M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y

M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y 1 S P R I N G 2 0 0 5 , V O L . 6 , N O . 3
In 1984, CEO Zhang Ruimin took over a nearly bankr 2003, Haier Group’s global sales hit $9.7 billion with a gr Today, Haier is recognized as a worldwide brand. On owth rate of 70% during the previous 19 years. upt refrigerator factory in Qingdao, China. In
January 31, 2004, the firm ranked 95th after such household names as Coca-Cola, McDonald’s, and Nokia, which
were the top three on the World Brand Laboratory’s list of
100 most recognizable brands. Haier was the only Chinese brand on the list. According to an October 2003 article in the Harvard Business Review, Haier is one of the five
Chinese “National Brands to Watch.”
How did it achieve its success? As one of China’s
fastest-growing companies, Haier Group fits a 1999
Gallup survey profile for a successful company. Customer service, product quality, operating efficiency,
innovation, and speed to market are among the top
seven factors for success. Haier excels in all these areas.
To achieve success, the company developed its
corporate culture, business strategy, and OEC
management-control system, which enforces firm work
rules and discipline. Haier’s Human Resource Management Director Wang Yingmin explains the OEC
acronym: “O stands for Overall; E stands for Everyone,
Everything, and Everyday; C stands for Control and
Clear. OEC means that every employee has to accomplish the target work every day. The OEC management-control system aims at overall control of
everything that every employee finishes on his or her
job every day with a 1% increase over what was done
the previous day.”
Why did CEO Zhang choose to implement the OEC
system? He says, “If you observe Chinese people’s
behaviors at the traffic lights, when the red light is on,
people simply ignore it and cross the street anyway. At
the workplace, Chinese people also tend to ignore rules
and do not pay enough attention to details. We need a
tough management system with fair rewards and penalty
features to help our workers get things done properly.”
To focus on customer needs, product quality, innovaSpring
2005
VOL.6 NO.3
THE COMBINATION OF A NEW CORPORATE CULTURE THAT EMPHASIZES EXCELLENCE,
A CHANGED BUSINESS STRATEGY, AND A MANAGEMENT-CONTROL SYSTEM OF WORK
RULES AND DISCIPLINE TURNED A NEARLY BANKRUPT COMPANY INTO A SUCCESS.
B Y T H O M A S W . L I N , P H . D .
OEC ManagementControl System Helps
China Haier Group
Achieve Competitive
Advantage
M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y 2 S P R I N G 2 0 0 5 , V O L . 6 , N O . 3
tion, and speed and to improve operating efficiency, the
firm developed and implemented the OEC
management-control system in the early 1990s.
OEC works. When I visited Haier’s air conditioner
manufacturing facility in the Haier High-Tech Industrial Park at Yellow Island in July 2004, the factory floors
were clean, and workers wearing uniforms and photo
ID badges operated in an orderly manner at the assembly lines. Banners featuring quotes such as “A Product
with Defects Is Useless” and “Innovation Is the Soul of
Haier Culture” lined the factory walls. One large bulletin board said, “Every day is a new day; all activities
are completed in the same day by innovations.” The
OEC management-control system implementation has
resulted in satisfied customers, efficient and effective
processes, motivated and prepared employees, sustainable revenue, and profit growth.
Let’s look at how OEC helped turn the company
into one of the world’s top brands.
COMPANY SNAPSHOT
Haier was not always a success story. When Haier CEO
Zhang Ruimin took over this refrigerator company from
a government official in 1984, the company had total
assets of $300,000, a net loss of $178,000, sales revenues
of $421,000, and 600 workers. In 2003, it had total assets
of $2 billion, 30,000 employees, more than $100 million
profit, and sales revenues of $9.7 billion.
The firm now manufactures a wide range of household electrical appliances, such as air conditioners and
freezers, in 96 categories with 15,100 specifications;
exports products to more than 160 countries; and has
established 58,800 sales outlets globally. In 2000, the
firm opened a $35 million refrigerator factory in Camden, South Carolina, and Wal-Mart and many other
national and regional chains sold Haier products.
On March 4, 2002, Haier unveiled its American headquarters in a landmark neo-classical building, the former
offices of the Greenwich Savings Bank on Broadway in
New York City, indicating that the firm had moved into
a new phase for globalization of product design, manufacturing, and sales. The move demonstrated a strong
determination for long-term development in the United
States. In 2002, Haier had a 30% U.S. market share for
refrigerators 230 liters and under and a 35% U.S. market
share for refrigerators in the 230- to 280-liter range. Its
U.S. sales had reached $300 million in 2002, and it wants
to hit $1 billion in U.S. sales in 2005.
Haier also has been successful in European markets
with a 10% market share in Europe’s air conditioning
market. The latest Euro-monitor statistics on company
sales show that it is fifth among the global white-goods
manufacturers and has the largest world-market brand
share for refrigerators. Its short-term goal is to be among
the world’s top three white-goods manufacturers.
CORPORATE CULTURE AND CORE VALUES
Haier established an enterprise culture department to
actively promote and educate employees. An 80-page
handbook about the Haier Enterprise Culture includes
the following key features:
1. Haier spirit: We work diligently to serve the country
and to pursue excellence through innovation.
2. Haier work style: We pursue operating efficiency,
quickly respond to the market, and take immediate
action to meet customer needs.
3. Employment principle: Every employee is talented
with an open bid for a vacant position.
4. Quality focus: Excellent employees produce highquality products.
5. Sales motto: We establish our credibility before selling products.
6. Market competition concept: We compete with value,
not price.
7. Service concept: The customer is always right.
8. Management accountability—80/20 principle: Management is 80% responsible for any subordinate’s
wrongdoing.
9. Team spirit—10/10 principle: The top 10% of performers ought to help the bottom 10% performers to
improve the firm’s competitive advantage.
10. Haier should be like the sea: We accept all talented
people from around the world for an ambitious goal.
Every Haier employee should be capable rather
than mediocre and redundant for they are the backbone and guarantee of Haier’s future development.
Haier should be like the sea and make contributions
to mankind “sincerely forever.” In so doing, it will
exist forever for the good of all, and Haier will be
part of the whole society.
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According to Zou Xiwen, president of Haier University, which was established in 1999 by the Haier Group
to train employees, the core values of Haier’s development are speed, innovation, and the strategic business
unit (SBU) program. All 30,000 employees strive to
reach the target set forth in the SBU. (SBU means that
each employee is a profit center with the responsibility
to make a profit. Each employee generates his or her
revenue by providing the best service to the employee
in the next step downstream and incurs expense or cost
by receiving service from the employee in the previous
step upstream and resources from various supporting
departments.)
The SBU goal is for each employee to become the
principal part of innovation, demonstrating his or her
own value while creating value for customers. The SBU
program changes the thinking of employees from “I am
only in charge of design and don’t think about manufacturing or sales” to “How does the market accept my
design?” All employees learn that they have to give customers what they want, and, with the SBU program,
employees care about the individualized needs of the
customers. Its philosophy is “The customer is the king
for every Haier salesperson.” In fact, Haier differs from
other appliance companies in that it will build products
to order and it doesn’t compete on price. For example,
when a customer buys a washing machine or an air conditioner, an employee goes to the customer’s home to
set it up.
BUSINESS STRATEGY
Haier CEO Zhang and President Yang Mianmian say
the firm developed three major strategies over three
stages: brand building or recognition strategy, expansion
or diversification strategy, and globalization strategy.
The first stage, called the famous-brand strategy, lasted
from 1984 to 1991. During this period, the company
created and built Haier-brand products and set up a
quality-assurance system. In April 1985, CEO Zhang
gathered all employees and battered the first poorquality refrigerator with a hammer. Then the employees responsible for these goods battered 76 defective
refrigerators. The event made all employees aware of
the importance of quality and established the concepts
of “defective products are wasters” and “excellent
products are produced by talented employees.” Thinking shifted from volume as the
priority to quality and brand recognition as the priorities.
From 1991 to 1998, the second
stage featured an expansion or
diversification strategy in China. As
the firm bases its strategy on quality instead of quantity, it decided
that if someone bought a Haier
Group refrigerator, then maybe
he/she would look to buy something else from the firm. Haier
expanded primarily through mergers and acquisitions to cover all
kinds of household electrical appliances and electronic consumer
goods instead of just one product.
At this time it also focused on
building great distribution channels
all over China and improving product development speed and quality.
Since December 1998, the third
Figure 1: Three Stages of Strategy Development
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stage has focused on the globalization strategy. Haier
exported its products to Germany first, then to other
European countries, the United States, Southeastern
Asian countries, Middle Eastern countries, and India.
On August 20, 2003, the firm displayed an electric billboard in the shopping district of Ginza, Tokyo, symbolizing its determination to reach the Japanese market.
The firm also consolidated its position abroad
through local production and sales. In 2000, it opened a
$35 million refrigerator factory in Camden, South Carolina, and started selling products through Wal-Mart
and many other national and regional chains. In 2002, it
opened its American headquarters in New York City.
As part of its globalization strategy, Haier started
using local capital and human resources. Its international promotion framework encompasses global networks
for design, production, distribution, and after-sales services. It established 18 design institutes, 10 industrial
complexes, 22 overseas production factories, and 58,800
sales agents worldwide. As mentioned earlier, in 2002,
Haier had a 30% market share in the United States for
refrigerators 230 liters and under and a 35% U.S. market
share for refrigerators in the 230- to 280-liter range. The
company sells its products in 12 out of 15 European
chain supermarkets and 10 of America’s chain stores.
The firm has design, production, and sales facilities in
the United States and some European countries, primarily with local employees running them. None of the
employees at its New York headquarters is Chinese.
Two other key business strategies at Haier relate to
winning over consumers: speed and differentiation.
Speed means to satisfy consumers’ needs as quickly as
possible; differentiation means to introduce brand-new
products or products with features that meet different
needs. For example, the firm’s U.S. president requested
that the Haier headquarters design a new refrigerator
with pullout drawers in the freezer chest for the U.S.
market, and, in 17 hours, a micro-freezer prototype was
built, exemplifying the firm’s speed strategy. Another
example demonstrates the differentiation in action:
When visiting rural customers in the western part of
China, an employee discovered that they frequently
used their washing machines to clean vegetables as well
as to launder clothes. Later, the firm marketed the
machines in China’s rural areas as versatile enough to
wash both clothing and vegetables.
HOW DOES OEC MANAGEMENT WORK
AT HAIER?
For constant business growth, a firm needs to continuously raise its goals and quality through innovation,
which is where OEC comes in. OEC management,
based on market competition, strives to continuously
raise the firm’s goals and improve management skills to
achieve a sustainable competitive advantage. Every
employee at Haier attends one month of corporate culture and OEC management training before being put to
work.
Haier’s OEC management-control system and enterprise culture have the following characteristics:
◆ Focus on and understand customer value, product
quality, operating efficiency, innovation, and speed to
market.
◆ Commit top management and leadership to creating a “new way of management” and a performance
culture.
◆ Involve management and employees in creating
the OEC management-control system. Allow them to
become familiar with OEC so they feel included and
share in ownership of the system.
◆ Educate management and employees. Use seminars and weekly company newsletters to explain the
firm’s strategy, customer value, OEC management, and
the idea of every employee being a strategic business
unit to enable them to understand the concepts and
appreciate the benefits.
◆ Create desired incentives, and reassure employees
that they will be evaluated properly in accordance with
their performance.
The OEC management-control system has three
subsystems: target setting; control, checking, and clearance; and incentive mechanism. Let’s look at how these
subsystems work.
Target Setting
Every December, Haier headquarters sets the next
year’s guidelines and goals for each division by considering past performance, market demand forecast, group
long-term goals, and each division’s input on specific
market-development needs (see Table 1).
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Each division submits a divisional action program
form with respect to its annual guidelines and goals. Also
called the divisional management account, it includes
specific annual goals, specific targets, action programs,
deadlines, responsible divisions, quality criteria, evaluation method, and frequency (see Table 2).
A department management account is the same as
the divisional action program. Before the 26th day of
each month, every department head submits an OEC
monthly control general ledger to his or her superior for
approval. It includes a list of items, target value, last
month’s value, expected evaluation result, last month’s
error-correction numbers, this month’s error-correction
numbers, responsible persons, work hours, and daily
clearance control evaluation summary.
In addition, every employee completes a daily activity control clearing account called an employee management account. It consists of task items, evaluation criteria (benchmark, past-period performance, and
this-period goal), values, name of the responsible
employee, daily actual results, evaluation results, actual
compensation, and reviewer. To track performance,
each job is assigned to a specific employee along with a
clear delineation of the job’s supervising manager, the
responsible employee, the employee’s partner, and the
quality-check person. For example, each piece of glass
in a particular building is associated with an employee
who must take care of it.
Control, Checking, and Clearance: the OEC
Daily Clearing Routine
The control, checking, and clearance subsystem

Prepared by: Verified by: Approved by:
Table 1: Division _________Fiscal Year Guidelines and Goals
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HR FINANCE PLANNING MATERIAL QUALITY EQUIPMENT INSPECTION AFTER-SALE FACTORY I FACTORY II FACTORY III (8) STANDARD SERVICE Operation Quarterly
Evaluation Plan Review
Result
Evaluation Monthly
Result Plan Review

M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y 7 S P R I N G 2 0 0 5 , V O L . 6 , N O . 3
includes the production site 6-S daily routine and the
OEC daily clearing routine. Haier workers are imbued
with the disciplines of a 6-S daily routine. An adaptation of the 5-S quality-control movement from Japan,
6-S takes its name from the initials of five Japanese
words—seiri (discard the unnecessary), seiton (arrange
tools in the order of use), seisoh (keep the worksite
clean), seiketsu (keep yourself clean), and shitsuke (follow workshop disciplines). Haier added a sixth, the
English word “safety.”
To promote the 6-S routine, small yellow 6-S squares
are painted on the factory floor. At the beginning of
each workday, team leaders stand inside the squares to
give a briefing on that day’s work and relay any news to
the employees. At the end of each workday, some workers will be called to stand on the footprints inside the
squares to criticize themselves for making mistakes and
share corrective actions taken during the day or to share
some of their good work.
The other part of the control, checking, and clearance subsystem is the OEC daily clearing routine,
which includes the following nine-step procedure:
1. Each team supervisor gives a daily briefing to
workers before they start their work.
2. Production workers conduct their activities by following the seven OEC criteria to check and control:
production quantity, quality, material consumption,
technology level, equipment maintenance and condition, production safety and workplace condition, and
labor discipline (see Table 3).
3. Supervisors conduct onsite tours every two hours
to detect and solve problems as well as complete the
production-site OEC form with the seven OEC criteria
items.
4. At the end of the day, all workers conduct a selfcheck of their own work with the OEC criteria, fill out
their 3E (Everyone, Everything, and Everyday) cards
with seven OEC criteria items, and submit them to
their supervisors. See Table 4A and Table 4B. For production workers, the self-check consists of seven OEC
criteria, and, for other workers, it consists of activity
items and specific targets. All employees fill in a form
daily and calculate their wage using the following
formula: wage = rate ✕ quantity + award – penalty.
5. Each supervisor examines the 3E cards submitted,
corrects errors, gives a comprehensive evaluation, and
submits the evaluation results to the work area manager. Evaluation results are graded as A, B, and C. If an
employee achieves an A, ¥5 are added to that employee’s daily compensation; if an employee receives a C, it
is minus ¥5.
6. Each work area manager checks the sample 3E
cards, then fills out his or her own 3E card and submits
it to the factory director.
7. Each factory director reviews the 3E cards and
records the results in the factory OEC account. He or
she then files a daily progress report to the deputy division general manager regarding problems that have
been solved, problems that have not been solved, and
suggested solutions to unsolved problems.
8. The deputy division general manager reviews daily
progress reports and suggested solutions and provides
feedback before reporting to the division general manager.
9. If necessary, all production and supporting department heads get together to discuss and analyze problems found through the OEC process and work
together to suggest corrections, improvements, and preventions that are needed.
Incentive Mechanism
Haier’s third subsystem is the incentive mechanism,
and the incentive policies are openness and fairness.
The company adopts a point system for production
workers using the 3E card, and, if an employee earns
more points, he or she makes a higher wage and bonus
(this way, both management and employee know the
daily wage and why).
The company also uses quality-check coupons to
provide an additional incentive mechanism. Each
employee has a quality-check coupon booklet with red
and yellow coupons for rewards and penalties. The
booklet lists all quality problems the firm has detected
and provides guidelines for checking each defect. If an
employee failed to self-check a quality problem that
was later found by his or her team member during a
cross-check or by the superior during a managerial
check, the employee will lose a red coupon and receive
a yellow coupon that will be counted against that day’s
wage and bonus.
As further motivation, each employee receives a daily
M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y 8 S P R I N G 2 0 0 5 , V O L . 6 , N O . 3
Table 3: 3E Card Evaluation Criteria
Production Plan Evaluation Criteria
◆ If less-than-plan production occurs because of external factors, production plan should be achieved by nonpaid
overtime.
◆ If an employee causes workshop/team overtime of less than 10 minutes, the employee should be fined ¥10 (U.S. $1 =
8.27Yuans). If the employee causes workshop/team overtime of more than 10 minutes or whole factory overtime of
more than five minutes, the employee’s daily wage should be confiscated, unless the cause of the overtime was an
unexpected act of God.
Quality Target Evaluation Criteria
◆ Daily defective-product costs should be fined according to the defective-product prices announced by the Quality
Inspection department. The monthly quality target is evaluated by the Technology department.
◆ Cash-equivalent coupons should be priced daily by the Quality Inspection department.
◆ Responsibility cost occurred in disposing of defective products should be accounted for according to “DefectiveProduct Disposal Rule.”
Technology-Level and Production-Discipline Evaluation Criteria
◆ Employees who work without an appropriate technical credential should be fined ¥50.
◆ Employees who fail to follow the technical production requirements should be fined ¥20.
◆ Employees who do not follow the company’s technical rules in production to record information or who do not record
on time should be fined ¥10.
◆ Employees who have no clear self- and peer-review contents and targets should be fined ¥10.
Equipment Evaluation Criteria
◆ Employees who fail to check equipment daily should be fined ¥5.
◆ Employees who fail to lubricate equipment should be fined ¥5.
◆ Employees who fail to record the condition of equipment properly and in a timely fashion should be fined ¥5.
◆ Employees who violate equipment operation procedures should be fined ¥50.
◆ Employees who operate equipment without an appropriate credential should be fined ¥100.
Material Evaluation Criteria
◆ Employees who produce defective products should be fined an amount of up to 10% of the material price.
◆ Employees who overuse raw materials should be fined an amount of up to 15% of the materials price.
◆ Employees who save raw materials should be awarded an amount of up to 5% of the materials price.
◆ Employees who fail to make timely and exact inventory checks and reports should be fined ¥10.
◆ Employees who fail to report that there is an insufficient amount of materials 12 hours ahead should be fined ¥300.
Labor Discipline Evaluation Criteria
◆ Employees who fail to place equipment in the proper area or fail to attach clear and matching tags on the equipment
should be fined ¥2.
◆ Employees who fail to clean and clear their work environment should be fined ¥2.
◆ Employees who are late for work should be fined ¥2; those who leave early should be fined the daily wage.
◆ Employees who leave work because of sickness or other personal reasons and who do not have appropriate approval
should be fined the daily wage.
◆ Employees who gather for fun or chat during work time should be fined ¥2.
◆ Other violations will be handled by related rules and regulations.
Production Safety Evaluation Criteria
◆ Employees who operate without following proper procedures should be fined ¥10.
◆ Employees who operate without knowledge of safety operation rules and procedures should be fined ¥10.
◆ Employees who fail to deal with dangerous factors in time—and effectively—should be fined ¥10.
◆ Employees who lose safety signs or who have unclear and damaged signs should be fined ¥10.
◆ Employees who fail to wear uniforms or gloves or wear untidy uniforms should be fined ¥2.
Other Awards and Penalties
◆ This section will handle actions not mentioned above.
Endorsement
◆ Additional explanations from the operators or inspectors will be recorded in this section.
Inspection and Review
◆ Inspectors, known as team chiefs, are required to schedule inspections of the 3E card and give comments on evaluation and endorsement results.
◆ Reviewers are required to schedule reviews of the 3E card and release a review opinion. Employees’ wages will be
determined according to review results.
M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y 9 S P R I N G 2 0 0 5 , V O L . 6 , N O . 3
Name: Employee Number: Group: Team:

Note: 1. OEC Evaluation Worksheet consists of 3E Card A and Card B. Card A is a monthly evaluation worksheet and is kept by every employee each year; Card B is for the purpose of salary calculation and daily evaluation and is updated every month and submitted to the factory’s plan and finance department by the end of the month. 2. Team head or team members entrusted by team head should prepare OEC Evaluation Worksheet, which should be confirmed by employee’s signature. 3. Employee number is the number used in the bank salary transfer system, and employee’s qualified position (1) can be employee’s real position. 4. Material consumed, quality, and value coupon should be filled in on Card B provided by group head. Other awards and penalties, such as on-site and labor disciplines, should be recorded daily. 5. Daily production of different types should be recorded on the back of Card B; salary calculation for daily production (including public holidays and weekend overtime) should be recorded on the front of Card B. Overtime production will be considered in salary calculation but not for evaluation purposes. Overtime for inventory check and on-site arrangement will be recorded on the back of Card B. 6. OEC Evaluation Worksheet review procedure: worksheet maker ➞ team head (evaluator) ➞ employee ➞ group head (reviewer) ➞ OEC supervisor ➞ personnel responsible for various functions.

1.

Annual Evaluation (Person)

Jan.

Feb.

March

April

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Month Accumulation

1 1

5 6

12 18

Category

Monthly Review

K

L

Cases

Careful self- review avoids poor quality

Poor quality occurs in this month

2.

3.

4.

5.

6.

Explanation:
1. OEC Evaluation Worksheet serves as major source for employee evaluation.
2. Comprehensive ranking explanation: Monthly ranking is based on the production-plan fulfillment, and accumulated
ranking is the sum of rankings of a particular month; annual ranking is sorted by accumulation by the end of each
year (ranked first with the smallest year-end accumulation and ranked last with the largest year-end accumulation).
3. Figure explanation: Red smiling face is excellent; green face with neutral expression is average; blue sad face is poor.
In-depth analysis for excellent and poor cases is required.
4. Evaluation and ranking refer to the team-evaluation method.
Positions Qualified:
Table 4A: OEC Evaluation Worksheet (3E Card A) for Monthly Evaluation

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Name: Position: Employee Number: Plant: Team:

Table 4B: OEC Evaluation Worksheet (3E Card B) for Daily Evaluation and Salary Calculation
FRONT PAGE
BACK PAGE
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grade for actual performance and progress toward
achieving his or her target. Daily evaluation results are
shown to workers the next day on the bulletin boards in
the factory. The employees who are acknowledged as
the best workers for three consecutive days have the
honor of telling their experiences to fellow workers.
The employees who become the best workers most frequently in one month are considered the best workers
of the month. They have more opportunities to attend
job training and more social benefits, while employees
who become the worst workers most frequently in one
month are demoted to probation workers.
Finally, the firm has an open competitive bidding
system for job placement. When there is a job opening
within the group, employees who have reached the
qualified skill level through internal training seminars
or on-the-job training can bid for that job. Management
then makes the final decision and selects the best candidate based on the submitted bids.
SUSTAINABILITY
Haier has come a long way from a nearly bankrupt company to a worldwide brand. By making employees
responsible for meeting OEC criteria, Haier will continue to excel and achieve its short-term goal of becoming
one of the world’s top three white-goods manufacturers.
In this current competitive market economy, many
companies have much to learn from Haier’s culture and
OEC management-control system. ■
Thomas W. Lin, Ph.D., is a professor of accounting and the
Leventhal International Faculty Fellow in the Marshall
School of Business at the University of Southern California
in Los Angeles, California. You can reach him at (213) 740-
4851 or wtlin@marshall.usc.edu.
The author acknowledges the financial support provided by
IMA Foundation for Applied Research and would like to
thank Haier University President Zou Xiwen for providing
the tables, which were originally in Chinese.

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