Analysis Of Huawei And Its Core Competencies Management Essay
Huawei Technologies was founded in 1998 by Ren Zhengfei who is a former People’s Liberation Army officer and telecom engineer. It was incorporated as a private enterprise which manufactures telecommunications equipments for domestic Chinese companies at a much lower price than its international competitors. And since the beginning, Zhengfei’s vision was to build innovation capability into the company. However, contrary to the China’s policy of “exchanging market for technology,” Zhengfei is convinced that having a joint venture with foreign companies would only cause the Chinese to lose their domestic market and not enable them to acquire foreign technologies.
In performing an internal analysis, it is important to have a ‘global mind-set’, which is the ability to analyse the internal environment in ways that are independent on the assumptions of a single country, culture, or context. In addition, the business’s portfolio of resources and the bundles of heterogeneous resources and capabilities have to be analysed so that they are be leveraged on if need to.
Business Fundamentals
Accounting
Huawei Technologies had annual revenue of US$6.7 billion and a net profit of US$470 million in 2005. This is an increase from annual revenue of US$5.8 billion and a net profit of US$470 million in 2004.
Huawei’s net profits in 2002 and 2003 were US$110 million and US$380 million respectively, and it had a net profit margin of 4% in 2002, 10% in 2003 and 8% in 2004. No doubt, Huawei’s net profit margin drop by 2% in 2004, Huawei is still generating profit.
Finance
There are short-term financing and long-term financing options available. Huawei’s financial support from the state-owned Chinese Development Bank in the form of a US$10 billion facility and US$600 million from the Export-Import Bank of China are both forms of long-term financing.
Risk Management
There are three major types of business risks; price risk, credit risk and pure risk.
As Huawei has markets overseas, there is bound to be some price risk involved when there is any fluctuation in foreign exchange rates as their receivables and payments are transacted in foreign currencies. Hence, Huawei can use hedging to manage its price risks.
In addition, pure risk is assume to be present in virtually any industry and there are four types of pure risk that affect business; damage to assets, legal liability, workers’ injury and employee benefits.
Organisation Design
Huawei practice departmentalization as its workforce is spilt into departments such as Research & Development (R&D) and production. It is also a mechanistic structure as there is high specialization and centralization.
Human Resource Management
Since its beginning, Huawei had been emphasizing on building a strong R&D team and it had been recruiting employees of high caliber with exceptionally high salary by Chinese standard.
Operations and Supply Chain Management
The success of most businesses is their ability to identify the customers’ needs and to come up with products that fulfills the necessary requirements. These products will then have to be produced at economically viable costs.
As Huawei manufactures and ships its products both locally and overseas. Thus, it is vital that Huawei monitors its operations and supply chain management to ensure that its products remain profitable and that bullwhip effect be controlled.
Product Development
Huawei has the foresight to invest and develop in new technologies in the industry which gives it a quantum leap in the market from its competitors.
Resources, Capabilities, and Core Competencies
Resources, capabilities and core competencies form the basis of competitive advantage. Resources create organizational capabilities when group together and in turn, capabilities result in the core competencies of a firm, and these are the foundation of competitive advantage.
Tangible Resources
Financial Resources
As previously mentioned, Huawei has the financial support from the state-owned Chinese Development Bank and the Export-Import Bank of China. With their financial support, Huawei received a US10 billion facility for its international expansion over five years and US$600 million respectively.
Organisational Resources
Huawei has departments such as R&D, production and marketing which form up the basic organization structure of the company. Huawei also integrates its marketing employees into its main R&D team so that the customers’ needs can be better communicated to the R&D headquarters responsively.
Physical Resources
Huawei has research centres located in China and overseas. For example, it has a 21 storey research center at its headquarters in Shenzhen and six other research laboratories in Beijing, Shanghai, Nanjing, Huangzhou, Xi’an and Chengdu; a software development centre in Bangalore (India) and research facilities in Moscow (Russia), Stockholm (Sweden) and the Silicon Valley in California.
Technological Resources
Huawei had a large number of patents under its name. It had more than 8,000 patent applications by late 2004, with 800 of them applied in more than 20 countries, including the United States and Europe. In fact, in 2004 alone, Huawei had more than 2,000 patent applications which put it on par with its international rivals in the same industry.
Intangible Resources
Human Resources
Since establishment, Huawei had focused its resources to build itself a strong R&D team. Starting off with 500 R&D staffs and 200 production staffs, Huawei had a workforce of 24,000 employees by late 2005 with 48% of them engaging in R&D works.
In addition, the education level of the company’s employees was higher than the average worker in China. More than 85% of its workforce had a bachelors or higher degree, and about 60% had a master’s or PhD.
Innovation Resources
Huawei undertook joint R&D laboratories with foreign companies such as IBM, Microsoft, Texas Instruments, Intel, e.g., focusing on different telecom techniques. These joint development efforts were used to complement Huawei’s innovation capabilities.
Reputational Resources
Huawei has a large customer base in China with the major telecom companies being its customer. In addition, Huawei is one of the major suppliers for equipments for the China Telecom’s ChinaNet Next Carrying Network, known as CN2, which is the core network for the country’s next-generation business and consumers services.
Capabilities
Capabilities exist when there are resources on hand that have been deliberately integrated to achieve specific tasks.
Huawei had a strong team of R&D staff which comprises of 48% of its total employees. In addition, Huawei recruits employees of high caliber, with more than 85% of its employees having at least a bachelors degree and 60% having a master’s or PhD. Thus, Huawei is able to come out with innovate products, hence holding an exceptionally high number of patents by Chinese standard.
In addition, coming from a military background, Ren Zhengfei’s connection with the Chinese military helps create a guanxi network which is extremely helpful to Huawei.
Being based in China, Huawei is able to manufacture and offer products at a lower price (typically 30% lower than those of established suppliers).
Core Competencies
Core competencies are capabilities that are a source of competitive advantage for a company over its rivals.
Huawei’s first competence is its R&D. Because of the inexpensive labour force in China, Huawei had an advantage over its international competitors. In addition, Huawei integrates its marketing people into its R&D team, thus the needs of telephone companies and service providers could be communicated through the marketers to the R&D department in the shortest time.
Another core competence which Huawei had is its close relationship with the Chinese military. This close relationship enables Huawei to create a guanxi network which few other competitors could rival and which helps Huawei to secure big contract orders in its initial years and huge financial loans from the state banks.
A third core competence is Huawei’s products low price as compare to its competitors.
In summary, Huawei would need to maintain these core competencies in the long run to have a sustainable competitive advantage.
Valuable
Rare
Costly to Imitate
Non-substitutable
R&D
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Close relationship with Chinese military
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Price
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*Must meet at least 3 criteria to be a competitive advantage (CA).
Value Chain Analysis
Using the value chain analysis, we will analyse which are Huawei’s operations’ segments that create value and those that do not. It is essential to understand these issues, as a business will only earns above-average returns when the value created is greater than the costs incurred to create that value.
Primary activities
Huawei’s primary activities are marketing and sales, inbound logistics, outbound logistics and operations.
Support activities
Huawei’s support activities are firm infrastructure, human resource management, service, technological development and procurement.
Activities which are not of competitive advantages to Huawei can be outsourced to external vendors so that resources can be put to better use within the company.
SWOT Analysis – Strengths and Weaknesses
Strengths
Huawei have a strong R&D team and high caliber employees which gives it an edge over its competitors.
Being based in China, Huawei is able to manufacture and offer products at a lower price (typically 30% lower than those of established suppliers).
In addition, with a low-cost workforce, Huawei spends less in R&D but achieve comparable results with foreign technology companies who spend more.
Ren Zhengfei’s connection with the Chinese military enables Huawei to have the support from the Chinese government which is essential to working in China.
Weaknesses
Being a Chinese company, Huawei will be view in a different light compared to other companies from other countries. In general, the perception was that Chinese vendors were mainly relying on western engineering methods and were turning the higher margins and complex products into standard commodities. Thus, Huawei would have to move beyond this to be view as a serious global competitor.
Huawei’s lawsuit with Cisco gives rise to the issue that Huawei has infringed Cisco’s patents and copyrights by copying its user interface, user manuals and source codes which inevitably affects Huawei’s reputation in the United States.
Key Success Factors
Huawei is able to be successful as in general the Chinese market is a closed industry and foreign companies would need to joint ventures with local Chinese companies in order to enter the market, which will involve large equity investments.
In addition, being a home-grown company, the Chinese will prefer to buy their products from Huawei, thus giving it an advantage in such a big emerging market. Furthermore, with Ren Zhengfei’s connection to the Chinese military, it would have an unfair advantage over other companies.
Secondly, since the onset, Huawei had focus on employing high caliber employees to form a huge R&D team. Together with joint R&D with other leading foreign companies, this has enables Huawei to come up with innovative products.
Question 2.
Perform an external analysis of Huawei. Based on your analysis, identify the possible opportunities and threats encountered by Huawei. (30 marks)
Business Fundamentals
Economics
China overtook the United States to become the largest telecom market in late 2002 and by 2004; China’s telecom industry had US$112 billion in business transactions. This is equivalent to an annual growth rate of 34.9% which was 3.7 times China’s gross domestic product (GDP) growth rate of 9.5%. In addition, China’s telecom equipment market will continue to grow annually at a compound rate of 10.9%, from US$30 billion to US$45 billion between 2004 and 2008.
Stakeholder Management
There are two major groups of stakeholders; market stakeholders and non-market stakeholders.
Market stakeholders are also known as primary stakeholders and they include the employees, customers, suppliers and distributors of Huawei. Non-market stakeholders, also known as secondary stakeholders are people whom are affected by Huawei’s actions but without being directly involved with any economic transactions with it.
Marketing
Huawei had to be aggressive to win contracts and typically, their products are about 30% cheaper than established brands. In addition, Huawei offer incentives when pitching for sales for major contracts.
The External Environment
The external environment of a company is divided into three major areas; the general, industry and competitor environments, each focusing on different aspects.
The General Environment – PESTL Model
The general environment comprises of dimensions in the broader society that influence an industry and the firms within it. Using the PESTL model, we will gather the information and analyse each segment and its implication.
Political
Huawei’s founder; Ren Zhengfei was from the Chinese military and this connection had created a guanxi network which few competitors could match. This relationship had helped Huawei secure big contract orders with the military during its early years. In addition, financial supports from state-owned banks were given to Huawei for its expansion plans overseas.
However, this connection to the Chinese military had also affect Huawei, as a number of distributors in the United States were skeptical about the influence Huawei was subject to, and they were cautious of any implications.
In addition, due to ownerships restrictions in China, most foreign firms would need to have a joint venture with local Chinese companies before they can enter the market. Hence, Huawei had an advantage in this aspect.
Economics
Huawei was the largest telecom equipment manufacturer in China with annual revenue of US$6.7 billion in 2005, and a net profit of US$470 million. At the same time, its market capitalization was estimated to be up to US$10 billion.
Sociocultural
Despite Huawei’s efforts to fit into the United States’ culture, Huawei still met with difficulties when it first started operating in Plano, Texas in 2001. For a start, the Americans had difficulty pronouncing the company’s name to the extent that Huawei had to come up with a working name. However, this caused confusion as the new name was not adopted nor promoted consistently and the Americans were confused by two different names belonging to the same company. To make matter worse, Huawei’s employees had difficulty adapting to the Texas accent and their local culture.
Huawei itself has a unique corporate culture within the company. Due to Ren Zhengfei’s military background, he had instilled military style training for new employees and his employees were urged to learn from the behavior of wolves. He wants Huawei’s marketing department to be aggressive, just like a pack of wolves.
Technological
Technological advances in the internet boom continued till 2006, and the technology choices and service requirements of service providers were getting more diversify. As previously mentioned, China had overtaken the United States to become the largest telecom market and hence, telecom service providers were now focusing on network improvement and value-added services rather than on infrastructure development.
Huawei had the foresight to venture early and invested heavily in the third-generation (3G) mobile communications technology and it started its own research and development (R&D) in Code-Division Multiple Access (CDMA) in 1995. And over the next few years, Huawei invested more than US$370 million in wide-band CDMA (WCDMA) technologies with a dedicated team of 3,500 R&D employees deployed throughout research centres in China and other countries.
In 2003, Huawei formed a 3G research joint venture with Japan’s NEC and Matsushita and entered the mobile handset market in early 2004 to familiarise itself with the 3G industry in future. At the same time, a joint venture was also formed with Siemens to test TD-SCDMA (China’s home grown standard) mobile handsets and networks equipments. As a matter of fact, Huawei had invested one-third of its R&D spending on 3G technologies for the past two years.
Legal
Huawei was sued by Cisco in the United States six months after setting up a subsidiary there. It had allegedly infringed a number of Cisco’s copyrights and patents and Cisco was seeking damages in the lawsuit, which includes the discontinuation of Huawei’s Quidway routers, and the impoundment and destruction of all Huawei’s routers and manuals in the United States. By the time Cisco dropped its lawsuit in July 2004; many sales contracts which Huawei was pitching for were lost. To make matter worse, a Huawei’s employee was caught taking photographs of high-tech equipment from Fujitsu in a trade show in Chicago in June 2004.
The Industry Environment – The Five Forces of Competition Model
The intensity of competition and the profit potential of an industry are the functions of the five forces of competition; the threats of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products and rivalry among competing firms.
Threat of New Entrants
There is a low to medium risk for Huawei for the threat of new entrants in the industry. China’s telecom industry had grown to become the largest telecom market in the world and most of the leading global telecom equipment firms had already started operations in China by setting up joint ventures with local Chinese companies. Among the multinationals in China now are leading global telecom equipment firms such as Motorola, Nokia, Lucent Technologies and Siemens. Thus, it is already a competitive market with little room for new players.
In addition, as previously mentioned, foreign companies wanting to enter the Chinese market would have to set up joint ventures with Chinese companies due to ownership restrictions and this usually involve equity investments. Hence, it is capital intensive for a new player to enter the market.
Bargaining Power of Suppliers
No evidence found in the case study.
Bargaining Power of Buyers
The buyers have a high bargaining power. Phone subscriptions had increased to 390 million mobile phone users and 348 million fixed-line users by October 2005. As there was low switching costs for customers, telecom service providers are focusing on network improvement and value-added services to win customers and make existing customers stay. In addition, China’s telecom equipment market has been forecasted to grow at a 10.9% annual compound rate between 2004 and 2008, from US$30 billion to US$45 billion.
Threat of Substitute Products
There is a low threat of substitute products as there is basically no substitute for the industry. There is currently no other products that can offer the same usage and convenience offered by the telecom equipment industry.
Rivalry Among Competing Firms
There is a high rivalry among competing firms. Beside the influx of multinationals telecom enterprises, there are also a number of domestic companies that are becoming competitive. There is little differentiation among competitors and hence, customers have low switching costs.
Besides Huawei, there are three more companies; ZTE, DTT and GDT that have started to emerge. Both Huawei and ZTE were expected to enter further into international markets in the near future, going neck-to-neck with the established multinational enterprises for the same customers.
The Competitor Environment
Intense rivalry creates a need for Huawei to understand its competitors and their objectives, strategies, capabilities and assumptions.
To help Huawei prepare for a response to its competitor, four dimensions (future objectives, current strategy, assumptions and capabilities) about the competitor should be found out and understand.
SWOT Analysis – Opportunities and Threats
Opportunities
Having already facing difficulties entering the United States market, Huawei can present itself better in the United States by collaborating with some of the United States companies. In this way, customers will not perceive Huawei as a low-cost vendor.
In addition, as long as Huawei delivers reliable equipments, quality service and continues its product development, it will pose a formidable opponent to foreign companies.
Threats
Huawei have to be wary of competition from companies from low-cost countries where they pose a direct threat.
Question 3.
Identify the business level strategy adopted by Huawei and discuss the strategic actions implemented by Huawei in supporting this strategy. (20 marks)
Huawei had adopted an integrated cost leadership/ differentiation strategy for its business level strategy.
With its focus on R&D and owning more than 8,000 patents, Huawei is able to differentiate their products in many ways. In addition, being located in a low-cost workforce country, Huawei is able to have their products manufactured at a much lower cost compared to others.
Huawei engages in both value-creating primary and support activities that enables them to simultaneously pursue cost leadership/ differentiation strategy. By having an efficient production, low costs can be maintained while creating products of unique value give rises to differentiation.
Primary activities
As mentioned in question 1, Huawei’s primary activities are marketing and sales, inbound logistics, outbound logistics and operations.
Marketing and Sales
Huawei priced their products about 30% cheaper than other established brands and to make it more attractive, Huawei offers attractive incentives as a sales package when pitching for major contracts.
Support activities
Huawei’s support activities are firm infrastructure, human resource management, service, technological development and procurement.
Firm Infrastructure
Huawei had a good infrastructure that enables it to effectively and consistently identify its external threats and opportunities, resources and capabilities and support core competencies.
It had a very good relationship with the Chinese military which is paramount to its success in China.
Human Resource Management
Huawei focus on having high caliber employees to build up its R&D team. With more than 85% of its employees having a bachelors degree and above, Huawei ensures that they are highly paid by Chinese standard.
In addition, due to Ren Zhengfei’s military background, new employees are put through intensive military style training for the initial months.
Service
To offer unparallel service to its customers, Huawei hires local personnel in customers’ home country as part of its strategy to tailor technologies and services according to customers’ needs.
Technological Development
Huawei ventured early and invested in third-generation (3G) mobile communications technology and it started its own research and development (R&D) in Code-Division Multiple Access (CDMA) in 1995. With a dedicated team of 3,500 R&D employees deployed throughout research centres in China and other countries, Huawei invested more than US$370 million in wide-band CDMA (WCDMA) technologies over the next few years.
In addition, to familiarise itself with 3G industry, Huawei formed a 3G research joint venture with Japan’s NEC and Matsushita in 2003, and entered the mobile handset market in early 2004. At the same time, Huawei started a joint venture with Siemens to test TD-SCDMA (China’s home grown standard) mobile handsets and networks equipments.
Procurement
Huawei has research centres both in China and overseas. It had a 21-storey research centre in Shenzhen, and six other research laboratories in Beijing, Shanghai, Nanjing, Huangzhou, Xi’an and Chengdu; a software development centre in Bangalore (India) and research facilities in Moscow (Russia), Stockholm (Sweden) and the Silicon Valley in California.
Flexibility
Flexibility is needed by firms in order to complete both primary and support activities that allow the production of differentiation products at relatively low costs.
Three sources of flexibility are: Flexible manufacturing systems, information networks and total quality management systems.
Flexible Manufacturing Systems
Flexible manufacturing systems enable a firm to produce a variety of products in moderate quantities with minimum human intervention. Through either patent-mining or reverse engineering, Huawei had turned high-profit and complex products into standard commodities. In addition, to offer better differentiation products, Huawei hires local personnel in customers’ home country to tailor technologies and services according to customers’ needs.
Information Networks
By linking companies with their suppliers, distributors and customers, information networks provide another source of flexibility. Ren Zhengfei’s relationship with the Chinese military had helped Huawei to have a close guanxi network which other competitors do not have, and this had helped Huawei to secure big contract orders.
Furthermore, Huawei’s major customers in China were the big players in the industry such as; China Telecom, China Mobile, China Netcom and China Unicom. Huawei’s networks in China has over 400 million people across the country, occupying 25% of the mobile network market shares and supplying 80% of all SMS from China Mobile.
Total Quality Management (TQM) Systems
TQM emphasizes the company’s commitment to the customer and to continuously improve process through usage of data-driven, problem-solving approaches from empowerment of employee groups and teams.
Huawei is able to simultaneously reduce cost while making use of its ability to develop innovative products. This increases their flexibility which is beneficial to implementing an integrated cost leadership/ differentiation strategy.
Question 4.
What other strategic actions would you recommend to Huawei to compete better in the future? Justify your answer. (20 marks)
Besides the current strategic actions which Huawei is already implementing, I would suggest that Huawei consider acquisition where Huawei will buys a controlling, or 100% interest in another company to make it Huawei’s subsidiary business within its portfolio.
They are several reasons for acquisitions and we shall look at each of them:
Increased Market Power
Market power exists when a firm is able to sell its goods or services above competition levels or when the costs of its primary or support activities are lower than those of its competitors. Hence, to increase its market power, Huawei can use horizontal acquisition where it acquires company competing in the same industry.
Overcoming Entry Barriers
Presently, Huawei experiences problems entering the United States market. Hence, by making a cross-border acquisition, Huawei can overcome these entry barriers and gives it more control over its international operations.
Cost of New Product Development and Increased Speed to Market
Acquisitions allow Huawei to gain access to current and new products that are unique to the acquired firm. Returns are more predictable as the performance of the acquired firm’ products can be observed and assessed prior to acquisition.
Lower Risk Compared to Developing New Products
As the results of an acquisition can be easily and accurately estimated than that of developing a new product, Huawei will find that there are lower risks involved.
Increased Diversification
Huawei can find it easier to develop and introduce new products through the acquired firm as it may be difficult to develop products that deviate from their current product lines.
Reshaping Firm’s Competitive Advantage
Competitive rivalry can affects Huawei’s profitability. Thus, to reduce the effect of an intense rivalry, acquisitions actually reduce Huawei’s dependence on one or more products or markets. This will in turn alters Huawei’s competitive scope.
Learning and Developing New Capabilities
Acquisition can allows Huawei to gain new capabilities which it does not currently possess. Through acquisition, Huawei can broaden their knowledge base and reduce inactivity.
In addition to acquisition, Huawei can also have a nonequity strategic alliance with other companies. A nonequity strategic alliance is a form of alliance where two or more companies have a contractual relationship such that they share some of their unique resources and capabilities to create a competitive advantage. This is used in more uncertain situations, and companies do not establish any independent company and hence do not have any equity positions.
Through nonequity strategic alliance, Huawei can have licensing agreements, distribution agreements, and supply contracts with other alliance companies. Usually, outsourcing commitments are specified in the form of nonequity strategic alliance.
In conclusion, I would recommend that Huawei consider acquisition and nonequity strategic alliance as its business strategy in the future so that it can better compete with other competitors.
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