SIYUAN ENERGY AND THE FREQUENT DEPARTURE OF EXECUTIVES Xingshan Zheng and Paul Bearish wrote this case solely to provide material for class discussion. The authors do not intend to Butirate other effective or ineffective handling of a managenal stuition. The author may have disguised certain names and other Identrying information to protect confidentiality. This publication may not be transmited, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact ley Publishing, Ivey Business School, Western University, London, Ontario, Canada, NEG ON1; (1) 519 661.3208, casesgivey.on; www.iveycases.com. Our goal is to publish materials of the highest quality, submit any errada to publishcases Givey.ca. Copyright @ 2023, SJTU Arfai College of Economics and Management and hey Business School Foundation Version: 2023-04-19 It was December 2019, and Hai Hao, president of Siyuan Energy (Siyuan), was still sitting in his office and brooding over the departure of his company's top executives. Not only had the externally recruited (external) executives recruited by Hao left in droves, but the internally promoted (internal) executives whom Hao had painstakingly groomed over the years had also started to leave. Morale was suffering, and the business was facing significant challenges from competitors, Hao thought that, as the company's president, he had done well enough in his main work of setting strategy, finding funds, and finding money. Why, then, did so many executives want to leave? How did it all come about? What could Hao do to rise to the challenge? And where could he start? COMPANY BACKGROUND Hao and his wife, Ling Liu, co-founded Siyuan in the 1990s in the Pearl River Delta region in southern China. It was a professional energy equipment supplier integrating research and development (RAD). production, and service. Since its inception, Siyuan had grown rapidly. By the beginning of 2019, the company's total number of employees reached five hundred, and sales reached $170 million.' Siyuan had business and functional support departments such as human resources (HR), finance, procurement, and logistics (see Exhibit 1). The company had three strategic goals: to make cost-effective products, to become a systems integration solution provider, and to become one of the most competitive companies in China. When Siyuan started business, it set up a new factory, becoming one of the first specialist energy equipment manufacturers in China. The following year, the company established a new headquarters and shifted its operations to eastern China. From 2016 to 2019, it successively developed energy equipment products. To meet the needs of localized customer service and shorten supply chain processes, Siyuan established production and manufacturing bases in many provinces. However, the high operating funds required to set up workshops in multiple locations posed challenges to the capital available to Siyuan. More importantly. the technological gap between Siyuan and its peers had gradually narrowed in over the years. Still, with industry strengths, brand reputation, a slight lead in technical quality, cost advantages, and long- term strategic partnerships with Fortune 500 companies and well-known domestic industries, Siyuan was still a well known energy equipment manufacturer in China. # = CNY = Chinese yuan renminbit US$1 = #71.7750 on December 1. 2010.EXHIBIT 5: EXCERPTS FROM SIYUAN ENERGY EMPLOYEE INTERVIEW, 2020 Position: Supply chain director (internally developed) Duration: 2008- 1. What do you think of the performance of external executives in Siyuan? Interviewer: Many of them used the management process documents of their previous enterprises and required the employees of Siyuan to carry these out with minor changes. However, they did not track the effects of implementation and waited until the employees encountered problems. On the other hand, many of them brought ideas and methods that were useful but just couldn't be implemented. For example, when I joined the company, the new executives proposed using a stopwatch to monitor the production process, scientifically controlling logistics, and using and analyzing data to guide decision- making. Their ideas were very good, but their feasibility at that time was not high. Later, we readjusted according to Siyuan's actual situation, and they worked well. 2. What do you think are the main reasons for executive departures? Interviewer: I think the executives and the boss are responsible for this. As for executives, some of them do not have a clear plan for their work, do not communicate actively with our employees, and do not understand or attach importance to the company's original systems; therefore, the solutions given cannot solve Siyuan's problems well, which also leads to their inability to meet the boss's requirements. As for the boss, he always hopes to find an all-rounder. The job is given to them, the responsibility is explained clearly, and then he waits for the profit. When there are many issues, the (new executives] naturally cannot keep up with them. In addition, the authority given by the boss is not sufficient. It is superficial. The real salary authority and personnel authority are not in the hands of the executives. They have no way to exert their power. Even if they have ideas, it is very difficult for them to exert them. J. How do frequent executive departures affect your work and the organization? Interviewed: As employees, we don't trust or support the new executives. At first, we valued their academic qualifications and actively supported them, but in the end, we found that their work did not improve much. They often don't understand the actual situation and don't care about the psychological well-being and needs of the employees. As time passes, we don't want to take the initiative to help. In addition, some colleagues also looked at the authority in the hands of the external executives and proactively raised the issue in the hope that they could help solve the problem at the initial stage of employment. For the company, it is mainly that it is difficult to build on the systems and processes. Each new executive would demolish the previous one's work, so Siyuan's whole process system had been in a cycle of establishment and disruption, and had never taken shape. Note: Translated by the authors. Source: Company documents.SIYUAN'S FOUNDER AND PRESIDENT: HAO Hao graduated from a well-known university in the 1980s with a degree in automation and was assigned to a large state-owned textile company as a technician There, he worked hard and became a core member of the production line. However, due to the scarcity of production lines and oversupply of personnel, Hao was assigned to maintain the equipment. He chose to leave the state-owned enterprise (SOE) and joined a start- up to do R.&D work, but the team was subsequently dissolved because of the team members' different ideas about the company's development prospects. In the 1990s, Hao went to the Pearl River Delta region, the frontier of reform and opening up in China, looking for opportunities. He joined an SOE to develop energy equipment, but the company went bankrupt two years later. Hao then took a technical support role with a sales company that made energy equipment. Coincidentally, the former owner was about to leave mainland China and return to Hong Kong, so he transferred all his equity to Hao, and Siyuan was founded. Hao expanded the original energy equipment agency business upstream and established a model of purchasing imported branded parts, integrating control systems, and selling to engineering companies, resulting in significant initial profits. However, margins became squeezed as rivals rushed to join in. In the face of intense market competition, the advantages of the original model declined. As a result, in 2012, Hao redesigned the products, helping the company successfully transform. Thanks to the high quality of its new products, precise positioning cost advantage, and high commission incentive system, Siyuan's performance quickly increased after the short-term profit decline, as demand for its products rapidly grew (see Exhibit 2). In 2008, Hao enrolled in an executive master of business administration (EMBA) program at a top Chinese business school During his EMBA studies, he was exposed to much management theory and practical knowledge. Influenced by the theories, he shifted his focus to "strategy, finding funds, and people," and handed over all matters of strategy implementation to the management team instead of doing that specific management work himself. The gap between reality and theory caused Hao to worry about the quality of business management within Siyuan. On the one hand, the industry-leading practices taught in the EMBA class made Hao realize that there were major problems in the company's management that needed to be improved; on the other hand, the professional background of the students reminded Hao that Siyuan's internal executives lacked expertise, which would cause the company to miss opportunities. Hao also said publicly that the internal executives, who relied on his guidance and their arrogance and experience to achieve performance breakthroughs, could not lead Siyuan to achieve its strategic goals. As a result, Hao shifted some of his energy to the search for external executives, hoping to find competent executives to help Siyuan make the desired leap forward. SIYUAN'S CO-OWNER AND FINANCIAL CONTROLLER: LIU In the 1990s, Liu and Hao jointly funded the establishment of Siyuan. Hao held $5 per cent of the company's shares, with Liu owning the remaining 45 per cent. In the beginning. Liu was in charge of Siyuan's project management and marketing. With superior capabilities, she successfully promoted many projects, won a large number of key customer orders, and laid a solid foundation for Siyuan's development. Later, in order to raise a child, Liu moved away from the front line of the business to the back office, where she was responsible for financial management. Hao and Liu each held a significant proportion of the shares, and their joint control over the company's fortunes resulted in long-term constraint on the company's operations, rather than a harmonious shared operating relationship. After Liu took charge of the finances, she steadfastly refused to approve funds for many of Hao's decisions, which she considered unreasonable. In addition, due to the unsound financial system, even if Hao had approved and authorized the funding needs, expenditures still needed to be communicated to and signed by Lin before being approved, which created great challenges in applying forcommercial funds, For this reason, executives in various departments had to go through unofficial channels to understand Liu's wishes on approved matters. When an issue was not resolved through repeated communications, authorized employees had to ask Hao to agree with Liu before obtaining project funds. FREQUENT DEPARTURES OF EXECUTIVES I: EXTERNAL During the 2008 global economic crisis, Siyuan products were in short supply, with a backlog of orders. Delivery efficiency could not meet customer demand. During this time, a large number of foreign-funded enterprises laid off staff, and the cost of bringing in executives was suddenly lower. Hao took this opportunity to hire executives externally. Recruiters on an online platform usually conducted the initial screening of potential executives based on information such as age, educational background, previous job title, work experience, historical performance, and desired location. Hao then personally screened candidates, and the recruiter contacted his choices. In addition, Siyuan also recruited executives through various other channels, such as EMBA graduate recruitment, recommendations from Hao's classmates, and headhunters. In hiring executives, Hao paid particular attention to the education and work background of candidates. He believed that "bright academic qualifications equal outstanding abilities." After obtaining the preliminary list of candidates, Hao would communicate with the candidates about their past management experience and abilities. If the candidates could point out Siyuan's pain points and put forward pertinent analysis, Hao would favour them. If the candidates expressed their appreciation of and interest in Siyuan, they were likely to be hired. Taking advantage of the opportunity to reduce costs by hiring executives amid the economic crisis, Hao hired Daisy Ding. Alex Wei, and Lance Zhang, the first batch of executives recommended by friends, to serve as the directors of marketing. HR, and operations, respectively. Each was offered two and a half times the salary of the internal executives at the same level at that time. Before coming to Siyuan, these external executives were all studying for an EMBA at top Chinese universities. Ding had an overseas academic background and had worked in foreign companies for many years. Wei had worked in a large Chinese SOE for a long time and had rich personnel experience. Zhang had worked in the management of a foreign car company for many years and was a senior cost optimization expert. On their starting day, Hao highly praised their abilities and backgrounds to the existing team, introduced them to the team members under their management, and requested that the respective onginal internal senior executives simultaneously withdraw from their positions and transfer their authority to the new executives. However, the company did not provide follow-up work assignments for the internal executives after they left their original management positions. Recognizing the capabilities of the new executives that Hao had touted, most of the internal executives compromised and actively supported the new executives in their efforts to boost the company's business. Ding promised to increase Siyuan's growth rate from 20 to 50 per cent. She believed that the target could be achieved by ensuring on-time delivery of existing orders and expanding distribution channels as external orders increased. Ding noted that the internal sales force was too weak to support business demand, and asked for permission to expand the sales team by recruiting new talent. When Hao visited customers with Ding, he found that she was able to speak confidently with them and win orders, something the original team had not been able to achieve. Trusting in Ding's abilities, the founder readily agreed to the request to expand the sales team and asked Wei, the HR director, to co-operate fully. Ding travelled frequently to interview staff in the next few months and set up a new sales team dedicated to developing new customers. The new sales team was paid at a much higher salary level than the existing sales team. However, some employees soon reported to Liu that Ding did not communicate with the old employees, maintain relationships with old customers, or create value. Liu told Hao that Ding's new team was seldom in the office and was less efficient than the original team despite a much higher salary. Hao then spoke with Ding. changing his previous encouraging attitude and asking her to quickly rectify the situation. In response, Ding said that her actions were based on her previous experience in a foreign company and that all of her salesteam was visiting clients. However, when asked, she could not specify which clients had been visited. A few months later, Ding was still focused solely on working with the new team. Morale among the original sales team plummeted, and orders fell rapidly. Soon, both Ding and her new team were all dismissed. Zhang took over the operations department at a time of short supply. He used his experience in process optimization to identify that many workflows could be optimized, and he almost completely overhauled the original processes. He believed that once the process optimization was completed, products could be delivered on time and the efficiency of the staff would be greatly improved. However, Siyuan's production manager suggested that it was necessary to urgently expand the number of employees to increase production capacity, otherwise delivery dates could not be met. With Hao's strong support in the early stage, Zhang insisted on promoting the optimization of work processes and not recruiting new employees. However, the work optimization process cycle was too long, which ultimately caused Siyuan to miss product delivery deadlines. Both Ding and Hao received complaints from key customers, after which Hao made private inquiries into the reasons for Zhang's actions through his old subordinates. With this limited understanding. Hao asked Zhang for an explanation. Zhang explained that "another two months will solve the problem" Hao quickly abandoned his original trust in Zhang and asked him to leave, telling the employees publicly, "If we continue to wait for another two months, Siyuan will have to close down. Zhang is not dedicated or diligent, and he is not the person Siyuan needs." To quickly resolve the deliver-date issue, Hao asked the internal executives to rectify the situation and raised their salaries, stabilizing the situation through personal rule and the domineering style he had previously criticized " Soon, the delivery problem was resolved, but Zhang's process optimization program also stalled Unlike Ding and Zhang, Wei only paid attention to the HR matters assigned by the founder. He never became involved in the affairs of his subordinates and only provided coordination and support for their work. As some of the management ideas Wei p Wei provided were very useful, his subordinates gave him good reviews. Hao found that Wei was very insightful on operational issues and wanted him to take over the operational work after Zhang's departure. Wei himself believed that such work was not difficult and that he could lead it. As a result, he served as the head of both the HR and operations departments. However, his lack of project operations experience as well as the work intensity of the HR department put pressure on him When sales demanded goods and production required more staff, he left it to his subordinates to sort it out, and he rarely visited the sites. For a long time, Liu suggested to Hao that Wei was at work but did not play his role, he received a high salary but did not do anything. Soon, Hao asked Wei to leave Siyuan To that end, the first batch of external executives were all gone within six months. Subsequently. Hao looked for and recruited the next batch of executives. Not surprisingly, the new executives quickly and involuntarily left their positions. However, Hao did not stop recruiting. Between 2008 and 2019, Hao successively brought in fifteen executives. Unfortunately, almost none of them worked at Siyuan for more than two years, and the vast majority stayed for less than one year (see Exhibit 3). Hao took some measures in this regard. In addition to recommendations from friends, Hao also recruited candidates through foreign and domestic headhunting channels. Siyuan also conducted exit interviews with executives (see Exhibit 4). However, the effects of these measures were not obvious, FREQUENT DEPARTURES OF EXECUTIVES II: INTERNAL Siyuan's internal executives had witnessed the rise and fall of external executives. They were required to step down from their management positions when new executives came on board and to quickly resume their responsibilities when the new executives left. However, Hao held a negative attitude toward internal executives. He believed that they had outdated skills, lacked foresight, and would be eliminated in the future. Personal rule was a ruling concept in the Confucian political philosophy in ancient China, which was opposed to rule by law. emphasizing ruling a state and its people through orderly human relations, moral standards, and other value systems.He firmly believed that he had been trying to train the internal executives but that they had not been able to grow, and had no value outside Siyuan In the long-term cycle of position changes and being devalued by their leader, the vast majority of internal executives resigned voluntarily. James Lee, the most senior and longest-serving internal executive of this group, returned to Sryuan after his resignation. Lee had been bom in 1949. After graduating from high school, he joined a large SOE in China. In 1999, after the reform of SOEs, Lee joined Siyuan as an engineer and had a co-operative relationship with the company for more than twenty years. Lee had worked initially as a production manager and then served concurrently as the technical manager and deputy chief engineer from 2008, when external executives were introduced to Siyuan. Lee and other internal executives were asked to step down and delegate power. However, the external executives' performance and Hao's actions dissatisfied Lee. In Lee's view, the production technology department he supervised required the team to work together and for him to have heart-to-heart talks with staff to reach consensus about how to improve the business. However, new executives often acted based on their previous experience, which did not fit with Siyuan's actual situation. They were often ineffective and unable to attract production staff. As for Hao, Lee believed that he had been pragmatic in the early days, putting all his energy into the product market and developing the company soundly. However, after receiving his EMBA education, he became arrogant in his criticism and questioning of the internal executives, which made it difficult for them to feel a sense of belonging and even brought about a sense of crisis. Siyuan had no performance appraisal system for anyone except the sales and production departments. For employees with heavy performance indicators, Hao would sometimes offer bonuses and raise their salaries at the end of the year, but those decisions were made on an ad hoc basis, as no regular rules had been established. In 2013, the company adjusted Lee's salary from $3,500 to $5,000 per month. However, in the same year, the salaries of newly recruited university students reached $7,000 to #8,000, and the salaries of newly introduced executives were several times higher. Lee felt that the huge wage gap was deeply unfair. When he sought reasons, Hao responded, "The new hires are college graduates. How about you? You've just graduated from high school." Lee expressed his dismay. He recounted that (a) he had introduced many new products for Sryuan during his period as chief engineer, (b) the technology he created had always maintained a leading position in the industry, and (c) the technological changes be implemented had increased the company's efficiency by tens of times. However, Hao did not respond to these points. Lee said bluntly. I have done my best for the company and have taken the initiative to improve efficiency. Not only did Hao not give me a raise, he never even praised me. All I did was give and received nothing in retum. There is no clear incentive system, no performance appraisals, and no rules. Decisions are made by feeling . . . not [by] recognizing the importance of people. After much deliberation, Lee finally left Siyuan. Three years after Lee's departure, Siyuan was working on designing a new product to enter the European market, but the company's technology was unable to successfully produce it. After thinking about it, Hao approached a good friend of Lee's and asked for his help in contacting Lee. Hao paid a special visit to Lee's home, hoping that Lee would come back to help Siyuan solve its technical problems, and promised to increase his salary to #10,000 per month. He also bought Lee an electric chair to support his old age and poor legs. On this occasion, Hao's special visit and action made Lee feel that he had been recognized. More importantly, Lee had a deep affection for Siyuan Lee said to himself, "I was in charge of factory design, land construction planning, process layout, and machinery and equipment, including all the factories in China. I always felt that Siyuan belonged to me. I don't see myself as an employee but as a boss." Lee promised to return to Siyuan. On the day of his return, Hao summoned the executives to welcome Lee back.He said publicly that he would take Lee on a trip to Europe when this market developed, and promised him a trip to Taiwan Province for relaxation. Other executives, however, did not have Lee's strong skills and did not receive special treatment from Hao. Most of the internal executives went on to work in the energy industry or even started their own businesses after leaving. However, despite Hao's saying that they had no value outside Siyuan, some internal executives used their experience at Siyuan to create several listed companies in the industry, challenging Siyuan's leading position Lee also said that the gap between competitors and Siyuan was closing. Once a leader and a dream enterprise in the eyes of others, Siyuan was gradually overtaken. AFTER FREQUENT EXECUTIVE DEPARTURES: EMPLOYEE INDIFFERENCE AND LACK OF ORGANIZATIONAL KNOWLEDGE Hao's EMBA education taught him that foreign and SOE executives in private companies had a low survival rate but that he must not stop recruiting. He recalled the adage, There are no bad soldiers, only bad generals. He felt that Siyuan would be able to find high-end talent that met its requirements. For this reason, Siyuan had not stopped recruiting executives over the past ten years. However, the frequent executive changes had had a profound impact on employees and the organization. With the arrival and departure of several executives and Hao's repeated praise of them, most employees in Siyuan gradually lost interest in the executive appointments. In their eyes, the new executives were being paid many times their salaries without creating corresponding value. The employees realized that the new executives would indeed bring some changes but that they did not know enough about the company's internal situation and only focused on the symptoms of problems, often doing harmful things with good intentions rather than bringing about substantial improvement to other employees' work (see Exhibit 5). As time went by, when new executives joined Siyuan, employees did not take the initiative to demonstrate their greater abilities and achievements; rather, they simply explained the problems with the current work, expecting the still newer executives to address issues when they had the management authority in the early stages. When problems were not resolved, employees began complaining, tattling, speculating, and even betting on when a new executive would leave. When the old executives left but new ones had not yet taken up their posts, employees took the opportunity to reduce their workload and only do light work. On the other hand, after experiencing frequent personnel changes and the reversals of previous decisions, internal executives also maintained the status quo, no longer pursued reform, were unwilling to provide support for new executives, and even showed indifference to their new initiatives. New executives often overturned the achievements of their predecessors and then selectively used their personal experience to improve the status quo. However, most of their external experience and systems could not be successfully implemented in Sryuan due to the lack of support from team subordinates and the new executives' short tenure. As a result, Siyuan's processes were always in the cycle of establishment, overthrow, and reconstruction, and never took root. Siyuan's internal executives said frankly, "Some of the ideas brought by external executives to solve problems are very important and useful, but it's a pity that we can't implement these ideas due to time constraints. The whole process system has been established and disrupted repeatedly, and hasn't taken shape." NEXT STEPS Late at night, Hao sat in the office, recalling the frequent departures of executives over the past decade. Why, he wondered, had a dozen executives that he had recruited left? Why did the internal executives who were onginally trained leave one after another? Did he do anything wrong? What steps would be needed in the future to recruit executives to lead the company?EXHIBIT 1: SIYUAN ENERGY, COMPANY STRUCTURE, 2019 President HR, france, and warbeing and supply chain Audit director, Deputy to antidant director, deputy director HR and BurchMing Techrica Equipment Regional PVC Product Customer service manager manager Note: HR = human resources; PMC = production material control. The director role took C-Suite responsibility in reality. Source: Company documents. EXHIBIT 2: SIYUAN ENERGY, REVENUE GROWTH, 2011-2020 (# MILLIONS) 183 187 140 144 122 87 87 2011 2012 2013 2014 2015 2016 2017 2018 2010 2020 Source: Company documents.EXHIBIT 3: DETAILS OF SIYUAN ENERGY'S EXECUTIVE TURNOVER, 2009-2019 Externall No. Position Duration Type Internal 1 External Operations director