1-Does Haier’s acquisition of Huanshan, or Haier’s acquisition strategy in general, pass Porter’s “Three Essential Tests”?
The Three Essential Tests which have been put forward by Porter shows that every diversification strategy should be tested for the three aspects as defined in the model of Three Essential Tests. The three criteria include the attractiveness test, the test for the cost of entry and the better off test. Porter explains that the diversification action should be tested against these three criteria to consider if the strategy is worth the effort or not.
The attractiveness test is conducted to ensure that the diversification is targeted on an attractive and profitable industry. The five factors of the porter can be utilized in this test to ensure the attractiveness of the industry in which the company is diversifying into. As per the case, Haier wanted to diversify in the black goods industry to move towards digitization. It is evident that digitization is the new trend which is making the companies capitalize on it in time. Therefore, it can be said that the strategy for going into the digitization of white goods is certainly the right direction. However, the television market in China at that time was fighting on cutting throat pricing to gain market share, showing the saturation in the market. Still, it can be considered as a positive test if we assume that Haier can make quality products and earn profits from this market.
The second test is that of the cost of entry which is to test that the cost of entering into this industry does not outweigh on the future profits, this is surely one of the main driving forces because of which the diversification projects are strategized and approved. Regarding this, it can be said that even though the debt and unpaid expenses of the company were huge, the divestiture of the company helped lower the burden. However, the prospects are considerable enough to consider it a positive test for the cost of entry as well.
The third test of the better off test shows that the new addition in the company should enable the company to gain competitive advantage from their cooperation. It calls for the fitting in of the new firm into the corporate culture of the acquiring organization. The acquisition of Huanshan by Haier did not show the attributes of fitting in. However, the continuous efforts of the management improved the situation until the introduction of the contracts instead of the lifelong permanent employee guarantee. However, the company can tackle this situation by negotiating with the union leaders and managers to provide job security for the cost of quality performance. Overall, the test for three essentials for Haier acquisition of Huanshan has positive results for all three criteria.
2-What competitive advantages Haier gains from its diversification strategy?
Haier fishes on the companies who are on the verge of bankruptcy and has the potential for growth and is also aligned with the diversification strategy of Haier and puts forward the proposal of acquisition at the last moment. The company uses its diversification strategy to gain a competitive advantage in the manufacturing of quality white goods industry and then also entered the black good market to move towards digitization in which it sees its future competitive advantage. IT acquired Haunshan to capitalize on the TV manufacturing plant to induce quality standards in TV manufacturing and then use the technology of digitization in their white goods and black goods market. This strategy would have helped the company to gain the competitive advantage of digitization in a market where the industry was not even making quality televisions.
3-How would you evaluate Haier’s actions in Huanshan takeover? Why did the strikes happen?
Haier implemented its turnaround strategy of Haier Enterprise Culture in Huanshan by initiating efforts to improve the quality of products and improving the performance of the workers and managers. They set examples of communicating on past events that led the other acquired companies to become profitable, and their workers performed well. Haier management started with the first communicating the Quality Message through stories, and group meetings. The company then used its new managers to set examples regarding performing well, cleaning their workplace and setting standards for gaining the trust of the workers. They evaluated performance on a daily basis and gave head-ups for the next day in daily group meetings. They opened managerial positions for competition and gaining the managers who would help them steer this division. They remedied the quality problem by getting contracts with better purchasing partners.
They changed the physical surroundings of the company and removed couches, televisions, and walls to have desks for working in one common area. They changed the factory floor by using the proper mechanism of quality control, pushing managers to focus on quality, using names of people who did not do well. They started to link performance with rewards and fines. They painted yellow feet on the floor each day on which workers would be called to explain why they did something wrong. The whole situation improved with these efforts and the company started making profits. However, it got out of control when the company introduced contracts instead of their permanent employment which scared the employees who never saw anything like this and called for a strike against Haier.
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