Business-to-business marketing practices in China 9781846633799, 9781846633782

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27/03/2007

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ISSN 0885-8624

Volume 22 Number 2 2007

Journal of

Business & Industrial Marketing Business-to-business marketing practices in China Guest Editor: Brian Low

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Journal of Business & Industrial Marketing Volume 22, Number 2, 2007 ISSN 0885-8624

Business-to-business marketing practices in China Guest Editor: Brian Low

Contents 126

82

Access this journal online

83

Guest editorial

84

Business-to-business negotiating in China: the role of morality Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

138

Securing network legitimacy in China’s telecommunication market Brian Low, Wesley J. Johnston and Jennifer Wang

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Buyer-supplier relationship dissolution: the Chinese context Andrew D. Pressey and Xin Xuan Qiu

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Marketing and business performance of construction SMEs in China Yiming Tang, Paul Wang and Yuli Zhang

Business-to-business marketing as a key factor for increasing service revenue in China Heiko Gebauer, Chunzhi Wang, Bernold Beckenbauer and Regine Krempl CASE STUDY Huawei Technologies Corporation: from local dominance to global challenge? Brian Low Executive summary and implications for managers and executives

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examination of dysfunctional relationships and their dissolution. For instance, it is common for relationships to have a transferable “energy” after the dissolution of a relationship due to the guanxi that exists between individuals prior to dissolution. It is also common for dysfunctional relationships to “fade away” so as not to lose “face” for a business partner or damage any guanxi developed by abruptly ending relations. The involvement of a third-party often plays an active role in the dissolution of the relationship. The impact of marketing-related variables on business performance of small and medium-sized enterprises (SMEs) in China was the topic of the study by Drs Tang, Wang and Zhang. Building on the rich findings of their pilot study, they developed a conceptual model, and constructed eight research hypotheses. Their study indicates that three factors are positively correlated with a small firm’s business performance, being: long – term differentiation marketing strategy; R&D as a percentage of sales; and years in business. Other factors such as their current product focus, government policy, quality and availability of services, conduct of regular market research, a firm’s registered capital and number of employees, supplying a few large firms, and having a few regular suppliers, were however not significantly associated with business performance. Next, Gebauer, Wang, Beckenbauer and Krempl examine how Chinese culture affects business marketing strategies and service revenue in manufacturing companies. The genesis of their study was an investigation of 118 Swiss companies that generated an average of 21.2 percent of their total revenue in Europe, compared with 10.3 percent in China. Through a combination of interviews, longitudinal study and bi-polar case studies, their study highlighted the characteristics of Chinese culture as the main reason for the significant difference in service revenue, and offers a number of suggestions for managers seeking to increase service revenue in China. The last article, a case study by Dr Low, identifies the challenges confronting Huawei Technologies, China’s biggest telecommunications equipment manufacturer, as it seeks to make the transition from an indigenous-owned business to a competitive global giant. His argument is that through internationalization, Chinese companies, like Huawei, have learned how to compete, by adjusting their mechanisms, learning instruments and focus. This proved that indigenous firms in a country late to internationalize like China can overcome their late mover position in entering advanced markets. However, Low also cautions against underestimating the role of government in helping to construct competitive indigenous firms that could compete internationally. Finally, the idea for this special issue did not arise in a vacuum. I am grateful for the editorial guidance and advice of Professor Wesley Johnston. Carol Tan was essential in providing administrative support. Of course this special issue would not exist without the reviewers. I wish especially to thank the following reviewers: Drs Esther Li, Lingnan University, Hong Kong; Yiming Tang, Macquarie University; Catherine Sutton Brady, Sydney University; Felicitas Evangelista and Richard Fletcher, University of Western Sydney. Brian Low

Guest editorial About the Guest Editor Brian Low is a Senior Lecturer in Marketing at the University of Western Sydney, Australia. A practicing academic, Brian has spent 18 years in the automotive, computer and telecommunication sector, in senior marketing and research positions. He has consulted for a range of American, European and Chinese companies on marketing strategies and regulatory policies in the telecommunication sector in Asia-Pacific. His current research interests are in the areas of business-to-business marketing, industrial networks, marketing in developing nations, and value-based marketing. He holds a DBA from the University of Western Sydney.

Business-to-business marketing practices in China The quest for the greatest untapped business-to-business market on earth remains difficult and fraught with challenges. While some have succeeded, many have also failed. Why? This issue seeks to answer this question. Written for academics, researchers and practitioners, I believe that the papers in this issue make valuable contributions toward, and provide substantive insights into successful business marketing practices in China. The first article by Drs Al-Khatib, Vollmers and Liu examined the effects of Chinese executives’ preferred ethical ideologies and Machiavellianism on their views of negotiation tactics, within the context of a nation moving from a centrally planned economy to a market economy. The results of their study support the contention that idealism, which describes the degree to which individuals understand actions as right or wrong, influenced perceptions of false promises, traditional competitive bargaining, and criticising an opponents’ network. Machiavellianism, a personality trait in which individual believes it is appropriate to use any means to accomplish personal and organizational goals, influenced perceptions of traditional competitive bargaining and misrepresentation of information. Drs Low and Johnston and Ms Wang also focus on the Chinese mindset in developing effective relationships, specifically the importance and approaches in securing an organization’s legitimacy from a “market-as-network perspective.” Through an inductive interpretative approach complemented by action-based research founded on inquiry and testing, they argue that the key to legitimacy success involves using legitimacy orientations to demonstrate commitment to the interests of constituents, acquiring legitimacy from them, but concurrently considering the central government’s influence on a firm’s legitimacy performance. If understanding the ethical Chinese mindset and securing network legitimacy are strategic business marketing imperatives in a transitional Chinese economy, Dr Pressey and Ms Qiu argued that greater freedom to build relationships with their partners of choice requires a meaningful

Journal of Business & Industrial Marketing 22/2 (2007) 83 q Emerald Group Publishing Limited [ISSN 0885-8624]

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Business-to-business negotiating in China: the role of morality Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu University of St Thomas, St Paul, Minnesota, USA Abstract Purpose – The purpose of this study is to examine the effects of Chinese executives’ preferred ethical ideologies and Machiavellianism on their perceived appropriateness of negotiation tactics as they operate in a nation transitioning from a planned economy to a market economy. Design/methodology/approach – A self-administered survey of a sample 300 Chinese managers with budgetary and personnel responsibilities in Tianjin, China was obtained for the purpose of the present study. A series of regression analyses were conducted to test the proposed relations. Findings – Results from the regression analyses provided partial confirmations for the proposed relationships. Idealism influenced perceptions of false promises, traditional competitive bargaining, and attacking an opponents’ network. Perceptions of traditional competitive bargaining, attacking an opponent’s network, and inappropriate information gathering were significantly influenced by relativism. Machiavellianism influenced perceptions of traditional competitive bargaining and misrepresentation of information. Research limitations/implications – Given the existing impediments to sampling and data collection in China, the sampling method used is nonprobabilistic, which calls for consideration of the results as exploratory. The present study’s sample is drawn from the Northeastern region of China and since ethical beliefs and orientation in China varies by region, the results of the present study cannot be generalized to the total population of China. Originality/value – The present study aims to provide the following contribution. First, as most studies in the negotiation ethics literature are focused in Western cultural contexts, this study attempts to fill this gap by investigating the negotiation ethical values of executives from Eastern culture. Second, global firms’ executives can better understand the ethical mindset of their Chinese counterparts and utilize this knowledge to efficiently and effectively manage the negotiation process with their counterparts in this important market. Third, public policymakers and researchers can also benefit from this study by understanding the external validity and the degree of ethnocentrism of not only their own code of ethics but also the validity of a universal code of ethic. Keywords Negotiating, Business ethics, China Paper type Research paper

An executive summary for managers and executive readers can be found at the end of this issue.

China faces similar problems with corporate scandals. In the economic transition from planned economy to socialist economy, many ethical and legal issues have emerged (Hong, 2001). Researchers have observed that a weak legal system, weak civic accountability, market distortion, public cynicism, and a workforce lacking moral self-efficacy, present major challenges to moral integrity in Chinese mainland enterprises (Snell and Tseng, 2002). These moral challenges are evident by several scandals recently report. For example, in January of 2002, the China Securities Regulatory Commission (CSRC) issued the Code of Corporate Governance of Listed Companies in China in response to a number of financial scandals occurring over the previous year. The CSRC was reprimanding a number of listed companies (some examples being Guangxia (Yinchuan) Industry Co. Ltd, Sanjiu Pharmaceutical Co., Lantian Co. Ltd, and Macat Optics and Electronics Co. Ltd) for violating provisions relating to financial reporting and management (Shi and Weisert, 2002). In 2004, four members of the banking industry were executed for fraud. As international trade and business opportunities grow in China, Western firms are attracted to the appealing Chinese market. Working in an ever increasingly global environment, executives are in constant negotiations with customers, suppliers and other constituents of their firms. One of the challenges of corporations participating in the global economy is to understand and manage the ethical negotiation practices and behaviors of their international partners (Volkema, 2004). To capitalize on the emerging opportunities in China, it is imperative that global executives understand the ethical

Introduction Throughout the world, business ethics has become a topic of interest and concern for the business community as well as the general public. During the last several years, the American public has seen numerous business scandals with corporate names such as Enron, WorldCom, ImClone, and Tyco appearing in news headlines. The offenders involved include chief executive officers (CEOs), chief finance officers (CFOs), board members, auditors and stock analysts. Not just an American problem, Italy was recently shocked by a corporate financial scandal involving its largest food company, Parmalat, involved in the disappearance of more than $10 billion in declared assets. Suspect accounting has earned the Dutch grocer, Ahold, the nickname of “Europe’s Enron”. Corruption and bribery also plague the international engineering and construction industry with scandals in Africa and Europe (African Business, 2004). The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing 22/2 (2007) 84– 96 q Emerald Group Publishing Limited [ISSN 0885-8624] [DOI 10.1108/08858620710730203]

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Business-to-business negotiating in China

Journal of Business & Industrial Marketing

Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

Volume 22 · Number 2 · 2007 · 84 –96

mindset of their negotiation counterparts in order to develop effective relationships (Bagozzi, 1995). Additionally, even though the negotiation literature is rich with numerous studies prescribing the means for managing and resolving conflict in the negotiation process, very little attention has been devoted to the potentially ethically challenging component of the negotiation process (Robinson et al., 2000). Very little guidance is provided to negotiating managers on how to effectively deal with the ethical component of the negotiation process. The present study will attempt to fill this gap in the negotiation literature by shedding light on the ethical mindset of the Chinese negotiator. Despite the repeated call in the literature for more research investigating ethical issues in different cultures, examining ethical behavior within the context of foreign cultures’ negotiation practices has been limited at best. Executives’ moral judgments and ethical perceptions within the negotiation context have been studied extensively in Western cultures, particularly in the USA. To capitalize on the opportunities provided by the emerging Chinese market, Western managers must gain an understanding of the country’s management culture. This inquiry is particularly important given the reported wide gap in the literature between Chinese and Western managers’ perceptions of ethical concerns and the priority they place on ethical issues in their business environment (Pitta et al., 1999). Developing a greater understanding of how Chinese managers perceive ethical negotiation concerns and the factors that shape such perception will enhance Western managers’ knowledge of the core values that drive the Chinese organizational culture. This understanding will aid Westerners in initiating profitable opportunities in the Chinese market. Finally, the recent surge in research examining organizational ethics has primarily been focused on the incorporation of codes of ethics within a company and the ethical climate of the organization (Robin et al., 1989; AlKazemi and Zajac, 1999). This research confirmed that employees’/executives’ ethical judgments are guided and influenced by the overall corporate ethical climate. However, as ethics pertain to the individuals’ value-guided behavior (McDonald and Zepp, 1988) and as the understanding of individuals’ core values and beliefs is a prerequisite to the understanding of corporate culture, individual ethical values, rather than the corporate code of ethics, should be the unit of analysis. This individual focus is further argued by Drucker (1981). He describes the individual aspect of ethics in the Asian context:

executives. By investigating the impact of these variables on Chinese executives’ perception of unethical negotiation practices, global firms’ executives can better understand the ethical mindset of their Chinese counterparts. With this understanding it is then possible to utilize this knowledge to efficiently and effectively manage the negotiation process with their counterparts in this important market. Public policymakers and researchers can also benefit from this study by understanding the external validity and the degree of ethnocentrism of not only their own code of ethics but also the validity of a universal code of ethics. The next section of this paper will describe the literature on ethics in China, the previous literature on executives’ perceptions of unethical negotiation tactics, the determinants of ethical judgments and hypotheses development. The following section will describe the present study’s methodology followed by results and discussion. The paper concludes with the present study’s implications, limitations and directions for future research.

Business ethics and culture in China Business ethics in China have been studied by several scholars (Harvey, 1999; Xiaohe, 1997; Hanafin, 2002; Snell and Tseng, 2002; Hong, 2001). These studies can be classified into four major categories based on their focus. The first category of studies examines the historical development of business ethics in China (Xiaohe, 1997; Harvey, 1999; Hong, 2001). Xiaohe (1997) argues that prior to 1984, ethics was viewed as a topic that is discussed among philosophers with no practical implications for its role in business. Between 1984, and 1994, the field of business ethics flourished as a response to the public dismay regarding the sharp decline in professional morality. Hong (2001) claims, that throughout the history of China, there has never been such a decline in moral standards as we are now witnessing. The second category of studies focus on the debate related to the impact of the transition from planned to market economy on public morality in general (Snell and Tseng, 2002; Hanafin, 2002; Lovett et al., 1999). For example, Hanafin (2002) questions whether the introduction of a market economy has a positive or negative effect on public morality. After reviewing both sides of the debate, he concludes that most of the moral problems that China is experiencing today are a result of the free market system adjusting to cultural and social forms that are not suited to it at the present time. The third category of studies examines the role of “guanxi” in the ethical management of business relationships in China (Leung et al., 1996; Steidlmeier, 1999; Wong and Chan, 1999; Su and Littlefield, 2001). Fan (2002) in describing business guanxi in China, explains that this form of guanxi is associated with favoritism, nepotism, unfair competition and fraud. Such practices are supported by a survey of 275 senior managers in China (Fu and Zhu, 1999). The final category of studies focuses on survey-based studies that examined the impact of culture on ethical perceptions among Chinese managers and/or compare and contrast them to other nationalities (Redfern and Crawford, 2004; Siu and Tam, 1995; Whitecomb et al., 1998; Jackson et al., 2000). These studies indicate that differences in individual ethics reflect cultural variation (England, 1975). A positive relationship between power distance and unethical behavior/corruption has been found (Getz and Volkema, 2001; Husted, 1999). It is

For the Confusion – but also for the philosopher of Western tradition-only law can handle the rights and objectives of collectives. Ethics is always a matter of the person (Drucker, 1981).

The present research will help firms interested in the Chinese market to test the external validity of their code of ethics and the extent to which individual ethical values facilitate or impede the universal application of a firm’s ethical code. This study will assist in this endeavor by examining the impact of Chinese executives’ preferred ethical ideology and Machiavellianism on their perception of unethical negotiation tactics. Through the present study’s exploration of patterns of Chinese executives’ negotiation related ethical beliefs and orientations, we hope to reveal interesting and significant differences into the ethical mindset of the Chinese 85

Business-to-business negotiating in China

Journal of Business & Industrial Marketing

Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

Volume 22 · Number 2 · 2007 · 84 –96

suggested that in high power distance cultures such as Chinese, top officials, taking advantage of their official position, and members of the underclass, trying to better their lot in life, are more susceptible to unethical behavior (Volkema, 2004). Volkema (2004) also found that uncertainty avoidance is inversely related to the perceived appropriateness and likelihood of using competitive and questionable negotiation behaviors. High power distance and uncertainty avoidance leads to value placed on working through established power structures (Volkema, 1998). In addition, the combination produces a lack of trust with the unfamiliar, and outsiders are viewed with suspicion and distrust (Volkema and Fleury, 2002). Power distance and uncertainty avoidance were positively associated with corruption. (Getz and Volkema, 2001). Volkema (2004) found that members of a collectivist culture would be less likely to use the tactic of influencing another’s professional network. This negotiation tactic is at odds with the high value placed on establishing and maintaining social systems. Individuals from countries with more masculine culture indicate a higher likelihood of engaging in questionable information collection behaviors (Volkema, 2004.) Husted (1999) found a positive relationship between masculinity and perceived corruption.

Robinson et al. (2000) found that respondents are generally more accepting of traditional competitive bargaining tactics and less accepting of the other more serious and potentially illegal tactics. Utilizing and contrasting US and Mexican samples, Volkema (1998, 1999) reported similar results. Elahee and Brooks (2004) in examining the role of trust on Mexican managers’ perception of six negotiation tactics empirically demonstrated that there is a negative relationship between trust and the likelihood of using inappropriate negotiation tactics. Several studies have found that demographic factors impact the perception of the ethicality of negotiation behaviors. It has been shown that age, gender, and occupation lead to different perceptions of deception in negotiation (Anton, 1990). Women have been found to be less accepting of unethical deception tactics than men (Lewicki and Robinson, 1998; Robinson et al., 2000). In addition, culture and nationality have been shown to cause differences in perception of ethicalness of negotiation tactics, with subjects from Western Europe and to a lesser degree the Asian Pacific Rim more likely to endorse ethically marginal tactics than other groups (Robinson et al., 2000). In studying the impact of Hofstede’s cultural typology (i.e. power distance, masculinity, uncertainty avoidance and individualism) on executives’ perceived appropriateness and likelihood of using competitive and questionable negotiation tactics (i.e. traditional competitive bargaining, attacking an opponent’s network, misrepresentation of position to the opponent, inappropriate information gathering and false promises) in nine countries and across three continents, Volkema (2004) reported that traditional competitive bargaining (e.g. exaggerating an offer or demand, hiding one’s bottom line) was the category of negotiation behaviors perceived to be the most appropriate as well as the most likely tactic to be used by negotiators. The other four categories were perceived less appropriate and less likely to be used. Similarly, country level analysis revealed that traditional competitive bargaining tactics were perceived as the most appropriate and the most likely to be used in each of the nine countries studied. Cultural factors were found to be significant predictors of the respondents’ perceived appropriateness of the questionable negotiation tactics. Specifically, power distance as inversely related to traditional competitive bargaining; uncertainty avoidance was inversely related to both inappropriate information gathering and attacking the negotiating partner’s professional network, however, it was directly related to power distance; masculinity was directly related to inappropriate information gathering and finally, individualism was directly related to attacking the negotiating partner’s professional network. Finally, situational factors have also been shown to have an affect on the perception of appropriate behavior (Volkema and Fleury, 2002). Examples of situational factors include your counterpart having a reputation as an unethical negotiator, being under a time deadline, and when future business relations with an opponent were likely.

Negotiation and questionable negotiation practices Negotiation has been defined as “a process of potentially opportunistic interaction by which two or more parties, with some apparent conflict, seek to do better through jointly decided action than they could otherwise” (Lax and Sebenius, 1986, p. 11). Negotiation brings two or more parties together to try to accomplish mutually beneficial outcomes, while meeting individual goals that may be at odds with the other negotiating parties’ goals. Negotiations involve serial communication between parties to exchange information and attempt to influence or persuade one’s counterpart (Banas and Parks, 2002, p. 237). The negotiation process is littered with ethical dilemmas. In a tactical process, as two parties try to reach agreement, each wanting to maximize their results, the temptations to use deceptive or dishonest tactics are undeniable. Several studies have examined the relationship between negotiation tactics and ethics (Banas and Parks, 2002; Lewicki and Robinson, 1998; Robinson et al., 2000; Volkema and Fleury, 2002; Elahee and Brooks, 2004). Lewicki and Robinson (1998) suggest that there are a wide range of negotiation behaviors varying with respect to perceived ethicality and appropriateness. At the basic level there is traditional competitive bargaining, consisting of tactics which are generally acceptable, such as exaggerating demands and appearing to be in no hurry to come to an agreement. In addition, there are more questionable tactics such as attacking your opponent’s network (e.g. threaten to make you opponent look weak or foolish in front of their boss), making false promises (e.g. offer future concessions you know you will not grant), misrepresenting of information (e.g. intentionally misrepresent information to strengthen your position), and inappropriate information gathering (e.g. gaining information through bribes). In studying business executives’ perceptions of unethical negotiation tactics, Lewicki and Robinson (1998) and

The impact of preferred ethical ideology on Chinese executives’ perceptions of unethical practices Business ethics theories (e.g. Ferrell and Gresham, 1985; Hunt and Vitell, 1986, 1992) suggest that different individuals, when faced with decision situations having 86

Business-to-business negotiating in China

Journal of Business & Industrial Marketing

Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

Volume 22 · Number 2 · 2007 · 84 –96

ethical content, will apply ethical guidelines or rules based on different moral philosophies. These moral philosophies can be categorized into two major types, deontological and teleological (Murphy and Laczniak, 1981). Hunt and Vitell (1986, p. 6) describe these two approaches as follows:

to be relativistic decision makers. That is they reject absolute moral philosophy and tend to be situationists. Whitecomb et al.(1998) in comparing US and Chinese students found that US students are more likely to exhibit idealistic concerns (e.g. concern for the environment and the welfare of others and avoiding harm to others) than their Chinese counterparts. Similarly, McDonald and Park (1996) and Lin (1999) have empirically demonstrated that when engaging in ethical decision making, Chinese tend to rely less on idealistic concern and more on economic or self-interest driven concerns. Finally, Redfern and Crawford (2004) in investigating the regional differences related to relativism and idealism in China, reported managers in North China tend to be more relativists than those in the South. Examining ethical ideology and judgments regarding appropriate negotiation tactics, Banas and Parks (2002) found that ethical ideology and acceptability of SINS tactics (a scale measuring perception of unethical negotiation practices) was correlated. The authors hypothesize that subject’s ethical judgments as to the appropriateness of negotiation tactics will be mediated by their ethical orientation. Applying the ethical orientation measures in the Pacific Rim, Singhapakdi et al. (1994) found that Thai marketers scored higher on both idealism and relativism than Americans. Results were mixed for Korean managers, who scored higher on idealism than their American counterpart, but did not differ significantly from Americans on relativism, both scoring low on this dimension (Lee and Sirgy, 1999). Very little research has examined this measure with a Mainland China sample. Pitta et al. (1999) suggested that Chinese negotiators view the win-loss negotiation strategy as immoral. Using a sample of managers from two regions, Redfern and Crawford (2004) administered the Ethics Position Questionnaire in China. While not comparing the Chinese scores to other cultures, they found that managers in the South of China were significantly higher on idealism than managers in the North.

Deontological theories focus on the specific actions or behaviors of an individual, whereas teleological theories focus on the consequences of the actions or behaviors.

The deontological evaluation examines the inherent rightness or wrongness of an evoked set of alternatives that an individual views as possible courses of action by comparing them with a set of predetermined deontological norms or predetermined guidelines that represent personal values or rules of behavior. Teleological evaluation considers: (1) the perceived consequences of each alternative for various stake-holder groups, (2) the probability that each consequence will occur to each stakeholder group, (3) the desirability or undesirability of each consequence, and (4) the importance of each stakeholder group (Hunt and Vitell, 1986, p. 9).

In both their original and revised ethics model, Hunt and Vitell (1986, 1992) depict the ethical decision-making process as involving both deontological and teleological evaluations. This proposition has generally received support (Mayo and Marks, 1990; Vitell and Hunt, 1990). The deontological/teleological paradigm is parallel to Forsyth’s (1980) two-dimensional personal moral philosophies concept – idealism/relativism. Idealism describes the degree to which individuals understand actions as right or wrong, and believe that a “right” decision can be made in an ethically tenuous situation. This is essentially the deontological perspective that embodies concern for others’ welfare when evaluating alternatives. Idealistic individuals believe that there is a morally correct alternative that will not harm others. Less idealistic individuals may make decisions irrespective of the impact on others. Relativism, not an opposite, but a separate dimension, is the degree to which an individual rejects universal moral norms in making ethical judgments. High relativists make decisions on a situational-specific basis. They evaluate the current situation and use this as the basis for making a judgment. In contrast, low relativists believe that standard rules can be applied across situations. Forsyth (1992) suggested that individuals’ ethical ideologies should have an impact on how he/she would handle ethically challenging situations. Scholars examining ethical issues in the marketing and management fields have found that business executives’ ethical judgments are mediated by the individual’s ethical ideology (Vitell et al., 1993; Barnett et al., 1994, 1996, 1998; Singhapakdi et al., 1995; Rao and Singhapakdi, 1997; Wong, 1998; Singhapakdi et al., 1999). Examining these constructs, Vitell et al. (1993), using a sample of American Marketing Association (AMA) members, found that more idealistic and less relativistic members showed higher levels of honesty and integrity than their less idealistic and more relativistic counterparts. A second study of AMA members found that those who exhibited high level of idealism and low relativism tended to perceive ethics and social responsibilities as more important than their less idealistic and more relativistic counterparts (Singhapakdi et al., 1995). Within the Chinese context, several studies (Redfern and Crawford, 2004; Jackson et al., 2000; Ralston et al., 1994; Dolecheck and Dolecheck, 1987) suggested that Chinese tend

The impact of Machiavellianism on Chinese executives’ perceptions of unethical practices Machiavellianism, a personality trait measured along a continuum, is often examined in relation to ethical decision making. A high Machiavellian individual believes it is appropriate to use any means to accomplish personal and organizational goals, including manipulation, persuasion, and deceit (Hunt and Chonko, 1984). Hundreds of studies have investigated Machiavellianism (Gunnthorsdottir et al., 2002). Researchers have also applied this concept to the business arena, many looking at the Machiavellianism level of current and future business executives (Chonko, 1982; Corzine et al., 1999; Hunt and Chonko, 1984). The research indicates that individuals scoring high on the Mach scale are likely to behave unethically. For example, Christie and Geis(1970) found that Machiavellian individuals lie more plausibly, manipulate others more, are persuaded by others less, and pay bribes more than non-Machiavellian individuals. Shapiro et al. (1995) found that Machiavellian individuals tend to engage in deceptive tactics to achieve personal objectives more often than non-Machiavellian individuals. Similarly, Beu et al. (2003) found a significant correlation between Machiavellianism and the intention to behave unethically. Examining the impact of personality factors, cognitive moral development, and demographic factors on unethical intent, 87

Business-to-business negotiating in China

Journal of Business & Industrial Marketing

Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

Volume 22 · Number 2 · 2007 · 84 –96

H5.

Machiavellianism was the strongest predictor of unethical intent. It has been found that high Machs are more likely than low Machs to behave unethically (Jones and Kavanagh, 1996). In summary, Machiavellian individuals do not mind bending the rules to achieve their desired gains. Looking at circumventing rules in China, Wong and Chan (1999) reported that business could not perform in an entirely legal fashion under China’s current guanxi network (informal influence, personal connections, relationship, favoritism). The importance of guanxi has been highlighted by a number of academics (Yeung and Tung, 1996; Luo, 1997; Wong and Chan, 1999; Leung and Wong, 2001). The consensus is that while the central planning era has promoted Machiavellian attitude by emphasizing a “the end justifies the means” attitude, the post-central planning era’s emphasis on free market activities, profit and competition has also fostered such behavior. Additionally, bending the rules, and using and discarding other people (particularly foreigners) to gain an advantage, has been a common practice in China (Hong, 2001). In describing the practice of business ethics in China, Hong (2001, p. 90) observes:

Chinese executives exhibiting high levels of idealism, low levels of relativism and low Machiavellian tendencies are less likely to attack their negotiation opponents’ network.

Methodology The research setting The Chinese market has generated much international interest since it opened its doors to the outside world in December of 1978. China’s accession to the World Trade Organization on December 11, 2001 only increases its attractiveness. Businesses find the Chinese market extremely attractive because of the large population of the country, the existence of a ready and literate workforce, an increasing per capita gross domestic product (GDP), and its role as a leader in international trade. With a population of 1.297 billion projected for 2003 (Wetzel, 2002), China is the world’s largest consumer market. While the size of the market remains relatively steady because of a yearly 1 percent population growth rate, the economic power of the market is increasing. Per capita GDP is rising steadily, resulting in more disposable income for the Chinese consumer. In 2001, China’s per capita GDP was US$912. This was expected to increase to US$969 in 2002, and US$1,030 in 2003 (Wetzel, 2002). While these dollar values may seem small compared to developed countries per capita GDP (e.g. US$35,897 and Japan $37,676), actual purchasing power is higher then the figure indicates. China’s 2000 per capita GDP of US$850 translates into $4,700 of actual purchasing power. This coupled with the large population of China creates attractive business opportunities. China has a competitive education system with a low national illiteracy rate (Woo, 1999). This creates an inexpensive, educated, literate workforce as well as educated, literate consumers. In addition, China is emerging as a world leader in international trade. China, with a total value of trade (imports and exports) for 2000 of US$509.6 billion, ranked fifth among the largest world markets in terms of trade volume. The attractiveness of the Chinese market has drawn increased international interest that has led to a steady increase in foreign direct investment (FDI) since 1979. China remains the leading developing country recipient of FDI, adding $46.9 billion in 2001 for a cumulative total of $395.2 billion (Wetzel, 2002). Given these characteristics, China’s role in world trade is increasing and will only continue to increase. China will be a major player in shaping the global economy of this new century. Understanding this vast market’s ethical mindset is essential for Western business to deal effectively with the current and potential suppliers, distributors, customers, and negotiation counterparts.

The whole society seems to have been taken over by money worship, with people over-emphasizing their material interests, and putting profit before anything else.

This “money power” mentality has translated into an increased level of corruption, deceit and dishonesty in business dealings as evidenced by offering fake goods, defaulting in repaying debts and cheating customers and business partners (Hong, 2001). Au and Tse (2001) in examining marketing ethics among Chinese managers in SMEs, found that perceived importance of money significantly affected the ethical position of the respondents. The authors explain that people who value money/profit may seek ways to increase their monetary wealth even at the expense of behaving unethically. The study also reported that individuals with high levels of egoism, a form of Machiavellianism opportunistic behavior, tend to behave unethically. Studies looking at the level of Machiavellianism in Chinese respondents are scarce. Examining the level of Machiavellianism among Chinese banking executives, Siu and Tam (1995) found Chinese banking executives in Hong Kong have lower levels of Machiavellian tendencies than those following other career paths (e.g. purchasing and marketing managers). Based on the above discussion related to ethical ideologies, Machiavellianism, and negotiation tactics we provide the following hypotheses: H1. Chinese executives exhibiting high levels of idealism, low levels of relativism and low Machiavellian tendencies are less likely to make false promises to their negotiation partner. H2. Chinese executives exhibiting high levels of idealism, low levels of relativism and low Machiavellian tendencies are less likely to engage in traditional competitive bargaining (TCB) tactics. H3. Chinese executives exhibiting high levels of idealism, low levels of relativism and low Machiavellian tendencies are less likely to engage in the misrepresentation of information to constituents. H4. Chinese executives exhibiting high levels of idealism, low levels of relativism and low Machiavellian tendencies are less likely to engage in inappropriate information gathering.

Sampling The difficulties associated with conducting research in transitional economies like that of China, and the absence of sampling frames for the present study’s specific population of interest necessitated the use of in-country-contacts to identify specific participants (Teagarden et al., 1995). Data were collected from a sample of 300 Chinese managers, with budgetary and personnel responsibility (of greater than five persons), working in the Tianjin Economic-Technological Development Area (TEDA) in Tianjin, People’s Republic of 88

Business-to-business negotiating in China

Journal of Business & Industrial Marketing

Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

Volume 22 · Number 2 · 2007 · 84 –96

China. China’s third largest city, Tianjin is located on the Hai River in Northeastern China and connected to the Yangtze River by the Grand Canal. This seaport is the leading port in Northern China and the country’s second-largest manufacturing center. Responding managers were contacted via academics and research assistants. The survey was selfadministered and distributed and collected by using the drop off/pick up method. The surveys were delivered on the first day of the workweek and collected at the end of the same week. This procedure was repeated for all non-responding managers. This resulted in an operational data set of 140 respondents, for a response rate of 46.7 percent. The sample size obtained by the present study is comparable to those obtained by previous studies utilizing Chinese managers (Redfern and Crawford, 2004; Siu and Tam, 1995; AtuaheneGima and Li, 2002; McDonald and Zepp, 1988). The sample size for these studies has ranged from as low as 50 managers to as high as 157 with an average sample size of 106 respondents. Since information regarding non-respondents was not provided, it is difficult to discern if any non-response biases exist. However, it has been argued in prior studies of cultural phenomenon across borders (i.e. Shane et al., 1995) that no theoretical evidence exists that suggest a significant nonresponse bias influence on culturally generated data. Given the tendency of Chinese to distrust US research activities (Sommer et al., 2000), data collection was conducted by a native Chinese and a coauthor of the present study during the period between February-June, 2004. The back-translation method was utilized to translate the survey from the source language (English) to the target language (Chinese). First, a native Chinese and a coauthor of the present study translated the scale into Chinese, and then a second colleague translated the survey back to English. The translated English version was checked for cross-cultural equivalency and accuracy. Additionally, given the sensitive issues discussed in the survey, the potential for social desirability bias is present and every effort should be made to reduce it. The present study dealt with this issue by guaranteeing respondents’ anonymity. Guaranteeing respondents’ anonymity has been routinely employed in ethics studies as a way to reduce social desirability bias (Randall and Fernandes, 1991; Ross and Robertson, 2003; Kwong et al., 2003). The present study guaranteed respondents’ anonymity in all data collection phases. The cover letter assured respondents that this was an academic study conducted by a team of university professors, respondents’ anonymity was guaranteed as their name and contact information was not asked for and the survey did not provide the respondents with a blank space to provide this information (Randall and Fernandes, 1991). Table I provides a summary of the sample’s demographic profile. The sample had an average of nine years of work experience, with an average of five years in their current position. Respondents were employed by organizations operating in various sectors of the Chinese economy (i.e. retail and wholesale 50.7 percent, manufacturing 20.7 percent; and services 28.6 percent). Of the total sample there were 58.2 percent males and 41.8 percent females. The majority of the sample (92 percent) had a college or graduate degree. Every attempt was made to have a broad distribution across the organizational and individual demographic categories of gender, education and type of economic

Table I Sample demographic profile (n ¼ 140) Demographic variable

Gender (%) Male Female

58.2 41.8

Education (%) Less than college College degree or higher

8.0 92.0

Type of business (%) Retail/wholesale Manufacturing Services

50.7 20.7 28.6

Years in business (O) Years in current position (O)

9 5

activity of participating organizations and their respective managers. Measurement In order to obtain reliable information from the respondents, established and validated scales were selected for data collection. The instrument consisted of four key sections. The first section contained basic demographic characteristics including age, educational level, occupation, and gender. These variables were included to account for any differences that may exist between individuals along the variables under investigation (Beltramini et al., 1984). In the second section, the respondent’s predominant ethical ideology or perspective was measured using the Ethics Position Questionnaire (EPQ) developed by Forsyth (1980). This consists of two scales, each containing ten items; one is designed to measure idealism, the acceptance of moral absolutes, and the second is designed to measure relativism, or the rejection of universal moral principles. Respondents were asked to indicate their agreement or disagreement with each item using a five-point Likert format where a 5 indicated strong agreement with a statement. Numerous previous studies (Davis et al., 1998; Lee and Sirgy, 1999; Attia et al., 1999; Singhapakdi et al., 1994) have applied the EPQ in Asia and demonstrated the scale’s validity and reliability. For example, Redfern and Crawford’s (2004) factor analysis of the EPQ in the People Republic of China revealed two dimensions that significantly overlapped with the idealism and relativism dimensions found by Forsyth’s (1980) original study. For the present study, both constructs achieved acceptable levels or reliabilities (0.79 and 0.83 respectively). Machiavellianism was measured using the MACH IV scale developed by Christie and Geis (1970). This scale contains 20 items, with ten items worded in a Machiavellian direction and ten items worded in the opposite direction. Each respondent was asked to indicate either agreement or disagreement with each of the twenty items using a five-point Likert scale where a 5 indicated strong agreement. The scale has also been validated using consumers in the USA and several foreign countries’ (Russia, USA, Japan, Hong Kong, Egypt, Lebanon, Saudi Arabia, Oman, and Kuwait). Cronbach’s alpha was 0.71. The final section contained the Self-reported Inappropriate Negotiation Strategies Scale (SINS) developed and validated 89

Business-to-business negotiating in China

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Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

Volume 22 · Number 2 · 2007 · 84 –96

by Robinson et al. (2000). This 16-item scale presents a fivefactor model of unethical tactics in negotiation contexts as follows: 1 traditional competitive bargaining (three items); 2 attacking an opponent’s network (three items); 3 misrepresentation of position to the opponent (four items); 4 misuse of information (three items); and 5 false promises (three items).

Table III Regression analysis results – dependent variable: traditional competitive bargaining Variable

Standardized beta

t-test

Significance of t-test

0.176 0.203 0.505

2.175 2.239 5.508

0.032 0.027 0.000

Relativism Idealism Machiavellianism

Notes: F value ¼ 20:387; Significant F ¼ 0:000; Adjusted R2 ¼ 0:368

These factors were evaluated on a seven-point scale that ranged from “Not at all appropriate” ¼ 1 to “Very appropriate” ¼ 7. The five SINS dimensions achieved reliability coefficients somewhat lower than, but consistent with, those obtained by previous studies conducted in the USA (Volkema, 2004; Banas and Parks, 2002). Nunnally (1967, p. 226) notes that in the early stages of research on predictor tests or hypothesized measures of a construct, “. . . reliabilities of 0.6 or 0.5 will suffice”. Table II shows the constructs measured in this study, the number of items for each construct, a sample statement of each construct, and the Cronbach alpha coefficients for the constructs.

Table IV Regression analysis results – dependent variable: attacking an opponent’s network Variable Relativism Idealism Machiavellianism

Standardized beta

t-test

Significance of t-test

0.353 20.175 0.067

3.511 2 1.762 0.751

0.001 0.081 0.454

Notes: F value ¼ 11:087; Significant F ¼ 0:000; Adjusted R2 ¼ 0:241

Data analysis, results and discussion To examine the impact of Chinese executives’ preferred ethical ideology/orientation and Machiavellianism on their perceptions of inappropriate/unethical negotiation tactics, five regression analyses were conducted (see Tables III-VII). Each equation used the executive’s perceptions of: traditional competitive bargaining tactics (equation 1); attacking an opponent’s network (equation 2); misrepresentation/lying (equation 3); misuse of information (equation 4); and false promises (equation 5) as the dependent variable with the three factors of idealism, relativism and Machiavellianism as the independent variables.

Table V Regression analysis results – dependent variable: misrepresentation of information to constituents Variable

Standardized beta

t-test

Significance of t-test

0.013 0.056 0.299

0.137 0.519 2.753

0.891 0.605 0.007

Relativism Idealism Machiavellianism

Notes: F value ¼ 4:430; Significant F ¼ 0:006; Adjusted R2 ¼ 0:112

Table II Study measurements

Construct

Cronbach’s alpha for current study

Number of items Sample item

False promises

2

Promise that good things will happen to your opponent if he/she gives you what you want, even if you know that you cannot (or will not) deliver these things when the other’s co-operation is obtained

0.48

Traditional competitive bargaining (TCB)

3

Make an opening demand that is far greater than what you really hope to settle for

0.54

Misrepresentation of information to constituents

4

Intentionally misrepresent information to your opponent in order to strengthen your negotiating arguments or position

0.59

Attacking opponent’s network

3

Threaten to make your opponent look weak or foolish in front of a boss or others to whom he/she is accountable, even if you know that you will not actually carry out the threat

0.54

Inappropriate information gathering

3

Gain information about an opponent’s negotiating position by trying to recruit or hire one of your opponent’s teammates (on the condition that the teammate bring confidential information with him/her)

0.60

Relativism

7

What is ethical varies from one situation and society to another

0.83

Idealism

10

A person should make certain that their actions never intentionally harm another even to a small degree

0.79

Machiavellianism

15

One should take action only when sure it is morally right

0.71

90

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Volume 22 · Number 2 · 2007 · 84 –96

engage in misrepresentation of information to constituents tactics. These results provide partial support for H3. Use of inappropriate information gathering by Chinese executives was found to be positively related to their degree of relativism (Beta ¼ 0:220, p , 0:05). This factor explained 10.2 percent of the variance in the equation. These results provide partial support for H4. The final equation investigated the determinants of Chinese executives’ engagement in the attacking opponent network tactic. Of the three variables investigated in the equation, relativism and idealism explained 24.1 percent of the variance. Relativism was directly related to the use of the attacking opponent network tactic (Beta ¼ 0:353, p , 0:05). Idealism was found to be inversely related to the use of this tactic (Beta ¼ 20:175, p , 0:010). These results provide partial support for H5. It is interesting to note that while idealism emerged as the most important factor determining respondents’ perceptions of inappropriate negotiation tactics that involves one’s negotiating opponent directly (e.g. making false promises, traditional competitive bargaining), relativism manifested its significant impact on questionable negotiation practices that involves a third party (e.g. inappropriate information gathering, attacking opponent network). These results are consistent with previous research (Volkema and Fleury, 2002) and suggest that Chinese negotiators may be situationists and are more concerned with face saving in direct negotiation by employing negotiation tactics that are less harsh and generally accepted tactics in distributive negotiation. However, when the tactic involves an indirect third party, they may act in a more brutal and unethical manner. This view is further supported by Cohen et al. (1992). The authors contend that in collectivist cultures like that of China, people tend to eschew questionable behaviors that involve one’s extended professional network (i.e. guanxi). Additionally, Volkema (2004) provides an empirical support for the negative relationship between collectivism and the likelihood of use of the attacking opponent’s professional network negotiation tactic. Given the long-term ramification of tactics used against a third party (e.g. a foreign partner), this pattern of results underscores the importance of building trust and long-term relationships in China as a means for reducing the likelihood of such tactics being employed. The strong impact of idealism, compared to that of relativism, on the Chinese negotiator’s ethical judgment is consistent with the findings in the literature. Davis et al. (2001) observed that most studies examining the impact of ethical ideologies on the individual’s ethical judgment, found idealism to be a stronger predictor of ethical judgment than relativism. The contradictory result related to the relationship between idealism and traditional competitive bargaining may be explained by the nature of the negotiation practice in question. Traditional competitive bargaining (e.g. pretending not to be in a hurry, exaggerating opening claims) may be an acceptable and expected negotiation tactic in China. In fact, previous studies (Volkema, 2004; Lewicki and Robinson, 1998) have empirically demonstrated the universal acceptability of such practice and even argue that failure to employ such tactics may create an unfair disadvantage (Dees and Cramton, 1991). The degree of use/abuse of these negotiation tactics may depend on the type of negotiator. While the idealistic negotiator may responsibly

Table VI Regression analysis results – dependent variable: inappropriate information gathering Variable Relativism Idealism Machiavellianism

Standardized beta

t-test

Significance of t-test

.220 2 0.116 2 0.089

2.275 20.1.073 20.812

0.025 0.286 0.414

Notes: F value ¼ 3:966; Significant F ¼ 0:010; Adjusted R2 ¼ 0:102

Table VII Regression analysis results – dependent variable: false promises Variable Relativism Idealism Machiavellianism

Standardized beta

t-test

Significance of t-test

0.022 20.229 20.078

0.224 2 2.091 2 0.702

0.824 0.039 0.484

Notes: F value ¼ 3:041; Significant F ¼ 0:032; Adjusted R2 ¼ 0:080

The first regression equation revealed that the three independent variables explained 8 percent of the variance in the executives’ perceptions of the false promises behavior. Idealism was the most influential variable in this equation (Beta ¼ 20:229, p , 0:05). The direction of the sign indicates a negative relationship between the degree of an individual level of idealism and engaging in actions involving making false promises to a negotiating counterpart. That is, idealistic executives in China are less likely to be involved in such unethical behavior. No significant relationship was found for relativism, and Machiavellianism. These results provide partial support for H1. The second regression analysis examined the impact of relativism, idealism and Machiavellianism on Chinese executives’ propensity to engage in traditional competitive bargaining tactics. The three independent variables explained 36.8 percent of the variation on the equation. Machiavellianism was the most influential factor of the three variables (Beta ¼ 0:505, p , 0:05). This positive relationship indicates that executives in China possessing a high level of Machiavellianism are more likely to become involved in traditional competitive bargaining tactics. Idealism was the second most influential factor in this equation (Beta ¼ 0:203, p , 0:05). The direction of the sign indicates a positive relationship between the degree of an individual level of idealism and engaging in traditional competitive bargaining. As hypothesized, relativism was found to be positively related to Chinese executives’ tendencies to engage in traditional competitive bargaining (Beta ¼ 0:176, p , 0:05). These results provide partial support for H2. Examining the impact of the independent variables on Chinese executives’ engagements in misrepresentation of information to constituents, we found that the three variables explain 11.2 percent of the variance in this equation. Machiavellianism was the only significant factor in determining executive engagement in such tactic (Beta ¼ 0:299, p , 0:05), these results suggest that the higher the level of Machiavellianism among Chinese executives and their negotiation counterpart, the more likely that they will 91

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Volume 22 · Number 2 · 2007 · 84 –96

use these tactics to reduce the risks associated with elaborate and governmentally instituted policies, procedures and rules, the relativist and Mach negotiator may be tempted to abuse these tactics by being deceitful and displaying opportunistic behavior. (Robinson et al., 2000; Volkema, 2004). The insignificant impact of relativism and Machiavellianism on the use of false promises tactic (e.g. making promises that are undeliverable, threaten harm without intent) is worth noting and can be explained in the context of the Chinese culture. Given the importance of the guanxi in doing business in China, negotiators understand and appreciate that such networking can provide them with business dynamic and opportunities. However, they recognize the great level of interdependence among the network members and potential losses associated with or resulting from any unethical behavior, thus they safeguard this relationship by taking a clear-cut or ethical approach to business (Leung and Wong, 2001). In a sense, a Chinese negotiator cannot afford to endanger their guanxi by exhibiting less than ideal ethical behavior. However, these tendencies may be exhibited when dealing with outsiders. The impact of Machiavellianism on Chinese executives’ perceptions of inappropriate negotiation tactics may be explained by several factors. First, given the hostile new market economy that witnessed many incidents of extortion, murder, tax evasion and theft, coupled with the competitive pressure (a prerequisite for opportunistic and unethical behavior) that is required to exist under the new economic order, Chinese managers may still feel that an opportunistic behavior is needed to survive in the current turbulent times. Second, in such a highly competitive environment, individuals form a competitive, rather than a cooperative disposition. Previous research showed that negotiators exhibiting a highly competitive disposition are more likely to accept unethical negotiation tactics than their cooperative counterpart (Robinson et al., 2000). The significant role of Machiavellianism on ethical perception found by the present study is consistent with the literature (see, for example, Ayios, 2003) and can be explained in the context of the Chinese culture. Previous research has shown that cultures characterized by high power distance and uncertainty avoidance, such the Chinese culture, produce a lack of trust with the unfamiliar, and outsiders are viewed with suspicion and distrust (Volkema, 1998, 2004; Volkema and Fleury, 2002). Second, in the Chinese culture, relationship and favor guanxi are of great importance (Leung and Wong, 2001). There is a great focus on trust and building relationships and doing business with those people in the inner circle. To the Chinese, engaging in behaviors that exploit the system is permissible; however, behaviors that exploit colleagues or an inner circle member are frowned on. Given the nature of the relationship among negotiating parties, the Chinese negotiator’s counterpart is an outsider that is not trustworthy, and thus, deserves exploitation

1994). Given the presumption of conflicting interests among the negotiating parties, it has been shown that many negotiators will attempt to seek advantages through Machiavellian behavior or other unethical means (Lewicki et al., 1994). The present study investigated the impact of Chinese executives’ preferred ethical ideology and Machiavellianism on their perception of unethical negotiation tactics. The results of this study support the contention that these variables are closely associated with Chinese executives’ perceptions of unethical negotiation tactics. Since little research has focused on the ethical mindset of the Chinese negotiators, the findings from this study can be used to help multinational companies doing business in China to become more aware of their host country’s ethical environment. International managers should also find the results of this study intriguing and helpful in their dealings with associates in China. The current Chinese environment is the result of a difficult and disappointing transition to a free market economy, this coupled with the absence of a welldefined legal system has resulted in relaxed and consequences-free attitudes among Chinese towards ethical negotiation. This situation makes it imperative that multinational corporations, joint venture partners to Chinese firms and international managers operating in China codify the desirable and undesirable behavioral activities of the Chinese negotiating partner, host country staff, workers, customers, and suppliers. Such effort needs to be developed with the Chinese culture, economic challenges and past history in mind, otherwise any effort to codify behavior is bound to fail. Western and Chinese joint venture partners must agree on a middle ground of firm-specific policies and codes of ethics. For example, since guanxi is an acceptable behavior in China, Western firms operating in China may adapt their policies by allowing some acceptable level of nepotism (Robertson et al., 2003). Western firms operating in China should be aware of and able to influence the ethical sensitivity of their Chinese partners and employees by establishing a culture-sensitive, but strictly imposed, code of ethics to govern the firm’s relationship with its Chinese constituents and curb any tendencies for unethical behavior. As the theory of planned behavior (Ajzen, 1991) suggests, individual perceived behavioral control can influence behavior directly. Perceived behavioral control refers to the degree to which an individual feels that performance or nonperformance of the behavior in question is under his or her volitional control. Individuals are not likely to form a strong intention to perform a behavior if they believe that they do not have any resources or opportunities to do so even if they hold positive attitudes toward the behavior. Individuals may have total control when there are no constraints of any type to adopting an unethical behavior. Therefore, instituting a culturally sensitive, clearly defined and well-communicated code of ethics may contribute to reducing incidents of unethical behavior by serving as a constraint on such undesirable behaviors. Such effort may be effective given the high levels of power distance and uncertainty avoidance most characteristic of the Chinese culture and the documented positive relationship between these cultural traits and adherence to formalized deontological rules of conduct (Vitell et al., 1993). In addition, Chinese executives exist in a system with high levels of legal hostility (the legal environment favoring local

Conclusion and managerial implications Several factors have been described as predictors of ethical behavior including personality variables (Hunt and Chonko, 1984), demographics (Volkema, 2004), ethical orientation (Al-Khatib et al., 1997), trust (Al-Khatib et al., 2005), cultural values (Vitell et al., 1993), opportunism (Al-Khatib et al., 2005) and economic factors (Ford and Richardson, 92

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Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

Volume 22 · Number 2 · 2007 · 84 –96

businesses regardless of just cause) (Cavusgil et al., 2004). If Western firms impose explicit legal contracts on their Chinese counterparts, the counterparts may perceive such action as a means of controlling them. This can raise the inclination to behave more opportunistically. Instead, reliance on trustbased exchange may result in the most effective and efficient negotiation process. Western standards and norms of ethical business have not yet been established in the Chinese business climate. Therefore, in order for Western businesses investing in China to succeed, the process of building trust needs to be understood and managed. Western investors, who focus on building personal trust that emulates healthy family and friend relationships, will find that such an approach to personalization of trust will promote a more congenial and more productive atmosphere than formal, arm’s-length contacts and contracts (Ayios, 2003). The importance of nurturing trust to curb opportunism in legally hostile markets has been supported in previous studies (Cavusgil et al., 2004). Moreover, Understanding the Chinese negotiator’s ethical mindset provides a valuable decisionmaking tool for firms interested in this market. The strong emphasis that the Chinese culture places on trust as the backbone of all social, organizational and transactional relationships influences both firm-level perceptions of transaction costs and the preference for FDI as an entry strategy (Shane et al., 1995). International firms capable of developing trustworthy relationships with Chinese strategic partners can reduce transaction costs and increase FDI in China. Finally, previous research (Volkema and Fleury, 2002) has shown that situational factors (e.g. possibility of future/long term business with the negotiating partners, ethicality of the negotiating counterpart, the degree of favorability of the negotiation condition) can dramatically affect the negotiator’s perception of the appropriateness of negotiation tactics and the likelihood of their use. It is possible for Western negotiators to influence their Chinese counterpart’s choice of appropriate negotiation tactic by discussing long-term business opportunities, exhibiting high ethical standards during the negotiation process and by understanding the conditions under which their Chinese partner is negotiating. Such understanding can then be integrated into training programs tailored to each specific negotiation situation and offered to Western negotiators as part of their preparation for the negotiation process (Volkema and Fleury, 2002).

ethical beliefs and orientation in China varies by region (Redfern and Crawford, 2004), the results of the present study cannot be generalized to the total population of the People’s Republic of China. There are many potential venues for future research. Future research should be conducted to determine the generalizability of the results of this study by investigating negotiation ethics in other countries of the Pacific Rim region. Such investigation will help us understand the diversity of ethicality in this important region of the world and the extent of ethical values convergence in the region. The longitudinal monitoring of Chinese negotiators’ ethical beliefs and judgments will clearly provide a more refined understanding of the degree to which Chinese ethical values resemble Western ethical values. Finally, future research should also examine other potential and influential factors such as trust, opportunism, justice and religiosity. These factors may provide additional insight into the determinants of Chinese negotiators’ ethical judgments. Overall, it is hoped that the present study’s findings have filled the gap in the negotiation ethics literature and added to our understanding of the ethical mindset of the Chinese negotiator.

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Limitations and direction for future research Given the sensitivity of the issues discussed in the survey and despite the fact that every attempt was made to prevent against this influence, social desirability bias may have been a factor in responses to some of the questions. Given the existing impediments to sampling and data collection in the sampled countries, the sampling method used is nonprobabilistic, which calls for consideration of the results as exploratory. The present study’s sample is drawn from the Northeastern region of China that enjoys the highest industrial output, GDP and foreign investment in the country (China State Statistical Bureau, 1999). Since regions within China are isolated geographically and politically, and the speed of modernization and educational achievement varies greatly (Goodman, 1997) and since 93

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Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

Volume 22 · Number 2 · 2007 · 84 –96

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Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu

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Further reading Akaah, I.P. and Riordan, E.A. (1989), “Judgments of marketing professionals about ethical issues in marketing research: a replication and extension”, Journal of Marketing Research, Vol. 26 No. 1, pp. 112-20. International Construction (2004), “Global anti-corruption”, International Construction, Vol. 43 No. 2, p. 7. Rao, A. and Schmidt, S.M. (1998), “A behavioral perspective on negotiating international alliances”, Journal of International Business Studies, Vol. 29 No. 4, pp. 665-93. Rawwas, M.Y.A. (1996), “Consumer ethics: an empirical investigation of the ethical beliefs of Austrian consumers”, Journal of Business Ethics, Vol. 15 No. 9, pp. 1009-19. Rawwas, M.Y.A. and Singhapakdi, A. (1998), “Do consumers’ ethical beliefs vary with age? A substantiation of Kohlberg’s typology”, Journal of Marketing Theory and Practice, Vol. 6 No. 2, pp. 26-38. Vitell, S.J., Lumpkin, J.R. and Rawwas, M.Y.A. (1991), “Consumer ethics: an investigation of the ethical beliefs of elderly consumers”, Journal of Business Ethics, Vol. 10 No. 5, pp. 365-75.

Corresponding author Jamal A. Al-Khatib can be contacted at: jaalkhatib@ stthomas.edu

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96

Securing network legitimacy in China’s telecommunication market Brian Low School of Marketing and International Business, University of Western Sydney, Penrith South, Australia

Wesley J. Johnston Centre for Business and Industrial Marketing, J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia, USA, and

Jennifer Wang College of Humanities and Development, China Agricultural University, Beijing, China Abstract Purpose – The purpose of this paper is to establish the importance and approaches in securing an organization’s legitimacy from the network community of customers, suppliers and manufacturers, including private investors and state-owned institutions when marketing their products. Design/methodology/approach – The paper presents an inductive interpretative approach complimented by action-based research founded on inquiry and testing. Findings – The paper finds that the key to legitimacy success involves using legitimacy orientations to demonstrate commitment to the interests of constituents, acquiring legitimacy from them, but concurrently considering the central government’s influence on a firm’s legitimacy performance. Research limitations/implications – The multiple interactions proposed in this paper remain untested and might have to be modified pending further empirical testing and analysis. Practical implications – In China’s telecommunication market, a company’s legitimacy emanates first and foremost from the development and commercialization of innovative and creative technological solutions. This requires good, creative management of technological resource and activity links, connecting the company’s technology to network constituents which include local manufacturers, carriers, software developers, investors. Originality/value – This is the first published paper that examines the proposed interactions among legitimacy orientations, alignments, and performances from a “market-as-network” perspective in a dynamic, transitional Chinese telecommunication market. Keywords China, Telecommunication networks, Legal process Paper type Case study

An executive summary for managers and executive readers can be found at the end of this issue.

cooperation and the exchange of favors with competitive organizations and government authorities (Park and Luo, 2001). The latter includes accessing, interpreting and codifying government policies as it relates to technical, marketing, and equity alliances and processes (Low and Johnston, 2005) which is especially important since these policies will ultimately impact on the firm’s performance. Many of these alliances and processes take place within a network community of powerful stakeholders, often with conflicting interests. In a transitional Chinese economy, in particular China’s telecommunications sector that is undergoing structural reforms, enterprises have often been forced to operate within a range of settings, often subjected to different “rules of the game” (North, 1990). Such settings have been known to range from a highly marketised setting to one that is highly controlled and regulated, as is the case with state-owned enterprises. A key question is identifying the positions to take along this continuum of settings. This often requires connections and personal ties with Chinese executives and officials. These connections, ties or quanxi in turn help enterprises achieve more institutional support in mitigating challenges arising from market and institutional uncertainty (Peng and Luo, 2000). But while quanxi is important, lying at the heart of China’s social order, its economic structure, and its changing institutional landscape (Don and Dawes, 2005), its

Introduction One need not be an expert on China to appreciate the significance of quanxi in achieving market success (Leung et al., 1996; Guthrie, 1998, Park and Luo, 2001). Defined as “the set of personal connections which an individual may draw upon to secure resources or advantages when doing business or in the course of social life” (Davies, 1995), quanxi has been identified as a critical business success factor by executives involved in business (Leung et al., 1996). Through networks of quanxi, Chinese executives and officials can perform many functions in the production and transformation of a firm’s resources and activities (Leung et al., 1996; Guthrie, 1998). Quanxi has also been used as a strategic mechanism to overcome competitive and resource disadvantages through The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing 22/2 (2007) 97– 106 q Emerald Group Publishing Limited [ISSN 0885-8624] [DOI 10.1108/08858620710730212]

97

Securing network legitimacy

Journal of Business & Industrial Marketing

Brian Low, Wesley J. Johnston and Jennifer Wang

Volume 22 · Number 2 · 2007 · 97 –106

popularity as a theoretical mechanism in explaining businessto-business (B2B) exchanges has been limited to the role of an individual or network of individuals. It involves person-toperson relationships, and often entails an escalating reciprocity of personal favors and acts (Yang, 1994). In sociological terms, quanxi consists of personal ties or social bonds (Walder, 1986) with some management consultants describing it as “the informal connections so essential to gaining approval for or access to just about everything in China” (Tsang, 1998, p. 64). And while quanxi resonates with non-contractual mechanisms that govern the exchange process between firms (Gundlach and Murphy, 1993), and where concepts of power and dependence have been used to explain non-contractual governance in B2B exchange by “focusing on the control one member has over [other exchange partners]” (Hunt et al. 1985), quanxi does not fully explain B2B inter-organizational relational exchanges, especially the forms and methods of governance that controls the production, transformation and consumption of firm’s resources and activities. From an industrial network perspective (Easton, 1992, Hakansson and Johanson, 1992), a firm’s success or failure does not lay with a network of individuals but with the resources they own and the activities they perform in transforming these resources. While important, resources owned and activities performed are often not as important as their relative attractiveness as perceived by others in the network. Their perceived attractiveness depends on the firm’s ability in relating to others in the network, in wanting their resources and the activities they perform. Firms that relates to other firms better than others (see for instance work by Hakansson and Snehota (1995)) are said to be attractive because of their network position (Mattsson, 1988, Henders, 1992, Low, 1997). The attractiveness of a firm’s resources and activities are located not so much within the firm but reside in the inter-firm networks in which firms are placed (Nohria, 1992; Gulati, 1999). Over time, firms in the network achieved a sense of legitimacy through the roles they play in the production and transforming process of network resources, reflected in the firm’s network position.

(Parsons, 1977, p. 358). We extend Parson’s consideration by linking it with network theory, thus allowing its application in B2B markets. We described legitimization as the process in which specific “network and relationship legitimacy orientations” are generated. Over time and over numerous interactions, these orientations are subsequently accepted as “approved features of current and future interactions, and relationships” in a given network setting. In this way, legitimization (or network legitimacy) may be described as social, economic, technical and political maneuvering processes that a firm undertakes to ensure quality and fit between its legitimacy orientations and its acceptance by network constituents. These constituents may include customers, suppliers, manufacturers, investors, and privately- and publicly-owned institutions. Legitimacy orientations include pragmatic, moral, and cognitive legitimacy (Suchman, 1995). In a B2B marketing setting, Wei and Bello (2004) added state-oriented legitimacy, partner-oriented legitimacy, and customer-oriented legitimacy. In this manuscript, we have adopted Wei and Bello’s classification, for two primary reasons. First, their classification is consistent with our network approach in terms of targeted audiences or actors in the network (customers, firms, provincial and regional authorities, and central government officials) when establishing a firm’s legitimacy. Second, it was developed with a B2B Chinese market orientation, making it particularly appropriate when applying and analyzing them in the research context of China’s telecommunication sector. We have, however, added global-oriented legitimacy to their conception. Amid the backdrop of an increasingly globalize telecommunication market place, global-oriented legitimacy involves resource and activity sharing programs that telecommunication giants like Motorola, Nokia and Lucent undertake with local Chinese equipment manufacturers. This in turn helps facilitate these manufacturers’ access to and participation in global markets, equity, and technology process. Active and constructive participation in programs like joint manufacturing, marketing, technical alliances, and contributions to social causes and regional developments in turn have earned these companies legitimacy among significant local network constituents, including local customers, suppliers, equipment manufacturers, carriers, provincial and central government authorities. These orientations, however, have to be justified. In an industrial network system, justification takes place in a context of interdependencies of both a complementary and a substitute nature. It involves both cooperation and competition between network constituents. Over time, and over many exchanges and interactions, these orientations are linked to sanctioned relational behavioral actions in the industrial network system. In China’s telecommunications sector, network justification and the behavior of firms in the network emanates first and foremost from the development and commercialization of innovative and creative technological solutions. This requires creative management of technical resource and activity links, connecting a firm’s technology to other firms in the network. As a result, cooperative and competitive market, equity, research, software, and training alliances and ventures are formed between network constituencies. Justification is therefore a critical and inevitable part of the network legitimacy

The concept of network legitimacy Organizational legitimacy has been defined as a quality of congruence between an organization’s action and social values (Dowling and Pfeffer, 1975). With its root in social and political theory, and in its original conception when used in work in organizational analysis, Weber (1947) suggested that there were three grounds for granting and claiming legitimacy – rational, traditional and charismatic. The notion of organizational legitimacy was subsequently extended to include relationships between organizations and their environmental context through Pfeffer’s (1982) “institutionalization theory,” which is widely used when studying the adoption of particular organizational strategies (DiMaggio and Powell, 1983). The central tenet of institutional theory has been that organizations need to achieve and maintain environmental legitimacy in order to survive. Firms survive by conforming to institutional norms within the environment, in turn earning them legitimacy (DiMaggio and Powell, 1983; Hillman and Wan, 2005). The process of legitimacy itself may be seen as two components, referred to as legitimation and justification 98

Securing network legitimacy

Journal of Business & Industrial Marketing

Brian Low, Wesley J. Johnston and Jennifer Wang

Volume 22 · Number 2 · 2007 · 97 –106

processes, being the establishment and nurturing of a firm’s network legitimacy among the network constituents.

Figure 1 Legitimacy orientations, justifications and outcomes – a network perspective

The significance of network legitimacy in China Establishing and nurturing a firm’s network legitimacy is important because it sensitizes managers to the relationship between an organization’s survival and the network environment beyond mere quanxi. Network legitimacy can lead to returns of economic, social, technical and political capital through an appropriate identification of network opportunities and constraints. In the telecommunication sector, these opportunities stem from innovative technical solutions that originate from the management of resource and activity links, which connect a firm’s technology. As a result, existing technological networks are disrupted, new ones created, connecting the interrelated resource and activity parts of emerging networks, and transforming old industrial production, procurement and consumption. Potentially, network legitimacy could be seen as a key to long-term survival and success in China. Indeed, it is not because of poor products or a lack of resources that companies have failed in China but rather because of inappropriate or ineffective efforts to build legitimacy (Ahlstrorn and Bruton, 2001). Some foreign businesses have also been known to find themselves in a hopeless situation in China (Vanhonacker, 2000), once they are labeled illegitimate. And as China moves from a centrally controlled to a market-based economy, making appropriate realignment decisions to better reflect structural transitional changes, and its impact on network resource and activities reallocation are becoming increasingly difficult and complex. For many companies, the challenge has been identifying management actions to take along the spectrum from having state controlled enterprises to a highly marketized environment (Peng and Luo, 2000; Nolan, 2001; Davies and Walters, 2004). The key question has been: “How does marketization affect the way in which Chinese enterprises manage their resource dependency” (Davies and Walters, 2004). Or, within the context of this paper, what would companies have to do to maintain their network legitimacy in transforming old to new industrial production, procurement and consumption? While some companies have, and will continue to make a virtue of their time and investments in the network, many face the prospect of “network legitimacy redundancy” unless they can build on their legitimacy in the presence of constant structural changes. Following this line of reasoning, we attempt to elucidate how network legitimacy affects, and is affected by, network dynamics that reflect network opportunities (e.g. deregulations, industrial growth, China’s entry into the World Trade Organization (WTO), introduction of new technologies) or threats (anti-competitive behavior, powerful stakeholders, cross-subsidies) and also how legitimacy justification behavior moderates the relationship between legitimacy orientations and a firm’s network legitimacy. Figure 1 provides a preliminary model of proposed interactions among legitimacy orientations, justification, and a firm’s network legitimacy. Legitimacy orientations and justification, however, must be considered in interaction. That is, particular network dynamics produce changes in justification, while justification in turn determines what if any changes are necessary in legitimacy orientations. The

resulting firm’s network legitimacy produces changes in legitimacy justifications, and through a process of learning and unlearning, changes in legitimacy orientations. In this way, legitimacy orientations are both the medium and outcome of a firm’s network legitimacy.

Network legitimacy and context – China’s telecommunications market Contingencies of legitimacy orientations and legitimacy justification behavior appear to be context specific. Like its banking, aviation, shipping and steel sector, China’s telecommunication sector is undergoing major structural changes. As this sector transforms itself from a centrally controlled sector to a semi-capitalist model, global telecommunication giants face increasing pressures to transform their local production, procurement and consumption of telecommunications products if they are to successfully compete in a newly deregulated environment. Often, these challenges involve ongoing tensions between: processes which take stock of the firm’s legitimacy orientations which is assumed in behaving legitimately; and justification processes which attempt to maintain the relevancy of these orientations in a dynamic telecommunication sector. Both processes are important in our model on network legitimacy. They occur simultaneously, with each assuming the other in its operation through the process and sanctions of network interactions and relationships. However, the telecommunications sector is also a rich setting in our legitimacy analysis for three reasons. First, China’s telecommunication policies remain underpinned by a desire to maintain control of a strategic interest, as well as the protection of vested interests within the state-controlled economy. Allowing further competition would mean confronting these powerful groups with vested interests. This could be expensive. While the Government is committed to structural reform, telecommunication policies continue to be affected by personal, institutional, national, and security considerations. Second, the development of this sector has been given the highest priority by China’s central government, with the knowledge that telecommunications facilitate economic growth and brings social and cultural reforms, especially in western China. Unfortunately, this has so far not materialized. Instead, telecommunication reforms are mainly confined to cities and provinces along the eastern seaboard. These regional differences have raised concerns between the “haves” and “have nots.” For instance, according to statistics issued for the first quarter 2004, western China has only 11.7 phone sets per 100 people, 24 percent fewer than eastern 99

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China. Phone service is also available to only 53 percent of the administrative villages in western China, 27 percent lower than the national average level. Third, China’s telecommunication sector is best viewed as a network community held together by entrenched and conflicting political, social, economic, technological and legal ties that have evolved over time (Low, 2005). Within this community, various government ministries (principally through the Ministry of Information Industry (MII)), carriers, equipment manufacturers, institutions, and investors have competed and cooperated, but always with the central government having the final say (Low, 2005). As Chen Jinqiao, the director of China’s MII’s Institute of Telecom Policy put it:

alliances with regional and provincial authorities, especially since telecommunications facilitate social and/or regional development. As China seeks to become a global telecommunications superpower, telecommunications companies like Motorola, Lucent and Nortel are increasingly seeking out technical and research alliances as a key to long-term success in achieving their technological legitimacy. They are actively collaborating with local partners (equipment manufacturers), customers (carriers), and the central Government, and helping them participate in global technical and research alliances programs. As a result of these orientations, legitimacy justification requirements espoused by network constituents are being met (Low, 2005). These telecommunication companies should then reap the benefits of positive legitimacy outcomes. These may include: recognition as a good corporate citizen; possible access to privileged information, including timing and awarding of licenses; preferences and incentives in setting up local research and development alliances; and award of local manufacturing licenses. The alternative is run the risk of “legitimacy orientation misfits” leading to “legitimacy redundancy,” where these companies no longer have a role to play in the network. We start with an examination of the four different types of legitimacy orientations foreign companies can bring to the network. In doing so it raised some analytical issues concerning the previous question as it relates to analyzing companies legitimacy orientation using a network perspective. This is discussed in the next section. The following section brings together the links between legitimacy orientations and legitimacy justification behavior through an analysis of Motorola China. The final section, concludes with a revisit of our proposed theoretical model, and suggestions for future research on the process of network legitimacy in China’s telecommunication sector.

The current set-up, though not perfect, reflects three unique conditions in China: government-run corporations will remain the main driver for the national economy, serious disparity in local markets (among the major operators and telecommunication manufacturers), and telecom reform must proceed in step with the economic system which is also controlled by the government.

The ambiguities and paradoxes of these contexts are manifested in pressures for maintaining and renewing network legitimacy. This, in summary, is the managerial dilemma global telecommunication giants faced in a dynamic telecommunications sector that is partly state controlled, partly market determined – in a network community of conflicting personal and institutional vested interests.

Overview of study Relationships with various network constituents are critical in establishing network legitimacy. These constituents are linked together by their performance of industrial activities (sales, marketing, production, logistics, administration, research and development, etc.), employing or consuming various types of resources (technical, financial, human, legal, etc.) to produce other resources. There is therefore heterogeneity in legitimacy orientations across organizations, and about the major elements of orientations to adopt in a dynamic telecommunication sector, as new networks are created, connecting the interrelated resource and activity parts of new, emerging networks, and transforming existing industrial production, procurement and consumption of telecommunication goods and services. Significantly, legitimacy orientation and legitimacy justification behavior takes place in the context of continuously disrupted networks. These disruptions may be due to broad political, social, and economic reforms that impact on the production, distribution, sales and consumption of telecommunication products and services. Or it may be caused by telecommunication-specific industry factors such as the introduction of new technologies, evolution of new channels, increased product commoditization, or increased market competition. Because of these disruptions, telecommunication companies need to realign their network legitimacy or faced “network redundancy.” If these companies successfully realign their “orientations,” and achieve a “dynamic fit” with network disruptions, then “legitimacy justifications requirements” are achieved. For instance, telecommunication companies that increasingly see social responsibility as a key to long-term legitimacy are adopting a state-oriented legitimacy through the establishment of social

Network legitimacy orientations In a B2B Chinese market context, Wei and Bello (2004) introduced the notion of organization legitimacy built around state, partner, and customer orientation. We extend these orientations to include global orientations but in the process analyze them in the context of B2B relational exchanges seen from an industrial network perspective and examine these orientations in the research context-specific setting of the Chinese telecommunication sector. We start with an analysis of global orientation. Global orientation This refers to the company’s ability to help local network constituents gain access to global markets, equity, and technology. This is especially critical when China starts implementing its WTO commitments, potentially signaling the end of state-led telecommunications policies and the protection of indigenous firms. China’s central government now looks favorably on global, publicly-listed companies especially in joint ventures and alliances with local Chinese partners. Global companies like Motorola, Siemens and Lucent with technological legitimacy are also favorably viewed as China seeks to become a “science superpower” through telecommunications. For instance, in China’s attempt to develop TD-SCDMA, its own version of 3G, companies’ with global 3G experience are in a better position 100

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to cultivate partnerships with local network constituents, and thus acquire their network legitimacy compared with companies without such experience.

analysis (Stone and Brush, 1998; Birkinshaw and Gibson, 2004). Ours are more speculative since the analysis of these orientations from a network perspective has never before been examined. Further, this perspective does not easily lend itself to quantification. But if these orientations and their implications are to be understood, their differences and their implementation in a network setting need to be analyzed. In conducting this analysis in a “high velocity market” landscape (Eisenhart and Martin, 2000), such as China’s telecommunications sector, we have adopted a process orientation. This allows us to look at and track a company’s legitimacy orientation, its justification, and its evolution as illustrative metaphors. We regard these evolutions as nothing more than the temporary and transient effects of changes in network competition and cooperation, which will be demonstrated by our inductive analysis of Motorola China. Several notes first need to be considered when analyzing a company’s legitimacy orientation from a network perspective. We will now discuss them.

Provincial and state orientation China’s telecommunication reforms have not generally provided the same level of incentives for carriers operating in provinces in the Western China hinterland compared with its eastern counterparts. Businesses and households in western China therefore do not have the same level of access to telecommunication services compared with eastern China. Strong institutional gaps also arise from a lack of market, technical and political support through the central government’s diminished role. These provide the ideal contexts and incentives for companies to participate in regional telecommunication reforms and contribute to social and economic development in Western China. Such contributions in turn help position these companies as good corporate citizens, establishing and reinforcing their network legitimacy. Further, opportunities are created to extend this legitimacy from state and provincial governments to central government level.

Analysis of firm’s legitimacy orientations in industrial networks – some useful notes

Partner orientation Partner-oriented legitimacy refers to a company’s ability to work with local equipment manufacturers. Historically, these alliances, particularly manufacturing, mirror the sector’s national competitive development policy (Low, 2005). This has resulted in a market structure where local manufacturers like Huawei, Zhongxing and Datang hold substantial market power, often supported by governmentled polices. While lauded in the formative years of the sector’s evolution, these policies are no longer tenable in an increasingly liberalized telecommunication sector. In order to survive, these manufacturers now openly acknowledge the importance of becoming part of the international sales and marketing, technical, and merger alliance process. Companies that could help facilitate manufacturer access to this process are likely to enhance their network legitimacy.

Companies wanting to establish network legitimacy have at their disposal technical, financial and social resources to call on. These resources are combined and transformed through opportunities in manufacturing, technical and marketing alliances. As China implements its WTO commitments leading to the rationalization of anachronistic network structures, windows of opportunity exist for companies to further establish, nurture and redefine their network legitimacy through these alliances. This task, is however, complicated in four different ways. First, while our conceptualization of legitimacy orientations may appear to be “confined” to a particular level (see Figure 1), in reality this is not the case. For instance, a company’s legitimacy building efforts based on a global technological leadership orientation and targeted at the central government may be concurrently extended to include the local partners (equipment manufacturers) and customers (carriers). In a network community of interdependent constituents, by not linking this orientation to, and the potential impact they may have on other network constituents, legitimacy orientation efforts may be compromised. This does not mean that legitimacy cannot be enhanced through negotiation or discourse with China’s central government, given that these manufacturers and carriers are essentially state-owned enterprises and the central government possesses the ability to block or delay these efforts, which indeed sometimes happens. As Deng Yusong of the Development Research Center of the State Council (on the issue of 3G licensing) noted:

Customer orientation Foreign companies faced high entry barriers when dealing with indigenous carriers like China Telecom and China Mobile, especially given their state-sponsored preference for local indigenous manufacturers. These carriers are also much less transparent and have a more bureaucratic background compared with their international, majority state-owned carriers (Nolan, 2001). But as pressures mounts on these carriers to access global funds through initial public offer (IPO), the investment community will expect more transparency and less bureaucracy from these carriers. Any preference these carriers have for sourcing local equipment from indigenous manufacturers would therefore be sorely tested, especially with increasing pressures to increase revenue yields, through reduced operating costs and capital expenditure. These factors provide great potential for companies to leverage their existing network legitimacy, especially with their superior, innovative cost-effective technological solutions. These orientations have some measure of empirical support albeit mainly from studies conducted using social and political theory (Weber, 1947), and in particular, organizational

Foreign companies will take 3G licensing as a new opportunity in China, but for JVs [joint ventures] to succeed, Chinese operators must also have the desire to work with the foreign partners, and the government has the final say on such attempts.

Second, the links between legitimacy orientations and justification behavior occur with limited cognitive ability. While the espoused purpose of any company has been to better articulate these links, prima facie one can hardly be 101

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skeptical about its chances of success, especially in an environment of constant policies changes. How companies deal with these policies becomes a key managerial question (Low and Johnston, 2005)? The answer, in part, depends on how companies conceptualize their networks. This in turn affects a company’s legitimacy orientations and justification behavior, linking them with significant network counterparts who act as an information and knowledge guardian and processor (Low and Johnston, 2005). Through these links, companies form business networks to deal with complex network environments (Hallen and Lundberg, 2004; Ritter et al., 2004), thus ensuring a better fit between orientations and justifications. Third, it is apparent that no company can act as if they are in control of their legitimacy orientations and justification actions. Those that do fail to understand and appreciate the importance of a network being a connected community of interdependent constituents, each with its own legitimacy. While no one constituent can dominate, within a centrally controlled economy, China’s central government has historically overseen proceedings. Furthermore, the existing network structure that has evolved over time and over various phases of the sector’s national competitive development also influences the actions of constituents. The existing network community, through an ongoing process of negotiation and deliberation, has created an interlocking system of legitimacy orientations and acceptable justification behavior. A focal firm’s actions cannot therefore be undertaken without considering the actions and reactions of other firms (Chelariu et al., 2000; Hakansson and Ford, 2000). Actions could, however, be made to influence others, where possible. Such actions are generally aimed at benefiting from other firm’s knowledge, interpretations, and perceptions of the focal firm’s orientations and justification behavior. Hence, orientations and justifications are always changing. Finally, to grasp the significance of network legitimacy, a process orientation is critical. This orientation allows the firm to examine changes in network structures and analyze legitimacy orientations as illustrative metaphors, within the framework of the sector’s competitive development policies. The focus is on the interface between policies and network structures, where structures are regarded as nothing more than temporary and transient effects of legitimacy justification actions. Using a qualitative, case-oriented methodology, our concern is not only with the way these orientations looks like, but with explaining changes to these orientations as a result of government policy shifts. This then enables a better alignment of legitimacy justification actions with network counterparts, thus ensuring the relevancy of a firm’s legitimacy orientations. Taken together, the four challenges described here define the core features of a network perspective in establishing legitimacy in China’s telecommunication sector. We now turn our attention to an inductive and speculative case study analysis, based on archival and contemporary secondary data, being how Motorola China has established and nurtured their network legitimacy.

Network legitimacy in China’s telecommunications market: the case of Motorola (China) Electronics Ltd Successful legitimacy performance outcomes Motorola (China) Electronics Ltd (MC) opened its first office in China in 1987, and in 1992, established a wholly-owned manufacturing facility in Tianjin (80 km east of Beijing). Since 1987, it has invested over US$3.4 billion in building local manufacturing and research and development (R&D) capabilities, including over US$450 million having been invested in 16 R&D centers, with over 1,800 personnel focusing on R&D activities alone. MC also has over 30 technology cooperation projects with more than 20 Chinese partners. MC operations now consist of a holding company in Beijing, a factory, eight joint ventures, 18 R&D facilities and 26 sales offices throughout China. MC has performed impressively in what has been until recently a highly protected and regulated telecommunication sector. Their success has been due in large part to their ability to articulate the links between legitimacy orientation choices and their justification in a changing network environment. Its success culminated in the nation’s 2005 recognition and award of MC with Best Corporate Citizenship Practice and the Most Influential Multinational in China. The question we posed here is “How did MC achieve and nurture their network legitimacy?” Legitimacy and management of co-specialized resources As one of the founding member of the TD-SCDMA forum, Motorola has one of the industry’s most comprehensive silicon portfolios. The historical role it has played and the resource portfolio it possesses culminated in the signing of an MOU with Datang Mobile in 2004. This MOU is significant because Datang Mobile is currently the leading provider of mobile communication equipment in China and the coinventor and principal driver of TD-SCDMA, China’s version of its own 3G technology. Datang Mobile owns this core technology as well as driving the access network. MC’s global technological legitimacy in TD-SCDMA predates another earlier relationship it had with China Unicom, the country’s second largest and the world’s third largest mobile operator, dating back to 2001. MC also has a long-standing relationship with China Mobile, the world’s largest wireless operator, culminating in the selection in 2004 of Motorola’s Global Telecom Solutions Sector (GTSS) by China Mobile to expand its Global System for Mobile (GSM) communications network. The contract prepares China Mobile for the coming evolution to 3G by upgrading its GSM/General Packet Radio Service (GPRS) network and enhancing the transmission of wireless data through an improved GPRS offering. Not only has MC moved with the right technology and at roughly the right time, it has also managed to do so in conjunction with the two largest mobile operators in China. Together with the relationship MC has with Datang Mobile, who is the front runner of TD-SCDMA national initiative, MC appears to have carefully crafted and leveraged its global wireless technological legitimacy, by choosing local complementary partners through inter-firm sharing knowledge routines that have evolved over time. This has happened despite the disruptive character of emerging 102

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wireless technologies that makes extrapolations of their eventual market prospects a futile exercise. As Adrian Nemcek, executive vice president of Motorola Inc. once remarked:

seed the country with R&D facilities. They see foreign companies as a catalyst for moving China up a few rungs on the R&D ladder. Opportunities therefore exist for MC to further build new R&D alliances and deepened its local R&D base. The company’s network legitimacy will be further entrenched as it helps accelerate China’s emergence as a technology superpower.

As a global leader of CDMA RF solutions, Motorola is proud to play an integral role in Unicom’s CDMA network upgrade. These contracts further strengthen our long-term partnership with China Unicom as well as the Sino-US trade relationship.

Legitimacy and the local market China has one of the world’s largest networks. It is also the world largest producer of handsets. The combined total of approximately 660 million fixed (315 million) and mobile (345 million) subscribers in 2004 make China the largest telecommunications market in the world. Showing no signs of abating, pressure mounts for local equipment manufacturers and carriers to satisfy demand. This offers new opportunities for foreign telecommunication companies keen to further legitimize their network existence, especially when preferences for sourcing local equipment from indigenous manufacturers diminishes in a deregulated telecommunications sector. Faced with a booming domestic market, the government has also embarked on colossal manufacturing and sourcing programs. This offers the possibility for large revenue streams, something that has not been lost on MC. Strategizing the market in many different ways, but ultimately with two very important constants – local manufacturing and sourcing, MC has been an active participant in these programs. For instance, while Motorola sell $5.7 billion worth of products in China, it also exports $3.6 billion from China, including $1 billion in international procurement from local suppliers. China, according to Christina Li, a Beijing-based spokeswoman for Motorola, is a winning base of production and sourcing for the company. As a major benefactor of these programs, Motorola now holds 12.1 percent of total 2004 handset market share (ChinaNex.com). It is also the only foreign company among 19 manufacturers in China to receive a license to manufacture CDMA handsets in the country. As Kao has noted:

Legitimacy and upstream and downstream innovation In addition to local carriers and equipment manufacturers, MC has also pitched its global technological legitimacy to include investment in local R&D activities aimed at helping local third party developers. For instance, the Application Center of Excellence (ACOE) was created in 2004 by MC, allowing the company to further develop their domestic legitimacy ambitions by working along side these developers. According to Patrick Kuong, Motorola corporate vice president and general manager, PCS North Asia, ACOE provides enhanced cooperation opportunities not only with carriers, but also with strategic solution providers and 3rd party developers in the telecom industry. Because wireless data services are viewed as a revenue growth opportunity for these carriers, ACOE help them to connect with third-party applications to develop creative new solution services. Carriers can then provide end user experiences that delight their customers and help drive wireless data usage. The creation of ACOE thus has the potential to make MC the core of a new giant integrated telecommunications company. It places the company at the forefront in upstream and downstream innovation with all the network constituents, including local carriers, equipment manufacturers, thirdparty developers, and its customers. Going into 2005 and beyond, MC had developed into a corporate giant that continues to leverage its technological legitimacy in the way existing industrial networks may be shaped and disrupted, and playing a significant role in the transformation of old industrial production, procurement and consumption in China’s telecommunication sector.

Facing these golden opportunities, Motorola will continue to invest in China to develop strategic partnerships with Chinese telecom companies [carriers and manufacturers], bringing to consumers smarter technologies and making their lives simpler.

Legitimacy and the central government’s ambitions All previously successful industrializing countries have used some form of industrial policy to construct large, indigenous globally competitive firms (Nolan, 2001). The growth of such firms has required substantial investment by the central government to develop indigenous large businesses that can challenge the global giants (Nolan, 2001). MC can help China achieve these goals, especially in wireless technology and handsets. This help is what China has been looking for, but seldom acknowledged until recently. Not withstanding China’s desire to be in the big league of technology leaders, the country has not yet achieved that status, and is unlikely to do so for at least a decade. As Jinpei Cheng, China’s vice minister of science and technology noted:

Technical, production, sourcing legitimacy – what is next? Having played a key role in ensuring China’s membership into the WTO, there is now greater incentive for Motorola to continue to advance their role. Why? Apart from the fact that the telecommunications industry is a global industry, there are two main reasons. First, there will be no such thing as a local market with the full and rapid application of WTO rules. Within a few years, central government capacity in protecting the local market will be greatly reduced. Competition will intensify and MC’s network legitimacy will come under increasing pressure. As MC continues to make China their “home”, a major challenge is to determine what legitimacy orientations would need to be made and subsequent legitimacy justification behavior to ensure its network relevance, and thus survival. This is important for Motorola China and China. As Mr Richard Brecher of MC Electronics remarked:

China is still in the tier-four rank of scientifically marginal nations, whereas the United States and Japan are tier-one science superpowers. We hope to reach the next tier, to become a “strong nation” in basic research in the coming 20 years.

Historically, the government has, and will continue to play, a central role in generating high rates of equity investment and stimulating technical progress. Together with the nation’s business leaders, the government will continue to rely heavily on foreign telecommunication companies like Motorola to

Motorola has been a long time supporter of China’s accession to the WTO, not only because it will bring more business opportunities and market access to Motorola but also because it is good for China in the long run.

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The second big problem for Motorola relates to China’s aspiration to join the big league of world technology leaders, as previously noted. This is not going to happen anytime soon in view of low local manufacturing investments when compared with global telecommunication giants (Low, 2005). While there is high incentive to increase R&D spending, there is an even greater incentive for MC to help train its citizens. Local manufacturers could then become more global and more powerful, developing their technical expertise and their global brand name. The establishment of Motorola University (MU) in 1988 is Motorola’s contribution towards helping China’s realize its “big league” aspirations. Indeed, MU was largely created in direct response to China’s emerging market-driven economy and hence, the need to train its employees. With centers in Shanghai, Guangzhou and Tianjin, MU has also developed many programs targeting senior and midlevel managers from the company’s suppliers, strategic partners, state-owned enterprises and customers. MU provides value-added services, the key one of which is delivering educational technology and know-how to China, not only to Motorola’s own employees, but also to many of the state-owned universities and enterprises. Since 1998, and in cooperation with the State Development and Reform Commission of China, Motorola has offered management-training courses to more than 4,000 managers from 1,000 state-owned companies in 26 provinces across the country. Now more than ever, China needs more Western trained managers to fill the country’s WTO entry requirements. According to Lois Webster, former director of MU’s China operations from 1996-1998:

sourcing and exporting, education and social development programs and initiatives. These legitimacy orientations do not come together at one. Instead, these orientations require constant monitoring and realignments in response to network disruptions. They evolve over time, where the actions and reactions of the network community of carriers, manufacturers, software developers, customers, state and provincial governments must be considered in order to ensure a “dynamic fit” with network disruptions. The alternative is to face “network redundancy” where Motorola China’s existing network legitimacy would no longer be relevant.

Conclusions and implications In industrial networks, B2B exchanges and adaptations takes place between organization’s resources and activities, capturing the essence of network legitimacy. Although not sufficient, we propose in this article that network legitimacy is an important condition for organizational success in China. A major challenge is determining what orientations to adopt in a dynamic Chinese telecommunications sector. There is heterogeneity legitimacy orientation across global telecommunications giants, especially as new networks are constantly created, connecting the interrelated resource and activity parts of emerging networks, and transforming old to new industrial production, procurement and consumption. A key feature of our proposal is that these heterogeneities together with the ambiguity of context, manifest in greater pressures upon companies in managing their network legitimacy. Ambiguity arises from multiple constituencies with conflicting interests in a tightly knit network community and central government’s conflicting policies. The key to legitimacy success involves using legitimacy orientations to demonstrate commitment to the interests of constituents, acquiring legitimacy from them, but concurrently considering the central government’s influence on a firm’s legitimacy performance. In the telecommunication sector, a company’s legitimacy emanates first and foremost from the development and commercialization of innovative and creative technological solutions. This requires good, creative management of technological resource and activity links,

Motorola University China has played a very significant business development role for Motorola’s operations in China. This confidence in based on Motorola’s deep rooted investment in China and its close co-operation and partnership with the Chinese Government and enterprises.

In summary, Motorola’s network legitimacy within China’s telecommunication sector has been built on a mixture of global, partner, customer and provincial legitimacy orientations (Figure 2). These orientations are manifested through the company’s global technological leadership, investment in local R&D activities, local manufacturing,

Figure 2 Network legitimacy orientations and legitimacy justification and alignment behaviour of Motorola China

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connecting the company’s technology to network constituents which include local manufacturers, carriers, software developers, investors. Companies like MC appear to have grasped the significance of network legitimacy and the link between legitimacy orientations to legitimacy justification actions. While China remains committed to maintaining the commanding heights of the telecommunication sector in state ownership, local equipment manufacturers and carriers are also increasingly allowed to build on foreign equity and technical knowledge. These include technical, marketing, training and education, social and regional developments and alliances. Our analysis of MC has shown the company to be an active participant in these alliances, constantly aligning their legitimacy orientations with the demands of the network, and hence their network legitimacy. By conforming to network norms, Motorola has earned their network legitimacy. We therefore find the proposed interactions among concepts comprising the model depicted in Figure 1 to have a measure of some empirical support, albeit a speculative based inductive interpretation of archival and contemporary data. Future conceptual frameworks that seek to deal with network legitimacy would however do well to take into account these interactions. Taken together, the four legitimacy orientations described in the model, and defining the core features of network legitimacy from a network perspective, should provide a useful starting point. In a transitional Chinese telecommunication sector, the setting should prove ideal. Finally, this study provides preliminary results and the theoretical model should open up several significant avenues for future research on the process of network legitimacy in China’s telecommunications sector.

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References Ahlstrorn, D. and Bruton, G. (2001), “Learning from successful local private firms in China: establishing legitimacy”, Academy of Management Executive, Vol. 15 No. 4, p. 72. Birkinshaw, J. and Gibson, C. (2004), “Building ambidexterity into an organization”, Sloan Management Review, Vol. 45 No. 4, pp. 47-55. Chelariu, C., Johnston, W. and Young, L. (2000), “Learning to improvise, improvising to learn: a process of responding to complex environments”, Journal of Business Research, Vol. 55 No. 2, pp. 141-7. Davies, H. (1995), “The nature of the firm in China”, in Davies, H. (Ed.), China Business: Context and Issues, Longman, Hong Kong. Davies, H. and Walters, P. (2004), “Emergent patterns of strategy, environment and performance in a transition economy”, Strategic Management Journal, Vol. 25 No. 4, pp. 347-64. DiMaggio, P.J. and Powell, W. (1983), “The iron cage revisited: institutional isomorphism and collective rationality in organizational fields”, American Sociological Review, Vol. 48 No. 2, pp. 147-60. Don, L.Y. and Dawes, P.L. (2005), “guanxi, trust and long-term orientation in Chinese business markets”, Journal of International Marketing, Vol. 13 No. 2, pp. 28-56. 105

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Brian Low, Wesley J. Johnston and Jennifer Wang

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(Eds), Networks and Organizations, Harvard Business School Press, Boston, MA. Nolan, P. (2001), China and the Global Economy, Palgrave Publication, London. North, P. (1990), Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge. Park, S.H. and Luo, Y. (2001), “guanxi and organizational dynamics: organizational networking in Chinese firms”, Strategic Management Journal, Vol. 22 No. 5, pp. 455-77. Parsons, T. (1977), Social Systems and the Evolution of Action Theory, Free Press, New York, NY. Peng, M.W. and Luo, Y. (2000), “Managerial ties and firm performance in a transition economy: the nature of a micromacro link”, Academy of Management Journal, Vol. 43 No. 3, pp. 486-501. Pfeffer, J. (1982), Organizations and Organization Theory, Pitman Press, Boston, MA. Ritter, T., Wilkinson, I. and Johnston, W. (2004), “Managing in complex networks”, Industrial Marketing Management, Vol. 33 No. 3, pp. 175-83. Stone, M.M. and Brush, C.G. (1998), “Planning in ambiguous contexts: the dilemma of meeting needs for commitment and demands for legitimacy”, Strategic Management Journal, Vol. 17 No. 8, pp. 633-52.

Suchman, M.C. (1995), “Managing legitimacy: strategic and institutional approaches”, Academy of Management Review, Vol. 20 No. 3, pp. 571-611. Tsang, E.W.K. (1998), “Can guanxi be a source of sustained competitive advantage for doing business in China?”, Academy of Management Executive, Vol. 12 No. 2, pp. 64-73. Vanhonacker, W. (2000), “A better way to crack China”, Harvard Business Review, July-August, pp. 130-6. Walder, A.G. (1986), Communist Neo-Traditionalism: Work and Authority in Chinese Industry, University of California Press, Berkeley, CA. Weber, M. (1947), The Theory of Social and Economic Organization, Free Press, New York, NY. Wei, Y. and Bello, D. (2004), “Performance outcomes for business marketers in China: the moderating role of legitimacy behaviors”, paper presented at the ISBM Conference Workshop, Shangai. Yang, K.S. (1994), Gifts, Favors, and Banquets: The Art of Social Relationships in China, Cornell University Press, New York, NY.

Corresponding author Brian Low can be contacted at: [email protected]

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Buyer-supplier relationship dissolution: the Chinese context Andrew D. Pressey and Xin Xuan Qiu School of Management, University of East Anglia, Norwich, UK Abstract Purpose – This paper aims to examine the characteristics of buyer-supplier relationship dissolution in China. Design/methodology/approach – The paper presents the results of nine in-depth interviews of Chinese managers of dissolved long-term business relationships. Findings – The paper finds that it is common in China for relationships to have a transferable “energy” after the dissolution of a relationship due to the guanxi that exists between individuals prior to dissolution. It is also common for dysfunctional relationships to “fade away” so as not to lose “face” for a business partner or damage any guanxi developed by abruptly ending relations. Additionally, a characteristic of dissolution in China is the involvement of a third-party (an individual who introduced subsequent business partners), who would often then play an active role in the dissolution of the relationship. Research limitations/implications – The findings are based on data from managers in private enterprises with no examination of state-owned enterprises. Practical implications – The paper offers guidelines for the characteristics of relationship dissolution in China that make it distinctive, particularly in comparison to dissolution in a Western context. Originality/value – This study contributes to the understanding of relationship dissolution by examining buyer-supplier relationship dissolution in China. The findings of this study suggest that much can be gained by examining predominantly western views of relationship functionality and dysfunctionality in different cultural contexts. Keywords China, Buyer-seller relationships, Qualitative research Paper type Research paper

. . . so little has been written about relational failure in business markets, there is a need to establish a theoretical and practical basis for this condition.

An executive summary for managers and executive readers can be found at the end of this issue.

During the 1990s, empirical research addressing the phenomenon of relationship dissolution increased markedly (for example, Perrien and Ricard, 1995; Gronhaug et al., 1998) and has grown steadily in the present decade (for example, Havila and Wilkinson, 2002; Hallen and Johanson, 2004). Consequently, research on the dissolution of relationships has been conducted in a range of areas including business-to-business relationships, consumer relationships, channel relationships, and professional services relationships (Tahtinen and Halinen-Kaila, 2000). Although our understanding of relationship dissolution has been considerably enhanced in recent years, studies examining relationship dissolution have overwhelmingly been based in western societies. As most of the literature concerning relationship dissolution has its roots in western cultures, it is not advisable to transplant western theories and practices into other cultural contexts without first investigating similarities and differences between countries and markets (Buttery and Wong, 1999). Consequently, understanding business relationship dissolution in western cultures does not necessarily further our understanding of dissolution in other cultures. With a population estimated to be in excess of 1.2 billion, years of economic growth and the transition towards a private sector-led economy, The People’s Republic of China (referred to hereafter as China) is one of the world’s largest and most promising markets. Billions of dollars of foreign investment continue to pour into China attracting the attention of both business and academic audiences. In recent years, many

Introduction Marketing theory has devoted a great deal of attention to relational exchanges and the building blocks of effective relationships between buyers and suppliers (for example, Wilson, 1995; Morgan and Hunt, 1994). In comparison, our understanding of dysfunctional relationships has been limited. Relationships are not immortal entities and can result in the premature ending or dissolution of the exchange. Consequently, managing relationships involves not only managing functional relationships, but also managing dysfunctional relationships (Ping, 1999). As Morgan and Hunt (1994, p. 33) note: Just as medical science should understand both sickness and health, marketing science should understand both functional and dysfunctional relationships.

Understanding relationship dissolution contributes to a more complete understanding of business relationships (Tahtinen and Havila, 2004), however, as Good and Evans (2001, p. 559) note: The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing 22/2 (2007) 107– 117 q Emerald Group Publishing Limited [ISSN 0885-8624] [DOI 10.1108/08858620710730221]

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Buyer-supplier relationship dissolution: the Chinese context

Journal of Business & Industrial Marketing

Andrew D. Pressey and Xin Xuan Qiu

Volume 22 · Number 2 · 2007 · 107 –117

studies have identified the importance of business relationships for doing business in China. China is often portrayed as a “relational society” (Styles and Ambler, 2003), where concepts such as “guanxi” (relationships or connections) are the major influence on both social and business behaviour (Tseng et al., 1995). Most of the research in a Chinese context has focused on building and maintaining successful business guanxi (Buttery and Wong, 1999; Wong, 1998; Mavondo and Rodrigo, 2001; Yau et al. 2000; Yeung and Tung, 1996). To-date, however, no study has meaningfully examined dysfunctional relationships and their dissolution in a Chinese cultural context, despite the dissolution of business relationships being viewed as an important marketing topic (Gro¨nroos, 1997; Tahtinen and Havila, 2004). This paper seeks to fill this gap in knowledge. Research concerning relationship dissolution in China should also be of interest due to its transition to market governance in recent years. Since 1978, the Chinese communist government have let thousands of private firms flourish, from small enterprise to large manufacturers, often through foreign investment, which continues to increase in part owing to China’s membership of the World Trade Organisation (WTO) in 2001. Under the tenets of the Chinese planned economy firms were usually not free to make decisions related to which suppliers or customers they could choose to develop relationships with or to dissolve. In the current business climate firms have greater freedom to build relationships with their partners of choice, both foreign and domestic – a feature also reported in the Russian transition economy (Hallen and Johanson, 2004). Unlike the Russian economy, however, where interdependence between firms was limited prior to its economic reforms (Hallen and Johanson, 2004), China’s cultural roots meant that relationships based on guanxi previously existed (Ballantyne, 1994). Consequently, there is clearly value to be gained from examining relationship dissolution in China. The study is organised in the following way. First, we discuss the literature concerning relationship dissolution in business-to-business relationships. Next, we examine the unique characteristics of business relationships in China. The remainder of the study explains the methodology adopted, presents the results of the study and discusses the theoretical and managerial implication of the study. The final part of the study offers a number of directions for future research.

A relationship is thought to have dissolved: “. . . when all activity links are broken and no resource ties and actor bonds exist between the companies” (Ta¨htinen and Halinen-Kaila, 1997, p. 560). The reasons for exchange relationships being dissolved has been attributed to a number of factors including buyer factors, supplier factors and competitor factors (Gronhaug et al., 1998; Perrien and Ricard, 1995; de Monthoux, 1975). In an attempt to unify the various types of relationship dissolution alluded to in the literature, Pressey and Mathews (2003) examined four categories of dissolution through a variety of business-to-business relationships (see Figure 1). Their research identified four categories of dissolution, namely: voluntary dissolution (bilateral decision to end the relationship), unilateral involuntary dissolution by either buyer or supplier (customer de-selection/supplier deselection), and bilateral involuntary dissolution (a fading away of relations). Their study suggested that relationship dissolution by the customer (or supplier de-selection) was the most prevalent form of dissolution. Although dissolution is largely perceived as irrevocable Havila and Wilkinson (2002) propose that relationships have a certain “energy”; they note that “you can push energy around and transform it but you cannot destroy it” suggesting that some relationships may be revocable. For the most part, research examining relationship dissolution has been conducted in western markets (chiefly the USA and Europe). As a consequence, understanding business relationship dissolution in predominantly western cultures does little to further our understanding of dissolution in other substantially different cultures. For example, Buttery and Wong (1999, p. 147) note that “relationships are often built on a cultural platform which means the route to developing a good relationship can be very different in western to eastern cultures.” In the case of China, for example, substantial differences exist in the creation and management of relationships in comparison to the western concept of relationship marketing (Alston, 1989; Yeung and Tung, 1996; Ambler, 1994; Buttery and Wong, 1999). Some of the more significant features of business relationships in China are now examined.

Business relationships in China Although little is known concerning relationship dissolution in a Chinese context, much has been written on relationship development. Perhaps the concept that has attracted the most attention is that of guanxi. Guanxi, a Chinese term referring to

Relationship dissolution in buyer-supplier relationships

Figure 1 Categories of dissolution in buyer-seller relationships

The topic of exchange relationship dissolution has been highlighted as important in order to redress the imbalance between studies of functional relationships versus the relatively limited knowledge related to dysfunctional relationships (see Dwyer et al., 1987; Morgan and Hunt, 1994). Despite the importance of the topic, however, the business-to-business literature has often failed to “go any further than simply stating so” (Giller and Matear, 2001, p. 97). This is slowly being redressed (see Hallen and Johanson, 2004) with much of present interest in business-tobusiness relationship dissolution having been influenced by the social psychology literature concerning interpersonal relationship dissolution (e.g. Baxter, 1985; Duck, 1982). 108

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interpersonal connections, first appeared in the western literature and popular business press in the 1980s with advice as to the cultural factors that affect doing business in China (Pye, 1982; Butterfield, 1983; Alston, 1989). The concept of guanxi is by no means unique to China (Yau et al. 2000), however, various studies (e.g. Ambler, 1995; Davies et al., 1995) have identified that guanxi is central to relationships in Chinese business. As such, it is recognised as an “emergent form” of relationship marketing in Asia (Ballantyne, 1994). Guanxi is commonly defined as a special relationship between two people (Alston, 1989) emphasising “connectedness” and ties between individuals (Jacobs, 1979), while others have focused on the resource dimension of guanxi. As Gold (1985) states “guanxi is a power relationship as one’s control over a valued good or access to it gives power over others”. Other authors have offered similar definitions of guanxi (Osland, 1990; Pye, 1982; Yeung and Tung, 1996). Guanxi is thought to be continuously accumulated, or built up, throughout the process of a business relationship episodically (Keep et al. 1998; Rodrigo, 1998; Yau et al. 2000). Guanxi relationships can bestow benefits including qinqing (affection to loved ones), ganqing (emotion to friends) and renqing (non-business favours) (Fan, 2002). A favour can be intangible (for example, advice, information, counselling) or tangible (for example, gifts, or any other products or services). Guanxi is a form of social investment or social capital, acting as an important resource that an individual can use when there is a need to find help or support (Butterfield, 1983). Through a single guanxi, or relationship, one can get access to a much wider network of connections (Fan, 2002) chiefly through group identification and altercasting (Yeung and Tung, 1996). For example, through “altercasting” the transfer of guanxi between two unfamiliar individuals is achieved by a third-party who bridges the gap by knowing both parties (Yang, 1994). An effective way of altercasting is to use an intermediary who is a mutual friend of both parties (Yeung and Tung, 1996). “Face” (mianzi), has been acknowledged as a key relationship variable to emerge mainly from the guanxi literature (Yau, 1988). Leung (2000) notes that:

western concept of relationship marketing (Alston, 1989; Yeung and Tung, 1996; Ambler, 1994; Buttery and Wong, 1999) we posit that relationship dissolution is also likely to be substantially different in China based on some of the characteristics of conducting business in China already discussed. For example, one characteristic of guanxi is for an individual never to allow the guanxi due to them to be fully discharged so that the obligation in a relationship always exists. This feature of business relationships in China is likely to lead to protracted dissolution in some instances and cause complications particularly as guanxi, as noted, is essentially a power relationship, and, as such, could potentially exert a powerful effect on business relationships obliging firms to conduct business with certain parties (or friends) with which the level of guanxi is greatest and to dissolve relations with those where it is weakest. Through one relationship an individual can also gain access to a much wider network of business connections and potential relationships, in the event of the dissolution of one connection in the network this may have an impact on the wider guanxi network. In addition, the prevalence of “altercasting” in China – the transfer of guanxi between two unfamiliar individuals via a third-party – should cause complications when it is deemed necessary to dissolve a relationship particularly as there will be the desire among parties to save one’s “face” and the “face” of others in order to preserve the guanxi built over time particularly with the third-party who may wield considerable influence. Consequently, the remainder of this study seeks to examine the types of relationship dissolution in business-to-business relationships in China and factors that influence the dissolution of relationships.

.

Methodology Given the paucity of substantive research concerning relationship dissolution in China, an exploratory approach was adopted. A qualitative methodology (comprising face-toface interviews) allowed the researchers to gain a greater familiarity with issues surrounding the research problem (Robson, 1993). In particular, the approach enabled subjects to put their behaviour into context and reveal insights about their experiences concerning the complex topic of buyer-seller relationship dissolution in their own words – something a quantitative study would not lend itself to easily. Interview methods also make it easier to ensure that data is gathered from the relevant individuals, in comparison to, for example, a mail survey approach where there is often limited control over who completes the questionnaire (de Chernatony, 1988; Barabba, 1990).

“Face” is the respect, pride, and dignity of an individual as a consequence of his/her social achievement.

As such, one’s “face” stands for an individual’s prestige, status, as well as moral reputation (Brunner et al., 1989, Lam and Wong, 1995; Brunner and Wang, 1988). Leung (2000) suggests that although each individual is responsible for maintaining their own “face”, it is also influenced by the individuals one closely associates with and how they are perceived by and interact with others. As Goffman (1972) argues, “In social interactions, one’s behaviour is to maintain one’s mianzi and the mianzi of others!” No similar construct exists in the western relational literature. Most of the research in a Chinese context has focused on building and maintaining successful business guanxi through a variety of constructs such as trust, reciprocity, and “face” (Buttery and Wong, 1999; Wong, 1998; Mavondo and Rodrigo, 2001; Yau et al., 2000; Yeung and Tung, 1996). Although considerable attention has been afforded functional relationships, no studies of dysfunctional relationships and relationship dissolution could be identified in a Chinese context. As numerous studies highlight that relationships in China are substantially different to the

Sampling rationale Rather than attempting to discover how many people share a particular opinion the emphasis of qualitative research is to gain insightful evidence concerning attitudes toward a certain topic in order to generalise to theory rather than to populations (Bryman, 1988). As the research was largely exploratory and inductive in nature, the rationale for sample selection was that they would be purposive and in-depth as opposed to a random large sample (Miles and Huberman, 1994). A variety of business contexts have been used in relationship dissolution research, including, for example, a high service element, products being closely tailored to individual 109

Buyer-supplier relationship dissolution: the Chinese context

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Volume 22 · Number 2 · 2007 · 107 –117

customers’ needs, and in low-tech/high-tech contexts (Sharma and Patterson, 1999; Stewart, 1997; Perrien and Ricard, 1995; Selnes, 1998). In order to maximise coverage and reduce the chances that our findings are distorted by peculiarities or extreme practices in a particular sector a sampling protocol was followed. The population for the study was Chinese companies operating in business-to-business markets in China with evidence of having long-term relationships with domestic buyers/suppliers. The sample criteria included: . hi-tech and low-tech firms; . firms with specialist, bespoke products and firms producing commodity goods; . firms with products incorporating either a high or low service component; and . privately owned firms (since they have greater control over the firms they choose to deal with).

which to examine relationship dissolution in a Chinese context. Although no rigid rules exist that define the appropriate sample size in qualitative exploratory research, several broad rules-of-thumb serve as a guide, including theoretical saturation (Glaser and Strauss, 1967; Seidman, 1991), or when enough data are collected to warrant a second stage of confirmatory research. The nine interviews conducted with Chinese managers were considered appropriate as later interviews added no new information.

Findings This section draws together the findings from the interviews and examines the categories of dissolution proposed in Pressey and Mathews’ (2003) typology: bilateral decision to end the relationship, customer de-selection, supplier de-selection, and a fading away of relations.

A total of nine in-depth interviews were conducted using a largely unstructured interview format. Considerable effort was taken to ensure that informants had been significantly involved in the management of long-term relationships for their respective firms, and could provide insights into a variety of relationship terminations. The final sample comprised a range of industries that satisfied the sample criteria: . pharmaceuticals producer (high-tech); . manufacturing ( £ 2) (high-tech/low-tech); . public relations agency (bespoke products/high service and collaborative components); . medical treatment apparatus sales (high-tech); . retail buyer (low-tech/high contact); . printing (high service component with bespoke products); . trading company (low-tech/commodity product sector with high contact); and . site maintenance and repair (high service component).

Type 1: bilateral decision to end the relationship Several managers reported that the transition to a market economy had put greater pressure on suppliers to meet the growing demands of customers in a country where demand often exceeded supply. One respondent working for a ceramics manufacturer recalled a recent example whereby they could not expand as quickly as one customer in order to meet the customer’s growing market overseas. They mutually agreed to end the relationship and the customer switched to another supplier. Similarly, a manager of a printing company suggested: We could not develop as quickly as our customer did in their production technology. That was the reason why we ended the business relationship mutually.

In these examples, a bilateral decision had been taken to end the relationship as one party had fared better in the economic transition. Recent economic reforms had led to other changes in the market. For example, a senior associate in a public relations agency cited several of their business relationships that had been bilaterally ended since some customers had set up their own public relations and marketing departments to promote their business. He attributed this to a “growing awareness of marketing in China in recent years”. The transition to market governance had placed greater power in hands of the market to allocate resources rather than through central planning. Respondents’ recognised that under such conditions, the profitability of the firm was vital, particularly as state intervention had been much reduced. A number of informants indicated that they had witnessed longstanding business relationships dissolve bilaterally because they could not offer competitive prices whilst still remaining profitable which was vital to both parties’ survival in the new economy; a feature of modern business in China which respondents argued would not have been commonplace previously.

The firms selected placed considerable emphasis on building lasting relationships due to the long-term nature of the sale (e.g. trading company), the high service aspect of the sale (e.g. public relations agency), and high contact (e.g. retail buyer). The interviews lasted between 60 and 90 minutes and collectively the informants possessed over 60 years’ experience in their current role of managing relationships with buyers and/or suppliers. The interviews were conducted in Mandarin and subsequently translated into English. All interviews were tape-recorded and transcribed verbatim. The job titles of the interviewees included general manager, sales manager, managing director, senior associate, local sales manager, buyer, and were a mixture of Chinese SMEs and MNCs. As the purpose of the research was to examine the types of relationship dissolution in China and factors that might influence dissolution, Pressey and Mathews’ (2003) typology of buyer-seller relationship dissolution was used as a framework to guide the interviews and to present the findings. Although several studies have reported reasons for exchange relationships being dissolved (e.g. Gronhaug et al., 1998; Perrien and Ricard, 1995; de Monthoux, 1975), Pressey and Mathews’ (2003) typology represents the only extant attempt to unify the various types of relationship dissolution. Their typology was developed based on business-to-business relationships in the UK across a range of industries and services sectors and is generic in nature avoiding “Westernbased” cultural terms and thus serves as a useful basis upon

Type 2: supplier de-selection Economic reforms to instigate a market economy place greater importance on customers and their ability to develop, as well as terminate relationships – a feature also noted in the Russian transition economy (Hallen and Johanson, 2004). Similarly, China is now regarded for the most part as a buyer’s market, thus giving the buyer greater power to dissolve relationships and defect to other suppliers. This view was 110

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Volume 22 · Number 2 · 2007 · 107 –117

supported by respondents, who suggested that this was now a feature of the market. Almost all respondents had experienced instances of dissatisfaction with a suppliers’ performance (or had received more attractive offers from other suppliers) and had therefore dissolved relations. The changes to the economy, in the view of the managers interviewed, had led to greater freedom to dissolve relations if suppliers could not deliver goods on time, if problems with quality occurred or certain levels of after-sales service were not received. These changes had led to managers consciously considering which relationships should be initiated, maintained and dissolved. Interpersonal inconsistency (changes in the individuals maintaining the relationship) (see Alajoutsija¨rvi et al., 2000) was regarded as an influential cause in supplier de-selection. The sales manager for a maintenance company suggested that personal guanxi was vital (particularly in small- and mediumsized companies) as there was a proliferation of new brands and companies – both domestic and foreign – that were relatively unknown. Hence people tended to deal with individual’s they had a relationship with. He argued:

third-party individuals or “introducers”. One manager claimed: If the introducer is crucial to our business, such as a high-ranking official, we have to maintain the business relationship with this person even though we are not satisfied with the outcome of the business. Damaging the guanxi with that introducer is more costly to our business.

The manager of a printing company claimed that one of his biggest customers introduced him to a business contact who could potentially supply printing paper to his company. The company switched to the new supplier but was not satisfied with the quality of the paper and decided to end the relationship. Initially, they were compelled to consult the “introducer’s” opinion and ask for his help in dissolving the relationship. The manager suggested that this was due their relationship with the customer. He claimed that: The closer the relationship between our customer and the person he introduced to us, the more possible that the dissolution would damage our guanxi with our customer. Fortunately, our customer did not have a close guanxi with that supplier, so the situation was much easier to handle. Otherwise the situation would be complicated and sensitive.

People rely on the trust of the people they know rather than the company’s. Every salesman has his own guanxi relationships. If the salesman leaves, he takes the guanxi with him and the company loses business.

The need take into account any possible damage to the guanxi with the “introducer” or third-party and to consult this individual prior to relationship dissolution was common among informants. Views expressed included: “if dissolving a business relationship would damage our guanxi with the intermediary, we need to evaluate the losses and gains to make the decision,” and “when we decided to end the relationship with a certain customer or supplier, we consider the supplier’s or the customer’s status and “face” in the industry in order to select the right way to dissolve the relationship.” If a supplier or customer has high status in an industry, it was often necessary to invite a third-party with whom they had “good” guanxi to help end the relationship rather than dissolve it formally themselves. This was viewed as important as it demonstrated that they “gave face” and respect to the third-party and the partner firm which would reduce the possibility of damaging their guanxi with the thirdparty and help to legitimately end the relationship. In comparison, acrimonious dissolution in western business relationships would appear to be more prevalent with a lesser desire to preserve any form of relations with former partners “post-dissolution” (Pressey and Mathews, 2003) despite relationship “energy” often existing after relations have dissolved (Havila and Wilkinson, 2002). Another reason for supplier de-selection highlighted by respondents was not working effectively on renqing (nonbusiness favours). A manager for a medical company suggested that non-business favours could play an important part in supplier de-selection particularly when the offers from suppliers were similar:

The manager recalled an instance where the entire sales force were retained during a major downsizing of the company because they did not want to lose business through sales staff with strong guanxi relationships with customers leaving and taking customers with them to a new company. One characteristic of relationship dissolution in China in contrast to studies of dissolution in the west (e.g. Pressey and Mathews, 2003) is the involvement/influence of a third-party as the cause of supplier de-selection in order to maintain guanxi between parties. One manager recalled an instance where they were forced to switch their stationery supplier as the director of a local branch of a state-funded commerce bureau (the name of the bureau has been withheld for purposes of anonymity) informed the company that his nephew had set up a stationery company. If they needed to buy stationery, they were compelled take his nephew’s company into consideration. In order to “give face” to the director to maintain good guanxi with him, they had to dissolve the business relationship with their current supplier and switch to buying from the director’s nephew. Even though the quality of the stationery they bought from the new supplier was regarded as inferior to the previous supplier, they could not dissolve the business relationship with the director’s nephew. To do so would be seen as not giving “face” to the director, and, as the manager recalled: . . . would cause us lots of trouble in the future. The maintenance of good guanxi with the director is crucial to our business.

The product and price must be right. When the products and prices are similar among competitors, adding value has become critical which help to make the difference. Working well on renqing is the best way to add value.

Several informants suggested that if they had to dissolve existing business relationships with suppliers on account of an influential third-party, they would generally find some excuse, such as quality problems, to end the relationship, thus reflective of the indirect dissolution communication style of attributional conflict through finding faults with the supplier to rationalise the ending of relations (Baxter, 1985). Informants admitted that it was common for business relationships to be initiated through introductions by relatives, friends or officials. If they decided to end these relationships at some point, they needed to consider their guanxi with these

The role of offering gifts to avoid supplier de-selection was also noted by an informant reflecting on the buyers in his firm: We used to have two suppliers A and B providing similar offers to us. But A always invited us to travel or gave some small gifts to our buyers while B did nothing beyond the business. After a period of time, all the buyers were inclined to do business with A and when we had orders we considered A first. Finally, all the business was transferred to A and our relationship with B dissolved.

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This view was endorsed by a third manager who proposed that a failure to offer non-business favours could lead to the gradual erosion of the relationship:

In general, most informants indicated that they were unwilling to end a relationship with a customer unless the customer was unprofitable, however, even in such cases they were often reluctant due to the damage it might cause to the reputation of the firm.

The result of not working on renqing well may not be seen immediately. But the customer takes it as not “giving face” to him and not paying enough attention to him. When it accumulates to a certain level, it has a destructive effect, especially when the customer has another choice. He will end the relationship with you without hesitation.

Type 4: fading away of the relationship For the final type of dissolution, it was evident that the “fading away” of relations was a preferred approach to dissolution when one firm did not want to do business with another as a mechanism that allowed both parties to keep “face”. In contrast, Pressey and Mathews (2003) found that this form of dissolution was rare in the firms they examined in the UK. One manager in a trading company declared that usually when they decided to end a business relationship they did not want to end the relationship abruptly. Instead, they preferred “fading away” relations, because they did not want to damage any friendship that might exist. He suggested:

Renqing was seen as vital as good personal guanxi was built in part based on the accumulation of favours. A high level of guanxi between individuals had clear benefits. One sales manager claimed that: Guanxi is important. When we had some orders, we noticed the suppliers who had good guanxi with us to see whether they could take the orders or not first. If they could not, we considered other suppliers.

This was echoed by another manager who argued: If two companies have similar offers and one has good guanxi with us while the other does not, we would fade away the relationship with the second firm gradually [and] give most of the orders to the first firm.

Although our business relationship might end, we can still have good guanxi. One more friend offers one more road to take. Maybe someday we may need their help again.

According to one manager, the level of guanxi would increase the trust between staff in two companies, leading to greater communication and co-operation. Guanxi was also seen to have an influence on referral business:

The gradual “fading away” of relations was noted by other respondents. It seemed reasonably common that in circumstances where a customer harboured dissatisfaction with a supplier and wanted to switch, that they initially gathered information concerning feasible alternative suppliers whilst slowly reducing the size of order with the present supplier. Over time, the supplier would transfer most of the orders to the new supplier whilst still trying to maintain the guanxi with the first supplier. As one manager suggested:

We sometimes introduce some of our previous customers or suppliers to do business with our friends or other business partners or the new company we are working in . . . if there is the appropriate chance.

Type 3: customer de-selection As noted, one feature of a market economy is that customers are relatively free to choose the suppliers they wish to do business with. The converse of this, however, is also true; suppliers are relatively free to choose the customers they wish to supply or dissolve their association with (customer deselection). The interviewees’ suggested that this form of dissolution was rare but did occasionally occur. A manager for a medical company noted that a lack of trust was a chief cause of customer de-selection. Trust often plays a more salient role than legal contracts in Chinese business (Yau et al., 2000), therefore people do not sign contracts for every transaction. In contrast to business transactions initiated in the west, in China individuals are often more likely to rely on the trust developed with a partner rather than relying on legal interpretations. In some cases, however, this leads to complications. Several managers claimed that they did regular business with customers without signing contracts since they had built mutual trust over a number of years. However, when markets were in decline or where companies had over-reached themselves in terms of borrowing from banks, problems with some customers emerged. One manager cited an example whereby one of their regular customers denied payment after the deadline owing to financial difficulties. The supplier gave the customer several payment extensions, however, the customer was still unable to pay for goods received. The supplier decided to dissolve the relationship and deny them further goods. The decision to dissolve the relationship became problematic and involved a costly legal dispute and the partial loss of company reputation for the supplier. This theme was highlighted by several respondents who harboured concerns over the growing amount of borrowing by Chinese firms.

. . . It is a gradual process. We did not stop doing business with the previous supplier suddenly. We still gave some small orders to the supplier to keep the guanxi. Because the quantity of our orders was small, after a period of time the supplier thought we were not important to them. Finally the relationship faded away.

From a supply perspective, a manager for a ceramics manufacturer indicated that they had limited experience of customers who had suddenly stopped doing business with them. He claimed that: Often, the customer’s orders dwindled at the beginning, maybe because their business declined or they did not want to do business with us. But at least they gave us time to adjust our strategy and resources allocation. We then paid more attention to other big customers and looked for new customers.

All informants asserted that if it was possible, they wanted to keep the guanxi with a former customer or supplier. It was also noted, however, that some guanxi relationships are too complicated to be ended abruptly. The general view from the managers interviewed was that in China businesspeople take more time to build business relationships, and at the same time they spend more time in dissolving dysfunctional relationships. Maintaining the “relationship energy” through guanxi between individuals was valuable, particularly as it might lead to rejuvenating a business relationship in the future or referral business opportunities.

Discussion and conclusions The types of buyer-seller relationship dissolution experienced in China bear some resemblance to relationship dissolution in western markets, as evidenced by the findings adhering to Pressey and Mathews’ (2003)types of relationship dissolution. However, beyond this generic typology of relationship 112

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dissolution a number of unique features of dissolution in Chinese business relationships were identified as markedly different to relationship dissolution in many western markets. In this section, five key themes emerging from the interview findings are discussed, namely: 1 relationship dissolution in a transitional economy; 2 dissolution and third-party involvement; 3 fading away of a relationship and “face”; 4 renqing (non-business favors) and dissolution; and 5 guanxi “relationship energy” post-dissolution.

a desire not to diminish guanxi with someone who was often a family member or business contact. In China, business guanxi may originate from family ties or other prior non-business relationships that are often different from the western purposefully-built relationship marketing arrangements. Guanxi can be classified into three categories: “family”, “helper” and “business guanxi”. All three types of guanxi, however, are mixed or entwined in reality, making it difficult to distinguish between them (Fan, 2002). Altercasting is a way to establish guanxi between two individuals who have no ascribed commonality and are yet to establish mutual trust (Yeung and Tung, 1996). An effective way of altercasting is to use an intermediary who is a mutual friend of both parties (Yeung and Tung, 1996). In instances of relationship dissolution, this third-party has to be taken into account and often consulted to ask for their help in dissolving the relationship. This demonstrates that the individual (or individuals) wishing to dissolve the relationship have “given face” and respect to the intermediary or “introducer” by taking them into account thus helping to maintain the guanxi between parties. The findings indicated that the level of intervention by the intermediary is dependent on their influence and status (in the industry, network and society) and importance to the business partner (or partners) who wished to end the relationship. For example, maintaining guanxi with the intermediary might be perceived as crucial, and any reduction to the guanxi between a business partner and the intermediary may influence the intermediary to damage the partner’s business wilfully. Simply put, the benefits or potential benefits that the intermediary brings to a business partner outweigh the losses of doing business with someone they may have “introduced” to the partner. Maintaining guanxi with the intermediary might be considered important but not crucial. In this instance, damage to the guanxi with the intermediary will have some influence on the individual’s life or business, but not particularly harmful. Finally, maintaining guanxi with the intermediary may be regarded of little importance. In this case, any damage to the guanxi with the intermediary will have no harmful effect on the individual thus minimising their involvement in the dissolution of the relationship. In summary, the intervention of the intermediary and the role they could potentially play in helping to dissolve a relationship can manifest in various ways according to their importance, influence and perceived level of guanxi. The findings also reveal that attempting to maintain guanxi can have ethical consequences (see Fan, 2002), as evidenced by the manager we interviewed who felt compelled to buy his company’s office stationery from the nephew of the director of a local branch of a state-funded commerce bureau. Similarly, other informants admitted that it was common to use particular suppliers because of the non-business favours and gifts they had given. Consequently, guanxi potentially has a darker side as individual’s feel the need to bend or even break the rules.

Relationship dissolution in a transitional economy A number of countries other than China have been involved in the transition to market governance in recent years including India as well as countries in Eastern and central Europe (Peng, 1999), leading to the significant reform of private sector business. In the case of China, the transition to a market system has inevitably created predominantly a buyers market. Under current market conditions companies are relatively free to deal with firms and suppliers (including foreign companies) of their choice. This has also made relationship dissolution more a feature of business than was previously the case under the planned economic system. Market reform in China has raised customer expectations concerning prices due to a greater choice of potential suppliers than was previously the case. Under these reforms state intervention has been much reduced placing considerable importance on the survival of firms and resulting in the dissolution of some long-standing relationships between organisations as firms strive for greater profitability. Some suppliers are unable to meet the growing needs of quickly expanding customers who are often venturing into overseas markets. This was perceived as a feature of the transitional nature of the “new” economy where supply could not always meet demand. The transition from a state-led economy to a private sectorled economy has created difficulties for some firms and their management of unprofitable, or, “problem customers”. For example, instances of customer de-selection were identified as customers were unable to pay their debts. This also mirrors a current concern in China regarding the increase of defaulted bank loan debts (partly blamed on the misallocation of credit by banks) (Economist Global Agenda, 2005). For example, credit agency Standard and Poor’s, estimate that perhaps as many as 45 per cent of loans are non-performing (BBC News, 2004). In addition, bringing an individual or firm to account can be difficult in China even if they have not performed in the way that they are contractually obligated to (International Monetary Fund, 2004). In China the legal system is viewed as having a number of imperfections, thus the issue of managing “problem customers” is often more serious than it is in the west. An aspect of business made more complex when one’s word is often favoured over written contracts, making customer de-selection often difficult and potentially complex. Dissolution and third-party involvement A feature of Chinese business that was seen to complicate the dissolution process was that of third-party involvement. It is common in China for a business relationship to be initiated between unfamiliar individuals through the involvement of a third-party who acts as an intermediary or “introducer”. If one party then wished to dissolve the relationship at some point they would often be obliged to consult the third-party in

Fading away of a relationship and “face” As noted in the previous section, the level of guanxi involved in a relationship influences the need to save “face” and the involvement of a third-party. It was also found to influence the way in which a relationship was dissolved. 113

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In China the “fading away” of relationships was often favoured in cases of desired relationship dissolution making it appear as if the relationship had naturally faded involuntarily (see Pressey and Mathews, 2003). The motive behind this behaviour was to “save face” for one party making it a popular style of relationship termination in China, particularly as dissolution might lead to a reduction in “face” for one party which could potentially damage a company’s reputation within a network of firms. Thus, saving “face” by fading away a relationship is a compromise that should limit any damage to the guanxi between individuals. The fading away of relationships has its roots in the Chinese Confucian culture and the unique guanxi relationships existing in China. In China it is important to maintain guanxi even when the formal business relationship has ended as “. . . it is a form of social capital, an important resource that a person can tap into when there is a need to find help or support” (Fan, 2002). In addition, although dissolution in a western context may witness “voice” as a popular way of signalling the end of a relationship or as a means to improve the conditions of the relationship (Hirschman, 1970), in China, however, people often do not like to express their opinions or feelings directly, especially negative opinions. Therefore, the “fading away” of relations was often seen as most desirable. In comparison, Pressey and Mathews (2003) found that dissolution by the customer (or, supplier de-selection), was the most prevalent form of dissolution in western markets. The establishment of guanxi between individuals has a number of potential benefits including business information and resources, and in other areas such as assisting in efficient transport arrangements, the collection of payment, and building up the firm’s reputation and image (Davies et al., 1995). In the words of one manager we interviewed:

greater understanding and mutual trust. A favour is also likely to lead to a positive return, as individuals in China are highly concerned with returning favours they receive (Yau et al., 2000). A person who does not follow the “rule” of returning a favour will be viewed as untrustworthy and socially unacceptable (Yau et al., 2000). The supplier who is considered to offer the “best” favours to the customer would often be the first choice when the customer has several similar offerings to choose from and would also be less prone to relationship dissolution in instances of suppliers with similar offerings. Guanxi “relationship energy” post-dissolution Havila and Wilkinson (2002) argue that: Relationship energy created overtime in a business relationship cannot be completely destroyed when a business relationship ends but manifests itself, possibly in new forms, in other relationship contexts.

In China, an important feature post-dissolution is the guanxi relationship energy that exists (in the form of enduring ties or bonds between individuals), accumulated in one relationship that can be transferred to others. For example, we found that it was not unusual for a salesperson to move to another firm and take his or her customers with them, or, dissolution due to interpersonal inconsistency (see Alajoutsija¨rvi et al., 2000). Although interpersonal inconsistency may be a feature of dissolution that has been observed in western cultures, the situation in China differs somewhat as the guanxi between individuals (as opposed to firms) is commonplace and considered of the utmost importance. Business relationships in China are not so much interorganisational relationships, but ultimately one-to-one matters that are usually perceived as personal capital (Styles and Ambler, 2003; Fan, 2002). In the words of one manager we interviewed:

One more friend offers one more road to take.

. . . people rely on the trust of the people they know rather than the company’s.

Consequently, individuals usually do not want to damage or deplete the established guanxi. In order to maintain guanxi, extra care is taken in the acquisition and maintenance of “face”, which is strongly linked to status and reputation (Brunner and Wang, 1988). In the context of dissolution in China, a loss of “face” for a business partner might manifest when one party dissolves a relationship abruptly expressing dissatisfaction. Therefore, to lose a business partner’s “face” ultimately leads to destroy the personal guanxi between individuals. To cause loss of “face” is a major indiscretion in business and social relations and to be avoided at all costs (Hutchings and Murray, 2003). Therefore, the managers we interviewed often favoured the fading away of relationships.

The individual who has strong guanxi with customers or suppliers is very influential. Therefore, individuals endeavour to preserve guanxi relationships even in the case of relationship dissolution between firms in the hope that it will be a useful future resource. This bonding is also transferable and can be extended to friends and business partners (Yau et al., 2000). In China, two strangers can develop relationships quickly by using an intermediary who is a mutual friend of both parities and can vouch for their sincerity. The “guanxi link” between individuals can last for a considerable time even after the dissolution of an inter-firm relationship. Although the inter-firm relationship may have been dissolved between a customer and supplier, the managers we interviewed felt that the social bonds and trust between personnel in companies may be used to help support and accelerate the development of new business relationships. The main vehicle for this creation, development and transfer of relationship energy (in the form of guanxi) is the individuals involved in a relationship over time.

Renqing (non-business favour) and dissolution One of the contributing factors to supplier de-selection in China was found to be not renqing (offering non-business favours) effectively. The customer often interpreted this as not “giving face” or paying them enough attention. Although a lack of renqing is unlikely to result in the immediate cessation of relations it can often have a detrimental effect when it is perceived to accumulate to a certain level, especially when the customer has other feasible supply choices. Renqing can be intangible in nature such as keeping in contact with business associates by greetings or visits, or can be more tangible in nature such as the giving of gifts or other services. Offering favours helps build guanxi, which in turn helps increase the contact between two parties leading to

Theoretical and managerial implications This study contributes to our understanding of relationship dissolution in China, something that had previously received limited attention. The findings suggest that much can be gained by examining predominantly western views of 114

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relationship functionality and dysfunctionality though studies in different cultural contexts. If understanding relationships dissolution is important, as the literature suggests, then it is worthwhile examining the characteristics of dissolution in other cultures. The findings suggest a number of issues of theoretical relevance and managerial implications. Theoretically, relationship dissolution in a Chinese context was seen to be similar in some respects to western studies of dissolution in terms of adhering to the typology of relationship dissolution proposed by Pressey and Mathews (2003), however, a number of substantial differences exist. For example, residual relationship “energy” in instances of relationship dissolution has been noted in western cultures (Havila and Wilkinson, 2002). In China, however, guanxi relationship energy that can be transferred to other business relationships post-dissolution was a common feature of business as trust often existed between individuals in the main rather than organisations. A major characteristic of dissolution in China was thirdparty involvement. It is common in China for a business relationship to be instigated between unfamiliar individuals through the involvement of a third-party who is familiar to both individuals, referred to as altercasting. If two parties then wish to dissolve a relationship at some point it is often necessary to inform and consult the intermediary. It was also fairly common for the third-party to be involved in the process of dissolution acting as an intermediary between parties. In instances where the intermediary was viewed as important and influential, and where one party had strong guanxi with the intermediary, it was necessary to involve this individual in the dissolution process in order to “save face”. It was also the need to “save face” for another person that makes the fading away of relationships in China often a favoured option as it is viewed as less likely to damage any guanxi between parties. Preserving “face” and avoiding relationship dissolution in certain circumstances was also seen to be heavily reliant on renqing, or non-business favours. In terms of managerial implications, one issue is for foreign firms wishing to enter the Chinese marketplace. In addition to understanding the unique characteristics of the culture in order to build effective relationships, foreign managers should appreciate that relationship dissolution is different in many instances than perhaps they have experienced in other cultures. For example, if a foreign firm initiates a business relationship with a Chinese firm as a result of the introduction of a Chinese third party, then if in the future the decision is taken by the foreign firm to dissolve the relationship, it is important that they inform, and, if necessary, involve this third party in the dissolution of the relationship. Failure to do so may cause the third-party and business partner to lose “face”, which would then have a detrimental effect on the foreign firm in the market and network. In general, just as managers expend considerable effort in developing and maintaining functional relationships considerable effort has also to be expended in the management of dysfunctional relationships. Understanding why relationships dissolve is of particular relevance to managers and those who come into contact with customers. Managers will not have a full understanding of ongoing relationships and what contributes to their effectiveness unless they understand why and how relationships end (Tahtinen and Havila, 2004). Consequently, understanding what weakens relationships is a useful managerial activity in order

to prevent the premature ending of relationships (unless this is seen as desirable) and to avoid repeating the same problems occurring in current and future relationships. It is also important to understand how to dissolve relationships amicably, particularly as the guanxi built up between individuals in different firms can act as an important business resource in the future.

Research directions A number of pertinent research directions arise from this study. One limitation of the study is that it is based on a single informant’s viewpoint in each company. Studies in dissolution rarely examine both sides of the dyad (Good and Evans, 2001). Dyadic studies (involving both buyer and supplier from the same relationship) would afford a degree of triangulation, to aid construct validity and to elicit “replication logic”. Dyadic studies in relationship dissolution would be particularly welcomed, as they would help reduce any possible bias in relying on the perspective of one individual. It should also be noted that our study sample did not contain any managers of state-owned enterprises (SOEs). SOEs employ roughly half of China’s 750 million workers and control approximately 57 per cent of its industrial assets as well as having powerful control over key industries such as financial services, power, and telecommunications (McKinsey Quarterly, 2004). As such, future research concerning relationship dissolution in China could include managers from SOEs for the purposes of comparison with privately-owned enterprises. As guanxi often exists after a relationship has ended, it would be a natural extension of this study to examine how relationships are resurrected and rejuvenated in instances where considerable relationship “energy” still exists between individuals. It would also be pertinent to examine the ethical consequences of guanxi in instances where one party is compelled to deal with another out of a perceived personal obligation and the implications this can have on relationship dissolution particularly in a network of firms. Relationship dissolution is a challenging area of study. The sensitivity of the topic often means gaining access to data is problematic as managers may view relationship dissolution as their personal failing (a challenge to research in dissolution as noted by Tahtinen and Havila (2004) and Havila et al. (2001)). This said, however, understanding dysfunctional relationships would seem necessary in order to contribute to a more complete understanding of business relationships particularly in different cultural contexts.

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Andrew D. Pressey and Xin Xuan Qiu

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Corresponding author Andrew D. Pressey can be contacted at: [email protected]

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117

Marketing and business performance of construction SMEs in China Yiming Tang Macquarie Graduate School of Management, Macquarie University, North Ryde, Australia

Paul Wang School of Marketing, University of Technology, Sydney, Australia, and

Yuli Zhang Department of International Business Administration, International Business School, Nankai University, Tianjin, China Abstract Purpose – This study aims to examine the association between a number of variables pertaining to marketing strategy and business performance of small construction firms in Tianjin, China. Design/methodology/approach – The paper consists of a qualitative pilot study and a quantitative main survey. Findings – Long-term differentiation marketing strategy, research and development (R&D) as a percentage of sales, and years in business are found to be positively associated with a small firm’s business performance. Current product focus, government policy, quality and availability of services, conducting regular market research, firm’s registered capital and employee number, being a supplier to a few large firms, and having a few regular suppliers are not found to be significantly associated with business performance. Research limitations/implications – The study has possible location and industry-specific limitations. Practical implications – Managerially, the findings encourage small Chinese firms to adopt a long-term differentiation strategy, focusing on R&D and new product development. Government should disseminate this knowledge and facilitate small firms in obtaining necessary external finances to support their R&D programs. Such measures are vital for small firms to adapt to the increasingly competitive business environment in China’s postWorld Trade Organization era. Originality/value – By systematically examining relationships between marketing strategy and performance of the small Chinese firms, this study adds knowledge to the field of small firm research in China. Keywords Small to medium-sized enterprises, Construction industry, China, Marketing strategy, Business performance Paper type Research paper

An executive summary for managers and executive readers can be found at the end of this issue.

It is therefore vital to study SMEs’ marketing practices and their relation to business performance. Such research can not only generate guidelines for best practice, but also help to develop theories that are relevant to the business environment in China. Research in this area should help SMEs operating in China’s post-World Trade Organization (WTO) era to formulate effective strategies to ensure their long-term wellbeing and development in an increasingly competitive environment. Furthermore, such research has policy implications for the government. However, most of the existing theories or conceptual frameworks on SMEs were developed in the West and only a limited amount of rigorous empirical research on this topic has been undertaken in China. As part of a large research project on SMEs in China, the current study represents a first step towards bridging the research gap. This study examines, among other factors, the association between marketing strategy and business performance of small construction firms in Tianjin, China. Since the start of China’s economic reforms in late 1978, the construction sector has become one of the fastest growing industries in China. Between 1980 and 2003, the total number of firms, number of employees, and output value of China’s construction industry increased by 7.37 times, 3.72 times, and 80.5 times, respectively (National Bureau of Statistics of China, 2004, p. 577). In this paper, we will therefore focus on this dynamic and fast growing industry in China.

Introduction Since economic reforms that began in 1978, China’s gross domestic product (GDP) has been increasing around 9 percent per annum and together with a population of 1.3 billion people (National Bureau of Statistics of China, 2004), China is fast becoming one of the largest economies in the world. Given the growing importance of the Chinese market, there is a need to study the impact of marketing-related variables on business performance of small and medium-sized enterprises (SMEs) in China. SMEs are a key element in China’s economy, accounting for 99 percent of the total number of firms, 69.7 percent of overall employment, 48.5 percent of total firm assets (China Enterprises Association, 2001), and 65.6 percent of China’s gross output value of industry (National Bureau of Statistics of China, 2004, p. 33). The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing 22/2 (2007) 118– 125 q Emerald Group Publishing Limited [ISSN 0885-8624] [DOI 10.1108/08858620710730230]

118

Marketing and business performance of construction SMEs in China

Journal of Business & Industrial Marketing

Yiming Tang, Paul Wang and Yuli Zhang

Volume 22 · Number 2 · 2007 · 118 –125

The remaining sections of this paper are organized as follows. We will first review relevant literature on SMEs in both developed and transitional economies. We will then discuss our qualitative pilot study. This is followed by the presentation of our conceptual model and research hypotheses for examining various factors affecting business performance for SMEs in China. Next, we discuss data collection, research method, and the results from our main survey. We conclude this paper by discussing the research findings, limitations of the study, and avenues for future research.

enough. To achieve the desired economic outcomes, governments must also adapt their policies to address SMEs’ varying needs. Drawing data from Western market economies, several studies have examined the association of market orientation (MO), marketing strategies, and market environment with SMEs’ business performance (Pelham and Wilson, 1996; Appiah-Adu, 1997; Appiah-Adu and Singh, 1998; Horng and Chen, 1998; Pelham, 2000; Siu et al., 2004). The results show that an SME’s practice of MO – a business philosophy guiding a firm to identify target markets, understand their needs, and co-ordinate business functions to best serve the needs of, and to create added values for, the target markets (Kohli and Jaworski, 1990; Narver and Slater, 1990) – is positively associated with its business performance. Low-cost and innovation/differentiation are identified as two dominant marketing strategies for most SMEs, yet their relationship with business performance was mixed. Little evidence was found to link an SME’s market environment to its business performance. Siu (2000) studied the marketing practice and business performance of 87 Chinese small firms across industries. The high performers (seven in total, or 8 percent of the sample) were found to have undertaken comprehensive situation/market needs analysis and have utilized sophisticated planning tools, including strength, weakness, opportunity and threat (SWOT) analysis, the Experience Curve, Portfolio Planning Matrices, and profit impact on sales (PIMS), etc. They set up a long-term profitability objective, and have followed a market expansion strategy, focusing on superior product design and after-sales services. Low performers (24 firms, or 28 percent of the sample) relied on cost-reduction as their key marketing strategy in order to “sell to whomever would buy” (Siu, 2000, p. 108).

Literature review There is no shortage of published studies examining various aspects of SMEs around the world. Many have pointed out the significant benefits that SMEs provide to a national economy, including their contributions to the economic development, industrial output, employment creation, and tax revenue. Examples of such studies include those conducted in the USA (Iqbal, 2000), Europe (Lyberaki, 1994; Dutta and Evrard, 1999), Australia (Graham, 1999), New Zealand (Lilley, 1998), and China (Chow and Tsang, 1994; Lin and Zhou, 2003). Some have attributed SMEs’ contribution in employment growth to the entrepreneurial and innovative culture, which is often the result of a relatively decentralized and flexible internal organization of many small businesses (Acs and Audrtsch, 1990). Compared to large enterprises, SMEs face many unique challenges, including: . limited resources and lack of experience in conducting formal market research and segmentation studies (Carson, 1990; Siu and Kirby, 1998; Verhees, 1998; Bamforth and Brookes, 2002); . their owners’ and/or managers’ lack of marketing skills and expertise (Carson and Cromie, 1990; Callahan and Cassar, 1995; Harris and Watkins, 1998; Siu and Kirby, 1998); and . the tendency of limiting their marketing to “selling” within their own industry (Carson, 1990).

Pilot study In the studies reviewed above, the key marketing concepts had originated from the West. By and large, their applicability to SMEs in China remains an unresolved question. Siu’s (2000) study, while extremely relevant to the current study, was based on a limited sample of cross-industry small firms in Guangdong, one of China’s most economically developed provinces. Therefore, the applicability of such findings to SMEs in other regions of China needs further verification. To address these issues, a pilot study was first conducted via semi-structured personal interviews with chief executives at ten SMEs in Tianjin. Together with Beijing, Shanghai, and Guangzhou, Tianjin constitutes China’s four largest cities with a vibrant SME sector. Most interviewees felt that the MO concept, while sound in principle, is not easily followed in China due to different market conditions. The most frequently cited business philosophy is the frequent switching of products aiming for higher sales and profits, echoing the “opportunist orientation” practiced by most businesses in China (Peng, 2003, p. 26). Most interviewees were unfamiliar with SWOT analysis, the Experience Curve, Portfolio Planning Matrices, and PIMS methods, but relied more on intuition for marketing analysis and decision making. Consistent with the findings by Pelham and Wilson (1996) and Pelham (2000), current product focus and long-term differentiation are two key marketing strategies practiced by all companies in our pilot study. According to the interviewees, the majority housing products available in

Specific challenges confronted by SMEs in China include both internal financial resources constraints and high barriers to obtaining external finances (Yao, 2003), government policy restrictions, and triangle debts, etc. Triangle debt is a common word used in China to refer to debt collection problems that involve three or more companies (Tang and Zhang, 2002). Governments in both developed and transitional economies have pursued a deregulation policy to improve the business environment in which SMEs operate, and have formulated programs specifically designed to support SMEs to deal with the challenges that they face (OECD, 1996; Parker, 2000). However, while such policies and programs have produced some positive results, the outcomes have often been uneven across countries, due to differences in economic conditions, development stages, and business environment that SMEs face. It is also due to SMEs’ varying needs and capacity in dealing with these factors (Ernst & Young, 1997, cited by Bryson et al., 1999, pp. 95-105; Smallbone and Welter, 2001). In addition, SMEs’ economic contribution levels also vary (Parker, 2000). This suggests that having good government policies supporting SMEs’ development is not 119

Marketing and business performance of construction SMEs in China

Journal of Business & Industrial Marketing

Yiming Tang, Paul Wang and Yuli Zhang

Volume 22 · Number 2 · 2007 · 118 –125

China remain very basic (i.e. apartments with bare walls, cement floor, and no closets, etc.). Purchasers of such products need to outlay a significant amount of extra money for further finishing work. While there is a clear need for further adaptation of such products, managers of the firms focusing on current products concedes that the potential for this adaptation is very limited, due to backward design, rising labor and material costs, and the rapid change of market needs. On the other hand, there is an increasing market demand for better-designed apartments (i.e. with finished floors, ceilings and closets, etc.). While such products usually command much higher prices, they seem to sell much faster. As such, companies focusing on innovation seem to do better than their competition. Most interviewees were not sure of their company’s exact market share, due to the small scale of their operations. Nine business environmental factors identified by interviewees as most important to an SME in China relate to government policy, the availability and the quality of services. They are similar to those found in other transitional economies (Fogel and Zapalska, 2001). In addition, financial resources and triangle debts were identified as the key challenges facing most SMEs in China. Compared to Siu’s (2000) study, our pilot sample firms were far less sophisticated in their marketing practice, suggesting that the Western-oriented marketing concepts may not be applicable to SMEs in Tianjin. The concepts of MO, SWOT, PORTFOLIO and PMIS were therefore excluded from our main survey.

Given China’s transitional economy and the importance of government policy for the success of SMEs in China, as evidenced by our pilot study results, the following two research hypotheses are proposed: H3. Satisfaction level of the government policy towards SMEs is positively associated with business performance of SMEs in China. H4. Satisfaction level of the availability and the quality of services to SMEs is positively associated with business performance of SMEs in China. Economic theory would suggest that the key challenges faced by SMEs would limit both their current operation and future development. As such, it is hypothesized that: H5. The challenge in obtaining financial resources faced by an SME is negatively associated with its business performance. H6. The challenge in triangle debt faced by an SME is negatively associated with its business performance. China’s industrial classification organizes the country’s various industries into primary, secondary, and tertiary grouping. The construction industry, under the secondary grouping, has a per company average employee number and average fixed assets value of 496 people and RMB 13.5 million, respectively, as compared to the 293 employees and RMB 53.8 million fixed assets average for all companies in all industries within this grouping (National Bureau of Statistics of China, 2004, pp. 518-19, 521, 578). These figures show that China’s construction industry is more labor intensive, while the others are relatively more capital and technology intensive. As such, SMEs in these other industries have a far greater need to cooperate closely with large firms in order to overcome their capital investment and technology challenges. Because of China’s abundant labor supply, it appears unnecessary for SMEs in the construction industry to do so (Lin and Zhou, 2003). It is therefore hypothesized that: H7. Formalized supply contract with a few large firms is not associated with business performance of SMEs in China. H8. Formalized purchase contract from a few suppliers is not associated with business performance of SMEs in China.

Conceptual model and research hypotheses Because most of the existing theories on SMEs have been originated from the West and little research on this topic has been undertaken in China, we have formulated the following conceptual model and research hypotheses based upon predominantly Western theories on SMEs. In addition, the development of the conceptual model and research hypotheses were further informed by the rich findings of our pilot study with SMEs in China (Figure 1). A total of eight research hypotheses are constructed. Based on our pilot study findings on the two prevailing marketing strategies practised by our SMEs in Tianjin, the following two research hypotheses are formulated: H1. Current product focus strategy is not positively associated with business performance of SMEs in China. H2. Long-term differentiation strategy is positively associated with business performance of SMEs in China.

Although we focus on the influences of marketing strategies, business environments, business challenges and relationships on business performance of SMEs in China, previous research suggests that several other factors affect business performance (e.g. Pelham and Wilson, 1996; Storey, 1994). They include firm characteristics such as business history, number of employees, registered capital, R&D expenditure, number of new products, and whether SMEs conduct regular market research. Controlling for such variables provides a stronger test of the research hypotheses developed in our model.

Figure 1 Conceptual research model

Methodology A structured survey was sent to 11,000 SMEs on the registration list of Tianjin Bureau of Industry and Commerce, together with the Bureau’s cover letter endorsing the survey. A total of 3,669 usable surveys were received, achieving a 33.4 percent response rate. To control for industry effect, this study focuses on the fast growing construction sector and utilizes data from the 141 surveys completed by small construction firms. Since the survey was sent to 616 120

Marketing and business performance of construction SMEs in China

Journal of Business & Industrial Marketing

Yiming Tang, Paul Wang and Yuli Zhang

Volume 22 · Number 2 · 2007 · 118 –125

construction firms in the sampling frame, these 141 construction companies represent a response rate of 22.9 percent. Our sample firms averaged RMB13.76 million in annual sales, RMB4.34 million in assets, and 172 in the number of employees. They are within the upper limits of the classification benchmarks for small construction firms: RMB30 million in sales, RMB40 million in assets, and 600 employees (National Statistics Bureau of China, 2003).

orientations stated by our pilot firms, we chose to use objective performance measures in term of sales revenue, net profits, and profitability for this study. We are fortunate that the local government’s support of this study has enabled us to collect the needed objective performance data. Specifically, high performers are defined in this study as firms showing positive growth trends in all three areas over the previous three-year period. Low performers are those showing opposite trends in each of these dimensions, while average performers are those showing mixed trends, over the same period. Accordingly, the low, average, and high performers accounted for 30.5 percent, 53.2 percent, and 16.3 percent of our sample, respectively.

Measurements A five-point Likert type scale was used to measure all items in the marketing and business environment scales (1 ¼ not practiced and 5 ¼ practiced to a great deal for the current product focus and long-term differentiation strategy; and 1 ¼ dissatisfied and 5 ¼ very satisfied for the government policy towards SMEs, and the availability and quality of services for SMEs scales). Items to measure these four scales were adapted from Pelham (1993, 1996) and Pelham and Wilson (2000). Other variables, including an SME’s R&D spending as percent of sales; whether an SME conducts regular market research, whether it supplies to a few large firms, and whether it holds purchase contract with a few suppliers; an SME’s registered capital, numbers of employees, and number of years in business, were measured using items adapted from Storey (1994). Business performance measurement is an issue that attracts debate. Many researchers have relied on top management’s subjective assessment of their firm’s performance in terms of product success, sales and market share growth, and profitability, as compared either to expectation (Pelham, 1993; Storey, 1994; Pelham and Wilson, 1996; Appiah-Adu, 1997; Appiah-Adu and Singh, 1998), or to their main competition (Brooksbank et al., 1992; Siu, 2000). Others utilized objective measures in terms of turnover, profitability, and export sales (Ernst & Young, 1996 and 1997, as cited in Bryson et al., 1999, pp. 95-105), productivity, maintenance efficiency, on-time delivery, lead time, capacity utilization, and quality (Lind et al., 2000; Hvolby and Thorstenson, 2001). While conventional wisdom would credit objective measures with higher objectivity and accuracy, more researchers have so far relied on the use of subjective performance measures. Their reasons for doing so include: . difficulty in obtaining objective performance data (Fiorito and LaForge, 1986); . such performance data are shaped by industry specific factors (Miller and Toulouse, 1986), thus, it is inappropriate to use them for cross-industry comparison (Appiah-Adu, 1997); and . the strong correlation found between objective and subjective measures (Dess and Robinson, 1984).

Data analysis Cronbach’s coefficient alpha values for the two marketing strategy scales and two business environment scales range from 0.689 to 0.791, indicating acceptable reliability of these measures (Nunnally, 1978; Peter, 1979). When the dependent variable is discrete, either multiple discriminant analysis or logit analysis can be used to examine the association between the dependent variable and the independent variables (Hair et al., 1998; Sharma, 1996). However, logit analysis has several advantages over discriminant analysis in that it does not rely on any assumption about the distribution of the independent variables, and its output is similar to linear regression with straightforward statistical tests. Several forms of logit analysis exist, including multinomial logit and ordered logit (Greene, 2003; McCullagh and Nelder, 1989). When the dependent variable is ordinal, ordered logit is recommended because multinomial logit ignores the ordered aspect of the dependent variable and discards useful information in the data (Anderson, 1984; McCullagh, 1980). Given that the dependent variable of our study is discrete and ordinal, ordered logit model was chosen for our hypotheses testing. The results are summarized in Table I. McFadden’s (1974) pseudo R-square for the model is 0.094, showing acceptable model fit (Louviere et al., 2000). The goodness of model fit is further supported by the hit-ratio of 60.0 percent being larger than 53.2 percent, the largest observed share of the dependent variable (Hair et al., 1998). Current product focus strategy has a negative coefficient of 2 0.083, which is not significant at 0.05 level, indicating that H1 is supported. In other words, the current product focus strategy is not significantly associated with an SME’s business performance. Long-term product differentiation strategy has a coefficient of 0.61, which is significant at 0.05 level, indicating long-term product differentiation strategy is positively associated with an SME’s business performance. Therefore, H2 is also supported. The coefficient of government policy towards SMEs and that of services quality and availability to SMEs are 20.363 and 0.212, respectively, However, neither is significant at 0.05 level, indicating H3 and H4 are not supported. Facing financial resources challenge has a coefficient of 20.443, which is significant at 0.05 level, indicating that H5 is supported. On the other hand, facing triangle debt challenge has a coefficient of 0.047, but is not significant at 0.05 level, suggesting that H6 is not supported. The coefficient of being a formal supplier to a few large firms and that of having a few steady suppliers are 20.434 and 2 0.161, respectively. Neither of

These reasons implicitly suggest that objective measures should be used, if relevant performance data are available, and if the industry-effect can be controlled. Siu (2000) classified an SME as a high-performer if it is judged to be better than its key competitor by top management. This classification would be questionable if the competitor in question is a low performer, and/or not easily identifiable. Because of SMEs’ limited resources, Hvolby and Thorstenson (2001) emphasized the importance for SMEs to utilize only the most critical performance indicators. Given the profitability and sales growth 121

Marketing and business performance of construction SMEs in China

Journal of Business & Industrial Marketing

Yiming Tang, Paul Wang and Yuli Zhang

Volume 22 · Number 2 · 2007 · 118 –125

Table I Marketing strategy, organizational characters, and business performance of small construction firms in Tianjin (n ¼ 141) Coefficient

Std error

Z-value

Comment

Predictors (independent variables) Current product focus strategy Long-term differentiation strategy Government policy towards SMEs Service quality and availability to SMEs Facing financial resources challenge Facing triangle debts challenge Formal supplier to a few large companies Having a few steady suppliers R&D as percentage of sales Number of new products launched over last year Conduct regular market research Number of years in business Registered capital (RMB million) No. of employees

2 0.083 0.610 2 0.363 0.212 2 0.443 0.047 2 0.434 2 0.161 1.793 0.885 0.378 0.949 0.031 2 0.093

0.284 0.273 0.424 0.416 0.210 0.289 0.319 0.238 0.564 1.062 0.339 0.354 0.158 0.163

20.29 2.23 * * 20.86 0.51 22.22 * 0.16 21.36 20.68 3.18 * * 0.83 1.12 2.68 * * 0.20 20.57

H1 H2 H3 H4 H5 H6 H7 H8 Control variable 1 Control variable 2 Control variable 3 Control variable 4 Control variable 5 Control variable 6

Model goodness-of-fit statistics Log McFadden’s Pseudo R Hit (5)

2 126.917 0.094 60.0

Notes: *p , 0:05; * *p , 0:01

them is significant at 0.05 level. Therefore, both H7 and H8 are supported. Results of the control variables in this study show that an SME’s R&D spending as a percent of sales has a coefficient of 1.794, and is significant at 0.01 level, showing that high performers have a significantly higher level of R&D, as compared to average and low performers. Furthermore, the coefficient of the number of new products launched over last year and that of conducting regular market research are 0.885 and 0.378, respectively. Neither is significant at 0.05 level. Number of years that an SME is in business has a coefficient of 0.949 and is significant at 0.01 level, showing that high performers have a significantly longer history than average and low performers. Neither the registered capital amount nor the number of employees is significant at 0.05 level, indicating that they are not associated with an SME’s business performance.

the business performance of our sample firms. Further analysis shows that ratings for the government policy, and for the availability and quality of services to SMEs, both exceed their average of 13.2 (based on the four-item, five-point scale) and 16.4 (based on the five-item, five-point scale), respectively. These findings suggest that our sample firms are generally satisfied with government policies, which is indicative of the success of Chinese government’s economic and housing reforms implemented in recent years. Third, there are mixed results for the control variables used in this study as well. Specifically, registered capital and employee numbers are found to be not associated with the business performance of our sample firms, confirming Siu’s (2000) findings. However, a small firm’s number of years in business is positively associated with its business performance, suggesting that firms have learned from prior experience. And fourth, neither the supply contract with a few large firms nor the purchase contract with a few suppliers is associated with the business performance, further suggesting that alliance in China’s construction industry seems unnecessary at the current stage of development.

Discussion Our data analysis has produced very interesting results. First, the current product focus marketing strategy is not significantly associated with the business performance of the small firms in our sample, while the long-term differentiation marketing strategy is. Related to the latter, the R&D spending as percentage of sales is also significantly and positively associated higher business performance, while the number of new products launched last year is not. These results contradict the findings by Pelham and Wilson (1996) and Pelham (2000). Furthermore, the finding that conducting regular market research is not associated with business performance contradicts Siu’s (2000) results, but echoes those from other studies (Carson, 1990; Siu and Kirby, 1998; Verhees, 1998; Bamforth and Brookes, 2002). Second, the satisfaction level of neither government policy towards SMEs nor services quality and availability to SMEs is associated with

Management and policy implications Overall, our findings suggest that the key to the success of small construction firms in China is to follow a long-term differentiation marketing strategy, focusing on R&D and on the development of new housing products that better serve the market needs. Such findings seem logical in light of China’s housing reforms and the significant development of its construction industry since 1978. In 1978, Chinese people’s housing needs were barely being met; when the country’s per capita living floor space in urban and rural areas were 3.6 m2 and 8.1 m2, respectively (National Statistics Bureau of China, 1996). There was only marginal improvement of this situation until the late 1990s when the 122

Marketing and business performance of construction SMEs in China

Journal of Business & Industrial Marketing

Yiming Tang, Paul Wang and Yuli Zhang

Volume 22 · Number 2 · 2007 · 118 –125

government took action to promote private residential property ownership, mortgage financing, and secondary market development, and effectively transforming China’s residential housing from welfare goods to market goods (Li, 1997). By 2003, per capita living floor space in urban and rural areas increased dramatically to 23.7 m2 and 27.2 m2, respectively[1] (National Bureau of Statistics of China, 2004, p. 355). Riding on the waves of the rapid housing market development in recent years, construction companies focusing on R&D and new product development were able to offer newer housing products that better serve the hugely unmet housing needs in China. As a result, they have performed much better than those focusing on existing product adaptation. Managerially, such findings have significant implications for small construction firms in Tianjin and other regions in China. They clearly call for the adoption of a long-term differentiation marketing strategy with a focus on R&D and new product development. In addition, younger firms would benefit by learning from the experience of the more established firms in how to conduct businesses. On the policy front, China’s vibrant residential housing sector and its construction industry, together with the high performance of those firms focusing on R&D and on new product development, highlight the success of the Chinese government’s current housing reform policy. Compared to the standards of developed economies, China’s current per capita floor space is no doubt still quite low. However, China can be justly proud of its remarkable housing reform achievements within such a short period of time. In addition, given the association found in this study between marketing strategy and business performance, there is value in dissemination by government of this information to encourage small firms to focus more on long-term differentiation, R&D, and new product development. This could be achieved by government initiatives such as management training programs and education campaigns designed to promote the adoption of such marketing strategies. Given their limited size and difficulty in trying to obtain external finances to fund their R&D activities, small construction firms will face increasing resources pressure when they try to adopt and implement the long-term differentiation marketing strategy with a focus on R&D and on new product development. Therefore, it is advisable for the government to do more to facilitate external financial support, via bank loans and other means, rather than for the government itself to invest in small firms. Such a policy will better assist small firms in their further development. Furthermore, it will help them to better prepare for and adapt to an increasingly competitive post-WTO business environment. Ultimately, such measures would contribute significantly to the long-term well-being of the small business sector in China, which is so vital not only to the country’s economic growth, but to its social stability as well.

should be noted that some of the proposed research hypotheses are tentative in nature given the limited theoretical research on SMEs in China at present. Future research should pay more attention to theory development in the context of the business environment in China. Nevertheless, this study can be seen as a major step towards systematically examining the association between marketing strategy and business performance of SMEs in China, and thus adding knowledge to this important area of research.

Note 1 The 2003 urban figure represents the “building space”, while the rural figure represents the “living space” (National Bureau of Statistics of China, 2004, p. 355).

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Limitations and future research directions The current study, focusing on small construction firms in Tianjin, may have possible industry and location biases. Before generalization can be drawn, further studies are needed to examine the association of SMEs’ marketing strategy and business performance in the context of other industries and/or other geographical locations. In addition, it 123

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Yiming Tang, Paul Wang and Yuli Zhang

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Frontiers in Econometrics, Academic Press, New York, NY, pp. 105-42. Miller, D. and Toulouse, J. (1986), “Strategy, structure, CEO personality and performance in small firms”, American Journal of Small Business, Vol. 10 No. 3, pp. 47-62. Narver, J. and Slater, S.F. (1990), “The effect of a market orientation on business profitability”, Journal of Marketing, Vol. 54 No. 4, pp. 20-35. National Bureau of Statistics of China (2004), China Statistical Yearbook – 2004, China Statistics Press, Beijing. National Statistics Bureau of China (1996), “Improvement in people’s material and cultural life”, (in Chinese), available at: www.stats.gov.cn/ndsj/information/zh1/i011a National Statistics Bureau of China (2003), “Classification standards for large, medium and small sized enterprises”, (in Chinese), available at: www.stats.gov.cn/tjbz/qyhxbz/ t20030528_80450.htm Nunnally, J.C. (1978), Psychometric Theory, McGraw-Hill, New York, NY. Organization for Economic Co-operation and Development (OECD) (1996), Public Support to Industry: Report by the Industry Committee to the Council at the Ministerial Level, OECD, Paris. Parker, R. (2000), “Small is not necessarily beautiful: an evaluation of policy support for small and medium-sized enterprises in Australia”, Australian Journal of Political Science, Vol. 35 No. 2, pp. 239-53. Pelham, A.M. (1993), “Mediating and moderating influences on the relationship between market orientation and performances”, PhD dissertation, Pennsylvania State University, University Park, PA. Pelham, A.M. (2000), “Market orientation and other potential influences on performance in small and medium-sized manufacturing firms”, Journal of Small Business Management, Vol. 38 No. 1, pp. 48-67. Pelham, A.M. and Wilson, D.T. (1996), “A longitudinal study of the impact of market structure, firm structure, strategy, and market orientation culture on dimensions of small-firm performance”, Journal of the Academy of Marketing Science, Vol. 24 No. 1, pp. 27-43. Peng, J.F. (2003), “Top ten marketing challenges in China in 2002”, China Marketing, Vol. 1 No. 1, pp. 26-9 (in Chinese). Peter, J.P. (1979), “Reliability: a review of basic issues and marketing practice”, Journal of Marketing Research, Vol. 16 No. 1, pp. 6-17. Sharma, S. (1996), Applied Multivariate Techniques, John Wiley & Sons, New York, NY. Siu, W.S. (2000), “Marketing and company performance of Chinese small firms in mainland China: a preliminary study”, Journal of Small Business and Enterprise Development, Vol. 7 No. 2, pp. 105-22. Siu, W.S. and Kirby, D.A. (1998), “Approaches to small firm marketing: a critique”, European Journal of Marketing, Vol. 32 Nos 1/2, pp. 40-60. Siu, W.S., Fang, W.C. and Lin, T.L. (2004), “Strategic marketing practices and the performance of Chinese small and medium-sized enterprises (SMEs) in Taiwan”, Entrepreneurship and Regional Development, Vol. 16 No. 2, pp. 161-78. Smallbone, D. and Welter, F. (2001), “The role of government in SME development in transition economies”, International Small Business Journal, Vol. 19 No. 4, pp. 63-81. 124

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Journal of Business & Industrial Marketing

Yiming Tang, Paul Wang and Yuli Zhang

Volume 22 · Number 2 · 2007 · 118 –125

Further reading

Storey, D.J. (1994), Understanding the Small Business Sector, Routledge, New York, NY. Tang, Y.M. and Zhang, Y.L. (2002), “Challenges facing SMEs in China: a preliminary analysis”, Proceedings of ANZMAC (Australia and New Zealand Marketing Academy Conference) 2002 Conference, Melbourne. Verhees, F. (1998), “Market orientation, product innovation and company performance: the case of small independent companies”, Proceedings of the 27th EMAC Conference, Stockholm. Yao, M.L. (2003), “An empirical analysis of the current financing status of SMEs in China and their needs for credit guarantee”, in Zhang, Y.L. (Ed.), Proceedings of the 1st Conference on the Study of Business Venturing and Entrepreneurship, Nankai University Press, Tianjin, pp. 225-31 (in Chinese).

Hines, P. (2002), “Strategy and buyer-supplier relationship”, in Warner, M. (Ed.), International Encyclopedia of Business and Management, Thomson Learning, London, pp. 6165-84. Payne, A. (2002), “Relationship marketing”, in Warner, M. (Ed.), International Encyclopedia of Business and Management, Thomson Learning, London, pp. 5595-602.

Corresponding author Yiming Tang can be contacted at: [email protected]

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125

Business-to-business marketing as a key factor for increasing service revenue in China Heiko Gebauer Institute for Technology Management, University of St Gallen, St Gallen, Switzerland

Chunzhi Wang Changchun University of Science and Technology, Shaoxing County, China, and

Bernold Beckenbauer and Regine Krempl Institute for Technology Management, University of St Gallen, St Gallen, Switzerland Abstract Purpose – This study seeks to examine how Chinese culture affects business-to-business marketing strategies and service revenue in manufacturing companies. Design/methodology/approach – The paper used a combination of qualitative research approaches, namely interviews, longitudinal study and bipolar case studies. The sequence of the qualitative research approaches was chosen to maximize internal and external validity. Findings – The findings expose the impact of the characteristics of Chinese culture on a firm’s potential to generate high service revenues in business marketing. Research limitations/implications – The study has possible location- and industry-specific limitations. Originality/value – The implicit logic for increasing service revenue starts with overcoming typical and, in some respects, limiting cultural characteristics. These characteristics limit business-to-business marketing for increasing service revenue. Monitoring the effects of Chinese culture and gaining an understanding of how they have to be managed provides some guidance for managers to generate high service revenues. Keywords Customer service management, Manufacturing industries, China, National cultures Paper type Research paper

market. In addition, 62 percent of those companies that have not yet entered the Chinese market are planning to do so within the next five years. The starting point for our hypothesis is the observation that most Swiss machine and equipment manufacturing companies have found it extremely difficult to transfer their traditional business model to China. A business model is generally defined as the way in which companies generate their revenue and profits. Today, Swiss machine and equipment manufacturers generate a major share of their total revenue through services. The share of service revenue on total revenue represents a service-related performance outcome in manufacturing companies. Service-related performance outcomes can include the quality of customer relationships (a non-financial outcome) and direct service profitability (a financial outcome) (Homburg et al., 2003). The first construct comprises such aspects as intensity of interaction with customers, intensity of personal relationships with customers, customer satisfaction and loyalty. Direct service profitability relates to the degree to which manufacturing companies directly earn money by offering and charging services to their customers. However, in this proposal, we will focus on the share of total revenue attributable to services. The share of service revenue as a proportion of overall revenue, can be interpreted as the service component in relation to the income generated. The share of total revenue attributable to services is sometimes referred to in the literature as the “value proposition”, for example in Oliva and Kallenberg (2003). However, in this paper, we will use the term share of service revenue to total revenue, which expresses more precisely the phenomenon we wish to convey.

An executive summary for managers and executive readers can be found at the end of this issue.

Introduction Until the late 1990s, only a few Swiss machine and equipment manufacturing were active in the Chinese market. The majority of them concentrated their business on the European or American markets or on other Asian countries such as Singapore, Hong Kong, Taiwan or Japan. Companies like Schindler, Sulzer, Bu¨hler and Saurer rank among the exceptions. These organizations have been present in the Chinese market since the early 1980s. Since most European or American markets have reached an advanced stage of maturity and China offers attractive growth opportunities, more and more Swiss machine and equipment manufacturing companies have entered the Chinese market over the last couple of years. The high speed of economic growth and the large population of 1.3 billion, for example, add up to a rapidly growing demand for consumer goods leading to emerging markets for machines and equipment. As our own study among 118 Swiss companies indicated in 2004, 41 percent of Swiss companies have already entered the Chinese The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing 22/2 (2007) 126– 137 q Emerald Group Publishing Limited [ISSN 0885-8624] [DOI 10.1108/08858620710730249]

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Journal of Business & Industrial Marketing

Heiko Gebauer et al.

Volume 22 · Number 2 · 2007 · 126 –137

To generate a major share of the total revenue through services cannot be achieved without a clear service marketing and management. According to the 4P model (product, price, place and promotion), there has to be a service that can be priced, communicated, and distributed to the consumers (Gro¨nroos, 1998). This also included typical service management approaches such as empowering service workers to offer services proactively and increasing the service orientation of the corporate culture. According to our survey in January 2005, Swiss companies achieved on average 21.2 percent of their total revenue through services in Europe. However, the service revenue share is significantly lower in China. Swiss companies indicated that on average they only earn 10.3 percent of their revenue through services. As a result of significantly lower service revenue, Swiss companies are losing potential margins, thus weakening their overall profitability. In general, services offer potentially higher margins than products. The average margin for products is just 1 percent. In contrast, services offer margins of more than 10 percent. Consequently, the operating margin is 5.2 percent in China, compared to 8.1 percent in Europe (see Figure 1). Nevertheless, we observed that some Swiss companies are quite successful at achieving an attractive share of revenue with services even if the average figure is only 10.3 percent. Our current data show that, even in China, 14 percent of the investigated companies generate more than 20 percent of their total revenue through services. If it was basically impossible to achieve an attractive service revenue share in China, it would then be easy to explain why most Swiss companies struggle to increase their service revenue. However, this would not explain why some companies have previously posted an attractive level of service revenue in China. Existing literature does not offer concrete suggestions as to how Swiss manufacturing companies might successfully increase their ratio of service revenue to total revenue in the Chinese context. To close the research gap, our paper tries to answer the following research questions: . How does business-to-business marketing contribute to increasing the share of service revenue? . How does Chinese culture affect business-to-business marketing?

.

How can Swiss companies overcome the effect of Chinese culture on business-to-business marketing?

Answering these research questions brings us closer to a theory and service marketing guideline for machine and equipment manufacturing companies in China. In case of a product manufacturer, in our context, service marketing concentrates on the 4P model (product, price, place and promotion), there has to be a service that can be priced, communicated, and distributed to the consumers (Gro¨nroos, 1998). According to Gro¨nroos and Gummesson (1985), the marketing of services cannot be separated from overall service management. Thus, we also included typical service management approach such as empowering service workers to offer service proactively and service-orientation of the corporate culture in our study. The next section describes our research methodology. In the third section, we describe the transition line from products to services as a key concept for service management in manufacturing companies. In this section, we also link the transition line to business-to-business marketing strategies for manufacturing companies. In the fourth section, we apply several qualitative research methods to identify and validate effects of Chinese culture on business-to-business marketing. We explain how different Chinese cultural characteristics limit or support business-to-business marketing. Finally, we offer some guidance for managers in overcoming the limiting effects and discuss the implications for further research.

Research methodology By investigating the effects of Chinese cultural characteristics on business-to-business marketing and service revenue, we rely on several core characteristics of service management (Gro¨nroos, 1998; Oliva and Kallenberg, 2003; Kurtz and Clow, 1998; Lovelock, 2001). On the cultural side, we refer to characteristics of Chinese culture (Hofstede, 1991; Davies, 1995; Arias, 1998). Since increasing service revenue in China is a complex and context-bound organizational issue, we concentrated on qualitative research approaches (Miles and Huberman, 1994). While qualitative studies may be considered inappropriate with respect to generalizability (Lincoln and Cuba, 1985), we concentrated on the transferability of our results. We applied three different qualitative research approaches (interviews, longitudinal study and bi-polar case studies). The sequence of our qualitative research approaches was chosen to maximize internal and external validity. External validity in the context of qualitative studies refers to the extent to which the results of our single, in-depth case study are transferable. Internal validity is the approximate truth about cause-effect or causal relationships (Eisenhardt, 1989). Our first qualitative study is based on a single, in-depth case study. We refer to the company by the pseudonym Swiss Machine Inc. The first author conducted a single case study based on a qualitative research methodology (Yin, 1994), involving inductive inquiry and field study between 1998 and 2004. This allowed direct observation of key parts of the corporation’s initiative to increase service revenue in China. Because the study covered a period of seven years, it can be also interpreted as a longitudinal study. This study is based on multiple sources of evidence: archival data, company documentation, and, most importantly, participation in

Figure 1 Operating margin and share of service revenue in Europe and in China (n ¼ 118)

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Volume 22 · Number 2 · 2007 · 126 –137

internal workshops, interviews ranging from service workers and managers to the chief executive officer (CEO), and customer surveys in China. The customer surveys were conducted on a regular basis: 1998, 2000, 2002 and 2004. The survey used a standardized questionnaire covering topics on customer value as perceived by Chinese customers. More than 35 Chinese customers of Swiss Machine Inc. participated in each survey. Our second qualitative study was conducted at the end of 2004. It involved 15 interviews with companies who had recently completed initiatives for increasing the ratio of service revenue to total revenue in China. Representatives of the following management functions participated in the 15 interviews: general management (seven), service management (five) and sales (three). Most interviews were recorded through extensive notes taken during the interviews. Based on the interview transcripts and some secondary data, we wrote 15 mini-case studies describing the main effects of Chinese culture on business-to-business marketing and increasing service revenue in China. Participants and the research team reviewed the cases, identifying gaps in the narrative and suggesting additional data collection. The reviews often led to interviewees providing more detailed background information. By allowing all the participants to review their cases, we were able to offset some of the bias normally associated with retrospective interviews. These interviews helped us to externally validate the main effects of Chinese culture on business-to-business marketing. Third, to enhance internal validity in respect of the causal relationship between Chinese culture and service revenue we recently completed four bipolar case studies. Two of the four manufacturing companies have been highly successful in their transition from products to services. Over the last couple of years, they increased service revenue share from 6 and 7 percent respectively to over 25 percent. In contrast, the other two manufacturing companies struggled to increase service revenue share. They only increased their shares from 5 and 6 percent respectively to less than 10 percent. Again, the four case studies are based on multiple sources of evidence: financial reports, company documentation, and, most importantly, participation in internal workshops, and interviews with employees. Our expectation was that a comparison of these polar-typed case studies would help to internally validate what prevents or limits the success of initiatives to increase service revenue in China. Overall, the research process is positioned between deductive and inductive qualitative studies, being neither a test of an already developed theory nor a development of a new theory. Rather, it is an extension of an existing theory (Strauss and Corbin, 1990) through dialectic interaction between field studies and existing theory.

A product manufacturer produces core products, with customer service purely as an add-on to the product (Oliva and Kallenberg, 2003). The notion of customer service refers to Lovelock’s (1994) “flower of service” framework wherein he depicts a seller’s total offering to a customer as an eightpetalled flower whose centre represents the seller’s basic product (good or services), while its petals represent key elements of how the seller serves the customer (e.g. information, billing, etc.). Profits and revenue are mainly generated through the company’s core products, and the contribution of services is quite low in terms of revenue, profit and customer satisfaction. As a result of more complex customer needs and increasing competition, selling products and offering customer service is in an advanced stage of maturity. A debate emerged on the rise of services as a source of added value in the manufacturing sector (Quinn et al., 1990), leading to the position of providing product-related services for the installed base. Product-related services fit the traditional view of a service offering in the business market (a typical illustration of such a service is an after-sales service like repair, inspection, etc.). Product-related services for the installed base can raise revenues. Potts (1988), for example, argues that the cumulative installed base can yield an attractive service revenue annuity. The installed base is the total number of products currently used by the customers. The entire service revenue is around one or two orders of a greater magnitude than annual new product sales and offers higher margins than products (Wise and Baumgartner, 1999). As a differentiation strategy, maintaining competitive advantage by offering product-related services is increasingly more challenging. The equipment and machine manufacturing industry must also consider the everincreasing customer expectations and provide innovative services that respond to them. The driving force behind the rise of customer expectations is the pressure on customers to downsize in order to create more flexible firms and to define narrower core competencies that lead to a higher specialization. The rise of customer expectations proceeds along the following lines: customers expect to reduce their investment when purchasing equipment. Windahl et al. (2004), for example, argue that customers do not want to invest in a pump, instead they want to buy the performance of x m2/s of pumped liquid. Another example would be to deliver “availability” of specific equipment. It is no longer enough for manufacturing firms merely to offer some form of productrelated services for the installed base in order to ensure a competitive advantage and to fulfill increasing customer expectations. Providing solutions is equivalent to shifting the emphasis of the business from machine manufacturer to solution provider. To satisfy increasing customer expectations, a solution provider offers more than just product-related services: the portfolio also has to include a broad range of customer support services. Customer support services refer, for example, to process-oriented engineering, spare parts management, managing customer maintenance functions, etc. Offering both product-related and customer support services enables manufacturing companies to cover various customer needs over the useful life of a product in order to run it effectively in the context of its operating process. This changes the focus of the value proposition from ensuring the proper functioning of the installed base to its efficiency and effectiveness within the customer process. In the case of a

Business-to-business marketing strategies Transition line from products to services Existing literature on service management in manufacturing companies (Oliva and Kallenberg, 2003) compares the expansions of service revenue share with a transition line between product manufacturer and solution provider. A product manufacturer and a solution provider represent the extreme points on the transition line. Between the two, we consider a provider of product-related services. 128

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solution provider, the major part of the value creation stems from services. Services account for over 25 percent of total revenue. Profits are mainly generated through services.

When communicating product-related service, two points appear to be relevant. First, it is important to empower service managers and technicians so that they can offer product-related services proactively (Gro¨nroos, 1998, Bowen and Lawler, 1998). In this case, they communicate productrelated services as “intangible” products in their own right, as one would with traditional products. Second, an empowerment of this kind is only possible if the employees have the right mindset. Changing employee mindsets calls for strong internal marketing which encourages service managers and service technicians to gain a better understanding of the value of product-related services. A solution provider changes business-to-business marketing from a transaction-oriented marketing to a more relationshipbased marketing. The general focus of relationship marketing is on building long-term relationships with customers. Relationship marketing must be implemented by changing the characteristics of the 4P model. When changing the characteristics of the 4P model, three points appear to be relevant. First, a solution provider offers a complete package consisting of the product, product-related services and customer support services. Second, according to the pricing, a solution provider uses the bundled pricing approach for the whole package. That means the customer pays a global price for the complete package (Guiltinan, 1987). The main disadvantage of the bundled pricing approach is that customers may believe they receive services they do not necessarily need. Third, in order to make the bundled pricing approach more attractive to customers, communication of the global price is based on specific contractual arrangements. These contractual arrangements should be based on equipment availability, i.e. where the pricing of these services is done on the basis of equipment availability. In this case, customers benefit from improved operations and greater equipment availability, avoiding customer aversion to receiving services they do not consider necessary. However, even with these contractual arrangements, the customer perceives potential external risks when purchasing equipment availability. In the course of improving equipment availability, a solution provider gains intimate knowledge of the customer’s operation. Customers’ aversion to revealing intimate knowledge of their operation explains why customers often use solution provider identity and reputation as a proxy when evaluating the risks of purchasing equipment availability. With the aid of personal and continuous communication, a solution provider can lay the first foundation stone for positive evaluation of purchasing equipment availability. A positive evaluation of this kind succeeds in changing the reputation of a manufacturing company from selling high quality products to providing superior equipment availability. Generally speaking, companies project a specific, highly reputable image, which highlights the uniqueness of their solutions in comparison with those of their competitors (Lovelock, 2001). Consequently, with the aid of personal and continuous communication, manufacturing companies are able to maintain an ongoing contact with customers over the whole product life cycle, leading to a long-term relationship between a solution provider and its customers. Maintaining an ongoing contact and establishing a long-term relationship with customers both reduce the customer’s perceived risks in purchasing equipment availability (see Table I).

Business-to-business marketing characteristics The characteristics of business-to-business marketing change between the three positions on the transition line. According to Gro¨nroos and Gummesson (1985), the marketing of services cannot be separated from overall management. In case of a product manufacturer, business-to-business marketing concentrates on typical issues of product marketing. Physical goods are the key variable around which the other marketing activities revolve in traditional product marketing. According to the 4P model, there has to be a product that can be priced, communicated, and distributed to the consumers (Gro¨nroos, 1998). Customer service is used as one of the main differentiating factors in product communication (Gebauer et al., 2005). In this context it can be generally understood as the use of customer service for selling more products (Mathe and Shapiro, 1993). More specifically on the customer side, assessing the importance of the service component in the purchasing decision has been a lasting tradition in marketing literature (e.g. Cunningham and Roberts, 1974). On the side of manufacturing companies, Kotler’s (1994) and Levitt’s (1981) product concept indicates that customer service has the potential to augment the product offering and appeal to the customer. Thus, the service component has been considered essential in any product communication. Furthermore, customer service affects the pricing of the product. Product manufacturers do not charge for customer service; they offer them for “free”. However, companies offering clearly superior customer service can often charge a price premium for the product. Providing product-related services for the installed base calls for different characteristics of business-to-business marketing. Compared to customer service, product-related services are “intangible products” that a supplier markets to its customers. Marketing these kinds of services still requires typical product marketing issues. Again, according to the 4P model, product-related services as “intangible products” have to be priced, communicated and distributed to the consumers. Defining a pricing approach to product-related services is, in reality, tricky. Manufacturing companies have difficulties in measuring the cost of providing their product-related services. In fact, the specificity of service cost structures in manufacturing companies means that services tend to comprise more fixed than variable, and more indirect than direct costs. The first step in defining a pricing approach for product-related services is to move from the fixed cost to the variable cost character by estimating the correct cost associated with each service and establishing a price for each service. By establishing a price for each product-related service, the manufacturer follows the unbundling pricing approach. In this case, product-related services are priced individually (Guiltinan, 1987). Consequently, product-related services for the installed base are task-specific, charges and prices are based on a mark-up for labor and parts each time a service is provided. For the customer, that means he chooses the services he wants. The emphasis in this form of businessto-business marketing is on the transaction-based selling of product-related services and products (Oliva and Kallenberg, 2003). 129

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Table I Summary of transition line, service offerings and business-to-business marketing Typical product manufacturer

Provider of products and productrelated services

Value proposition

Profits and revenue are generated mainly through the company’s core products and the contribution of services is quite low in terms of revenue, profit and customer satisfaction. Customer service is purely an add-on to the product

Profits and revenue are generated through the company’s core products. Product-related services for the installed base are an essential source of added value. Service revenue accounts for about 20 percent of the total revenue

The focus of the value proposition changes from ensuring the proper functioning of the installed base to its efficiency and effectiveness within the customer process. The major part of value creation stems from service. Service revenue accounts for more than 30 percent of total revenue. Profits are mainly generated through services

Service offering

Customer service includes facilitating supplementary services that aid in the use of the core product or are required for service delivery (e.g. information, order taking, billing, payment) and enhancing supplementary services which add extra value for customers (consultation, hospitality, safekeeping and exceptions)

Product-related services for the installed base (e.g. disassembly, recycling, consignment stock of spare parts at the customer site, general business training, general business advice and financial support

A solution provider also offers a broad range of product-related services and customer support services. Customer support services (e.g. process-oriented engineering, spare parts management, managing customer maintenance functions, etc.)

Business-to-business marketing

Customer service is used as one of the main differentiating factors in product communication. The customer is considered as essential in product purchase decisions. It can be generally understood in this context as the use of customer service for selling more products. Product manufacturers do not charge for customer service. But companies offering clearly superior customer service can often charge a price premium for the product

Product-related services are “intangible products” that a supplier markets to its customers. Productrelated services are priced individually. When communicating product-related service, two points appear to be relevant. First, with the aid of the various communication tools (personal chat, service brochures, questionnaires, etc.), manufacturing companies can lay the first foundation stone for positive customer expectations. Second, it is also important to empower salespeople and service technicians so that they can offer product-related services as offerings in their own right, as one would with products

A solution provider changes the business-to business marketing from transaction-oriented product marketing to a more relationship-based service marketing

Business-to-business marketing in China

Solution provider

attributes appeared to be relevant. The three different customer benefits refer to product-related benefits, benefits of product-related services and solution benefits. Based on the results of the four regularly conducted customer surveys, we are able to illustrate changes in the perception of customer value. In 1998, typical product-related benefits and sacrifices dominated perceived customer value. Chinese customers paid significantly less attention to both product-related service benefits and solution benefits. The situation changed in 2000. Chinese customers paid more attention to product-related service benefits. They did not just purely buy a machine. Instead, they also wanted to achieve a high yield and appropriate quality. Consequently, Chinese customers asked for product-related services for their installed base. However, the Chinese customers still did not recognize the value of offering solutions in 2000. The perceived customer value of providing solutions in terms of guaranteeing equipment availability by increasing machine up-time or reducing mean time between failures and mean time to repair was still low. In

Exploratory findings of a longitudinal, in-depth case study Traditional inductive research methods were used to analyze our longitudinal, in-depth case study. We coded and recoded our multiple sources of evidence systematically and iteratively until the data were saturated and consistent structures emerged (Strauss and Corbin, 1990). Analyzing the resulting structures showed that Swiss Machine Inc. moved along the transition line from products to services between 1998 and 2004. The transition corresponds with significant changes in perception of customer values (see Figure 2). Customer value is generally a trade-off between different benefits (e.g. perceived product benefits, perceived strategic benefits, perceived personal benefits) and sacrifices perceived by the customer (e.g. Ravald and Gro¨nroos, 1996; Monroe, 1990; Zeithaml, 1988). In the case of Swiss Machine Inc., three different customer benefits measured by several 130

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Figure 2 Changes in the relative importance of perceived customer benefits

3 4 5

femininity versus masculinity; uncertainty avoidance; and long-term orientation in life versus a short-term orientation.

Singh (2004) shows Hofstede’s (1991) five dimensions are not free of controversy in the literature (e.g. IBM as a single case study, measurement of corporate culture, concentration on cultural values). Witkin and Goodenough (1981) argue, for example, that culture can be studied not only at the level of cultural values, but also at the level of cultural forms, propositions, recipes, routines, customs, and systems of customs. McSweeney (2002) predicts that the limited characterization of culture in Hofstede’s work, its confinement within the territory of states, and its methodological flaws mean that it is a restrictor not an enhancer of understanding particularities. Hofstede (1980) has not demonstrated what national culture is. There is a lack of explanation of the richness and diversity of national practices and institutions – rather than merely assuming their uniformity and that they have an already known national cultural cause. Extreme, singular, theories such as Hofstede’s model of national culture are profoundly problematic. His conflation and uni-level analysis precludes consideration of interplay between macroscopic and microscopic cultural levels and between the cultural and the non-cultural. Consequently, we also included typical phenomena (guanxi, renqing and mianzi) of Chinese society. According to Arias (1998), differences in the cultural dimensions and typical phenomena of Chinese society lead to four constants that differentiate Chinese from Western management: 1 the base economic actor is the family rather than the firm; 2 long-term horizon; 3 risk reduction approach; and 4 a consensus approach to decision making.

2002, product benefits, product-related service benefits and sacrifices still predominated. But the importance of solution benefits increased essentially between 2000 and 2002. By 2004, more and more Chinese customers were appreciating the value of solutions. The importance of solution benefits now outweighs product-related benefits, benefits of productrelated services and sacrifices. Chinese customers no longer just want to ensure proper functioning of their installed machines and equipment. They want to maximize its efficiency and effectiveness within their processes. They specially want to benefit from improved operations, greater equipment availability, pricing models and different contractual arrangements. Based on changes in the perception of customer value, Swiss Machine Inc. moved along the transition line from selling products to providing product-related services and providing solutions. By moving along the transition line, different triggers of business-to-business marketing were implemented in each position. It found that Chinese culture can affect the implementation of these triggers significantly. The effects can be both limiting and enhancing. Culture or cultural characteristics are, generally speaking, an abstract construct affecting human behavior (e.g. Geertz, 1973; Hofstede, 1991; Kluckhohn, 1951). However, even if culture is a complex latent construct, it will still be possible to describe it by labeling its different dimensions. In the past, many researchers have identified and labeled numerous dimensions in which cultures differ (e.g. Hofstede, 1980; Kluckhohn, 1951; Hall, 1959). For the purposes of our context, we selected Hofstede’s (1991) five dimensions: 1 power distance; 2 collectivism versus individualism;

In terms of power distance, Chinese cultures tend to have higher scores than European countries (Hofstede, 1991). This indicates that people in Chinese-speaking countries accept the fact that power is unevenly distributed in society and business. The high power distance in China limits the empowerment of service managers and service technicians to offer productrelated services proactively. One service manager, for example, argued that Chinese service managers and technicians find it difficult to recognize different customer situations and to use their own judgment on how to communicate product-related services. With regard to long-term orientation, China reflects a high average score. In the context of services, this long-term orientation forces service managers to establish binding relationships with their customers. Establishing a binding relationship affects various triggers of business-to-business marketing. It corresponds with supporting the customer’s purchase decision by offering customer service for “free”. However, Chinese service managers often use the “free-ofcharge” approach for all services including not just customer service but also product-related services. This “free-ofcharge” approach increases customer satisfaction, leading to better long-term customer relationships. Consequently, on the one hand, this approach makes it difficult to sell productrelated services and increase service revenue. On the other hand, establishing a long-term relationship by using a “freeof-charge” approach to product-related services has helped Swiss Machine Inc. to reduce the risk perceived by its 131

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customers when they consider the purchase of equipment availability. The uncertainty avoidance index is a measure of the extent to which members of a culture feel threatened by uncertain and unknown situations. The Chinese are highly risk-averse. In the case of Swiss Machine Inc., we observed that Chinese service managers are averse to pricing equipment availability. The risks inherent in pricing equipment availability refer to the estimation of the equipment’s operating risk. Under this pricing mechanism, profitability depends on how accurate the Chinese service managers are in assessing risks of failure and in guaranteeing specific mean time between failures and mean time to repair. This requires a new set of skills within the service organization as well as information gathering capabilities to determine risk realistically. We observed that Chinese service managers were willing to develop risk assessment skills through experience but, unlike their counterparts in the West, felt very uncomfortable with defining specifications and enforcing contracts. They argued that in China providing solutions is based in particular on personal relationships (Davies et al., 1995). Therefore, Chinese service managers favor personal relationships over establishing contractual arrangements. This preference for personal relationships limits the implementation of contractual arrangements for pricing equipment availability. The aspect of personal relationships is closely linked to guanxi. Guanxi is briefly translated as personal relationships on which an individual can draw to secure resources or advantage when doing business (Davies, 1995; Shenkar and Ronen, 1987). Swiss Machine Inc. found that moving successfully along the transition line requires an influential person in the service organization as part of a guanxi network. The guanxi network has helped Swiss Machine Inc. to build a reputation and personal relationships with its customers. However, the establishment of these networks of trust relationships is often a lengthy, complex and timeconsuming business. Building a reputation and personal relationships required more time in China than in Switzerland. To build and sustain a position within a guanxi network requires some knowledge of renqing which is about the exchange of favors and mianzi which is about preserving individual dignity or enhancing someone’s social status. Mianzi can be translated as paying respect and recognizing the status and moral reputation of the Chinese in society, indeed enhancing this status by whatever means possible. It is important to protect one’s “face” but it is perhaps even more important to “give face” to others. In short, it involves a reciprocal relationship of respect and courtesy to and from your counterparts. “Giving face” means praising someone’s reputation in society. To cause someone to “loose face” is to denounce status and reputation. It also indicates a loss of confidence and a lack of trust (Brunner and Wang, 1988). Swiss Machine Inc. observed that encouraging service managers and service technicians to gain a better understanding of the value of product-related services can damage the face of both employees and customers. Thus, service managers and service technicians were highly reluctant to change their mindsets in order to gain a better understanding of the value of product-related services. Renqing is closely associated with the giving of “face”. It is about performing favors and giving gifts, which in China is

called renqing. Swiss Machine Inc. reported that service technicians and service managers may make a donation to their customers (Brunner and Wang, 1988). They may lend their support to improve all processes associated with a company’s product. In this case, they “give face” to their customers and praise their customers’ reputation. Thus, renqing helped Swiss Machine Inc. to project a specific image of providing solutions and to build a reputation for improving the customer’s equipment availability. The concepts of guanxi, mianzi and renqing are closely linked with the “free-of-charge” approach for product-related services. We observed that on the one hand service managers loose face if they charge for services which customers expect to obtain for free. On the other hand, service managers deliberately use “free” services for establishing a guanxi network and “giving face” to their customers. The last effect of Chinese culture on implementing triggers for business-to-business marketing stems from the base of the economic actor. Because the base economic actor is the family rather than the firm (Arias, 1998), Swiss Machine Inc. experienced a high fluctuation in service staff. In combination with the our previous argument that guanxi networks are built among individuals not among organizations, the establishment of personal relationships and the company’s image of providing solutions is even more time-consuming (see Table II).

Results of 15 mini-cases While our in-depth, longitudinal study of Swiss Machine Inc. may be considered inappropriate with respect to generalizability and transferability (Lincoln and Cuba, 1985), the effects of Chinese culture on service marketing were validated externally through 15 mini-cases studies. Since our qualitative research study is not designed to be generalized, we focus on transferability. Traditional inductive research methods were used to analyze the minicases. We coded, recoded and systematically compared the transcripts until we could identify effects of Chinese culture on business-to-business marketing. Analyzing the 15 mini cases showed that all effects of Chinese culture on businessto-business marketing recurred explicitly and systematically across all cases. Additional cultural effects were not found. The frequency of the different effects across the case is illustrated in Table III.

Results of four bipolar case studies The resulting rationale behind increasing service revenue and the associated cultural effects on business-to-business marketing was tested through four bipolar case studies. We observed that the two manufacturing companies transitioning and achieving more than 25 percent of their revenue through services were able to overcome the explained effects. By comparing these findings with those from the two companies achieving less than 10 percent, we are able to deduce that the cultural effects on business-to-business marketing can increase service revenue in China. As illustrated in Table IV, we established internal validity in the causal relationship between Chinese culture and service revenue for eight out of 11 cultural effects. 132

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Table II Effects of cultural characteristics on business-to-business marketing Positions referring to the transition line

Triggers for business-tobusiness marketing

Traditional product manufacturer

Customer service is offered for “free” to support customer’s purchase decision

Cultural characteristics Long-term orientation

Guanxi, renqing and mianzi

Provider of products and product-related services

Product-related services are charged separately

Long-term orientation

Guanxi, renqing and mianzi

Solution provider

Empowerment of service manager and service technicians to offer productrelated services proactively

Power distance

Encouraging service manager and service technicians to gain a better understanding of the value of product-related services

Guanxi, renqing and mianzi

Contractual arrangements control pricing on the basis of equipment availability Project specific image to build a reputation

Uncertainty avoidance

Power distance

Guanxi, renqing and mianzi

Personal relationship

Guanxi, renqing and mianzi

Family as the base economic actor

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Effect of cultural characteristics on business-tobusiness marketing Establishing a binding relationship corresponds with supporting customer’s purchase decision by offering customer service for free Service managers deliberately use “free” customer services for establishing a guanxi network and “giving face” to their customers Chinese service managers also use the “free-ofcharge” approach for related service. This approach makes it difficult to sell product-related services and increase service revenue Service managers deliberately use “free” customer services for establishing a guanxi network and “giving face” to their customers The high power distance in China limits the empowerment of service managers and service technicians to offer product-related services proactively. One service manager argued that Chinese service managers and technicians find it difficult to recognize different customer situations and to use their own judgment on how to communicate product-related services Because encouraging service managers and service technicians to gain a better understanding of the value of product-related services can damage the face of both employees and customers, service managers and service technicians are highly reluctant to change their mindsets The preference for personal relationships limits the implementation of contractual arrangements for pricing equipment availability Establishing a long-term relationship by using a “free-of-charge” approach for product-related services reduces the risk perceived by customers when they consider the purchase of equipment availability Service managers support customers to improve all processes associated with a compnay’s product. In this case, they “give face” to their customers by praising customers’ reputations. Thus renqing helped Swiss Machine Inc. to project a specific image of providing solutions and to build a reputation for improving customers’ equipment availability The guanxi network has helped Swiss Machine Inc. to build a reputation and personal relationships with its customers The fact that the base economic actor is the family rather than the firm leads to a high fluctuation among service staff. In combination with our previous argument that guanxi networks are built among individuals, not among organizations, the establishment of personal relationships and the company’s image as a solution provider is even more time-consuming

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Table III Evidence of the cultural effects according to 15 mini-cases Number of mini-cases where the descriptive effect was indicated as a major impact on increasing service revenue in China

Descriptive effects of Chinese culture on business-to-business marketing Service managers deliberately use “free” customer services for establishing a guanxi network and “giving face” to their customers

15

Establishing a long-term relationship by using a “free-of-charge” approach for product-related services reduces the risk perceived by customers when they consider the purchase of equipment availability

14

The preference for personal relationships limits the implementation of contractual arrangements for pricing equipment availability

13

Service managers deliberately use “free” product-related services for establishing a guanxi network and “giving face” to their customers

13

The high power distance in China limits the empowerment of service managers and service technicians to offer product-related services proactively. One service manager argued that Chinese service managers and technicians find it difficult to recognize different customer situations and to use their own judgment on how to communicate product-related services

12

Because encouraging the service managers and service technicians to gain a better understanding of the value of product-related services can damage the face of both employees and customers, service managers and service technicians are highly reluctant to change their mindsets

12

The fact that the base economic actor is the family rather than the firm leads to a high fluctuation in service staff. In combination with our previous argument that guanxi networks are built among individuals, not among organizations, the establishment of personal relationships and the company’s image as a solution provider is even more time-consuming

12

Establishing a binding relationship corresponds with supporting the customer’s purchase decision by offering customer service for “free”

11

Service managers support customers to improve all processes associated with a company’s product. In this case, they “give face” to their customers by praising customers’ reputations. Thus, renqing helped Swiss Machine Inc. to project a specific image of providing solutions and to build a reputation for improving customers’ equipment availability

11

Chinese service managers also use the “free-of-charge” approach for related services. This approach makes it difficult to sell product-related services and increase service value

10

The guanxi network has helped Swiss Machine Inc. to build a reputation and personal relationships with its customers

9

Discussion

Because Chinese service managers and technicians are difficult to empower, successful companies trained their Chinese service staff in Switzerland. That helped service managers and technicians to gain a better understanding of what empowerment means in the context of Western culture. This intensive training helped the Chinese service staff to recognize different customer situations better and to define how to communicate product-related services more easily. Furthermore, instead of damaging the face of service managers and technicians by encouraging them to gain a better understanding of the value of product-related services, the two successful companies “give them face” through internal marketing. For example, service employees who understand the value of product-related service are given internal awards. Additionally, the successful companies do not “give face” to their customers by improving all processes associated with their products. This was implemented by specific control mechanisms. For example, the provision of

Managerial implications Our ideas presented in this paper offer a complementary perspective to many existing theories advocated by practitioners. Managers should be aware of the effects of Chinese culture on business-to-business marketing in either limiting or enforcing service revenue. As our field studies indicated, manufacturing companies can overcome the limiting effects. Successful companies use various methods as illustrated in Table IV. To overcome resistance to rules for charging productrelated services, both successful companies offer their service managers the freedom to be personally available for their customers 24-7. They arranged special budgets and times for personally picking up customers at the airport, showing them the city all day and even inviting them for dinner. In that case, customers are more likely to pay for product-related services. 134

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Table IV Comparing successful and unsuccessful companies

Descriptive effects of Chinese culture on business-to-business marketing

Two successful machine and equipment manufacturing companies achieving less than 10 percent of their revenue through services

Two less successful machine and equipment manufacturing companies achieving less than 10 percent of their revenue through services

Service managers deliberately use “free” customer services for establishing a guanxi network and “giving face” to their customers

Service managers in both successful and unsuccessful companies deliberately use “free” customer services for establishing a guanxi network and “giving face” to their customers

Establishing a long-term relationship by using a “free-of-charge” approach for product-related services reduces the risk perceived by customers when they consider the purchase of equipment availability

Establishing a long-term relationship by using a “free-of-charge” approach was limited by clearly defined rules for charging for product-related services. To overcome resistance to these rules, both companies offer the service managers the freedom to be personally available to their customers 24-7. They also arranged special budgets and times for personally picking up customers at the airport, showing them the city all day, and even inviting them for dinner. Because of these essential favors, customers are more likely to pay for product-related services

No clear rules and processes for billing productrelated services were considered to limit use of a “free-of-charge” approach for establishing longterm relationships

The preference for personal relationships limits the implementation of contractual arrangements for pricing equipment availability

Successful companies reported that they reduced the degree of contractual arrangements in favor of personal relationships. Only a few basic arrangements are resolved by personal relationships

Unsuccessful companies did not adapt their contractual arrangements to local Chinese requirements by reducing the degree of contractual arrangements. Consequently, their managers felt very uncomfortable when offering such specific contracts

Service managers deliberately use “free” product-related services for establishing a guanxi network and “giving face” to their customers

Similar to point two, the “free-of-charge”approach was limited by clearly defined rules for billing product-related services

The two unsuccessful companies have not established any clear rules for billing services

The high power distance in China limits the empowerment of managers and service technicians to offer product-related services proactively. One service manager argued that Chinese service managers and technicians find it difficult to recognize different customer situations and to use their own judgment on how to communicate product-related services

Because Chinese service managers and technicians are difficult to empower, the empowerment was a major part of their basic and follow-up training. Both successful companies even trained their Chinese service staff in Switzerland. That helped service managers and technicians to gain a better understanding of what empowerment means in the context of Western culture. This intensive training helped the Chinese service staff to recognize different customer situations better and to define how to communicate product-related services more easily Instead of damaging the face of service managers and technicians by encouraging them, the two unsuccessful companies “give them face” through internal marketing. For example, service employees who understand the value of product-related service are given internal awards

Lessons on empowerment were not an explicit part of basic and follow-up training. The training courses have usually taken place in China

To reduce the fluctuation in service employees, both successful companies use a broad range of instruments for retaining employees

Both companies pay little attention to gaining their service employees’ loyalty

Because encouraging service managers and service technicians to gain a better understanding of the value of productrelated services can damage the face of both employees and customers, service managers and service technicians are highly reluctant to change their mindsets The fact that the base economic actor is the family rather than the firm leads to a high fluctuation in service staff. In combination with our previous argument that guanxi networks are built among individuals, not among individuals, not among organizations, the establishment of personal relationships and the company’s image as a solution provider is even more timeconsuming

The two unsuccessful companies do not use internal marketing to “give face” to their service employees

(continued)

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Table IV

Descriptive effects of Chinese culture on business-to-business marketing

Two successful machine and equipment manufacturing companies achieving less than 10 percent of their revenue through services

Two less successful machine and equipment manufacturing companies achieving less than 10 percent of their revenue through services

Establishing a binding relationship corresponds with supporting the customer’s purchase decision by offering the customer service for “free”

Service managers in both successful and unsuccessful companies deliberately use “free” customer service to support the customer’s purchase decision

Service managers support customers to improve all processes associated with a company’s product. In this case, they “give face” to their customers by praising customer’s reputations. The, renqing philosophy of “giving face” to customers’ projects a specific image as a solution provider and builds a reputation for improving customers’ equipment availability

The successful companies do not “give face” to their customers by improving all processes associated with their products. This was implemented by specific control mechanisms. For example, the provision of customer support services requires the approval of the head of the local service organization

Specific mechanisms are not used to limit the “giving face” philosophy by improving all processes associated with the companies’ products

business-to-business marketing for increasing revenue. Consequently, a complete theory of management in manufacturing companies calls interdisciplinary approach that integrates management and culture.

service service for an service

customer support services requires the approval of the head of the local service organization. These examples and the other methods illustrated in Table IV can be understood as the key managerial implications and recommendations for achieving high service revenues in China. Monitoring the explained effects of Chinese culture and gaining an understanding of how they have to be managed provides some guidance for managers seeking to generate high service revenues.

References

Limitations and further research Our findings have some clear limitations. The main focus was on Swiss machinery and equipment manufacturing industries, and our remarks are limited to these sectors. However, we recommend applying our findings to other branches and regions which are confronted with similar problems. One indepth case study, 15 mini-cases and two bi-polar case studies enhance the transferability of our findings, but do not lead to a generalization of our results. Thus, we recommend further research to investigate the success factors for increasing service revenue with quantitative methods. Several authors show Hofstede’s (1991) five dimensions are not free of controversy in the literature. Consequently, we also included typical phenomena of Chinese society: the base economic actor is the family rather than the firm; long-term horizon; risk reduction approach, a consensus approach to decision-making, and guanxi, renqing and mianzi. Of course, there are other typical phenomena of Chinese society such as Ying-and-Yang, but the phenomena that we have used, capture the main cultural challenges in context of business-tobusiness marketing in China. In future studies, we recommend strongly to apply arguably richer concepts of culture (e.g. Geertz, 1973) and other typical phenomena of Chinese society such as Ying-and-Yang to the context of business-to-business marketing in China. Nevertheless, our study has some significant implications for researchers. For service management theorists, our findings suggest that increasing service revenue in China is affected to a high degree by Chinese cultural characteristics. The implicit logic for increasing service revenue starts with overcoming typical and, in some respects, limiting cultural characteristics. These cultural characteristics limit

Arias, J.T.G. (1998), “A relationship marketing approach to guanxi”, European Journal of Marketing, Vol. 32 Nos 1/2, pp. 145-56. Bowen, D. and Lawler, E. (1998), “Empowerment im Dienstleistungsbereich”, in Meyer, A. (Ed.), Handbuch – Dienstleistungs-Marketing, No. 1, Dienstleistungs-, Scha¨fferPoeschel, Stuttgart, pp. 1031-44. Brunner, J.A. and Wang, Y. (1988), “Chinese negotiation and the concept of face”, Journal of International Consumer Marketing, Vol. 1 No. 1, pp. 27-43. Cunningham, M.T. and Roberts, D.A. (1974), “The role of customer service in industrial marketing”, European Journal of Marketing, Vol. 8 No. 1, pp. 15-28. Davies, H. (Ed.) (1995), “Interpreting guanxi: the role of personal connections in a high context transitional economy”, China Business: Context and Issues, Longman, Hong Kong. Davies, H., Leung, T.K.P., Luk, S.T.K. and Wong, Y.H. (1995), “The benefits of ‘guanxi’. The value of relationships in developing the Chinese market”, Industrial Marketing Management, Vol. 24 No. 3, pp. 207-14. Eisenhardt, K.M. (1989), “Building theories from case study research”, Academy of Management Review, Vol. 14 No. 4, pp. 532-50. Gebauer, H., Fleisch, E. and Friedli, T. (2005), “Overcoming the service paradox in manufacturing companies”, European Management Journal, Vol. 23 No. 1, pp. 14-26. Geertz, C. (1973), The Interpretation of Cultures, Basic Books, New York, NY. Gro¨nroos, C. (1998), “Marketing services: the case of a missing product”, Journal of Business and Industrial Marketing, Vol. 13 Nos 4/5, pp. 322-38. 136

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Gro¨nroos, C. and Gummesson, E. (1985), Service Marketing – Nordic School Perspectives, Stockholm University, Stockholm. Guiltinan, J.P. (1987), “The price bundling of services: a normative framework”, Journal of Marketing, Vol. 51 No. 2, pp. 74-85. Hall, E.T. (1959), The Silent Language, Doubleday and Company, Garden City, NY. Hofstede, G.H. (1980), Culture’s Consequences, International Differences in Work-related Values, Sage Publications, Beverly Hills, CA. Hofstede, G. (1991), Cultures and Organisations: Software of the Mind, McGraw-Hill, Maidenhead. Homburg, C., Fassnacht, M. and Guenther, C. (2003), “The role of soft factors in implementing a service-oriented strategy in industrial marketing companies”, Journal of Business-to-Business Marketing, Vol. 10 No. 2, pp. 23-51. Kluckhohn, C. (1951), “Values and value orientations in the theory of action: an exploration in definition and classification”, in Parsons, T. and Shils, E. (Eds), Toward a General Theory of Action, Harvard University Press, Cambridge, MA, pp. 388-433. Kotler, P. (1994), Marketing Management: Analysis, Planning, Implementation and Control, 8th ed., Prentice-Hall, Englewood Cliffs, NJ. Kurtz, D.L. and Chow, K.L. (1998), Services Marketing, John Wiley, New York, NY. Levitt, T. (1981), “Marketing intangible products and product intangibles”, Harvard Business Review, Vol. 59 No. 3, pp. 94-102. Lincoln, Y. and Cuba, E.G. (1985), Naturalistic Inquiry, Sage, Beverly Hills, CA. Lovelock, C. (1994), Product Plus, McGraw-Hill, New York, NY. Lovelock, C. (2001), Services Marketing: People, Technology, Strategy, 4th ed., Prentice-Hall, Upper Saddle River, NJ. McSweeney, B. (2002), “Hofstede’s model of national cultural differences and their consequences: a triumph of faith – a failure of analysis”, Human Relations, Vol. 55 No. 1, pp. 89-118. Mathe, H. and Shapiro, R.D. (1993), Integrating Service Strategy in the Manufacturing Company, Chapman & Hall, London. Miles, M.B. and Huberman, A.M. (1994), Qualitative Data Analysis: An Expanded Sourcebook, 2nd ed., Sage, Thousand Oaks, CA.

Monroe, K.B. (1990), Pricing. Making Profitable Decisions, 2nd ed., McGraw-Hill, London. Oliva, R. and Kallenberg, R. (2003), “Managing the transition from products to services”, International Journal of Service Industry Management, Vol. 14 No. 2, pp. 160-72. Potts, G.W. (1988), “Exploiting your product’s life cycle”, Harvard Business Review, Vol. 66 No. 5, pp. 32-5. Quinn, J.B., Doorley, T.L. and Paquette, P.C. (1990), “Beyond products: service-based strategy”, Harvard Business Review, Vol. 68 No. 2, pp. 58-67. Ravald, A. and Gro¨nroos, C. (1996), “The value concept and relationship marketing”, European Journal of Marketing, Vol. 30 No. 2, pp. 19-30. Shenkar, O. and Ronen, S. (1987), “Structure and importance of work goals among managers in the people’s Republic of China”, Academy of Management Journal, Vol. 30 No. 3, pp. 564-76. Singh, N. (2004), “From cultural models to cultural categories: a framework for cultural analysis”, The Journal of American Academy of Business, Cambridge, Vol. 5 Nos 1/2. Strauss, A. and Corbin, J. (1990), Basics of Qualitative Research: Grounded Theory Procedures and Techniques, Sage Publications, Newbury Park, CA and London. Windahl, C., Andersson, P., Berggren, C. and Nehler, C. (2004), “Manufacturing firms and integrated solutions: characteristics and implications”, European Journal of Innovation Management, Vol. 7 No. 3, pp. 218-28. Wise, R. and Baumgartner, P. (1999), “Go downstream: the new imperative in manufacturing”, Harvard Business Review, Vol. 77 No. 5, pp. 133-41. Witkin, H. and Goodenough, D. (1981), Cognitive Styles: Essence and Origins, International University Press, New York, NY. Yin, R.K. (1994), Case Study Research: Design and Method, 2nd ed., Sage, Thousand Oaks, CA. Zeithaml, V. (1988), “Consumer perception of price, quality and value: a means-end model and synthesis of evidence”, Journal of Marketing, Vol. 52 No. 3, pp. 2-22.

Further reading Baskerville, R.F. (2002), “Hofstede never studied culture”, Accounting, Organization and Society, Vol. 28 No. 1, pp. 1-14.

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Case study

Huawei Technologies Corporation: from local dominance to global challenge? Brian Low School of Marketing and International Business, University of Western Sydney, Penrith South, Australia Abstract Purpose – The paper aims to identify the challenges faced by Huawei Technologies, China’s biggest telecommunications equipment manufacturer, as it makes the transition from an indigenously-owned business to a potentially competitive global giant. Design/methodology/approach – This is an inductive, interpretative case study complimented by hands-on experience with the industry. Findings – The paper finds that Huawei lies at a crossroads in a transitional telecommunication sector that is no longer isolated from global reforms and advancement. Through internationalisation the company has learned to compete by adjusting their mechanisms, learning instruments and focus. Originality/value – The paper is useful for practitioners in that it shows how indigenous companies in latecomer industrialising countries like China can overcome the late mover position in some of the advanced markets they have entered. For academics it highlights the role of government in helping to construct competitive indigenous firms that could take on global giants. Keywords China, Transition management, Telecommunication equipment Paper type Case study

UK, USA, Sweden and The Netherlands. It has also established 32 worldwide branch offices, and eight regional headquarters, with established research institutes in Dallas (USA), Bangalore (India), Stockholm (Sweden), Moscow (Russia), Beijing and Shanghai in China. In 2002, Huawei launched FutureWei, the company’s wholly-owned US subsidiary, underscoring the company’s commitment to international business and long-term investment in the North American market. The company has also actively participated in global research and development (R&D) and marketing alliances with US, European, and Japanese telecommunication giants. Huawei’s internationalisation has been achieved through a two pronged strategic approach emphasising price competitiveness and value-added technology products. The company is now the world’s second largest-supplier of advanced digital subscriber lines, the primary conduit for the world’s broadband connections. U-SYS, Huawei’s end to end Next Generation Network (NGN) solution is currently the leading option for carriers around the world, and was ranked No. 1 in the global market in 2004 by Dittberner, a research and consulting firm. It remains a leading global player in switching and optical network products, and is aggressively pursuing growth in datacom and wireless network. By all accounts, Huawei’s growth and progress has confounded its critics. Huawei is now a potential global telecommunications player to be reckoned with. In keeping abreast with international benchmarks, the company is transforming its management by actively cooperating with world-class management and consultancy companies such as IBM, Hay Group, KPMG and PwC (see www.huawei.cn). Collectively, these developments have contributed to Huawei’s increasing global market profile. “Making the World Listen” is how one journalist (Dolven, 2004) writing in the Far Eastern Economic Review, captures Huawei’s

Huawei: a sleeping giant awakes? Huawei was established in 1988 in Shenzhen, Guangdong as a private enterprise during the peak of China’s economic reforms and technological advancement. The company had a humble beginning, and began by selling imported telephone call switches before manufacturing them. It grew rapidly by focusing on the relatively poor Chinese rural regions ignored by larger companies, making and selling low-end, low-margin switches and access equipment. Its product line has since expanded to include high-margin optical network, data communications networks, wireless networks, handsets and terminals (see www.huawei.cn). It is now the largest telecom vendor in China, with reported 2004 sales of US$5.58 billion. This represents an increase of 81 per cent compared to 2001 sales of US$3.08 billion (see Table I). This growth has been achieved at a time when global telecommunication giants like Alcatel and Lucent were experiencing a sales decline, and Motorola experienced minimal growth. Significantly, Huawei’s international sales grew from US$330 million (or 10.7 per cent of total sales) in 2001 to US$2.28 billion (or 41 per cent of total sales) in 2004, a growth of more than 590 per cent (see Table I). Huawei’s foray into international markets was initially limited to developing countries in South-East Asia, Central Asia and Latin America. The company then sought international growth into Middle Eastern nations, before turning their attention to developed nations, including the The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing 22/2 (2007) 138– 144 q Emerald Group Publishing Limited [ISSN 0885-8624] [DOI 10.1108/08858620710730258]

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competitive firm which can challenge global players, especially at the point at which the degree of unevenness of business capability has never been greater (Nolan, 2001). At the beginning of 2004, after three years of market uncertainty, global telecommunication giants are competing more aggressively and creatively for a share of the global market, which includes China. Huawei’s challenges in both China and global markets are considerable.

Table I Huawei’s sales: 2001-2004 Sales by markets: (in US$ billion)

2001

2002

2003

2004

Total sales Chinese Foreign Foreign as % of total sales

3.08 2.75 0.33 10.7

2.67 2.15 0.52 19.5

3.83 2.78 1.05 27.4

5.58 3.30 2.28 40.9

Source: Huawei’s 2004 Financial Highlights Report

China’s telecommunication policies: what positions to take?

transition from an unknown local, indigenous Chinese telecommunications company to a potential, global telecommunication giant. Despite this impressive growth, global market, institutional and technical challenges are likely to confront Huawei over the next five to ten years. China’s World Trade Organization (WTO) agreement would lead to greater liberalisation of the Chinese telecommunications market, making it increasingly difficult for China’s central government to limit market access of international competitors. Local carriers and primarily state-owned enterprises such as China Telecom, China Mobile, China Unicom and China Netcom are also coming under increasing pressure from the global financial community for greater transparency and accountability. Local preferences for Huawei’s products and services may not last. State procurement contracts for these state-owned carriers may not continue, and their position will also be weakened by telecommunications reforms and China’s WTO commitments, which is likely to lead to a stronger presence for global carriers. While the Chinese telecommunications market is growing, it is still smaller than the markets of the trading blocs in which global telecommunications giants like Motorola, Nortel, Siemens and Alcatel are located. While Huawei sales figures look impressive, they are well short of the sales of these organisations (see Table II). Further, while Huawei has made great strides in research and development, investments in R&D represent only a small fraction of its total sales revenue compared to global telecommunication giants like Motorola, Nokia and Alcatel (see Table II). For instance, Huawei’s R&D spending in 2004 amounted to US$480 million, compared to US$5 billion and US$3.1 billion for Nokia and Motorola respectively. In a sector where future growth and expansion is heavily dependent on R&D, this could severely limit Huawei’s ability to compete globally and profitably. While Huawei has a strong national identity, it is seeking international expansion at a time when global telecommunication giants have already established their global brands in major trading blocs. History has also not been kind to a nation’s attempt at constructing a globally

Historically, this sector has been closely overseen and tightly controlled by the central government through the Ministry of Information Industry (MII). It remains so despite an outward commitment to reforms by MII. These reforms were driven by a number of different, and, at times, apparently contradictory concerns (Low, 2005) which is not surprising since such reforms are captive to a number of interest groups. Allowing further reforms and competition would mean the difficult task of confronting vested interests in the telecommunications sector. Rather than stepping back and letting the market operate, reforms continues to have an ideological overture, given the need to maintain control of a strategic interest in this sector. As Chen Jinqiao, the director of China’s MII’s Institute of Telecom Policy put it: The current set-up, though not perfect, reflects three unique conditions in China: government-run corporations will remain the main driver for the national economy, serious disparity in local markets [among the major carriers and telecommunication equipment manufacturers], and telecom reform must proceed in step with the economic system which is also controlled by the government.

It is, however, apparent that as the telecommunications sector is transformed from a centrally controlled sector to semicapitalist industry, China’s central government is increasingly facing pressures to hasten the pace, and indeed the transparency of transformation, given its WTO commitments. China will have to open more doors to foreign investment despite the nation’s preoccupation with economic nationalism. Starved of limited access to global telecommunications technology, equity and markets, indigenous firms like Huawei and Zhongxing (see www.zte. cn) have been actively participating in global R&D, technical and marketing alliances and processes. The nation’s desire to become a tier four telecommunications superpower also implies a greater need for and urgency to mobilise global resources, activities and connections in order to realise this ambition. As Jinpei Cheng, China’s vice minister of science and technology eloquently put it:

Table II Huawei’s R&D compared with competitors: 2001-2004 Telecom manufacturer

Salesa

2001 R&Da % of sales

Salesa

2002 R&Da % of sales

Salesa

2003 R&Da % of sales

Salesa

2004 R&Da % of sales

Huawei Motorola Nokia Alcatel Lucent

3.08 30.0 27.8 22.6 21.3

0.34 4.3 2.7 2.9 3.5

2.67 26.7 30.8 17.4 12.3

0.36 3.8 3.1 2.2 2.3

3.83 27.1 36.2 14.3 8.5

0.39 3.8 4.6 1.8 1.5

5.58 31.3 39.1 15.3 9.0

0.48 3.1 5.0 2.0 NA

11.0 14.3 9.7 12.8 16.4

13.5 14.2 10.1 12.6 18.7

Note: a US$ billion Source: Company reports

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10.2 14.0 12.7 12.6 17.6

8.6 9.9 12.8 13.1 NA

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Continuing strong local growth – all eyes on China?

China is still in the tier-four rank of scientifically marginal nations, whereas the United States and Japan are tier-one science superpowers. We hope to reach the next tier, to become a “strong nation” in basic research in the coming 20 years.

China remains one of the few global telecommunication equipment markets that offer substantial growth opportunities. In 2004, the equipment market was worth approximately US$130 billion, compared with US$120 billion in 2003, an increase of more than 8 per cent (see ChinaNex.com). Besides Japan’s NTTDocomo, China Telecom is one of the largest carriers in Asia Pacific, with capital expenditure spending amounting to US$6.8 billions in 2004. This spending will be maintained for 2005 (see www. chinatelecom.cn). China also has one of the world’s largest telecommunications networks, and is also the largest producer of handsets. In 2004, the country produced 240 million mobile phones, the most in the world. Production is expected to climb in 2005, on increasing investment from both domestic and foreign firms. The combined total of 532 million fixed and mobile telephone subscribers in 2003 (see www.mii.gov.cn) also made China the largest telecommunications market in the world, a point reinforced by the International Telecommunications Union (ITU) recognition of China as a “telecommunications superpower”. This has now grown to approximately 660 million fixed (315 million) and mobile (345 million) subscribers in 2004. Not surprisingly, China’s telecommunications market, in particular the equipment sector, is becoming highly competitive. Global telecommunication giants like Motorola, Nokia, Alcatel and Nortel are increasingly focusing their attention on this burgeoning market. This attention comes at a time when capital expenditure spending on telecommunications equipment from mature markets in North America and Europe has slowed considerably, following massive deployment of new systems in the late 1990s. Despite recent signs of some improvement in western markets, China is now a major location for multinational investment. Many global companies have strategic positions in China, having progressed from initial arms-length export transactions to collaborative R&D, production and marketing relationships (see for instance www.motorola.cn. www.nokia. cn, www.lucent.cn and www.nortel.cn). This includes a network of relationships with central and provincial government authorities, local telecommunications carriers, and competing local equipment manufacturers. The Chinese market now forms an integral component of the internationalisation plans of the major global companies. This is despite the many cultural, political and regulatory difficulties faced when competing for a share of the Chinese telecommunications market. But economic returns remain a powerful and compelling universal language for these giants. For instance, China is Nokia’s second biggest market after the USA, with sales of US$2.7 billion in 2004, representing approximately 7 per cent of Nokia’s total sales. China accounted for 9 per cent (US$2.8 billion) of Motorola’s 2004 global sales of $US31.3 billion, coming from a high of 14 per cent in 2002. While home market competition is a serious threat to indigenous companies, and should invoke some reaction from Huawei, the question remains whether taking on global players through expansion into their domestic markets is a logical move. Possibly it would be better for Huawei to defend its local market from encirclement by these giants, hence reinforcing its local successes, especially given China’s

China’s central government has, and will continue to play a central role in generating high rates of equity investment and stimulating technical progress through alliances, mergers and acquisitions. Together with the nation’s business leaders, they have, and will continue to rely heavily on global telecommunication giants like Motorola, Nokia, Alcatel and Siemens to seed the country with technical design and research facilities. They see these giants as a catalyst for moving China up a few rungs on the R&D ladder. Huge concessions have already been made to these US and European telecommunication giants, and more concessions are likely. These concessions do not mean the end of state-led industrial telecommunication policies aimed at constructing large, globally competitive indigenous firms like Huawei. For instance, Huawei continues to receive plenty of state support, including soft loans to help with their international expansion. China Development Bank (CDB), the biggest state policy bank recently extended a credit facility of US$10 billion to help overseas customers fund the purchase of Huawei’s products. A similar deal has been struck between Huawei and Sinosure, the Chinese government insurance company, for export credit financing operations in order to help Telemar Norte Leste SA, Brazil’s biggest telecommunications operator, finance the purchase of equipment from Huawei. MII has also continued to encourage local Chinese operators like China Telecom and China Mobile to purchase telecommunications equipment from Chinese manufacturers, notably from Huawei, ZTE (Zhongxing), Datang and Great Dragon. Such government support and protection of local equipment manufacturers is not unusual, with the practice also existing in Canada with Nortel, Siemens in Germany, Marconi in the UK, Alcatel in France, and Lucent in the USA. China has therefore reacted to local and global telecommunication reforms and their conflicting demands in different, and at time, conflicting ways. This is not unusual since it reflects the competing interests and dynamics of a partly, centrally-controlled and semi-capitalist telecommunications sector. China, and Huawei in particular, will however come under intense pressures to rethink these demands as it seeks to better align strategic choices with global market dynamics. For Huawei, the key question in moving into the twentyfirst century is competing in not one, but two governance structures – one local and the other global. Locally, Huawei has, and should continue to benefit enormously from the central government’s policy of building and protecting a potentially, globally competitive indigenous firm. This however is not consistent with the company’s desire to transform itself into a global telecommunications giant, capable of challenging existing global companies. These strategic choices are not necessarily mutually exclusive. As Deng Xiaoping, one of China’s great leader famously remarked: You must not think that if we have elements of a market economy we shall be taking the capitalist road. Both a planned economy and a market economy is necessary.

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impending WTO commitments. Because China also potentially affords these giants an opportunity to improve their already weakened global position, thus gaining valuable experience in the burgeoning Chinese market, would it not be better for Huawei to minimise this local threat first? Critics have argued that internationalisation for Huawei is one of necessity, not choice. Indeed, would it not make sense in terms of timing, taking on these global telecommunications giants when they are at the most vulnerable, especially with recent ongoing restructuring exercises and capital write-downs? Could Huawei not leverage on their innovative, value-adding products and competitively priced products to maintain local market dominance, and at the same time compete for a share of global markets, including developed nations? With its active and ongoing participation in global technical and marketing alliances, is the company not ready to confront these giants directly, both locally and globally? While the light currently shines brightly on China, it might not be in the near future, especially as the US and European markets recovers from the doldrums of the late 1990s and early 2000s. Future growth opportunities thus appear to present themselves for Huawei in international markets, as well as China.

Access (CDMA), and China’s own Time Division Synchronous Code Division Multiple Access (TD-SCDMA). While China has not resolved which of the three 3G standards it plans to adopt (WCDMA, CDMA 2000, TD-SCDMA or combinations thereof), and initial tests have been disappointing, there is no doubting the local and global market potential of 3G. Globally, more than 20 pre-commercial exchanges have already been set up for Huawei’s 3G products. Third, while China-based, cost-effective R&D has given Huawei the competitive edge in developing telecommunications equipment, this has not come at the expense of software development. The company now has four CMM5 certified software research institutes, being three in China and one in India, demonstrating their international commitment and competitiveness in core technologies and top-ranking software development process management. However, as noted previously, Huawei’s R&D spending pales in comparison with that of global telecommunication giants. In a sector where future growth and expansion is heavily R&D dependent, this could limit Huawei’s ability to compete globally. Limited R&D spending could have major implications for Huawei in presenting a credible challenge to some of the global telecommunications giants. Investment in R&D would have to substantially increase before Huawei can be taken seriously by the global investment and technical community. But Huawei’s R&D investments are intrinsically linked to its ability to generate substantial sales revenue. Unless there is a substantial increase in sales, there is unlikely to be any increase in R&D spending. Once again, this raises the question: “Is Huawei in a position to challenge international telecommunication giants for a share of the global market, given its comparatively lower R&D spending?” If the company cannot mount a credible challenge, should it or indeed could it ever become a global telecommunication player? To cope with some of the company’s inherent limitations in R&D spending, Huawei has undertaken several initiatives including participation in global R&D, technical joint ventures and marketing alliances. This is examined next.

Whither Huawei’s research and development spending? Huawei’s R&D expenditure has grown steadily from US$340 million in 2001 to US$480 million in 2004, representing growth of more than 41 per cent. As a percentage of total sales revenue, R&D spending has declined from a high of 13.5 per cent in 2002, to 8.6 per cent in 2004. This trend is repeated for Motorola but not Nokia or Alcatel. Significantly, Huawei’s R&D spending in absolute dollar value pales in comparison with these companies (see Table II). This does not necessarily demonstrate Huawei’s lack of R&D commitment. For example, 48 per cent of its 24,000 employees are engaged in R&D. Its engineers are highly trained, with many holding doctoral qualifications. The company also actively recruits engineers from other telecommunications giants, for example, those displaced due to global restructuring. Huawei’s research and development laboratories are also strategically located not only in China but around the world, with its first site located in Bangalore (India), Asia’s own Silicon Valley. Collectively, these R&D activities have helped to propel Huawei onto the world stage. Its suite of products including wireless infrastructure, optical networking and datacom products now holds global leadership or challenger positions. While pricing has been its main competitive advantage, the company has now complemented this advantage with a suite of innovative, value-adding products. Within the company, Huawei’s focus on their R&D spending is three-fold. First, it focuses on developing common build blocks (CBB) based on network convergence. This emphasises mainly nonproprietary solutions, thus assuring their customers that they are working with an industry standard, open operating system. This in turn allows customisation of services. Open standards also ensure global network interoperability, an important purchase attribute among cost-conscious operators when upgrading existing or deploying new network infrastructure. Second, the company has made substantial investments in NGN and wireless technology, especially on third-generation (3G) technologies (a glossary of terms used in this paper can be found in the Appendix), in particular Code Division Multiple

Alliances, alliances and more alliances? In a liberalising telecommunication sector, China’s telecommunication manufacturers need to change the way they manage their resource dependence. For Huawei, one key strategic question posed is: “How does liberalisation affect the way in which they form and manage their local and global R&D technical joint ventures, marketing alliances, mergers and acquisitions?”. There are of course many reasons for Huawei to actively participate in these processes. They include the need to build its global market capabilities, cope with escalating technology and R&D costs, facilitate easier access to global technology, speed up innovation and product introduction especially in developed nations that have so far proven hard to enter, and to cope with the integration of information and telecommunication technology. It is also apparent that for China to become a global technological superpower, foreign help is going to be needed. This help is also needed in order to accept the world’s telecommunications standards in China, rather than China imposing their own on the world. Paradoxically, in seeking foreign help to develop and control Chinese-owned technologies such as China’s own 3G TD-SCDMA technology, the country also hopes to cast off one of the biggest fears of global technology companies – that China’s growing crop of smart engineers might pirate intellectual 141

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property in any technology transfer (Kahn, 2004). These ambitions and sentiments are perhaps best reflected in Ms Zhnag Qi, the Director General of the Department of Electronics and IT recent remark:

cross-licensing agreement of WCDMA-related products with Nokia. The company then set up a joint venture with Siemens in 2004, specialising in the development, sales and service of TD-SCDMA technologies and products to boost TDSCDMA commercialisation. More than US$100 million has been invested in this joint-venture, with Huawei contributing 49 per cent and Siemens the remaining 51 per cent. Besides technical joint ventures, Huawei has also actively participated in global marketing, sales and distribution alliances. For instance, in 2003, Huawei developed a $US160 million joint venture with US-based 3Com to manufacture and market low-end routers. The deal allows 3Com to sell Huawei’s computer data routing equipment under 3Com’s name outside of China and Japan. In China and Japan, Huawei products will be sold under the joint venture name Huawei-3Com. In early 2005, Huawei announced a mutual distribution agreement (MDA) with Marconi U.K. where the two companies will resell parts of each other’s product portfolio. Part of the agreement involves a process wherein they will leverage their respective sales and marketing teams’ capabilities and regional strengths on an account-by-account basis (see Table I). There are now reports that Huawei is seen as one of several suitors over a possible US$1.08 billion takeover of Marconi (Seager, 2005). The possibility that Marconi may fall to Huawei comes on top of two key, albeit smaller acquisitions of US-based Cognigine and Optimite in 2003. These acquisitions offer Huawei the opportunity to dominate the global optical communication technologies market through Cognigine’s innovative network processor, and Optimite’s Super Dense Wavelength Division Multiplexing (SWDWM) technologies. These acquisitions also complement Huawei’s strategic partnership with US-based LightPointe on free space optic (FSO) technology, thus providing Huawei access to the high profit margin, high-end fiber optic market. As Paul Waide of Pacific Epoch, Shanghai, noted in Dolven’s (2004) Far Eastern Economic Review article:

Owning and winning the initiatives in setting industrial standards should be top priorities for domestic manufacturers. MII would help form various industrial alliances among manufacturers to gain the upper hand against foreigners in setting industrial standards.

Echoing a similar sentiment and reinforcing China’s central government role in the “battle over the adoption of 3G standards” proceedings, is Deng Yusong of the Development Research Center of the State Council: Foreign companies will take 3G licensing as a new opportunity in China, but for JVs to succeed, Chinese operators must also have the desire to work with the foreign partners, and the government has the final say on such attempt.

Significantly, it is amid this backdrop of conflicting technical, political and economic imperatives that Huawei’s global technical, marketing alliances, joint ventures and acquisitions have evolved. For instance, in 2002, it established with NEC its 3G Mobile Internet Open Laboratory in Shanghai (see Table III). Since then the company has also signed a Table III Huawei’s major technical alliances, joint ventures, and marketing and distribution agreements October 2002

October 2002

March 2003

March 2003

April 2003

July 2003 03’ September 2003

February 2004

May 2005

August 2005

Set up 3G Mobile Internet Open in Shanghai with NEC (Japan) to create an open platform to support 3G development in China Signed a strategic agreement with Microsoft (USA) to set up a joint laboratory at Huawei’s head office in Shenzhen, incorporating Microsoft’s strength as a software innovator and Huawei’s telecommunication expertise Reached agreement with Nokia (Finland) on patent cross-license of WCDMA related technology products, covering the manufacturing and sales of WCDMA infrastructure equipment globally Committed to a $US160 million joint venture with 3Com (USA) to manufacture and market low-end routers. Signed a strategic partnership agreement with LightPointe (USA) on free space optic (FSO) technology Partnership agreement with Avici Systems Inc. (USA) in IP market datacom solutions Huawei acquired US-based optical communication technologies firms Cognigine and Optimite Joined forces with Infineon Technologies (Germany) to offer a competitive WCDMA mobile phone platform Signed and committed to a US$100 million joint venture with Siemens (Germany) to develop, market, and manufacture TD-SCDMA technology Signed a mutual distribution agreement (MDA) with Marconi (UK) that will allow the two companies to resell parts of each other’s products Marconi (UK) begins talks with Huawei that could lead to a takeover by Huawei

The fact that they’re [Huawei] established in China and have got the foresight to pick up the technology, and possibly tap into sales networks, seems like a good idea to me. It’s not as if they’re going to wipe the floor with their rivals, but they seem to have a good idea on how to tap into foreign markets.

As well as these technical alliances, Huawei has established R&D sites in Sweden, the USA and Russia. Its main research sites are however located in China, in Shenzhen (its corporate head office), Beijing, Nanjing and Shanhai. Huawei’s site location strategy is not unusual, and generally conforms to acceptable global practice. Some of the reasons for the location strategy are the need to keep these sites close to the place where the strategic decisions are made, to protect technology as they develop over time, and to ensure the company’s voice is heard as far as technical and market developments are concerned. Making China its R&D base also makes perfect sense for Huawei especially when global telecommunication giants are investing heavily in local R&D such as wireless, optical network and NGN. These reasons however do not detract from the importance of housing some of Huawei’s research sites overseas, given the need to tap into global technological knowledge and to hasten the speed of product commercialisation for global markets. In summary, Huawei has been an active and willing participant in the global alliance process. Despite its relatively low R&D spending and weak global branding, major telecommunication giants continue to seek out Huawei.

Source: Huawei’s press releases (2002-2005)

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Undoubtedly, this is motivated by the prospect of selling their products into the growing Chinese market. But as local and global telecommunication reforms result in more liberalised markets, a perennial problem for Huawei is “How best to manage and redirect their R&D alliances strategies?” What type of R&D fit should they be seeking, with whom and why? What constitutes strategic, dynamic technological fit? What are the drivers and facilitators? How much would nationalism impact on their R&D investment decisions? The following quote from Huawei’s 2004 annual report could perhaps throw some lights on Huawei’s current and future global alliances’ directions:

the influence of telecommunication reforms and China’s WTO commitment grow stronger over coming years, state procurement contracts favouring local carriers will become increasingly open to competition, strengthening the position of global players in the Chinese market. These giants have, and will continue to dominate the global market in the foreseeable future. Huawei’s investments in China’s 3G markets have not as yet paid dividends. Having poured millions of dollars into 3G research, uncertainty over which of the competing 3G technologies will be adopted, technical failures in recent trial runs, and timing over the award of 3G licences could dampen Huawei’s ambitions. Like China, Huawei is now at a crossroad, and like many of the global telecommunications giants too, Huawei faces the question of what position it should take along the “local and global marketisation path” continuum. That Huawei needs to grow internationally is not in question. That Huawei will have to directly confront these global giants if the company is to realise its ambitions in becoming a global telecommunication player is also not in question. What is in question is “how, why and when?” A diagrammatic representation of Huawei’s local and international strategy over the years (see Figure 1) should perhaps give some insights into analyzing and articulating some of the strategic choices that need to be made, and the links between these choices, environments, and the company’s performance now and into the future.

Innovation is always an impetus for us to progress. In recent years we have partnered with our international peers . . . which reflects our willingness for cross-culture cooperation on an agree-to-differ basis.

Global growth strategy for a low-priced challenger – where to next for Huawei? Unlike many global companies, Chinese companies like Huawei have historically suffered from a mismatch between ambition and resources. Not surprisingly, Huawei therefore stands little chance competing directly with global telecommunication giants like Motorola, Nortel, Alcatel and Siemens, without the benefit of central government sponsored protectionism and support. Despite significant R&D investments and participation in global alliances, Huawei is still perceived as a low-cost, low-margin telecommunication equipment manufacturer. It is still a privately-owned company, does not report its profitability, and while there has been talk of an IPO, this has remained elusive. As Xu Zhijun, president of Huawei’s wireless product line noted:

Managerial implications and conclusions Huawei has benefited from China’s central government policy to construct large, indigenous globally competitive firms. Government support such as soft loans has helped local and overseas customers fund the purchase of Huawei’s products. Government-led initiatives in leading tender talks in developing nations have significantly raised the company’s global profile. These policies and actions have provided both a spur and the potential for Huawei to construct successful local and global R&D and technical joint ventures, as well as marketing and distribution alliances. However, major technical, economic, and political challenges confront Huawei in a transitional global telecommunications market. One of these is continued central government involvement in constructing large indigenous enterprises that can challenge the world, although some critics have argued that Huawei has

An IPO is something for Huawei sooner . . . But at the present time there is no timetable . . . There is no need for us because its cash flow is strong [since most IPO are financially driven].

Huawei’s competitive advantage remains its low-cost home case. Its engineers cost one-fifth to one-eight of their counterparts in the USA or Europe. Its major and principal customers include local carriers China Telecom, China Mobile and China Unicom. While initially content mainly with selling products to developing countries, the company now has strong aspirations in penetrating the markets of developed nations. Initially marshalling its resources onto a narrow global market is of course not unusual, and is frequently seen as a viable option especially for smaller multinational competitors (Porter, 1996). In the mid- to late 1990s, Huawei saw this niche opportunity by focusing on less developed markets that needed cheap technology. However, as Huawei and its brand become more established, so is the company’s confidence in pursuing a share of the global market. Its strong domestic base has and should continue to fund the company’s global expansion drive, and provide a much needed revenue source to fund increased R&D investments. Indeed, while the hard-driving expansion of Chinese companies like Huawei around the world are taking business away from the big established vendors through their well-known low prices, they also have a new weapon in “competitive technology” (Rhoads and Hutzler, 2004). Increasingly, Huawei now relishes the prospect to become a global player despite its late entry into the global market and concerns over its profitability. But for now, Huawei might have to resist this desire for global expansion, which has contributed to restructuring of major global telecommunication giants and capital writedowns. This cautionary note is not without justification. As

Figure 1 Evolution of Huawei’s geographical and product segment scope – 1990s and beyond

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References

achieved success despite being largely independent of the central government. The second and somewhat paradoxical factor is China’s bureaucracy, which has a tendency to limit the expansion of ambitious, and increasingly entrepreneurial indigenous firms. Third is the perennial question of whether the nation’s, and by inference, Huawei’s aspiration to become a technological super power can be achieved without access to foreign technical and marketing help, and access to the global equity market. Huawei, like China, lies at a cross road in a transitional telecommunication sector that is no longer isolated from global reforms and advancement. Through internationalisation, the company has learned to compete. By putting themselves up against the best, initially in developing nations and lately in developed nations, they have learned to appreciate the network of global telecommunication giants, their resources and the activities they perform in transforming these resources. Through this process, Huawei has also adjusted their mechanisms, learning instruments, and focus. By exposing themselves to global markets and dealing with global telecommunications companies, Huawei has also raised their profile. Increasingly, the company is appearing on the radar of the global telecommunications community. It is no longer seen solely as a Chinese telecommunications company, but as a potential global telecommunications giant. Numerous challenges are now faced by Huawei, as it seeks to make the transition from an indigenous telecommunications business to a potential global telecommunications giant. Unfortunately, this is happening at a time when Huawei needs to be where market growth is. Right now, the action is largely in China.

Dolven, B. (2004), “Making the world listen”, Far Eastern Economic Review, February, pp. 26-9. Kahn, A. (2004), “Profiting from benchmarks: reasons behind China’s rush to develop standards (part one)”, ChinaTechNews.com, April. Low, B. (2005), “The evolution of China’s telecommunications equipment market: a contextual, analytical framework”, Journal of Business and Industrial Marketing, Vol. 20 No. 2, pp. 99-108. Nolan, P. (2001), China and the Global Economy, Palgrave Publication, London. Porter, M. (1996), “Competition in global industries: a conceptual framework”, Competition in Global Industries, Harvard Business School Press, Boston, MA. Rhoads, C. and Hutzler, C. (2004), “China’s forays hit telecom rivals hard – amid a shaky recovery, competitive pressures rise for Western manufacturers”, The Asian Wall Street Journal, 9 September. Seager, A. (2005), “Marconi may fall to Chinese”, The Sydney Morning Herald, 9 August.

Corresponding author Brian Low can be contacted at: [email protected]

Appendix. Glossary of terms .

Case questions .

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Can Huawei compete in the global telecommunications market dominated by a select few especially given its limited research and development investment when compared with some of the global telecommunications giants? If yes, why and how? If not, why not? “Global telecommunication giants stand to gain more with global telecommunications reforms and liberalisations than Huawei does.” Do you agree or disagree with this statement? Explain your reasons. “Huawei’s successes in penetrating the markets of developing nations will not be easily replicated when attempting to penetrate the markets of developed nations.” Do you agree or disagree with this statement? Explain why or why not? Is it desirable for China’s central government to actively participate in the construction of Huawei so that the company is in a position to challenge some of the global telecommunication giants? Do you agree? Why or why not? Should Huawei seek an Initial Public Offering (IPO) listing as a matter of strategic priority? What are the advantages and disadvantages in seeking this listing?

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Third-generation (3G) technology. This is usually used to describe the next wave of mobile communications. While analog technology represents the first wave of mobile communications technology and digital represents the second (2G), 3G technology will provide more bandwidth for mobile devices. Code division multiple access (CDMA) 2000. This is a 3G mobile wireless technology. It can support mobile data communications at speeds ranging from 144 Kbps to 2 Mbps. Qualcomm’s CDMA is widely used in the USA. Time division synchronous code division multiple access (TDSCDMA). This is China’s homegrown third-generation mobile wireless technology. It competes with the US CDMA2000 system backed by Qualcomm Inc, and Europe WCDMA backed by Ericsson and Nokia. Development started in the late 1990s and is certified by the ITU (International Telecommunications Union) as a 3G (third-generation) standard in 2000. Wideband code division multiple access (WCDMA). Developed by Ericsson and Nokia, this 3G mobile wireless technology promises much higher data speeds to mobile and wireless devices than commonly offered in today’s market, and has been adopted by 3 and Vodafone in Europe. The input signals are digitised and transmitted in coded, spread-spectrum mode over a broad range of frequencies. A 5 MHz-wide carrier is used compared with 200 kHz-wide carrier for narrowband CDMA.

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because of the country’s current “guanxi” network (informal influence, personal connections, relationship, favoritism). Consequently, Western firms operating in China might be well advised to adapt their policies by allowing some acceptable level of nepotism. And while Chinese negotiators may take an ethical approach to business to safeguard the benefits of a guanxi relationship, their dealings with someone outside that network might be different. In such circumstances, bending the rules and taking advantage of people, particularly foreigners, might be considered a perfectly legitimate way of doing business. Additionally, Chinese executives exist in a system with high levels of legal hostility – the legal environment favoring local business regardless of just cause. If Western firms impose explicit legal contracts on their Chinese counterparts, the counterparts may perceive such action as a means of controlling them. This can raise the inclination to behave more opportunistically. Instead, reliance on trust-based exchange may result in the most effective and efficient negotiation process. The authors noted that, in their study, idealism emerged as the most important factor in determining perceptions of inappropriate negotiation tactics that involve one’s opponent directly (e.g., making false promises, traditional competitive bargaining). Relativism manifested its significant impact on questionable negotiation practices that involve a third party (e.g., inappropriate information gathering, attacking opponent network). These results suggest that Chinese negotiators may be situationalists and are more concerned with face saving in direct negotiation by employing negotiation tactics that are less harsh. However, when the tactic involves an indirect third party, they may act in a more brutal and unethical manner. Jamal A. Al-Khatib et al. conclude:

Executive summary and implications for managers and executives This summary has been provided to allow managers and executives a rapid appreciation of the content of the issue. Those with a particular interest in the topic may then read the issue in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present. It is said that Niccolo Machiavelli – arch advocate of ruthlessness, cunning and the defence of what some might abhor as indefensible – believed world leaders need to be half beasts, possessing the fox’s guile and the lion’s brutality. So when the phrase “Machiavellian tendencies” crops up in a study of the impact of Chinese executives’ preferred ethical ideology and perception of unethical negotiation tactics, managers of companies wishing to do business with them should take heed. Today’s business leaders may not have much in common with fifteenth century world leaders, but the phrase “the end justifies the means” still holds true for some. While Western eyes have focused on business scandals such as Enron, WorldCom, Parmalat and others, China has also had its corporate wrongdoings which highlight important ethical and legal issues for a country which continues to increase its importance and presence in the global economy. In their paper “Business-to-business negotiating in China: the role of morality”, Jamal A. Al-Khatib, Stacy M. Vollmers and Yusin Liu note:

Given the long-term ramification of tactics used against a third party (e.g., a foreign partner), this pattern of results underscores the importance of building trust and long-term relationships in China as a means for reducing the likelihood of such tactics being employed.

The impact of Machiavellianism on Chinese executives’ perceptions of inappropriate negotiation tactics may be explained by several factors. First, given the hostile new market economy that witnessed many incidents of extortion, murder, tax evasion and theft, coupled with the competitive pressure (a prerequisite for opportunistic and unethical behaviour) that is required to exist under the new economic order, Chinese managers may still feel that an opportunistic behavior is needed to survive in the current turbulent times. Second, in such a highly competitive environment, individuals form a competitive, rather than a co-operative disposition.

The current Chinese environment is the result of a difficult and disappointing transition to a free market economy. This, coupled with the absence of a well-defined legal system, has resulted in relaxed and consequences-free attitudes among some Chinese business people towards ethical negotiation. This situation makes it imperative that multinational corporations, joint venture partners to Chinese firms and international managers operating in China codify the desirable and undesirable behavioral attitudes of the Chinese negotiating partner, host country staff, workers, customers, and suppliers. Such effort needs to be developed with the Chinese culture, economic challenges and past history in mind, otherwise any effort to codify behavior is bound to fail. Western and Chinese joint venture partners must agree on a middle ground of firmspecific policies and codes of ethics. Western firms operating in China should be aware of and able to influence the ethical sensitivity of their Chinese partners and employees by establishing a culture-sensitive, but strictly imposed, code of ethics to govern the firm’s relationship with its Chinese constituents and curb any tendencies for unethical behavior. Establishing such agreements, relationships and codes of behavior between companies which are, to some degree, part of a market economy is one thing – establishing them when the Chinese organization you are working with is, like the telecommunications industry, underpinned by a desire to maintain control of a specific interest, as well as the protection

The underlying message of the latter point being that highlycompetitive people may be more likely to accept unethical tactics while negotiating with business partners. While China’s era of central planning is generally considered to have promoted a Machiavellian attitude by emphasizing “the end justifies the means” characteristics, the post central planning era’s emphasis on free market activities, profit and competition has also fostered such behavior in some. It is well understood by many Western business managers that, to capitalize on the opportunities provided by the emerging Chinese market, they must gain a comprehensive understanding of the country’s management culture – one that may be very different from the culture they are used to. For instance, there is a view that business in China could not function if it were to do so in an entirely “legal” way Journal of Business & Industrial Marketing 22/2 (2007) 145–148 q Emerald Group Publishing Limited [ISSN 0885-8624]

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For instance, telecommunications companies that increasingly see social responsibility as a key to long-term legitimacy are adopting a state-oriented legitimacy through the establishment of social alliances with regional and provincial authorities, especially since telecommunications facilitate social and/or regional development. As China seeks to become a global telecommunications superpower, telecommunications companies like Motorola, Lucent and Nortel are increasingly seeking out technical and research alliances as a key to long-term success in achieving their technological legitimacy. They are actively collaborating with local partners (equipment manufacturers), customers (carriers), and the central government, and helping them participate in global technical and research alliance programs. With legitimacy justification requirements being met, these companies should then reap the benefit of positive legitimacy outcomes. These may include: . recognition as a good corporate citizen; . possible access to privileged information, including timing and awarding of licenses; . preferences and incentives in setting up local research and development alliances; and . award of local manufacturing licenses.

of vested interests within the state-controlled economy, has its own unique challenges. While the sector is undergoing major structural changes, transforming itself from a centrally-controlled one to a semicapitalist model, and while the government is committed to structural reform, telecommunications policies continue to be affected by institutional, national, and security considerations. In their study “Securing network legitimacy in China’s telecommunication market”, Dr Brian Low, Dr Wesley J. Johnston and Jennifer Wang propose network legitimacy as an important condition of organizational success in China. Not just important but perhaps a key factor towards longterm survival and success, particularly as companies have failed in China, not because of lack of resources or inferior products, but because of inappropriate or ineffective efforts to build legitimacy. The authors say: “Establishing and nurturing a firm’s network legitimacy is important because it sensitizes managers to the relationship between an organization’s survival and the network environment beyond mere guanxi.” Network legitimacy can lead to returns of economic, social, technical and political capital through an appropriate identification of network opportunities and constraints. In the telecommunications sector, these opportunities stem from innovative technical solutions that originate from the management of resource and activity links, which connect a firm’s technology. As a result, existing technological networks are disrupted, new ones created, connecting the interrelated resource and activity parts of emerging networks, and transforming old industrial production, procurement and consumption. The authors add global-oriented legitimacy to their conception, saying:

The alternative is to run the risk of “legitimacy orientation misfits” leading to “legitimacy redundancy” where these companies no longer have a role to play in the network. Dr Low et al. conclude: The key to legitimacy success involves using legitimacy orientations to demonstrate commitment to the interests of constituents, acquiring legitimacy from them, but concurrently considering the central government’s influence on a firm’s legitimacy performance. In the telecommunications sector, a company’s legitimacy emanates first and foremost from the development and commercialization of innovative and creative technological solutions. This requires good, creative management of technological resource and activity links, connecting the company’s technology to network constituents which include local manufacturers, carriers, software developers, investors. Companies like Motorola China appear to have grasped the significance of network legitimacy and the link between legitimacy orientations to legitimacy justification actions.

Amid the backdrop of an increasingly globalized telecommunication market place, global-oriented legitimacy involves resource and activity sharing programs that telecommunication giants like Motorola, Nokia and Lucent undertake with local Chinese equipment manufacturers. This in turn helps facilitate these manufacturers’ access to and participation in global markets, equity and technology process. Active and constructive participation in programs like joint manufacturing, marketing, technical alliances, and contributions to social causes and regional developments in turn have earned these companies legitimacy among significant local network constituents, including local customers, suppliers, equipment manufacturers, carriers and provincial and central government authorities.

While establishing and maintaining networks in governmentcontrolled enterprises such as telecommunications may indeed go well beyond guanxi, interpersonal relationships can be pivotal and should not be underestimated in the event of the dissolution of a business-to-business collaboration. Not surprisingly, China has its own distinctive characteristics which come into play when an arrangement is coming to an end – for instance, “saving face” is an important consideration. So too is the possible requirement to involve in the dissolution any “third party” who might have been instrumental in getting the parties together in the first place. It should also be remembered that from the Chinese viewpoint, even when a business partnership becomes dysfunctional and has to be ended, good personal relationships which existed before the dissolution can have an “energy” of their own which can be transferred. Studying “Buyer-seller relationship dissolution: the Chinese context”, Dr Andrew D. Pressey and Xin Xuan Qiu say no previous study has meaningfully examined dysfunctional relationships and their dissolution in a Chinese cultural context. An understanding of business relationship dissolution in western cultures does not necessarily further our understanding of it.

There is, of course, still much to do. Despite the high priority given to the sector by the government, telecommunication reforms are mainly confined to cities and provinces along the eastern seaboard, regional differences which have raised concerns between “the haves” and the “have nots.” Legitimacy orientation and legitimacy justification behavior in China takes place in the context of continuously disrupted networks. These disruptions may be due to broad political, social, and economic reforms that impact on the production, distribution, sales and consumption products and services. Or they may be caused by telecommunication-specific industry factors such as the introduction of new technologies, evolution of new channels, increased product commoditization, or increased market competition. Consequently, telecommunications companies need to realign their network legitimacy or face “network redundancy”. If these companies successfully realign their “orientations,” and achieve a “dynamic fit” with network disruptions, then “legitimacy justifications requirements” are achieved. 146

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The interpersonal connections of guanxi, for instance, is central to relationships in Chinese business. One characteristic of guanxi is for an individual never to allow the guanxi due to them to be fully discharged so that the obligation in a relationship always exists. This feature of business relationships in China is likely to lead to protracted dissolution in some instances and cause complications particularly as guanxi is essentially a power relationship and, as such, could potentially exert a powerful effect on business relationships obliging firms to conduct business with certain parties (or friends) with which the level of guanxi is greatest and to dissolve relations with those where it is weakest. Through one relationship an individual can also gain access to a much wider network of business connections and potential relationships. The dissolution of one connection in the network may have an impact on the wider guanxi network. In addition, the prevalence of “altercasting” in China – the transfer of guanxi between two unfamiliar individuals via a third-party – could cause complications when it is deemed necessary to dissolve a relationship, particularly as there will be the desire among parties to save one’s “face” and the “face” of others in order to preserve the guanxi built over time, particularly with the third-party who may wield considerable influence. Whereas at one time firms were usually not free to make decisions related to which suppliers or customers they could choose to develop relationships with or to dissolve, they now have greater freedom to build relationships with their partners of choice, both foreign and domestic. The transition economy has put greater pressure on suppliers to meet the growing demands of customers and to change suppliers who cannot meet that demand. China is regarded for the most part as a buyer’s market, giving the buyer greater power to dissolve relationships. However, cultural considerations remain. One manager in the study recalled being forced to switch their stationery supplier because the director of a local branch of a statefunded commerce bureau told them his nephew had set up a stationery company. Consequently they switched to a supplier whose products were considered inferior in order to “give face” to the director and maintain good guanxi with him. Another manager recalled an instance where an entire sales force was retained during a major downsizing because they did not want the company to lose business through sales staff with strong guanxi relationships with customers leaving and taking the customers with them to a new firm. Informants said it was common for business relationships to be initiated through introductions by relatives, friends or officials. If they decided to end these relationships at some point, they needed to consider the guanxi with these thirdparty individuals or “introducers”. One manager said:

slowly reducing the size of the order with the present supplier. Over time, the supplier would transfer most of the orders to the new supplier, whilst still trying to maintain the guanxi with the first supplier.

Whether such businesses survive, are dissolved or just fade away to make room for new ones, small to medium-sized enterprises (SMEs) in China are a key element in the economy, accounting for 99 percent of the total number of firms, 69.7 percent of overall employment, 48.5 percent of total firm assets and 65.6 percent of the country’s gross output value of industry. Since the start of economic reforms in late 1978, the construction sector has become one of the fastest growing industries. While SMEs worldwide face many unique challenges – including limited resources, lack of experience in conducting formal market research and segmentation studies, lack of marketing skills and expertise – specific challenges are confronted by SMEs in China including constraints in accessing both internal and external financial resources. In “Marketing and business performance of construction SMEs in China” Dr Yiming Tang, Dr Paul Wang and Professor Yuli Zhang identify factors which positively correlate with a small firm’s business performance, studying small construction firms in Tianjin, one of China’s four largest cities with a vibrant SME sector. The majority of housing products available in China remain very basic (i.e. apartments with bare walls, cement floor, and no closets, etc.) Purchasers of such products need to outlay a significant amount of extra money for further finishing work. While there is a clear need for further adaptation of such products, managers of the firms focusing on current products concede that the potential for this adaptation is very limited, due to backward design, rising labor and material costs, and the rapid change in market needs. However, there is an increasing market demand for betterdesigned apartments (i.e. with finished floors, ceilings, closets, etc.). While such products usually command much higher prices, they seem to sell much faster. As such, companies focusing on innovation seem to do better than their competition. The findings clearly call for the adoption of a long-term differentiation marketing strategy with a focus on R&D and new product development. In addition, younger firms would benefit by learning from the experience of the more established firms in how to conduct businesses. Most interviewees in the study were not familiar with SWOT analysis, the Experience Curve, Portfolio Planning Matrices, and PIMS methods, but relied more on intuition for marketing analysis and decision making. Most were also not sure of their company’s exact market share, due to the small scale of their operations. On the policy front, China’s vibrant residential housing sector and its construction industry, together with the high performance of those firms focusing on R&D and new product development, highlight the success of the Chinese government’s current housing reform policy. Dr Tang et al. say:

If the introducer is crucial to our business, such as a high-ranking official, we have to maintain the business relationship with this person even though we are not satisfied with the outcome of the business. Damaging the guanxi with that introducer is more costly to our business.

Sparing people’s feelings is also evident in the number of relationships which are not formally, and perhaps abruptly, dissolved when they become dysfunctional, but are allowed to merely “fade away.” The authors note:

Compared to the standards of developed economies, China’s current per capita floor space is no doubt still quite low. However, China can be justly proud of its remarkable housing reform achievements within such a short period of time. In addition, given the association found in this study between marketing strategy and business performance, there is value in dissemination by government of this information to encourage small firms to focus more on long-term differentiation, R&D and new product development. This could

It seemed reasonably common that in circumstances where a customer harboured dissatisfaction with a supplier and wanted to switch, that they initially gathered information concerning feasible alternative suppliers whilst

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China, demonstrating it is not impossible to improve the situation of those which lagged behind. A preference for personal relationships also manifested itself in Chinese managers using a “free of charge” approach not just for customer services, but also product-related services which would normally be paid for. On one hand service managers lost “face” if they charged for services which customers expected to get for free. On the other hand, they deliberately used “free” services for establishing a guanxi network and “giving face” to their customers. While this “free-of-charge” approach made it difficult to sell product-related services, thereby increasing service revenue, it did lead to better long-term customer relationships and reduced the risk perceived by customers when they considered the purchase of “equipment availability” rather than just a product. Building and sustaining a position within a guanxi network also requires some knowledge of “renqing” which is about the exchange of favors and “mianzi” which is about preserving individual dignity or enhancing someone’s social status. To overcome resistance to rules for charging for productrelated services, successful companies in the survey offered their service managers the freedom to be personally available for their customers 24-7. They arranged special budgets and times for picking up customers at the airport, showing them the city all day and even inviting them for dinner. In that case, customers are more likely to pay for product-related services. The effects of the importance in Chinese culture of “giving face” – in other words praising someone’s reputation in society – and to protect one’s own “face” should not be underestimated. One company observed that encouraging service managers and technicians to gain a better understanding of the value of product-related services can damage the face of both employees and customers. Consequently the managers and technicians were highly reluctant to change their mindsets in order to gain that better understanding. Because service managers and technicians are difficult to empower, successful companies trained their Chinese service staff in Switzerland. That helped them gain a better understanding of what empowerment meant in the context of Western culture. This intensive training helped the Chinese service staff to recognize different customer situations better and to define how to communicate product-related services more easily. Furthermore, instead of damaging the face of service managers and technicians by encouraging them to gain a better understanding of the value of product-related services, the successful companies “give them face” through internal marketing. For example, service employees who understand the value of product-related service are given internal awards. Companies wishing to have a business-to-business presence in China should also understand the importance of the family, rather than the firm, being the base economic actor.

be achieved by government initiatives such as management training programs and education campaigns designed to promote the adoption of such marketing strategies.

Given their limited size and difficulty in trying to obtain external finances to fund their R&D activities, small construction firms will face increasing resources pressure when they try to adopt and implement the long-term differentiation marketing strategy with a focus on R&D and on new product development. It is, therefore, advisable for the government to do more to facilitate external financial support, via bank loans and other means, rather than for the government itself to invest is small firms. Such a policy will better assist small firms in their further development. Furthermore, it will help them to better prepare for and adapt to an increasingly competitive post World Trade Oorganization business environment. Ultimately, such measures would contribute significantly to the long-term wellbeing of the small business sector in China, which is so vital not only to the country’s economic growth, but to its social stability as well. Managers of foreign companies wishing to enter the Chinese market, or increase their presence, will by now have noted the abundance of advice about the need to take account of Chinese cultural characteristics. They should heed it – their business prospects may depend on having the means to overcome or limit those characteristics. Guanxi, gift giving, saving face, the importance of family and other phenomena of Chinese society pervade all aspects of business. Take service revenue, for instance. In their study “Businessto-business marketing as a key factor for increasing service revenue in China”, Dr Heiko Gebauer, Dr Chunzhi Wang, Bernold Beckenbauer and Regine Krempi – who compared the methods and attitudes of successful and less successful machine manufacturing companies – say: Increasing service revenue in China is affected to a high degree by Chinese cultural characteristics. The implicit logic for increasing service revenue starts with overcoming typical and, in some respects, limiting cultural characteristics.

In a survey of Swiss sewing machine and equipment manufacturers, they observed, for instance, that Chinese service managers were averse to pricing equipment availability. Profitability depends on how accurate such managers are in assessing risks of failure and in guaranteeing timescales between failure and repair. While Chinese service managers were willing to develop risk assessment, unlike their counterparts in the West, they felt very uncomfortable with defining specifications and enforcing contracts. They preferred personal relationships over contractual arrangements – an example of views linked to guanxi and one which holds the danger of limiting the implementation of such contracts. Although Swiss machine and equipment manufacturers generate a major share of their total revenue through services, in the survey 118 companies said that in Europe they generate on average 21.2 percent of their total revenue through services compared with only 10.3 percent in China - losing potential margins and weakening overall profitability. However, some companies had posted attractive levels of service revenue in

(A pre´cis of the special issue “Business-to-business marketing practices in China”. Supplied by Marketing Consultants for Emerald.)

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