GDM ISBM CASE STUDY SOLUTIONS – I’m not sure whether they understand that a firm cannot he a bundle of discreet businesses
GDM ISBM CASE STUDY SOLUTIONS – I’m not sure whether they understand that a firm cannot he a bundle of discreet businesses
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International Hr Management
Total Marks: 80
Note : All Questions are Compulsory
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CASE STUDY : 1 (20 Marks)
Zhuhai of Shanghai
“I’m not sure whether they understand that a firm cannot he a bundle of discreet businesses. Most of the senior Chinese executives I talk to arc convinced that they can make anything . . . absolutely anything that will make money. After so many years of command economy, managers are oblivious to the concept ofmarket ……they aren’t keen to get into bilateral trading even when it makes sense. They would rather pursue different ventures totally unrelated to each other,” said a financial analyst of an American brokerage firm located in Shanghai. Mr. Dong Hong is the president of Zhuhai To Zi Company (Zuhai) which was founded in 1980 as a construction company. Before joining the company in 1989, Hong was a high ranking army officer in thePeople’s Republic of China. As president of Zhuhai, he attended an executive management programme at Harvard Business School. Although Hong enjoyed the programme, he came back with some reservations about the relevance of what he learned. One of his oft-repeated summation of the programme was: “I have problem with the terms like core competency and synergy. At this point in time, there are ample opportunities in China to make good return in any business. You don’t mean to say that we simply stick to the knitting and pass these opportunities to others? China is a virgin land, you need to understand that.”
HISTORY OF SGL
Zhuhai has received a favorable media splash in China upon its taking a controlling interest of Shanghai Gue Za Liao Company (SGL), a poly-crystal manufacturer. SGL was founded in 1969. At that time, it was the largest manufacturer of poly-crystal in China employing 900 people. It received quality awards for six consecutive years. In 1992, SGL was authorized by the Shanghai Municipal Government to become a joint stock company. In less than 15 days, it sold RMB ¥(yen) 1.1 million worth of stock at RMB ¥22.00 per stock (¥10 par value) to the public and to the employees of the firm. The registered capital was RMB ¥33.799 after the fund raising. The Government owned RMB ¥18.799 million worth of stock. The stock was floated through the Shanghai Securities Exchange Centre. In 1993, the market price per stock was RMB ¥l8.79, with a price of RMB ¥7.85 at its lowest point. By being a listed company, SGL cased its cash flow problems but the rate of return was getting depressingly low and its market share went down from 51 per cent in 1970 to 36 per cent in 1993.
MANUFACTURING TECHNOLOGY OF POLY-CRYSTAL
Poly-crystal is a crystalline specimen which contains many small individual crystals. There are different methods of making this product. The most common and widely used method is called Chemical Vapour Disposition or CVP. In this process, the material to be crystallised is vaporised in a chamber and then condensed on a substrate to form crystals. Silicon crystals are mostly used in semiconductor (i.e., computer 3 chips) and solar power applications for their unique properties and inexpensive raw materials (mainly sand). Though it is not a labour-intensive process, it requires rather sophisticated technical skills. The electronic industry in the developed countries produces its own crystals. IBM, RCA, Motorola, andTexas Instruments are the major producers of crystals in the U.S. Application of semiconductors and use of photovoltaic cells will continue to rise, and with it the demand for poly-crystal is expected to increase.
OPERATIONAL EFFICIENCY OF SGL
Since China started allowing imports, SGL’s market share had shrunk for a combination of reasons. First was the slow rate of growth of Chinese electronic industry where poly-crystal is mostly used. Second was that imports had been consistently of high quality which SGL could not match due to lack of skilled labour and obsolete technology. Third was the ever-increasing costs of power and raw materials contributing much to increasing cost per unit of production. Pricewise, SGL could not compete with the major importers from the U.S., Russia, Ukraine, and Germany inspite of the fact that the labour rate in China is about one-third of the U.S. and Germany. In 1994, SQL sold 34 tons of polycrystal where the total domestic demand was estimated to be about 105 tons. In an attempt to diversify the company, the board of directors decided to get into the taxi business as the city experienced a surge in the tourist market. As of 1994, Shanghai had about 35,000 taxis. A taxi owner typically receives V300 per day per taxi irrespective of the driver’s earnings.
The driver makes on an average about V150 to 200 each day but he is responsible for buying gas and paying for repairs of any mechanical defects. In addition, he has to pay the police for any traffic violation. The time SGL entered this market, the Chinese banks eased their lending process allowing many of the existing drivers to buy their own taxis with easy repayment schedules. This had the salutary effect, for SQL, of not finding enough “qualified” drivers without lowering the owner’s usual income of 300 per day. Managing this line of business was becoming a headache. SGL asked several of its managers to move into the taxi-sector. Some of them flatly refused and a few accepted the assignment grudgingly. SQL, though doing poorly both in crystal and taxi business, did not lay-off employees or reduce their benefits. SGL’s top management thought that the company had gone as far as possible with its restructuring efforts and decided to be taken over either by a foreign or a domestic firm.
It also tried in vain to form alliances. In April 1994, the Government decided to sell its RMB Vl2 million worth of stock of SGL to Zhuhai To Zi company, making it the largest stock holder holding 35.5 per cent of the entire stock. Immediately after thetakeover, Zhuhai asked SGL to produce quartz glass for a particular Japanese company. The outsourcing attempt by this Japanese firm to SQL lasted about a year as it was not satisfied with the variance in quality and delivery schedule. With the available technology of SGL, Zhuhai decided to get into manufacturing electric energy meters for state-owned facilities. These state-owned operations had been the major customer base for SGL’ s poly-crystal. Working with the similar customer base, SGL started to make money with its energy meters. The two business segments, real estate and the energy meters, contributed much of Zhuhai’snet return of 15 per cent, providing an overall liquidity ratio of 2.7 per cent and a quick ratio of 1.94. The financial position of Zhuhai is provided in the Table 1.below
RESTRUCTURING OF ZHUHAI
The president of Zhuhai restructured the company making each division a separate strategic business unit (SBU). The revised organisation structure is provided below. Note that the positions immediately below the unit vice presidents and under them there were a cadre of personnel doing various jobs as directed by their bosses. Mr. Hong made it clear to all SBU vice presidents (VPs) that decisions regarding product development, pricing, procurement and human resource management would be taken by the president himself in consultation with the board of directors. Mr. Hong stated in a recent meeting that the VPs were responsible for making at least 20 per cent rate of return for their units. “Lower than 20 per cent will mean either demotion or transfer for that particular VP”, he said. “We have started making short cuts, saving money in every possible way…. but I’m not sure whether any strategic business unit can function without strategy. Just a promise of fixed rate of return at the end of the year? Is that all in the name of strategy?”, asked the vice president of an SBU.
Question :
1) Discuss the typicalities of Chinese Industrial system vis-à-vis the Western/global Industrial system.
2) Where does the Chinese system fault?
3) Is over production and mis-match in marketing leads to poor prices of Chinese products in the International Market?
4) If you are offered, views as a top consultant, what would you like to suggest the Chinese Government and industry? Give your reasons.
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