
- In Europe, Haier established its headquarters in Italy and, through an extensive
distribution network, would sell its products across European countries by adapting
designs to the local needs and preferences.
- In the Indian market the company promoted a $200 million investment plan to establish a
refrigerator factory and R&D centre.
Buy:

- In Europe, Haier acquired for $8 million a refrigerator plant from major Italian appliances
manufacturer.

The BBB framework, complemented by insights from the electric paradigm outlines the different
market-entry strategies pursued by the company. Haier followed a gradual internationalization
strategy, beginning with a “borrow” strategy through OEM and JVs the company was able to gain
a deep understanding of the different local peculiarities and gain the know-how required to purse

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an effective “build” strategy, eventually establishing itself as a powerful independent global
player.

(b) Let’s have a look in detail at the most important international market for Haier
so far: the USA. Which entry mode did Haier choose, and how did it evolve later?
How do you evaluate such expansion mode in order to build a corporate
advantage in the USA in the short and mid-term? (20 points – 400 words)
The USA was a highly consolidated and complex market, characterized by a few players
dominating the competitive landscape. Haier had to find a way to enter the market despite the
high liability of foreigners. Aside from the strong cultural, administrative, geographic distance
between the two regions, American consumers generally viewed Chinese goods as cheap and
low quality alternatives, far from Haier’s vision and value proposition. For such reasons, at the
beginning, Haier opted for a “borrow” entry strategy, leveraging on a partnership with Welbilt
brand to generate sales in the USA through indirect exports. The partnership was a success, and
the Chinese manufacturer was able to sell 150 thousand units within one year under the Welbilt
name.

Eventually, Haier shifted strategy and decided to pursue a “build” entry mode, effectively
becoming an independent player in the America region while still seeking partnerships with local
stakeholders such as large chain retailers. Despite the several arguments against entering a
mature market in a developed country, Haier leveraged on innovation to become a fierceful new
player in its targeted industry vertical. Instead of competing with large established players, it
identified and pursued a separate under-served niche market segment, namely compact
refrigerators by targeting students and offices. Within a short time, Haier was able to obtain over
30% market share in the compact refrigerators industry vertical.

Looking at the AAA framework, Haier pursued an Adaptation strategy focused on localization to
build competitive advantage in the short and mid-term. The company focused on quality rather
than pricing and strived to build customer awareness within the region. For instance, it moved its
New York headquarters in a landmark building in Broadway and build a $40 million industrial park
and refrigerator factory in South Carolina.

Acknowledgements
The report was put together with data from the case study “Haier: taking a Chinese Company
Global in 2011”. The work also builds on class material provided by Professor Marc Smelik.

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