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To cite this article: WEN-SHINN LOW & SOO MAY CHENG (2006) A Comparison Study of Manufacturing Industry in Taiwan and
China: Manager's Perceptions of Environment, Capability, Strategy and Performance, Asia Pacific Business Review, 12:1, 19-38,
DOI: 10.1080/13602380500336996
To link to this article: http://dx.doi.org/10.1080/13602380500336996
Introduction
Contingency theory has acknowledged the appropriateness of various strategic
orientations in a variety of environmental conditions, arguing that no one strategy
can be appropriate in all situations; effective strategies are dependent on the
specific environmental conditions (Lawrence & Lorsch, 1967; Miller & Friesen,
1983; Miller, 1988; Wright et al., 1995). Organizational ecology from a broad and
long-term view postulates that organizations must either fit their environmental
niches or fail; their survival is a result of environmental evolution (Wholey &
Brittain, 1979; Ulrich, 1987). The r-selection and K-selection put forth by
MacArthur and Wilson (1967) represent two types of biological proliferation
in different climates: rigorously seasonal and uniformly benign. On the basis
of this, Brittain and Freeman (1980) developed r-strategy and K-strategy.
The r-strategists are organizations that move quickly to exploit resources and
focus on activities that require low levels of capital investment and simple
Correspondence Address: Soo May Cheng, Faculty of Business Administration, University of Macau, Av. Padre
Tomais Pereira, Taipa, Macau SAR, China. Email: smcheng@umac.mo
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between capability and performance in China and Taiwan; (3) to determine whether
strategies selected by cross-strait managers in different environments mediate to impact
performance; (4) to determine whether strategies selected by cross-strait managers
with different capabilities mediate to impact performance. The results are based on the
analysis of a survey of top managers in the fastener industry of China and Taiwan.
The article begins with an overview of the research background and industry in China
and Taiwan. A literature review is presented, with this discussion leading to a series
of hypotheses. The methodology used to test these hypotheses is next, followed
by a presentation of the research findings. The essay concludes with a summary
and implications, including the limitations of this study and some suggestions for
further research.
Research Background
The Chinese economy has shown dramatic growth in recent years. In the first half
of 2001, the economic growth rate in China jumped by 7.9 per cent from the
previous year despite the slow-down of the world economies (Business Times,
2001). In contrast, economic growth in Taiwan revealed minus 0.73 per cent
growth in the first half of this year, according to the Directorate-General of
Budget, Accounting and Statistics of Taiwan. It was the first minus growth in
Taiwan since 1975. Prior to Chinese industrial development, Taiwan had laid
down solid economic foundations and featured excellent manufacturing
capabilities, but the worsening environment in the last ten years, such as soaring
production costs and environmental awareness, has decimated previous
competitive advantages. Since May 2000, a minority of the governing party has
caused further unrest for the Taiwanese government. In facing different
environments, the cross-strait managers would have different perceptions about
environmental and strategic orientations. Although the management of Chinese
firms has received increased scholarly attention, few scholars have rigorously
examined the issue either empirically and theoretically (Nee, 1992; Luo, 1999).
A review of the literature also shows that most studies about environment-strategy
alignment focus on the firms within specific districts (Kean et al., 1998;
Luo, 1999), international business (Carpano, et al., 1994; Francis & Collins-Dodd,
2000) and small business (Lang et al., 1997; Beal, 2000). Limited research has
been carried out on a specific industry and was studied whether strategy mediates
to impact on performance.
The fastener industry was chosen as the research subject for this study due to its
export significance to Taiwan. Taiwan has been acclaimed as the kingdom of
fasteners due to its fastener export volume remaining the worlds number one for
many years. The achievement is particularly salient as many traditional industries,
such as shoes, umbrellas, bicycles, toys and so forth, have diminished production
scales in Taiwan on the one hand and relocated factories in China on the other.
The fastener industry of Taiwan is characterized by: (1) the domination of small
and medium-sized enterprises; (2) complete industrial systems from up, middle
to down stream; (3) high export-orientation and; (4) export market concentration
(Metal Industry Research and Development Center, 1998). According to statistics
of the Taiwan Institute of Fastener Industry, the number of fastener firms totalled
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1,185 in 2001, mainly located in the south of Taiwan with capital of less than
NT$10 million (about US$300 thousand).
The development of the Chinese fastener industry has taken more than 30 years
since the establishment of the first fastener manufacturer in 1953. The industry
features (1) small factories with average 3 5 workers; (2) standardized and low
value-added products; (3) incomplete up stream and poor quality materials; and
(4) sales divided equally between national and international markets (Metal
Industry Research and Development Center, 1998). The Chinese fastener factories
numbered about 8,000 in 2000. Large-scale fastener manufacturers numbered
about 300, employing more than 220,000 people. Factories are mainly located in
east China.
Theory and Hypotheses
Environment and strategy have been empirically demonstrated to have significant
influence on performance (Miles & Snow, 1978; Porter, 1980; Scherer, 1990).
The structure-conduct-performance paradigm proposed by Scherer (1990)
suggests that organizational performance is determined by strategies, such as
low price and differentiation. Several different conceptualizations of environment
have been adopted to test the environment-strategy linkage, including
environmental dynamism (Miller & Toulouse, 1986; Tan & Li, 1996);
environmental uncertainty (Miller, 1988); environmental munificence (Dess &
Beard, 1984; Venkatraman, 1989; Yasai-Ardekani, 1989). These studies further
demonstrate that the environment-strategy configuration lead to superior
performance. Some scholars focus on the activities of environmental scanning,
such as frequency and scope, to examine the effect of successful congruence
between environment and organizations. They emphasize that effective scanning
of the environment allows firms to learn about opportunities and threats, thus
enabling the firms to choose appropriate strategies congruent with environmental
conditions (Bourgeois, 1980; Jennings & Lumpkin, 1992; Lang et al., 1997; Wu
et al., 1998; Beal, 2000). Specifically, Jennings and Lumpkin (1992) found that
firms following a low cost leadership will focus on the scanning of environmental
opportunities; while firms following a differentiation strategy will look for
scanning environmental threats. Beal (2000) concludes that firms pursuing a
combination of low cost leadership and differentiation in mature industries should
monitor and analyse information regarding their own resources and capabilities.
These findings imply that the environmental scanning follows strategy, suggesting
that firms in a given strategy need to be conscious of the significant trends in a
rapidly changing and/or competitive environment. These findings also adequately
reflect the central argument of the attention-based view which postulates that firm
behaviour is the result of how firms distribute their attention.
Organizations must adapt by changing as environmental conditions change.
By steering ongoing adaptation, organizational theorists note a paradox between
adaptation and inertia (Miles & Snow, 1978; Morison, 1989) because adaptation
might preclude adaptability (Weick, 1979). An organizations capacity to learn and
adapt may be reduced as a consequence of internal congruence and past success.
As a result, todays success may sow the seeds of tomorrows crisis when
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24
25
26
positively
proactive
positively
proactive
H5 & H6
H7 & H8
H1 &
H2
Strategy
Proactiveness
Conservativeness
Capability
Organizational Capability
Network Capability
27
H3 &
Performance
Financial Performance
Operational Performance
Organizational Performance
H4
28
For the general environment, respondents were asked for their perceptions of the
level of economic, political, financial, infrastructure and exporting segments in
their countries. For the industrial environment, respondents were asked for their
perceptions of the level of competition, supply, customer demands and production
conditions in their countries. These questions were measured by using a balanced
5-point Likert scale. Each respondent was asked to indicate the extent to which
they disagreed or agreed with the given statement, such as 1 Strongly Disagree
and 5 Strongly Agree.
Strategic orientation was measured along a proactive/conservative continuum,
based on the operationalization by Beal (2000), Miller (1988) and Porters (1980)
generic strategies. The approach was defined by asking respondents questions
about their emphases on developing new products and markets, creating a high
quality image, establishing distribution channels and increasing advertisement
expenditure. These questions used a 5-point Likert scale.
Firm capability was suggested by Chen (1999) as a two-dimensional construct:
organizational and network capability. Organizational capability was measured
using an adaptation of existing instruments (Grant, 1998; Lin, 1999). Network
capability was based on the work of Lin (1998) and Lin (1999). Respondents were
asked whether their companies were characterized by the organizational
capability (for example, manufacturing, R & D, marketing, management, finance
and distribution channels) and network capability (for example, relationships with
suppliers, distributors, associates, R & D organizations and financial institutions).
A 5-point Likert scale was used to measure these scales, such as 1 Very Low
and 5 Very High.
In addition, a set of questions was included in the survey to measure the
subjective evaluation of performance. In such studies, because most of the
objective data are confidential for the enterprises, the information is difficult
for researchers to access. Instead, scholars use a subjective way to evaluate
performance, including financial, management and technical performance (Grant,
1990; Boardman & Shapirot, 1997; Reuer & Miller, 1997). Although these data
are subjective, according to Grants research findings (1990), the results of the
subjective method are very close to those of an objective method. Chandler and
Hanks (1993) also contended that the subjective, self-reporting approach was
appropriate as these measures of organizational environment and performance
have been validated and shown to correlate with objective measures with a high
degree of reliability. This study adopted Venkatraman and Ramanujams (1986)
constructs, that is, financial, operational and organizational dimensions to
measure performance for they have broader domains to examine an industry
in different environmental contexts. Financial performance was measured by the
mean of the response scales for sales growth and profitability. Operational
performance was defined as the mean of the response scales for quality
improvement, market share enlargement and customer satisfaction. Organizational performance was then measured by the mean of the response scales for
working satisfaction and productivity of employees.
Reliability was assessed using Cronbachs coefficient. Generally a value around
0.7 is considered adequate to conclude internal consistency (Nunnally, 1978).
The results of the reliability coefficients ranged from 0.672 to 0.805, suggesting
29
China
Taiwan
Independent Variables
General Environment
Industrial Environment
R square
F
Df
0.079
0.286
0.100
4.345
80
0.712
2.572*
0.015
0.743
100
0.126
2 0.109
1.111
2 0.963
* p , 0.05
** p , 0.01
*** p , 0.001
b: standardized coefficient.
Taiwan
0.478
0.243
0.438
30.348
80
4.286***
2.176*
0.325
23.615
100
0.533
0.057
5.010***
0.532
30
confirming the impression that guanxi or relationships are important for business.
However, network capability is not significantly related with performance in
Taiwan. Hence, H3a is supported, but H3b is not.
Path analyses in Figures 2 and 3 show the possible role of strategy in
influencing performance, when environment does not. It was expected that the
success of the manufacturing industries could have been due to proactive
strategizing which transcended the environment. But path analysis revealed
otherwise. Strategy does not mediate between environment and performance in
China or Taiwan. Therefore, both H5 and H6 are not supported.
In Figure 4, organizational and network capability are not significantly related
to strategy and performance in Taiwan. On the contrary, both organizational and
network capability are significantly and positively related to strategy and
performance in China. Thus, H8 is supported.
Discussion
The result that general environment is not significantly related to performance
confirms Grants (1998) argument that for most strategy decisions, the core of the
firms external environment is its industry which is defined by the firms
relationships with customers, competitors and suppliers. In this light, political
unrest and economic conditions in Taiwan have little impact on performance.
In addition, the industrial environment is significantly associated with
performance in China. The finding reflects Deng and Darts (1999) empirical
study, stating that market orientation in Chinese enterprises varies across company
General
Environment
.442***
.138
Strategy
Performance
.421***
Industrial
Environment
(*): p<0.05; (**): p<0.01; (***): p<0.001; value: standardized coefficient
31
Organizational
Capability
.055
Strategy
Performance
.173
Network Capability
(*): p<0.05; (**): p<0.01; (***): p<0.001; value: standardized coefficient
location, ownership type, governmental control and company size. In other words,
as the industrial environment in China has changed dramatically in recent years,
Chinese firms which are sensitively aware of the changes in the industrial
environment may yield superior performance. Conversely, the industrial
environment is not significantly linked with performance in Taiwan. This may
be attributed to the fact that disadvantageous factors that have existed within an
industrial environment for several years have little influence on performance
because firms have found the solutions to these disadvantages. For example,
Taiwanese fastener firms have developed high-speed, multi-station forming
machines to cope with soaring labour costs; therefore this disadvantage does not
pose a threat.
The result that network capability does not impact firm performance is contrary
to the understanding that Taiwanese industries are characterized by close network
relationships. This might be explained by the specific situation the cross-strait
managers are located in and the distribution and allocation of their attention into
specific activities, communications and procedures. In field experiments
investigating individual decisions about littering, Cialdini et al., (1990, 1991)
found that individuals litter less in litter-free environments than in littered ones;
individuals litter more in litter-around environments because they feel further
litter would not make any difference. Taiwanese fastener firms are clustered in
south Taiwan, especially in the Tainan area. Businessmen can meet readily with
their suppliers, customers and associates in the neighbourhood, thus diminishing
the strategic importance of their relationships. On the other hand, an industrial
forum is held twice a year in Shanghai; attending Chinese fastener firms would
Organizational
Capability
.270**
.268**
Strategy
Performance
Network Capability
32
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Theoretical Implications
Based on the analysis of survey data collected from the fastener industry, this
study provides detailed and insightful information relating to managers
perceptions of environment, capability, strategy and performance in China and
Taiwan. Several theoretical implications are summarized. Firstly, the article
contributes to the literature by focusing on a specific industry, excluding the
variable of different industrial contexts because the same environment can have
different effects on different industries (Miller, 1998). Secondly, the study
investigated not only organizational capability but also network capability which
has been ignored in previous research. Combining both organizational and
network capability to examine empirically their influence on organizational
performance, this essay provides a direction that may be useful for further
research. Thirdly, the study deepens understanding of strategy by examining
whether strategy mediates the relation between environment and performance
as well as between capability and performance. Thus a formulating process of
strategy can be clearly mapped out, showing how firms identify niches and
distribute organizational resources.
Practical Implications
The findings of this study suggest a number of implications for managers in
Taiwan and China. Firstly, the alignment between industrial environment and
performance in China suggests that not only Chinese firms but also foreign
investors in China should be aggressive in pursuit of emerging market
opportunities. Secondly, organizational capability has a strong impact on
performance in both China and Taiwan, regardless of the perceived difficulties or
ease of environmental factors. Thirdly, from the environment-strategyperformance relationship, the findings of this study imply that both Chinese and
Taiwanese fastener firms are not strategy oriented. Therefore, it is easy for the
industry to become embroiled in price competition. Instead of being involved in
daily operations or administrative detail, managers should concern themselves
with broader issues of strategy. Fourthly, the performance of the Chinese firms is
related to network capability. This finding might suggest that the cultural
preference for personal rather than contractual relations, the much discussed
guanxi, remains an important factor in doing business in China (Leung & Yeung,
1995). Further research may be worthwhile to incorporate this issue.
Research Limitations and Future Research
This study has two limitations. First, it focused only on the business people in
China and Taiwan. Given this its limited scope, caution must be exercised when
generalizing its findings to the contexts of different countries. Further research
could test the models of congruence in various economic contexts (for example,
China and Western countries). Secondly, as a cross-sectional approach, this study
does not capture the incremental process of strategic formulation and
implementation or the achievement of external and internal alignment over
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Conclusions
Environmental analysis is widely viewed as the first step in formulating business
strategies. Most models of environmental analysis are based on rational choice,
for example, strengths, weaknesses, opportunities and threats (SWOT) and the
Five Forces model (Porter, 1980). However, the actual and perceived
characteristics of environment and capability may vary because of decision
makers perceptions and priorities. This study investigated the relative
importance of environment and strategy perceived by the managers in Taiwan
and China. Its findings indicate that the general environment does not influence
firm performance, meaning that the concern of the managers is not with the
general environment, but with getting their organizational competences right.
Hence the industrial environment was seen to have minimal impact on firm
performance in Taiwan. This reflects that when advantageous or disadvantageous
factors have existed in an industry for several years, their importance may be
lessened. Therefore, to understand the influential levels of a changing
environment, it would be better for researchers to conduct investigations within
the initial periods after the change. For example, as China and Taiwan were
approved to enter the World Trade Organization (WTO) in 2002, research into
the effects of their entry should be conducted during the first few years after
entry.
In addition, previous research has focused on either organizational capability
or network capability but ignored the combination of the two capabilities
(Gulati et al., 2000). This study redresses this deficiency. The results show that the
organizational capability does impact on firm performance in both Taiwan and
China, appearing consistent with the resource-based perspective. However,
networking has little influence on firm performance in Taiwan. The result again
contradicts previous understandings of the networking characteristics of
Taiwanese industries and highlights the limits of rationality in managers
perceptions on network capability as mentioned before.
The environment-strategy-performance relationship is not supported in both
Taiwan and China. This result might relate to the fact that the fastener industry is
mostly mass production orientated. Managers are keen on the improvement of
operational efficiency to the extent of ignoring strategic issues. Besides, decision
making in Taiwanese SMEs and Chinese enterprises may be dominated by
CEOs subjective judgement based on their past experience rather than on rational
strategy formulation. The ability of a firm to sustain its competitiveness beyond
the tenure of the CEO is therefore questionable. As Pearce and Robinson
(2000) indicate, CEOs and senior managers should encourage employee
participation in making strategic decisions because strategy concerns whole
organizations. Employees who are consulted in the decision-making process
are likely to feel they own a part of that decision and have an obligation to
make it work.
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