Chinese State-owned Enerprises- Prescription of McKinsey
Posted : October 29, 2004 at 6:35 am [IST]
The latest issue of McKinsey Quartely Journal has some good aticles where different aspects of the Chinese growth and economy have been dealt nicely. I am giving below a part froom one article:
When Deng Xiaoping launched his reforms, in 1978, state-owned enterprises generated about 80 percent of China’s gross domestic product; by 2003 that figure had dropped to 17 percent. But state-owned companies remain a great force in the economy. In 2003 they employed half of China’s 750 million workers and controlled 57 percent of its industrial assets. They also dominate vital industries such as financial services, power, and telecommunications.
However, state-run enterprises in China yield, on average, a return on assets of 3 percent-well below the 7 percent by the private sector companies. The state banking system has propped up these failing businesses to maintain employment over the years. In turn, the banks have accumulated huge amounts of bad debt that threatens the stability of China’s financial system.
As suggested by Mc-Kinsey, many companies can avoid this including the worrisome job losses. Some may even become global champions in their respective industries. However, they must focus now on improving their performance. Many of the top managers in state-run enterprises still define their performances still in terms of output and employment rather than profits or value creation. The system followed does not motivate underperformers or allows to carry out painful efficiency programs
Managers must have a change in their mind set, and measure their company’s performance by how well it serves its customers and other important stakeholders, including domestic and foreign minority shareholders. Top executives must build organizations that instill individual accountability in workers and persuade them to make the most of their talent and experience. For a performance culture to take root, workers must assume responsibility for their actions, understand how they add value to the organization, and accept the consequences if they fail to perform as required. Given China’s history and scale, the magnitude and complexity of the task are unprecedented and the chances of success unclear. Early results from pioneers such as Haier and TCL have already demonstrated the transforming power of reform.
A state-owned coal-fired power plant sought ways to reduce the amount it paid for coal, which represented over 60 percent of its total cost base. One key lever involved closing the gap between the heat-content rate specified in the plant’s contracts with coal suppliers and what they were actually delivering. In the past, coal supplies were tight in China, so the power plant had simply accepted deliveries as they came in, without properly testing the coal. Some suppliers therefore cheated on their shipments, at great cost to the power plant. To correct the situation, it completely redesigned its sampling process and began holding frontline inspectors accountable for any gap between the heat content its contracts specified and what suppliers delivered (exhibit). A month into the pilot program, the power company had generated more than $1 million in savings at this plant by reducing its heat-content gap. It expects savings of at least $100 million when it rolls out the same procedure to its 100-plus power plants.
One tool that has been applied successfully is a system of key performance indicators, which are directly applicable to thousands of managers and frontline employees and can reach the people who are ultimately responsible for change. Senior managers are evaluated largely on high-level financial indicators (such as sales growth, market share, profits, and value creation), lower-level employees on a handful of important operational metrics (such as productivity, the quality of products, and service) that drive those indicators.
A state-owned tobacco company seeking to increase its revenues, for instance, defined three indicators for gauging the performance of its sales representatives: the percentage of targeted retailers in the region that carried its products, the number of outlets the reps visited each day, and the number of outlets displaying its point-of-sales materials. Frontline sales reps could thus use specific guidelines to meet their quotas. One year into the pilot program, the company’s sales penetration had risen by 25 percent in four key cities.
Haier, an appliance manufacturer, uses key performance indicators to underscore the linkage between the behavior of individuals and the company’s fortunes by making workers share in the successes-and failures-of their departments. Product designers, for example, receive a bonus if their products are profitable. Otherwise, losses are carried over in each worker’s “account” and deducted from future profits before new bonuses are awarded. Similarly, procurement employees receive bonuses for cost savings on materials such as steel.
Top performers must be properly compensated even when a company’s policy and culture limit the amount of money budgeted for salaries
.
One insurance company financed its performance-based compensation system by redesigning its national pay scheme, in some instances eliminating extra pay to workers who were transferred to less attractive offices. Nonmonetary incentives too can be effective for a workforce starved of recognition, career advancement, and personal development. As part of an operational-improvement program, for example, the aforementioned power plant instituted an internal-certification program that designated some workers as specialists, experts, and masters in their areas of responsibility. As the skills of the workers developed, they advanced to the next level, winning recognition for professional accomplishment and opening the door to further training. Extra cash wasn’t available, so the program aimed solely to motivate and retain high-potential, well-educated workers. It worked: morale and productivity increased significantly among the target group.
CEOs in China tend to have much less power than their counterparts in developed countries, as they often can’t control the promotion and compensation of their management teams. Decisions about senior personnel still remain largely within the realm of the government or, more precisely, of party evaluation committees on the central, provincial, and municipal levels. Although this approach reinforces consensus-driven decision-making processes, strong leaders can inspire their workers. Zhang Ruimin, the CEO of Haier, took over a failing state-owned refrigerator factory in 1984 and turned it into the world’s fifth-largest manufacturer of white goods. Zhang spurred his workers to overhaul their lax work attitudes and improve their performance radically. To drive the point home, one day he ordered workers who had produced defective refrigerators to smash them with sledgehammers on the factory floor. ( I am reminded of Late Mungaonkar who built TELCO, presntly known as Tata Motors doing that)
Along with the usual hallmarks of a strong and market-driven corporate leader, a CEO in China must balance the demands of the state and the market by taking into account the company’s social responsibilities (which are much greater than they are in developed countries) as well as its profitability. Occasionally, the CEO must be willing to risk tipping the balance between profit and social responsibility. Liu Chuanzhi, the long-time chairman of the computer maker Lenovo (formerly Legend), started making and selling PCs in Hong Kong when central planners initially refused him a manufacturing license for mainland China. While the state still owns a majority stake, the company is now Asia’s largest computer manufacturer.
Are there some lessons for the managers of loss making PSUs above?
- Indra
Category: Industry/Management |
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