A Stakeholder View of Strategic Management in Chinese Firms

INTERNATIONAL JOURNAL OF BUSINESS STUDIES VOL 15, NO1, JUNE 2007: pages 1 of 13 A STAKEHOLDER VIEW OF STRATEGIC MANAGEMENT IN CHINESE FIRMS Dr Xueli Huang1 Dr Scott Gardner2 Despite the fact that China has emerged as a driving force of the world economy over the last decade, little research has been undertaken into how Chinese firms strategically manage their businesses. This paper develops a theoretical framework of strategic management in the Chinese firms through reviewing and synthesising five strategic perspectives that are relevant to the Chinese context: the Industry Structure View (ISV), Resources-Based View (RBV), Institutional View (IV), Relational View (RV), and Stakeholder View (SHV). We elaborate the relevance of the SHV in the Chinese context and its relationships with other strategic perspectives. Finally, we offer several managerial and research implications based on the theoretical framework developed. Key Words: strategic management, Chinese firms, stakeholder perspective I. INTRODUCTION One of the most significant developments in the global economy is the re-emergence of China as a major driving force of the world economy. Since the implementation of the open-door, market-oriented policies in 1979, China has quadrupled its GDP and sustained a significant average growth rate of over 9 per cent. The foreign direct investment (FDI) in China in 2004 amounted to US$ 60 billions, making China the biggest FDI destination country over three consecutive years from 2002. Chinese organisations now compete fiercely in domestic markets, and the international trade arena, with the value of China’s international trade accounting for over 70 percent of its GDP in 2004. The Chinese have also expanded their business operations to other countries as illustrated by the recent examples such as the Levono, China’s largest Personal Computer (PC) manufacturing company, acquiring IBM’s PC division, and the unsuccessful bid of China National Offshore Oil Corporation (CNOOC), China’s third largest oil company, for Unocal, the ninth largest oil company in the USA. Despite the important role played by the Chinese economy in general, and Chinese firms in particular, in the global economy, China has been considered as one of the most underresearched regions in the world (Tsui, Schoonhoven, Meyer, Lau, & Milkovich, 2004). Although interest from executives, academics and media on Chinese business matters has 1 Dr Xueli Huang is Senior Lecturer at the School of Management, Edith Cowan University. Email: x. [email  protected] edu. au 2 Dr Scott Gardner is Associate Professor at Murdoch University. Email: s. [email  protected] edu. au 1 A stakeholder view of strategic management in Chinese firms increased dramatically over the past several years, little research effort has been devoted to studying the strategic management of Chinese organisations. This paper investigates strategic management in Chinese organisations. In doing so, an attempt is made to integrate the current literature on strategic management, focusing on the two dominant perspectives of the past twenty years: the Industry Structure View (ISV) (Porter, 1979) and the Resource Based View (RBV) (Barney, 1997; Prahalad & Hamel, 1990; Wernerfelt, 1984). It also examines Post, Preston and Sachs’ (2002) conceptual schema of complementary perspectives for strategic analysis of 21st century corporate environments – the Stakeholder View (SHV). In attempting to make sense of increased strategic complexity and the central role of networks of human relationships in shaping economic activity in Eastern (notably Chinese) and Western markets, our analysis will call upon the ISV, RBV and SHV with additional reference to other contemporary strategic perspectives including the Relational View (RV)(Dyer & Singh, 1998), and the Institution-Based View (IBV) (Peng, 2002). By focusing these lenses on how business is conducted in the cultural context and commercial environment of China, this paper aims to: 1) enhance understanding of why and how the strategic behaviours of Chinese managers differ from those of Western managers? 2) explain why the SHV is relevant to Chinese management practice; and 3) develop an integrated theoretical framework that can be used for guiding future research into the unique characteristics of strategic management in Chinese organizations. II. LITERATURE REVIEW The Industry-Structure and Resource Based Views How firms behave and what determines a firm’s performance in international competition are two of four fundamental issues in strategic management (Rumelt, Schendel, & Teece, 1994). Searching for sources of competitive advantage has been a key theme for strategy researchers and business managers over the past five decades. Consequently, a number of strategic management views or thoughts have emerged that explain either sources of competitive advantage or how firms form strategy (Mintzberg, Ahlstrand, & Lampel, 1998). The ISV and RBV are two prominent views that have endured in the literature and in practice despite significant reconfiguration of global market boundaries and technologies over the decade to 2006. The fundamental assumption of ISV proposed by Porter (1979) is that a firm’s performance is primarily determined by the environment, including both macro environment and industry environment within which it operates. These two broad sets of environmental factors heavily influence the attractiveness of a position for a firm to occupy. As such, a firm uses its market power, or in Williamson’s (1991) terms, ‘ strategizing’, as a primary means to generating supernormal returns or achieving competitive advantage. The second prominent perspective of strategic management is the RBV proposed by Wernerfelt (1984) and subsequently developed by strategic scholars, most notably by Barney (1986; 1997), Rumelt (1984) and Teece and his colleagues (1997). The RBV 2 International Journal of Business Studies argues that a firm’s competitive advantage is primarily based on the heterogeneity of the key resources and capabilities it owns or controls, particularly those that are difficult to mobilise. It is the heterogeneity and immobility of these unique resources and core competence that earn a firm’s supernormal rents. In Williamston’s term, firms adopting this approach are ‘economizing’ (Williamson, 1991). Although the RBV has been widely used in strategic literature, its contribution to the theoretical development has been recently challenged (Priem & Butler, 2001). The Relational and Institution-Based Views Although these two schools of strategic management mentioned above have contributed significantly to understanding of the firms’ strategic management practices and behaviours, the quest continues. Recent effort devoted to this area has resulted in several promising and interesting developments over the past decade which are relevant to the study of strategic management in Chinese organisations, including the Complex Response Process View (CRPV), (Stacey, 2003), Relational View (RV) (Dyer & Singh, 1998), Institution-Based View (IBV) (Peng, 2002) and, more recently, the Stakeholder View (SHV) by Post, Preston and Sachs (2002b). There are considerable overlaps across these views that attempt to balance the long standing use of high level and rational industry analysis to explain firms’ strategic behaviours, within a defined marketplace, with a more dynamic, processual, and ultimately political view of strategy. This is focused on human motives and interactions within inter-connected, local, national and global networks or constituencies. The Relational View (RV) (Dyer & Singh, 1998) proposes that firms can achieve abovenormal returns through profiling and actively managing their network of relationships with other business organisations, particularly with suppliers and users. Dyer and Singh (1998) also outline four mechanisms through which these inter-organizational relationships can generate competitive advantage. They are: 1) investing in relationspecific assets to gain productivity in the value chain; 2) substantial knowledge exchange, or sharing between participating organisations to enhance inter–firm organisational learning; 3) leveraging the complementary resources and capability of alliance partners to develop new products and services; and 4) using effective governance to reduce transaction costs. As Dyer and Singh (1998) argue, one of the major benefits of this view is that it extends the unit of analysis for sustainable competitive advantage from a single firm (RBV) or single industry (ISV) to a network of inter-organizational relationships. The RV can be regarded as a middle range theory as it only focuses on a limited number of concepts (Neuman, 2003). Another recently developed view that is relevant to the studies of strategic management in Chinese organizations is the institution-based view (IBV) (North 1990; Peng, 2002). This view attempts to explain why the strategic decisions of apparently similar firms in different countries vary, and considers institutions as a new set of independent factors, besides a firm’s resources and its industry structure, that influence its strategic choices. According to North (1990), institutions are â€Å"the rules of the game in the society†. More specifically, Scott (1995) refers to institutions as â€Å"cognitive, normative, and regulative 3 A stakeholder view of strategic management in Chinese firms structures and activities that provide stability and meaning to social behaviour†. Thus, institutions help identify what strategic choices are acceptable and supportable, reduce uncertainty, and provide consistency to firms. Based on this view, therefore, institutional factors constrain the choices a firm can make, and are often considered in the strategy literature as part of the environment under which organisations operate. Organisations in different countries behave differently because the political and legal systems, social norms and values vary from one country to another, and these are important elements which influence strategic decisions. In other words, the institutional framework, as defined by Davis and North (1970) as â€Å"the set of fundamental political, social and legal ground rules†, in different countries influences firms’ strategy and consequently their performance. The IBV has shed much light on our understanding of strategic behaviour of firms in different countries, and could be good platform for developing new theoretical perspectives that are pertinent to the emerging business culture of China. (Peng, 2005). The Stakeholder View A more recent development in strategic thinking is the stakeholder-based view (SHV) (Post, Preston, & Sachs, 2002b). In line with the institution-based view, the SHV recognizes the important role played by political and social arenas shaping organisational decision making and performance. Post, Preston and Sachs (2002) build on this broad position, arguing that organisations, and particularly powerful multinational corporations, need to actively develop, maintain and manage relationships with their key stakeholders, including governments and communities. This proactive cultivation and long term management of strategic relationships contrast to the IBV, which suggests passive conformance to the rules. It is however quite consistent with management as understood and practiced in Chinese business networks. It therefore deserves more detailed discussion and elaboration in this paper. According to Post, Preston and Sachs (2002) the stakeholder view holds that â€Å"the capability of a business enterprise to generate sustainable wealth, and hence long-term value, is determined by its relationships with critical stakeholders† (p. 1). There are two primary, but implicit, assumptions on which the SHV is based. First, a firms’ sustainable and long-term value is determined by three broad types of factors: industry structure, resource base, and social and political setting. It combines the external and internal environments of the firm, and human relationships within its immediate sphere of operations and broader constituency as lo ci for analysis. Second, within this broad constituency there are critical stakeholders whose relationships with the focal firm influence its performance either positively or negatively, (See Figure 1). Thus, the authors (Post, Preston, & Sachs, 2002a) argue that the SHV both integrates the industrystructure view and RBV into a broader analytical framework for understanding strategic decisions and actions, and complements them through a broader understanding of how the industry position, resources and firm performance are affected by social and political factors. International Journal of Business Studies Figure 1 The stakeholder view of the corporation (Post, Preston, & Sachs, 2002, p. 55) The theoretical foundation of the SHV can be traced back to the stakeholder theory popularised by Freeman’s seminal work on stakeholder management and its ethical implications (Freeman, 1984). Since then, the stakeholder concept as a significant element in strategic management theory and practice has been widely used in varied settings, including the public sector and not-for-profit organizations in the USA and various European contexts. Following Freeman’s discussion of the purpose and ethical considerations of stakeholder management, Donaldson and Preston (1995) proposed three types of stakeholder theory: descriptive, instrumental and normative. Descriptive stakeholder theory attempts to describe and explain specific characteristics and behaviours of business organisations, instrumental theory is used to identify the connections between stakeholder management and organizational performance often where profit motive or advantage over rivals are dominant considerations, whilst normative theory focuses on the interpretation of corporate functioning, including moral and philosophical guidelines for operations and management (Donaldson & Preston, 1995). Based on this typology of stakeholder theory, instrumental motives and the quest for competitive advantage through stakeholder management appear to have dominated in the literature over the past fifteen years. However this has been offset to a certain extent in recent years by an increased focus in the literature on the role of stakeholders and stakeholder management in the practice and adoption of corporate social responsibility by US and European multinationals (Laszlo, 2003; Sirgy, 2002; Vogel, 2005). In common with other major US based stakeholder theorists, Post, Preston and Sachs (2002) widely disseminated notion of the SHV has been developed primarily from observations of the characteristic management behaviours within a small number of large US and European based multinational corporations, which they refer to as â€Å"large, complex enterprises† (p. 9), citing examples such as Motorola, Shell, and Cummins Engine Co. The reasons for adopting this particular case-based research method is that it 5 A stakeholder view of strategic management in Chinese firms equires an in-depth and comprehensive understanding of the organisations under study, and that the development of the relationships with its critical stakeholders is often evolutionary and path-dependent. Summarising the strategy perspectives discussed above, an integrative framework can be proposed as shown in Figure 2. Figure 2. An integrative model of strategic management in the Chinese organisation Is the SHV pers pective appropriate for understanding and explaining strategic management in Chinese organisations? Whilst the SHV ocuses on the relationships with key stakeholders and its impact on the long-term organisational wealth, many have observed that unique business relationships, or Guanxi, have been based on characteristic behaviour of Chinese managers. Thus, there is a coincidence between the SHV theory and Guanxi practice in China. Using the distinction provided by Argyris and Schon (1978) between theory and practice, one could wonder if the SHV is a theory espoused and consciously enacted by Western managers in recent years, but imbued in Chinese business practices for many centuries. As stated by Donaldson and Preston (1995), how stakeholder theory is understood varies from country to country, even in the highly developed market capitalist economies, of the USA, Europe, and Japan. The current Chinese context, in an economic, and more so, social and political sense, is vastly different from those of Western countries. Therefore, it is helpful at both a conceptual and practical level to examine how and why stakeholder management is practiced by Chinese firms. In the following section, we attempt to explain strategic behaviours of Chinese business practitioners, particularly the relationships between stakeholder management and other 6 International Journal of Business Studies dominant strategic views through examining the Chinese business settings and making use of the theoretical insights offered by the SHV. III. THE RELATIONSHIPS BETWEEN STAKEHOLDER MANAGEMENT AND OTHER STRATEGIC VIEWS IN THE CHINESE CONTEXT Although the five strategic views mentioned above have been largely developed independently, a close examination of these views reveals that overlaps exist between some of them. In the following subsections, we focus our discussion primarily on the relationship between the SHV and other views. Stakeholder management and resource-based view in the Chinese business setting Based on the RBV, an organisation can generate supernormal rents through the identification, acquisition, and use of its resources that are valuable, rare, difficult to imitate and non-substitutable (Barney, 1991). Although human resources have been considered as one of the four major categories of resources within the firm, RBV has not looked beyond the properties of these resources. The focus of this view is primarily internal with little attention who, outside the firm, can influence the processes of resource access, acquisition and use. The relationship between organisational performance and external resources has been convincingly elaborated by the resource-dependence theory developed by Pfeffer (1978). According to the resource-dependence theory, the organisation relies heavily on its external stakeholders for key resource inputs to survive and prosper. For Chinese organizations, there is considerable dependence on external stakeholders for resource acquisition and use. Typically these external bodies or parties would be partly those with authority for either allocating resources, such as governments and banks, or influencing resource acquisition and use, such as taxation departments, or Bureau’s of Industrial and Commercial Administration, which can exercise considerable discretion within the broader legal and regulatory framework impacting Chinese business contexts. One particular point in case is the role of the Chinese government. Historically Chinese governments have controlled much of the national wealth and resources, and been heavily involved in making economic decisions. For example, most of major investment decisions in the state-owned enterprises have been directly influenced by the Chinese governments. Moreover, anecdotal evidence, either from public media or the word of mouth conventional wisdom in China, suggests that cultivation of relationships with Chinese banks, other business entities and their employees, are important to support financing, timely information sharing and sourcing critical materials for business enterprises. Stakeholder management and the market-based view Establishing a strong market position in China is very difficult because Chinese markets, even market segments, are usually big due to its large regional population bases. The well-established, and usually large, state-owned enterprises also make it harder to operate competitively for new comers in the Chinese markets. Although many new business 7 A stakeholder view of strategic management in Chinese firms opportunities are continuously emerging, most of them are still heavily regulated by the Chinese governments. The governments can help and/or deter market position building through licensing (e. g. , taxi industry, iron ore importing), investment approvals (e. g. , steel mills), and issuing permits for key capital intensive activities such a commercial building and large scale infrastructure projects, whilst similar practices of these can also be observed in Western countries, the licensing and approval processes in China are often opaque and leave much room for discretion by government officials. Stakeholder management and institutional view As discussed above, the legal and political settings in China have profound influence on the strategies pursued by Chinese organisation. The legal systems in China have traditionally been loosely configured and left much room for interpretation. Chinese laws are usually not well codified and difficult to reinforce (Ahlstrorm & Bruton, 2001). Moreover jurisdictional boundaries between the governmental departments at the same level or governments at different levels often overlap. Therefore, favourable relationships with Chinese regulatory authorities can have a positive impact on the organisation’s performance. With regards to the political setting in China, the long history of feudalism in China from 221BC to 1912 has consistently shown a close link between political power and economic wealth. With the prevailing feudal system, political power was centrally controlled by the emperor and his royal family with business enterprises in China relying heavily on their government (emperor and royal families) for survival or prosperity. Coupled with the loose legal systems, favourable relationships with the Chinese government or royal family have traditionally been considered extremely important for business organisations to maintain their survival and growth. Modern Chinese history shows similar patterns of a close link between the government and business entities. Even after the Chinese communist party took over the power in 1949, the Chinese government controlled most of the country’s wealth. Many Chinese large enterprises are still state-owned. Therefore Chinese governments have been heavily involved in economic activities at both industry and firm levels over the past five decades. Developing a favourable relationship with various government departments and doing business under their authority or with their help, is still considered one of the most profitable courses for Chinese businesses to adopt in today’s global economy. It is good relationships with the government that help business organisations to grow and occupy a strong position in specific industries with provincial, national and international market penetration. This relational perspective on business and strategy has many historical and cultural precedents in China. Stakeholder management and relational view in the Chinese cultural setting Since the time of the Qin Dynasties Chinese culture has been dominated by Confucianism that stresses the importance of human relationships and harmony within a society. This requires that interpersonal relationships be appropriately arranged. The friendship (yi), which emphasized the mutually beneficial relationships between one and other, has been 8 International Journal of Business Studies egarded as one of the four characteristics of the fundamental tenet of Confucianism is humanity (ren). The central significance of these principles of friendship or egalitarianism has not waned in the Chinese recent history. In contrast, the Chinese Communist Party reinforced these ideas during the 1950s to 1960s, and more recently from the mid 1990’s to the present day, as a desirable social norm or virtue. At the business level, the Chinese governments have facilitated cooperation and collaboration among the state-owned enterprises in many business areas, such as new product development (Huang, Schroder, & Steffens, 1999). Frequent gatherings amongst businesses either through political meetings or economic activity among managers in China has also served to facilitate this collaboration and cooperation processes. Such institutional and cultural settings in China manifest in different behaviours including information sharing and informal governance, two of the four mechanisms suggested by Dyer and Singh (1998) which can be used by organisations to enhance their competitive advantage. It suggests that the strong cultural and institutional foundation that exists in Chinese business for developing reciprocal relationships. This can help improve organisation’s performance – a central principle for the Relational View. IV. THE STAKEHOLDER VIEW AND MANAGERIAL IMPLICATIONS FOR CHINESE MANAGERS AND RESEARCHERS This paper explored the relational basis on which the Chinese organisations compete in their domestic markets drawing comparisons with recent Western views of strategic behaviour. These were framed in a broader historical context of doing business in China. It is contended that the recent stakeholder view proposed by Post, Preston and Sachs (2002) provides much promise in terms of both theoretical and practical insights into how and why strategic management is practiced in Chinese organisations. However, clear differences in Chinese and Western social and political systems, and the stage of capitalist evolution need to be considered in applying the SHV to the Chinese settings. As stated by Donaldson and Preston (2005), how stakeholder theory is understood varies even in the market capitalist economies. This is more evident in the contemporary Chinese context, where social and political settings are vastly different from those of Western countries. A number of managerial and research implications are proposed from this paper. First, we have presented an integrated framework of strategic management that indicates the mechanisms linking relationships with key stakeholders and organisational performance. It is proposed that whilst developing and maintaining these relationships has been traditionally valued by Chinese as part of their culture, contemporary Western strategic management thinking would seek to equate effort spent on this area with measurable performance outcomes and long term competitive advantage. With this in view, the integrated framework presented could be used to provide Chinese managers with a more holistic and formalised view of strategic management to support the development clearly articulated objectives and productive long term interactions with key stakeholders. A stakeholder view of strategic management in Chinese firms Secondly, it is clear from the framework presented that the stakeholder view is only one of the approaches for creating organisational wealth. Several types of organisations are competing in the Chinese markets and each could be competing on different basis. Multinational corporations compete on their market position and resources, whilst stat eowned enterprises compete on the basis of being institutionalised within political and cultural settings, providing strong market influence and ready access to resources. Most local private firms may compete on the cultural settings, flexibility and speed of decisionmaking. As the Chinese governments gradually level the playing field for all business players, the political settings in China will be changed. Therefore, managers of Chinese organisations, particularly state-owned enterprises, need to develop relationships with other types of new era capitalist stakeholders who can help build strong market position and/or gain access to key resources. Thirdly, relationships with the stakeholders need to be considered as strategic (intangible) assets for business organisations in Western markets and as a powerful means to compete in China. As in the West, these relationships are located within a broader social and transactional knowledge networks (Kaplan & Norton, 2004; Nahapiet & Ghoshal, 1998), containing untapped strategic value for Chinese companies operating locally, regionally, and globally. Currently many Chinese managers spend much effort practicing a stakeholder theory in a fragmented way at a one – on – one, individual level. Whilst the compounding effect of the aggregation of these individual relationships is not clear, there is an argument with respect to the SHV to support a more strategically aligned, and systematic integration of these routinised interactions at the organisational level. This is one of the most challenging issues in implementing stakeholder theory in the Chinese organisations, as most of the relationships with key stakeholders are based on the trust between individuals, rather than between organizations. Looking to the future merging of Chinese and Western business practices organisational structure also needs to be redesigned to manage the relationships with key stakeholders. This is crucial. Although stakeholder orientation can be built into organisational culture, people need to be assigned to facilitate the ongoing integration and implementation of stakeholder management. There is no doubt that stakeholder management is both a science and an art. It requires intuition and human skills – more art than a science. However, it also requires systematic, rational, and analytical techniques. A number of stakeholder management techniques have been developed over the past decade, which may support the integration of stakeholder management into mainstream in to the strategy processes of Chinese businesses- most notably stakeholder mapping (Johnson, Scholes, & Whittington, 2005), and cognitive mapping (Eden & Ackermann, 1998) which help to tap into the social capital and relationships embedded in broader business networks. Finally, from a methodological point of view, the SHV points out the importance of a more holistic and integrated approach in understanding strategic management in Chinese organisations. So far, most of studies on Chinese management have used existing Western management theories to explain the Chinese business phenomena. 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