While “know your customer” is paramount for business success, so too is “know the country.” Take China, for example, where local companies are fast learning that combining Western management practices with the smart leveraging of government support can open doors and win contracts. As these authors write, Western companies would do well to understand just how Chinese companies are melding market and nonmarket strategies.
For executives and students of business management in other countries, Chinese companies may look, at best, to be merely beginning to experiment with market-based competitive strategies. Or, they may also appear to be employing competitive approaches totally alien to established thinking. However, we believe that Chinese local firms may have already been effectively integrating market-based competitive strategies with nonmarket based competitive strategies to advance themselves. Appreciating the non-market based competitive strategies in practice will offer executives and researchers alike useful insights on Chinese firms’ strategy-making decisions.
Central to these non-market-based competitive strategies are the various measures the local firms devise to work closely with the government. In fact, an appreciation of Chinese business management will not be complete unless we carefully examine carefully the complex interactions between businesses and governmental agencies. Certainly, with deepened reform, we have seen diminished direct involvement of the government in company activities. However, there still remain intricate interactions between the government and businesses. Top managers make their important decisions after taking into consideration not only market factors such as customers, competitors and demand, but also the important roles played by various government entities in China. Using examples, this article explores the paramount role the government plays in a company’s decisions and the measures local firms devise to work closely with the government.
Know your customer – and benefactor
Kingsoft, a well-known software company in China, was founded in 1988. It developed an office suite called WPS Office that competes directly against Microsoft Office in the Chinese office applications software market. Facing an underdeveloped market, and strong competition from Microsoft, the company decided to target governmental agencies as its main customer base. Through extensive interactions with the government, especially several central government level branches such as the ministries of Commerce, Foreign Affairs, and Public Security, the company made significant inroads in the market.
In such cases, the government is a special kind of customer – one that the local firms can rely upon. The government is also interested in fostering the local firm’s development (and so fulfilling its main role) and Kingsoft’s knowledge and understanding of the government as a special type of customer have paid off.
Proper recognition and privileged access might be another important consideration. The Chinese government provides tax relief and other investment support for high-tech firms in early development. Firms that explore these provisions may benefit significantly from government support, and begin to develop and enhance their resources and capabilities. Being designated a high tech enterprise requires special review and authorization by various governmental agencies. Of course, these companies will focus on core activities and functions such as R&D, but they also establish mechanisms to work directly with government agencies in order to maximize the benefits of being a high tech enterprise.
The Chinese government and its various branches are actively involved in boosting the profile of market players. For example, the government may be involved in selecting outstanding companies and outstanding products, and recognizing outstanding top managers. Local firms clearly recognize the importance of such public recognition and actively work to gain and leverage these recognitions. Haier Group and Huawei Technologies are obvious examples. By actively publicizing the government’s recognition and awards, these firms are able to establish positive images in the market- place and to deal with governmental agencies more effectively.
With central planning playing a diminishing role in the Chinese economy, the government remains interested in holding a significant portion of company assets to influence firm strategy and competitive moves. Local firms see this is significant, as state ownership offers a sense of legitimacy and security, in the form support and assistance.
While recent economic reforms have helped attract private investment in various local firms, state ownership remains an important and integral part of Chinese business landscape. In fact, many local firms have a curious mix of ownership types. They have state ownership, private ownership, and even foreign ownership. ZTE Corporation, one of China’s largest telecommunications firms, has multiple types and sources of ownership, including private capital and other state-owned enterprises. Its rapid growth owes a great deal to its close relationship with the government. In fact, ZTE and other telecommunications firms work closely with the related governmental agencies to reform and regulate the Chinese telecommunications market. Thus, the non-market strategy offers additional governmental support, and an effective way for firms to work with governmental agencies to affect future market conditions.
Non-market based competitive strategies
As can be seen from these examples, the government can be a unique customer, while at the same time provide scarce resources, legitimacy and recognition, and help local firms grow and develop. Local firms, because of their intimate knowledge of the Chinese context, devise strategies to utilize these resources and support to the best of their advantage. When examined from a value chain perspective, we may speculate that these non market-based strategies cover the important areas of a company’s value chain. Policy mandated preferential treatment relates to the resources and support side. Governmental customers, and legitimacy and recognitions involve the output side. State ownership relates to top management and guidance. Finally, enhancement of the business environment may represent multiple benefits for not only the local company itself but for other collaborators.
Business scholars in the West have begun to recognize the importance of non-market strategies. However, it is important to note that these approaches have not been examined as central to company strategy formulation in the developed economies.
The Chinese institutional environment
Firms in China must scan, monitor and design strategies to deal with six major institutional environmental realities. These include (1) continued transition to a market economy, (2) opening up to world stages, (3) continued development of laws and regulations governing economic activities, (4) paramount roles that various levels of governments play in economic activities, (5) geographical diversity and developmental stage disparity, and (6) rapidly developing emerging product markets.
The economic reform and open door policy the Chinese government adopted more than twenty years ago has produced drastic changes. The external environment the Chinese firms now deal with is more market like. We have also witnessed various developments in product, labour and capital markets. Changes in these markets will have significant impacts on firm behavior. China’s admission to the WTO and its opening up to the world market represent another remarkable transition, with farreaching and long-lasting impacts not only on industrial structure but also on managerial practices.
Furthermore, more and more laws and regulations are being developed. However, new laws and regulations require implementation and mutual adjustments, potentially contributing to greater uncertainty and turbulences. Government involvement, whether through macro control or direct intervention, may make the external environment even more complex. These complexities multiply as various intertwined governmental agencies get involved in influencing firm behavior. Examples might include central banks, various ministries related to specific industries (e.g., telecommunications), local governments, various specialized zones and local economic planning commissions or developmental and reform commissions as they are known today.
It is important to note the significant geographical heterogeneity of mainland China, and its linkages with other regions of the Greater China economy. The vast areas of China exhibit very different weather patterns, cultural and ethnic diversities, resource bases and economic activities. These heterogeneities are intertwined as different regions depend on each other for resources, markets and support. Coupled with this geographical diversity is developmental disparity. The eastern and southern regions in China are further ahead than the northeastern and western regions as far as economic development is concerned.
Finally, we must also note the importance of the emerging product markets. New technologies create possibilities and uncertainties in the market as new products get introduced and new companies get formed. This factor assumes paramount importance in China, or new high tech ventures in China, as it implies possibilities and entrepreneurial opportunities. A clear example is the emerging markets of information technology and telecommunications products. Many Chinese firms seized that opportunity to develop new consumer goods. Examples might include cell phones, USB devices, computer hardware, software, and new information appliances.
Firms in China are developing their strategies in response to, and in anticipation of, the continued evolution of the domestic environment. These six important environmental aspects and the high interdependence among them lead us to believe that the Chinese domestic environment for businesses should best be characterized as turbulent. We believe firms there need to develop strategies that combine complex elements to deal with these significant turbulences in the external environment. Combining market-based competitive strategies and non-market competitive strategies may be such an effective approach.
In this article, we first offered examples of Chinese companies that use non- market strategies to compete in a dynamic, complex environment. Through these examples, we characterize the government as customer, resource provider, owner, arbitrator, and economic cluster builder. We also note that businesses devise strategies as well as support mechanisms to work with the government along those dimensions. Clearly, we recognize that Chinese firms also utilize market-based competitive strategies. They learn to respond to market demand and customer sentiments. They engage in extensive product development, process improvement and competitor interactions. These market-based competitive strategies are intertwined with the nonmarket competitive strategies identified above. This represents a puzzle. Can companies successfully combine two approaches that are the two extremes of a continuum? We believe the answer is “Yes!” We provide an explanation rooted in Chinese culture.
Many accomplished scholars over the ages have labored to characterize the Chinese culture, with probably mixed success, at best. It is indeed a daunting task to capture the essence of Chinese culture in a short section. To understand the broad influence of Chinese culture on firm strategic behavior, we would like to focus on several factors: firms’ long-term orientation and the critical roles played by strong leaders, Yin and Yang, harmony, middle way of thinking, holism and flexibility and adaptability.
The long term and strong leaders. Michael H. Bond and his colleagues pointed out the influence of Confucian dynamism, which emphasizes perseverance, persistence, and the sacrifice of short term gains for long- term prospect. The concept of long-term orientation is considered an important aspect of Chinese culture. Researchers have utilized this notion in various business research as well. In the authors’ field research of Chinese firms, they too heard time and again the importance of perseverance and persistence in competitive maneuver and success.
Long-term orientation is frequently associated with the important roles played by strong leaders. The latter can be understood from two related perspectives. First, company managers learn from Chinese culture to develop skills and capabilities and become strong leaders, especially in complex, turbulent environments. Second, Chinese people educated in the Chinese culture tend to respect and follow strong leaders, as this helps with the implementation of strategies formulated by these leaders. In fact, our field research shows that behind every successful firm there is a strong CEO. Existing studies also indicate that strong leadership is a key characteristic of successful Chinese firms.
Yin and Yang. The second aspect identified above is the notion of Yin and Yang, or the acceptance in Chinese culture of opposites or polarities. Yin and Yang can be viewed as dualism, as it relates to all the opposite principles one may encounter. According to Yin and Yang, opposites complement and contrast each other, each making up what is lacking in other. However, the acceptance of opposite principles does not mean the Chinese culture simply allows two opposing ends of a dimension to exist in isolation.
Harmony. The notion of harmony emphasizes that efforts be made to bring the opposite principles together. The middle way of thinking in Chinese culture may provide an effective channel in which harmony to take place. The middle way would help achieve meaningful integration of the two polarities by avoiding the extremes, and generating enlightenments through the practices of seeking middle grounds. This middle way of thinking is critical, since it is an important mechanism for transcending paradoxes.
Holism constitutes another important aspect of the Chinese culture that would help achieve and reinforce harmony. From a holistic perspective, any entity, be it a nation or an organization or an individual, is viewed as a complex and interactive whole composed of interrelated parts. The whole can not exist without the parts and nor can parts without the whole. So, in addition to achieving harmony along opposite principles via the middle way of thinking, it is important to achieve harmony in all parts of the system if the whole is to work effectively. We may also consider the significant role of the middle way of thinking in holism, as different pairs of opposites may represent extremes that are to be avoided per the middle way thinking in favor of coordination and integration.
Flexibility and adaptability. We also note that the Chinese culture remains an open culture and that it has a remarkable ability to accept and internalize new ideas and new thinking. The Chinese culture has experienced significant acculturation and socialization through centuries and is continuing to do so. Years ago, in his Exhortation to Learning, Chang Chih-tung advocated the idea of “Chinese learning as substance, and Western learning for applications.” There are plenty of recent examples as well. Chinese firms are combining Western management practices effectively. “Transplant” companies, or those developed in Silicon Valley, find new homes in the Chinese culture- based regions and have begun to meld Western management practices with Chinese practices. In fact, an economic cluster that transcends geographical territories is being formed; it links Silicon Valley, Hsinchu, and Shanghai. Leading Chinese companies are transplanting Western business practices such as “integrated product development” and human resource systems.
Most of the discussion of the Chinese institutional environment focuses on its turbulence and the need for Chinese firms to invent strategies that integrate and coordinate complex and paradoxical elements. However, we believe that our discussion of the Chinese culture points to a different direction: The Chinese culture may be an enabling and stabilizing force for Chinese firms to formulate and implement such strategies of a complex and paradoxical nature. One clear example of this type of strategy is the combined use of market based and non marketbased competitive strategies.
Clearly, businesses must develop their own resources and capabilities in order to survive and thrive in the market place. The unique Chinese context examined earlier implies that local firms in China need to devise effective ways to work with the government to gain resources, market, support, legitimacy and to improve their operating environment. These measures are closely tied in with their competitive approaches such as new product development, customer segmentation and response, and competitor interactions. Executives from other countries may benefit from these insights as they observe the Chinese competitive landscape, engage in competition with these firms in China, and also embrace a global economy with increased presence of the Chinese firms. As companies in other countries invariably start to utilize non market-based strategies as they go international, a more systematic understanding of these strategies in China will prove to be useful.