Change while you’re ahead

Chinese companies have much to learn from successful UK businesses about strategic transformation, writes professor George Yip

Change while you’re ahead

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One of the greatest challenges facing Chinese companies, especially state-owned enterprises (SOEs), is how to strategically transform themselves while maintaining strong financial performance. This is also a challenge for major companies in the West. Most transform themselves only after a downturn in performance, as happened with IBM and Apple and is happening now with Nokia and General Motors.

Manuel Hensmans, professor at Solvay Brussels School of Economics and Management in Belgium, Gerry Johnson, emeritus professor at Lancaster University Management School in the UK, and I wrote about how companies can avoid this fate in our new book, “Strategic Transformation: Changing While Winning” (Palgrave Macmillan, 2013). We studied the 20-year financial performance of 215 of the largest publicly listed British companies. We made a further strategic analysis of those 28 companies that were found to have consistent financial performance and conducted in-depth historical research and extensive interviews with top executives at six companies.

We found three major UK winners. Tesco, the supermarket chain, began as a street stall and became one of the world’s largest retailers. Food and beverage company Cadbury Schweppes successfully challenged much bigger rivals, such as Coca-Cola and Nestlé, for decades. Smith & Nephew transformed itself from a maker of simple wound coverings to a major global player in technically advanced medical devices such as those used in orthopedic reconstruction for knees and other joints.

These three companies built a formula for successful strategic transformation. They did this by fostering alternative management coalitions and constructive tension (in other words, productive conflict), while maintaining an essential level of strategic continuity.

For instance, the original Tesco model was to “pile it [the merchandise] high, sell it cheap,” which founder Jack Cohen perpetuated through a personal command-and-control management style. Nonetheless, a coalition of top managers formed in the 1960s to pursue more modern logistical and operations practices. The new leaders  introduced a corporate model of management control to Tesco. During the 1970s, the new coalition included more and more non-family members, who received credit for modernizing Tesco in the 1980s and 1990s.

At both Tesco and Smith & Nephew, conflicts occurred in the open. Tesco, for example, had a boardroom battle between family members and, later, between the two coalitions of managers. At Smith & Nephew, there was a major showdown between the “textile traditionalists,” who wanted to focus on their old wound covering line of business, and those who wanted to develop new business ideas. At both companies, the conflicts became less intense over time and more respectful. Constructive challenging had a much longer legacy at Cadbury Schweppes. Cadbury was founded in the early 1820s by Quakers, and its leaders had long been keen to foster a corporate culture in which candor, freedom of speech, a spirit of toleration and liberty were the dominant notes.

 

Chinese lessons

Unfortunately for China, many of its companies are bad at these three capabilities of alternative management coalitions – constructive tension, contestation (useful conflict) and strategic continuity. SOEs and other Chinese companies often have several dysfunctional activities: for example, central planning that is overly directive and controlling, such as attempts to determine operational values and behaviors from the center; autocratic leadership; a reliance on heroic “great man” leadership where strategy is vested in one individual; intolerance of dissent or closing down conflict in the name of consensus and harmony; and following management “cults” that every other company is following.

The boss-dominated culture in China means that challenging the boss and the current way of doing things is suppressed. Bosses also try to keep all the power, so they seldom allow the alternative management coalitions that are usually the vehicle for strategic change. The short term and opportunistic orientation of most Chinese companies also means they experience frequent changes in strategy.

For example, the SOE steel giant “Wu Gang” (Wuhan Steel) invested US$6.26 billion (RMB39 billion) outside the steel industry, including its ambitious “ten-thousand pigs farm,” because of the simplistic calculation that steel screws sell at RMB4.7 per kilogram (US$.075), while the cheapest pork sells at RMB26 (US$4.17) per kilogram. The company devoted almost 20% of its 2011 revenue (10 times its annual profit in 2011) to investing in an unrelated business, instead of investing in technological innovation and upgrading.

This occurrence is common among SOEs, though not all look to the pig market. Many SOEs have diverted from their main business into real estate speculation, which led to a firmly worded warning from the State Council against such diversions. “Stick to the main business, upgrade and innovate” was the central government's suggestion to the major SOEs.

Some Chinese SOEs have successfully transformed themselves, however. Shanghai-based Baosteel has established a long-term, stable and in-depth strategic partnership with China Development Bank since 2001. That relationship continuously provides large-scale funding for Baosteel to transform from a regional business model to a national one. The bank will devote an additional US$20 billion of financing by 2015 to finance acquisitions and help the company go international.    

Another SOE that has succeeded is Industrial and Commercial Bank of China, the country’s oldest commercial bank. ICBC has intensified its efforts in innovation and has made remarkable achievements in upgrading its business model, products and supply chain. The rise of e-banking has helped it upgrade customer service. The bank also innovates constantly. In 2010 alone, it created 449 new products, expanding its total products by 15.9%.

Strategic transformation does not mean constant changes in strategy, but continuity that yields superior performance while allowing for occasional major changes at the right time. Many of China’s SOEs still need to find this correct balance and capability. That will take time. A full strategic transformation can take 10 years or longer.

For the British companies we studied, the key was to develop a culture and mindset where constructive challenging of the dominant business model is encouraged. Although the UK and China may seem very different, the essentials of successful business management are the same. The UK even managed to transform one if its most ineffective SOEs, British Airways, into a world-class brand, which is now often voted the world’s best business airline. China can do the same with its SOEs.

 

George Yip is a professor of management and co-director of the Centre on China Innovation at China Europe International Business School