As China shifts from a manufacturing economy to a knowledge-based economy, will the Chinese management style need to adapt?
Haidilao, China’s leading spicy hot pot chain, opened the doors to its first restaurant in London in May, teeing off a planned 20-shop roll-out across the United Kingdom—adding Europe to its ever-expanding list of markets.
The company has expanded quickly and to a massive scale at home in China based on excellent and creative service, good food and reasonable prices, and its global build-out has also been remarkably seamless. The key seems to be a management model appropriate for both Chinese and international business environments.
Haidilao is popular not only for its hot pot dishes, but also for such free services as manicures and board games offered to waiting customers. It was founded in 1994 and now has a market value of $21 billion with over 370 restaurants worldwide. The chain had $10.4 billion in revenues last year.
The company says it runs according to Confucian values, and has developed an employee-centric work culture with generous training, welfare benefits and family-support schemes. Meanwhile, the hierarchical chain of command typical of most Chinese companies has been replaced by a flatter, more Western structure: Restaurant managers have significant autonomy to operate without interference from head office, and even frontline employees are entrusted to make own decisions on a wide range of issues.
As a result, Haidilao—with 60,000 staff members—has a level of employee loyalty rare for a Chinese company. There is only a 10% annual frontline staff turnover rate and a management staff turnover near zero, compared to China’s national average of 20.8%, according to human capital and management consultancy Aon Hewitt.
This has all made Haidilao’s founder, Zhang Yong, into China’s richest restaurateur. His success story mimics that of Jack Ma, who lifted Alibaba to global stardom using his own unique brand of East-West blended management. Former Alibaba vice president, Porter Erisman, once described Alibaba as having Chinese management culture paired with Silicon Valley spirit.
Is a shift in Chinese leadership style toward the Western model necessary for China to transform from a predominantly manufacturing-led economy to a knowledge-based economy? Both appear to provide lessons on what management style means for a company’s bottom line, especially as more Chinese companies go global and the domestic economy matures.
“The appropriate leadership style has to match the market context,” says Paul Ryder, president of the College of International Finance at the Bank of China. “As China looks to move up the value chain and become more competitive against other global players, some of the challenges faced by Chinese firms [on] questions of leadership style and competence become more crucial.”
“Chinese businesses who wish to operate in the West will have to recognize that the West operates differently than Chinese businesses—and vice versa,” says Jonathan Geldart, executive director for markets development at Grant Thornton. “I think there are lessons to be learned on both sides, that, handled sensitively, could add better results.”
The Chinese model
The strict, hierarchical and often opaque Chinese management style, is often criticized. A 2011 OECD survey covering 20 countries placed China at the bottom of the management rankings along with India and Brazil. In manufacturing, the survey found, Chinese firms “tend to be poorly managed.”
But as Chinese business successes around the world pile up, observers are becoming more willing than before to look for the positives in how Chinese companies are run and what there is to learn from the Chinese leadership style.
An agile approach to strategy is one area where Western businesses can learn from China, says Geldart: “From the ability of Chinese management to move very quickly between one idea and another—to try something, fail and move on.”
Barbara Wang, program director at Ashridge Business School, points to flexibility and pragmatism as two other key managerial strengths of the typical China business model. Chinese company structure, however, can be both positive and negative, she says. With hierarchical and paternalistic structures, efficiency depends heavily on the motivations and priorities of the one top leader. “So things can happen quickly in a Chinese company, and they can be very slow,” she says.
Leadership styles also vary within China. John Van Fleet, director of corporate globalization at Antai College of Economics and Management, Jiaotong University, cautions against forcing all companies into a single mold. The gaps between them in achievement, efficiency and return on investment, “are vastly greater than the difference between some aggregated, averaged pool of such enterprises,” he says.
The gaps are especially large in China between private and state-owned enterprises, with smaller private companies being typically far nimbler and more efficient, Wang argues. Still, she lists the Confucian notion of harmony, “giving face” and the system of social networks and influential relationships which facilitate business and other dealings—more commonly known as guanxi in China—along with indirect communication and longer decision-making timeframes, as shared cultural traits that guide all Chinese work culture.
In China, communication is designed to lubricate relationships just as much as to deliver information, Wang argues. Leaders express themselves less directly than those in the West and Chinese colleagues hold back ideas in a group setting for fear of being seen as showing off. This can be a challenge for Western managers who expect employees to contribute vocally.
A human touch
Direction and delegation are frequent sources of misunderstandings.
Western workers in China find a lack of transparency and the unwillingness of Chinese colleagues to speak their mind challenging, Wang says. Similarly, Chinese workers, accustomed to orders through crystallized chains of command, can be confused by the lack of direct instructions from their Western superiors.
The flatter structures of European and North American companies can also leave Chinese workers searching for communication channels and wondering who they should report to. “The Chinese are always cautious about speaking with peers across departments without getting permission from their boss,” Wang says.
Meanwhile, Western linear thinking can clash with broader and more circular Chinese decision-making horizons. “Chinese thinking is quite holistic,” Wang says. “They have to think outside the project, outside their department, and what kind of impact this decision will make on other departments or personnel.” Decisions need to balance the interests of all parties. The process often involves going back to the beginning and starting the discussion over again.
“Chinese businesses are more Taoist in their views on strategy,” says Ryder. “At their best, they embrace partnerships with other businesses to open up and grow new market potential, to make the whole business ecosystem generate more value.”
Five- and 10-year plans make Chinese businesses look farsighted on paper. In practice, however, blueprints are frequently reworked or abandoned. “In Chinese culture you have a long-term view, but that’s just a kind of vision, not a specific action plan,” Wang says. “When you’ve fixed a one-year or two-year plan [in the West], normally you don’t change much.”
Chinese companies often alter contracts after signing. Centralized decision-making means signatures by the department head have little value unless followed by that of the CEO. And even then, dates may change.
Western companies follow structures, systems and policies more strictly, but sometimes lack a “human touch,” Wang says. Chinese management provides an alternative model where inter-personal relationships are the focus. “I think this is the one thing they can learn from Chinese companies.”
“Chinese relate very much on a person-to-person basis whereas Westerners tend to operate more on an organization-to-organization basis,” says Stephen Morgan, professor of Chinese economic history at the University of Nottingham. “And for that reason, relationships tend to have greater priority over formal or legal type of relationships.”
Battle of the business schools
The rise of Asian MBA programs on global rankings reflects a growing international confidence in the region. World class universities, English teaching programs, lower study costs and good job prospects all combine to shift the center of gravity to the East—making the Asia-Pacific the world’s fastest growing market for business master’s degrees.
“An MBA from a leading business school in ‘the West’ has a lot of cachet here [China], while an MBA from a leading local school has an increasing amount,” says Van Fleet. “And the gap, while often wide, is narrowing.”
Differences in what is taught are mostly small and much of the curricula is borrowed from the United States. Van Fleet highlights Marxist-Leninist theory, and Deng and Xi Jinping Thought, however, as obvious departure points.
Chinese business schools tend to focus on hard scientific skills, while Western schools put more emphasis on how to build a high-performance team, as well as on EQ, self-awareness and understanding others, according to Wang.
She says Chinese students graduating in the West with a science degree are likely better equipped for the job market back home. Students of Western management aiming to work in state-owned or private Chinese enterprises might find it challenging.
In a purely domestic company, a local MBA may well be valued higher than an overseas one, according to Van Fleet.
The economic context
Success often hinges on an understanding of cultural idiosyncrasies as well as a grasp of relationship building. As the political and personal are especially intertwined in China, effective management can require network building that extends beyond relationships with colleagues and clients, to government, state and private businesses and other entities and institutions.
Private firms with less access to state resources often overcome that constraint by making connections to government officials.
Size, age, level of technology and managerial competencies all influence the types of relationships the firm develops, says Morgan. Smaller, less technologically sophisticated Chinese firms “are likely to rely upon social networks much more strongly as a way to obtain resources, capital, develop markets, develop partnerships, than larger firms or technically sophisticated firms, and better managed firms.”
“Business structures and capabilities are a product of the market they have been exposed to,” says Ryder. “There should be no surprise, then, that a state owned enterprise (SOE) is structured to support the requirements of the Chinese government. This means that as the market liberalizes, Chinese businesses will need to respond to the new norms of the environment and adapt.”
Stable markets require better structured organizations and managers capable of tackling several dimensions at once, while fast changing ones tend to favor looser organization and managers who can act independently.
“In stable environments, bureaucratic structures are reasonably efficient,” Ryder says. “In changing environments more agility is required. This places an emphasis on judgement, strategy, decision-making, and leading through people—motivating, empowering, developing.”
The way forward
China is predicted to overtake the US in R&D spending within a decade. As China transitions to a knowledge-based economy, the new demands and expectations of a higher skilled workforce will likely force management models to adapt.
“The question for China in part is what leadership style is important as employees need to move up the value chain in terms of their productivity and competence,” says Ryder.
China’s economic catch-up with the West is largely based on people sacrificing personal life for work, Wang says. But rising wages and increased economic independence among some groups is changing employment demands. Upper middle-class workers now expect more holidays and shun overtime work.
The “996” work week—working from 9 a.m. to 9 p.m. six days a week—practiced by many Chinese tech firms has recently been lambasted for causing worker burnout.
“Employee tolerance for different leadership style is changing. Generation Z the world over want their work to be meaningful,” says Ryder. “There are significant generational differences in China between traditional leaders in their 40s and 50s and today’s workers in their 20s and early 30s.”
Also, as more Chinese companies set their sights on foreign markets, business models capable of bridging work cultures become increasingly important.
Morgan points to parallels between globalizing Chinese firms today and Japanese firms moving offshore in the 1970s and 1980s. “They both face similar issues of how to manage a work culture which is very different to their own,” he says, pointing to delegation of responsibilities as a key conflict point.
“They have to develop a competency within their senior management staff and those who go offshore, in understanding what it is like to work across borders and between cultures,” says Morgan. Some Chinese companies, such as train manufacturer CRRC, are investing in this, he says. But many others are not.
A perfect blend
Chinese companies also hold lessons for others. Geldart points to agility as a key strength of Chinese management culture that Western companies would benefit from adopting. Relationship building is another strength, according to Morgan. “It’s important that people appreciate the value that a Chinese company and Chinese business place on a personal relationship over and above the organization with which they are dealing. And that’s where sometimes Westerners make errors,” says Morgan.
Geldart believes a blended management approach is possible if done through careful consideration. “But you can’t just smash one into the other,” he says.
There is already widespread adoption of Western practices by Chinese companies, in training systems, performance management practice, talent management and more. And Western executives are often advised to adopt a similar approach, blending the best of both worlds.
“There are also changes required on the Western side,” says Ryder. “Management philosophy is driven by Western academic thought. There is room to take more of what’s positive from the East and find a hybrid norm.”
As Haidilao and Alibaba have shown, a blended management model can reap rewards. Foreign companies in China and domestic ones looking outward might want to take note. And perhaps infuse their own models with either a touch of Chinese management culture or Silicon Valley spirit, depending on where they are coming from.