Organisational Change at a Multi-National Gas Corporation in Shanghai

Dr Doug Davies & Liang Wei

Introduction

The change from a controlled to a more open economy has been occurring at a
relatively rapid pace in China. Many of the state-owned enterprises are either
undergoing a privatisation process or are becoming a joint-venture operation with
western multi-national enterprises. This has had an impact on the organisational
culture of both the management and the individual employees, and the pace of
change, which has been incremental, has been met with some resistance.

The ability of the employees to cope has been outstanding, but the ability of the
foreign company to adjust to the changed conditions in a different environment also
needs to be noted. This study deals with a major Chinese Gas Supplier and Distributor
and the challenges faced on both sides as a result of a takeover and the resultant
necessary changes in the areas of safety and finance. Resistance to the change
processes and the remedies used to overcome that change are noted.

Theoretical Overview

The technological advancement, changes in customer needs and the importance of

creating value for customers have led, to a large extent, to organizational changes
needing to be implemented in many organisations (Mi et al., 2005). However,
resistance is almost inevitable for any changes happening, especially when the
organisational culture needs to be changed.
One source of the resistance is the employees, who, sometimes having problems in
receiving sufficient information, may be unwilling to accept change because of loss of
established interest and being unable to adapt to changes (Lu, 2005 & Li, 2007).
Apart from individual employees, resistance to changes can also come from the
organizational level, such as incompatible organizational structure, rules and
regulations as well as from within the existing culture of the management(Lu, 2005 &
Li, 2007).

Lewin (1951) developed an early model of change describing it as a three-stage

process including unfreezing, changing and refreezing. In order to make changes
easier, the organization can try to reinforce the discontent of the employees about the
existing conditions during the unfreezing process; show empathy towards employees
while changing; and consolidate the achievements through intrinsic and extrinsic
motivation in the refreezing stage (He, 2008). Similarly, Lu (2005) and Li (2007) both
mentioned that proper motivational approaches played a vital role in helping in
advancing changes in the organization.

To overcome the resistance encountered in the change process, it is necessary for the
organization to improve communication within the organization (Li, 2007) because
communication could help to ease employee tension caused by the change (Wang,
2008). This purpose can also be fulfilled by ensuring employee involvement during
the change (Lu, 2005).
Besides, leadership is of great importance in the changing process as Li (2007)
proposed that the role of a change champion and a spiritual leader was irreplaceable.
Both transformational and transactional leadership exert a positive effect on
organizational changes. Which approach is more effective is contingent upon various
situational factors (Mao et al., 2008).

What is more, experiential learning and recruiting fresh blood into the organization
can break employees long-held views about the current situation and thereby will
help to facilitate change (Wang, 2008).

Training is extremely necessary because it can help employees enhance their

competency and therefore better adapt to change (Lu, 2005 & Wang, 2008).
Employee self-performance management helps to reduce the cost of changes both in
financial and time terms (Zhang, 2008). The organization can also offer gain-sharing
scheme to overcome the resistance incurred by the loss of established interest (Wang,
2008).

During the change, the HR department has many things to do to ensure smooth
transitions in the above-mentioned functions (Ke et al., 2008). HR may be responsible
for designing a new selection, evaluation, and compensation system to facilitate the
changes. Besides, HR plays a large role in promoting changes in the existing
corporate culture (Wang, 2007). According to Hu Hongliang (2003), mid-level
management also plays multiple roles in implementing changes in the organization,
such as that of idea generator, communicator, counsellor and collaborator.

Organisational Overview

MNC Gases (MNCG), a Multi National Corporation (MNC) located in Shanghai, has
a large presence in China and has seen the changes that occurred from the Chinese
organisation being a full State owned Enterprise (SOE) to becoming a joint venture
(JV) and there has been substantial changes in the evolution from the state owned
corporation to it becoming part of a multi-national enterprise.

MNCG (China) initially started business in Shanghai in 1988, as a Joint Venture.

Typically in those days when MNCs came into China to form JVs, they wanted to
take over control of all employees. Many existing state employees went into the joint
venture. However, employment was iron rice bowl clad. The employees would not
leave and could not be fired, as they were guaranteed jobs for life under the conditions
that currently existed within China.

Secondly, many of the SOEs were very old and traditional companies, and they had
groups of employees who were quite old. There was no possibility of these employees
being pressured into retirement to bring in a new cultural approach, with the younger
or newer employees bringing in a fresh perspective.

Typically for MNCG, their policy was to go in with at least 50% ownership of the JV,
with MNCG preferably being a majority shareholder. MNCG, though, would prefer to
have overall management control. It was found in the past to be an effective way, as
far as MNCG was concerned, to allow it to introduce its policies and more
importantly, its safety practices. Its emphasis was on safety. This control was
therefore not so much from a profit perspective but more from a safety perspective.
This was due to the nature of the product. Gases are highly explosive so it is a
potentially dangerous industry.

However, from about 1998 to 2002 the Chinese Government discouraged full
ownership by an outside (China) firm. This acted as an inhibitor to MNCG
introducing many of their management, safety and HR practices and procedures into
the company in the first instance.

Area of Change/challenge

One of the most important challenges, supported by much of the literature, is to

change peoples mind-sets. It goes into many areas in terms of management practices.
Safety and finance are two examples of this, and these were two areas of concern for
MNCG. Taking it to the next step, one was to do with processes (the way of doing
things) and the other to do with procedures (the steps that need to be taken).

The Safety Issue

Being a dangerous industry, due to the nature of the product, safety was a prime
concern to MNCG. The SOE, in the opinion of the new British partner, had some
safety standards but the rules and enforcement of those rules was not of the standard
expected by MNCG.

Under the rules of the SOE, smoking was only allowed in certain designated areas.
Before the JV came into operation, the Chinese partner gave a first warning if the
employee was caught smoking in a prohibited area. For the second instance a serious
warning was given, and for the third instance, the employee was dismissed. MNCGs
policy, however, was more direct. The first time an employee was caught smoking it
resulted in an immediate dismissal for that person.

This change of mindset to a focus on safety was relatively easy to implement.

Employees were trained in the new safety requirements and advised of the
implications of breaching these requirements.

The Financial Issues

The second issue was related to the financial aspects of the organisation, specifically
relating to authorisation of expenditure. There appeared to be no knowledge of limits
of expenditure, and managers were effectively given an open policy on their
delegation, with no or minimal monitoring The problem that existed was how to gain
acceptance from people for the kind of changes that needed to be made on these
policy matters, as the organisation under its new owners needed to make a profit and
it could be seen that the lack of delegated authority would be an inhibiting factor in
the process. This aspect can then be broken into 2 components of the problem. The
first is standards and the second is processes.
Authorisation Policy

As far as MNCs are concerned, they have a stringent compliance on authorisation of

expenditure. Being a listed company in both London and New York, MNCG and
many other companies have very stringent compliance requirements on both financial
and legal reporting. Leadership in these aspects of management sets both example in
practice and in the pace of change occurring. The management have to set the
example as they have a high profile among employees. Any transgression on their part
results in a loss of faith on the part of the employee. Flexibility can be allowed but
certain regulations are non-negotiable.

The Chinese way of doing things tends to be too flexible, and it is well known among
expatriate management that the Chinese people do not like regulations. They will not
follow regulations. They also do not like monitoring and do not like follow-up. The
core issue behind this is to do with leadership setting the examples and leadership
setting the pace. Leaders have a very high profile, and therefore in a society like
China, whatever leaders do, the rest tend to follow

The Chinese way of doing things is very much a follow-ship. The concept of
empowerment, especially in the early days, was an alien concept in China. This brings
into the equation the concept of Guanxi, which is based on a Confucianist ideal and
includes things such as respect for elders, seniority and authority.

The initial problem to resolve then is how to change the mindset of both management
and employees. So, how can the mindset be changed? This is difficult when senior
people, at the social level, need to understand, accept and live by the rules in the
Chinese context, while living and working in China.

However, it can still be changed if a better approach can be demonstrated to the

employees. This is done through the process of communication and training. In the
communication sessions, the trainer needs to show employees the benefits of the
change process.

To provide this training program, MNCG had developed a corporate culture training
program called ACTS: A is for accountability, C is for collaboration, T is for
transferability and S is for Stretch.

Accountability was a fairly alien concept in Chinese society. Employees tended to

mix accountability with responsibility. But accountability has a further step, and that
is the question of answerability. In other words, you answer for whatever you do. It
is not just the responsibility. In China, responsibility is considered to be a task. You
are assigned a task and that is it. Whether you do it well, badly, or do not even
complete it, you are not answerable for it.

So at MNCG, the way that the Chinese employee defined a given term first needed to
be examined. The Chinese perspective was studied and understood from this unique
point of view. What were the critical differences and similarities of the same term
taken in a multi-national context. Ability is one, but substantial emphasis is also
placed on collaboration. With collaboration, the organisation is not just talking about
a corporate image. They need to go one step beyond that. When managers talk about
collaboration, they talk about all needing a common objective to allow this
collaboration. Different departments will have different objectives, but at an industry
level and at a country level, collaboration leads to the achievement of a common
objective.

The Objective

One example of achieving a common objective is that of finance. Finance loves to

collect the money, salesman love to make their customers happy, and salespeople will
find it so hard to press customers for payment. Finance will find it unacceptable that
payment is delayed, for so long. So the question is, how is this problem resolved so
that the common objective of making money can be resolved?

The answer is that we resolve it with a common bonding, a common aim or shared
objective. The question to be asked is, if the customer does not pay, does the
organisation really need or want this customer? How far will an organisation let the
customer takes this liberty of not paying debt owed to the company? Where does it
stop? Must there be endless debt. By bringing these two factors together, we make
people realise that there is a common bond. That common bond or goal is what the
organisation called its strategic objective.

This, then, brings up the issue of transparency. The organisation should not
necessarily tell the whole world about changes that are going on, but should
concentrate on the parties that are directly affected and the external parties which are
also affected. Management need to know who to give information to add two to share
information with. There needs to be a balance between confidentiality and the need to
share valuable information to the employees. This is the value of transparency, where
an employee should be willing to go beyond what they need to do and be given the
information to do this.

For example, if management gives its employees at KPI of 100, a good employee
should aim to meet a personal objective at a higher level, say 106. They are then
giving the manager, 6% above what is being asked. If they over extend their KPI, for
example to 140 that can be very unrealistic and many employees will fail if they try to
set unrealistic goals.

It as discussed earlier, the major area that was needed to be emphasised by MNCG,
was that of safety. This needed to be broken up into behaviour-based versus process
based aspects. From this perspective, it was more important to confine it to process.

The financial process, however, is essential if the organisation is to grow and thrive.
When a multinational enterprise enters into a joint-venture, it does what is called a
due diligence test. Part of the due diligence process is looking at the various items
within the organisation, looking at the various setbacks of the organisation may have
suffered, and as a result, putting a number of improvements into the organisation.

The practical setback that MNCG suffered was the limits to authority given to
management in China, the philosophy is that whatever the senior man says, goes. So
it is in a factory environment, whatever the factory manager says, goes. There
appeared to be no concept of limit of authority for each and every level within the
organisation. So in terms of limits of authority, it was necessary to introduce it
initially at the conceptual level. This is both in terms of breadth and depth.

In terms of breadth, it was necessary to look at the area that the person was
responsible for. For example, how much can a cheque be signed for, how much can
you approve capital expenditure for? What is the authority to approve daily
expenses? This is commonly known as delegated authority.

It was then necessary to explain to the employees and management why this limit of
authority was necessary. AS mentioned previously, the Chinese employees did not
have an understanding of the concept of limit of authority. Historically, the limit of
authority of the local authority, in the past, may have been the emperor of the country.
At the country level, it may have been the county magistrate. However, within an
organisation, there could be many different levels of authority.

The difficulty, was educating all employees about the different levels of responsibility
and authority, and a deeper problem was to ensure that people auditing at those levels
of authority were aware of this. The employees, therefore needed to be educated
about the different levels of responsibility and authority. It was not only necessary to
talk about the what and the how, but also to talk about the why. Knowing the what is
the knowledge, knowing the how is the application, but knowing the why is the real
understanding. So the problem was explaining to them why, a delegation of authority
or a limit of authority was done in the way it is.

All this was explained to them in quite clear terms. There are certain areas in which
the things could not be questioned. The classic area would be the laws and
regulations of the country. One never questions, for example, why you always
stopped at a red traffic light. The simple answer is that it is a regulation. Why does 1
foot equal 12 inches. The reason is that it is a standard. In its standards and
regulations, there is no why. There is only acceptance.

What must also be realised, is that in the areas such as health and safety, and financial
delegation, these may be more questioned by people working within the organisation
if they are not used to the rules and regulations that apply. In standards and
regulations, although they can be changed, employees must realise that when the
stand is a changed, there will be occasions as a result of this change that will result in
the actual results being less than the expected.

Also, if the standards are similarly dropped, they may be overridden and the result
may be an increasing wastage, and as a result of this the unit cost they go up. The
organisation must decide if they could accept this. This is how the organisation
conceptually changed the way that people think.

When taking over a joint-venture or engaging in a joint-venture, the use of senior

management staff within the organisation needs to be sought. If the senior people
within the organisation do not necessarily believe that what they are doing is
necessary, or do not believe in what he wanted to, it is very difficult to implement any
changes in policy, practice, rules and regulations or procedures. As a result, it is very
important that people at this supervisory level, and people at the management level
are unaware of, and convinced of, the value of the change process. They need to have
a strong commitment, and the new owners of the joint-venture need to ensure that this
commitment is followed-through. If this commitment is followed through, this will
result in exemplary conduct of managers and employees.

The next issue that the owners of the joint-venture needed to look at was to identify
who the employees identified as the champions and who management identified as
their champions within the organisation. The organisation needed to be aware of
resistant camps within the company, and as a result of this, those people who are
likely to resist the things that are needed to be done need to be determined.

Once the champions within the organisation have been identified they are the best
people to use as spokespersons to engage in the change process. For those who are
resistant to the change process, the organisation needed to hold a number of sessions
with them to allow them to understand the reasons for the change. In conjunction
with this, it was necessary to get the employee champions to talk to them.

What needed to be explained, were two things. The first thing that needed to be
explained was the reason the change had to be undertaken. It is probable though, that
questions may still arise as to why the changes were necessary. It is probable that the
questions that may arise could indicate that resistance still existed within the
organisation. A hard decision may then be necessary to implement the change
process. Preferably, though, in the first instance, the soft approach of implementing
this change is more desirable. It is better to gain acceptance by convincing them or
explaining to them the reasons of the change.

If all this fails, the last choice could well be a parting strategy, if the employees still
refuse to accept the change. Of course, the severity of this resistance, and in what
areas needs to be examined. If it is a safety case, there will not be any compromise.
Policy must stand, and of the effectiveness of this policy needs to be communicated to
all employees. The communications process is an extremely important part of the
change.

In terms of leadership and authority, the various rules need to cascade down from
head office level into the smaller business units. The way that MNCG was structured,
in China was by line of business. Before the year 2000, it used to be by geographical
region, China was carved into three regions. These were the North region in the
eastern region and the southern region. From 2000 onwards, however, it was cut by
line of business. It was organised by product line.

When MNCG implemented the new authorisation policy, it was common across all
business units. Supporting functions like human resources, finance, quality and others
were common across all business units. Corporate functions, therefore, cut across the
product line.

In any kind of change, there will be people who are adversely affected, and may then
go against the change. There are people who are neutral, who are not positively or
negatively affected by the changes. Nothing much has really changed.. There will,
however, be a small number of people who are strongly affected. Their jobs may be
made easier, or maybe made bigger. In other words, their authority may have been
enhanced or may have been diminished. Different people will be impacted differently
as a result of these changes and resistance or acceptance will vary. This resistance can
then be broken into three categories.

The first category consists of people who actually resist the changes. These are
people who are very uncertain of the changes and did not know how to implement
them. The second group of people to resist the changes will be people who are
adversely affected, and there is the perception that their authority has been eroded. So
the resistance may be a reaction by them to what the organisation is trying to do. It is
quite possible that these employees have jobs, which have actually grown smaller. In
the Chinese context, they could be seen as losing face. They consider that they have
effectively been demoted. The resistance, therefore, that they display may be a
reaction to them in giving opposition to what changes are actually going to be
implemented. The reality is that these employees may have had a job which had a
quite high status, but now has actually grown smaller. The third category of people
who may resist the change process would be those who do not have the skills to
actually cope with changes. In terms of limiting their authority, the third category
does not apply.

The main area of resistance tended to come predominantly, from those whose
authority was not clearly stated in the past. This was because, theoretically, they had
unlimited authority. Their delegated authority had not been clearly stated by the
previous management.

Similarly, it was found by a number of managers on their entry into the Chinese
market, that the Chinese had a tendency to say, you did not say that I could not do it,
so therefore I did. To re-phrase, the Chinese workers considered that if you did not
say that they could not do it, they therefore assumed that they could do anything
without limit.

Therefore, when an authorisation or delegation policy was introduced into the

organisation, it was viewed by many as a restrictive covenant. It meant to them that
they could only take action up to a certain stage. Beyond that they were forbidden to
take any further action. As an example, looking at the area of financial delegation,
certain employees may have been given the authority to sign up to an amount of
$1000. If they were requested to sign for a figure of, for example, $1020, they were
not allowed to do so. It was explained to them that this was what the authorisation
policy included. This was also what led to resistance in many quarters of the
organisation, where people may have actually had unlimited authority or perceived
that ultimate authority in the past. Now, however, a strict delegation was to be
applied to the employees.

This then, was the problem of the MNCG had to understand and had to modify.
Because the delegation was applied to many people in the company, these managers
and other employees thought that it was an erosion of their authority and therefore
considered that they had lost face as a result of this policy.

This whole issue points to a cultural problem of the Chinese people. To understand it,
expatriate managers need to understand and study how the problem evolved. The old
management structure of the organisation did not get the Chinese employees to
question the authority of the manager. In fact, they were definitely told not to
question it. However, under the re-organisation, employees were advised that if they
noticed that their manager was signing something that was contrary to the policy, this
error or breach should be pointed out to the senior manager.

Employees who were auditing management expenditure, were given two options.
They were advised in the first instance, to go back to the manager who signed it and
bring the matter to his or her attention, raising the issue that they may not be aware of
their delegated authority. The other option was to raise the issue with their manager.

If they were an accountant, they would raise it to the accounting manager. They were
advised that the best approach would be to mention to their manager that they
consider that the manager may have made a mistake, in that he has signed an authority
beyond his delegated expenditure. It is then the responsibility of the accounting
manager to handle the issue.

Effectively, the expatriate managers were advising the finance people to check on
what other managers and people were doing. The reason for this, is that the finance
department was viewed as the last line of defence. If an over-expenditure passes
through the finance department, it is too late. It then costs the company money.

The initial training of the new regulations, therefore, were focused on the finance
staff. It was found and acknowledged that in the initial period of training and
acceptance of the new policy, there were a number of mistakes that would be made.
Employees either were not too sure of the policy or were not familiar with the
application of the policy. Because MNCG management expected a number of errors
to be made, the situation was monitored very carefully.

Corporate finance employees were advised to go to the supervisory and management

level, and examine the documents. Effectively this was a snap audit. It was
emphasised to employees that it was not a formal audit. This snap audit was used to
pick up small erroneous authorisations. This snap audit was done over a six-month
period. The first three months, involved the review of any errors. The second three-
month period was to determine if there were any improvements. If it was found that
there had been improvements made in the second three months, it would then be
subject to a formal audit.

It must be admitted that there were mistakes made. People may have forgotten or
misinterpreted the policy, or there were other reasons for these mistakes being made.
However, over a given period of time, each finance meeting pointed out any
discrepancies that were made. The intention was not to highlight these mistakes, but
to let the employees share and learn from what each area had done. It was effectively
a self-improvement exercise.

Conclusion

Many multinational enterprises have managers who are expatriates. It is important

that these managers who are coming from a foreign country into China, understand
and know the local way of doing things. However, it must be acknowledged that
foreign managers do have a number of difficulties.
The manager must understand how much he or she can tolerate and how much cannot
be tolerated. In other words, what must be done, and done now and what can be done
later. In other words, the manager will need an adjustment period.

There are exceptions, however. For example, in the issue of safety within MNCG and
other multinational organisations, there was no room for compromise. When people's
lives are at stake, there is no margin for error. In regards to the financial changes
impacting on delegated authority, there was some leniency given to the initial
implementation of the changes introduced to the organisation.

For these processes, an adjustment period should be given for the process-based
change. Foreign managers need to be aware that a fine balance is required when
implementing the changes. They need to understand what areas can be changed
rapidly and what areas need caution in the change process, as well as the changing of
existing mind-sets within the company. This brings an acknowledgement of the
existing culture and a realisation that the locally-based culture needs to be taken into
consideration.

References

He Xiaoli (2008). The Effective Motivational Mechanism in Organizational Changes.

Management and Administration. 3:54-55.

Hu Hongliang, Chen Xudong & Xu Xiaodong (2003). A Study on the Role of Mid-
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Ke Jian & Pei Liangliang (2008). Human Resource Management Approaches in

Organizational Changes. Human Resource Development of China. 6:10-13.

Li Zuozhan (2007). Overcoming Resistance in Different Organizational Change

Patterns. Modern Management Science. 6:45-46.

Lu Hong (2005). Reducing the Resistance from Employees in Organizational

Changes. Human Resource Development of China. 2:51-54.

Mao Minxin & Long Lirong (2008). An Empirical Study on Relationship Between
Leadership Style and Organizational Change of Service Industry. Industrial
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Mi Xuming & Huang Liming (2005). A Study on Affecting Factors in the

Organizational Changes. Contemporary Economic Management. 27(1):43-45.

Wang Bingcheng (2008). Managing Employee Behavior in the Context of

Organizational Changes. Human Resource Development of China. 6:20-22.

Wang Ruojun (2007). The Supportive Function of Human Resource Management in

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Zhang Yongsheng (2008). Employee Self-performance Managements Driving Effect

on Organizational Changes. Human Resource Development of China. 6:17-19.
Questions:

1. Analyse the case study using the guidelines in the ICE information.

2. As a consulting team, how would you have resolved the issues in this
organisation, demonstrating the change management process and its effect on
organisations? Use appropriate theoretical models to support your
arguments/solutions.

This report is due in week 12 of this semester, to be handed in, in class, on 15th May.
Length of this report is to be approximately 4000 4500 words.

Although not assessable, groups are expected to also give a small presenation.