achieving superior financial performance in china

8/13/2019 Achieving Superior Financial Performance in China

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advantage from their low labour and production costs. However A differentiation

strategy creates customer value through means such as innovative products,

superior quality and technology, a differentiated brand image, good service, and so

forth, which distinguish the firm from its rivals It represents an external focus that is

designed to enhance customer satisfaction and to create customer loyalty bymeeting a particular need. Controversies and conflicting empirical evidence mark the

discussion of whether firms can effectively adopt and implement a dual strategy, in

which they simultaneously differentiate and lead on cost, to attain superior

performance. However, the combined strengths of a dual strategy (i.e., high quality

and low cost) could match with or exceed the needs and expectations of average

Chinese consumers, who have boosted their standards in terms of consumption

patterns and lifestyles as China increasingly integrates into the global economy ,

though their disposable income remains limited. Thus, pursuing a dual strategy in

China may be a more likely means to gain profitable volume and market share.

Effect of Domesticity

A cost-leadership strategy should have a greater impact on the financial

performance of domestic firms because, compared with foreign enterprises, firms

from emerging economies often possess natural cost advantages in terms of low

labour and production costs, from which they can gain higher financial returns.

Domestic Chinese firms that undertake cost leadership as their primary mode gain

relatively higher margins through their solid supply networks and entrenched

distribution channels, which ensure them consistent access to raw materials and

efficient delivery. From the foreign firms perspective, cost leadership appears to beless effective for superior performance, mainly because of firms comparative cost

disadvantage when operating in emerging economies. Foreign multinational

corporations have gained increasing benefits from the liberation of trade and

investment around the world but still suffer overall cost disadvantages relative to

domestic firms in emerging economies because of the liability of foreignness. The

impact of a cost-leadership strategy on financial performance is greater for domestic

firms than for foreign firms. However, foreign firms may achieve greater financial

performance than domestic firms when they use differentiation strategy foreign firms

enjoy an inherent advantage over domestic firms with regard to adopting a

differentiation strategy.

The resources and capabilities they own (e.g., financial and technological

resources, modern management systems, updated production methods, trained

personnel) better fulfil the conditions required to implement a differentiation strategy

successfully, thus we can say The impact of a differentiation strategy on financial

performance is greater for foreign firms than for domestic firms. The effect of a dual

strategy on performance is stronger for foreign forms than for domestic firms for

several reasons. Because a cost-leadership strategy is focused internally on

operational efficiencies whereas a differentiation strategy is externally targeted

toward satisfying customers, the two strategies essentially stem from divergentorganizational philosophies. Although foreign firms face the same conflicting


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philosophies when they implement a dual strategy, their well entrenched corporate

culture may help them resolve conflicts by building ambidextrous organizations

comprising separate divisions that effectively follow different strategies.

Dells successis a perfect example: Dell entered China in the late 1990s, much

later than rivals such as Compaq and IBM. However, Dell pushed lower costs andprices in China through effective cost controls, obtained through its direct sales and

supply chain integration

Effect of Market Concentration

Industrial organization theory suggests that market structure influences the

strength of relationship between business units strategiesand their performance

(Scherer and Ross 1990). Most industries in China are experiencing deep structural

transformations that are characterized by greater structural uncertainty and

unbalanced growth (Zhou, Tse, and Li 2006); thus, both domestic and foreign firms

must align their marketing strategy with market structure factors. Market

concentration refers to the extent to which a large share of market sales is

accounted for by a small number of competitors. It is an important characteristic of

market structure that reflects the oligopolistic nature and competitive behaviour of

the market. Therefore, following the industry structure model, we examine whether

the effects of generic strategies on financial performance vary according to different

levels of market concentration.

When the level of market concentration is low, a cost-leadership strategy has a

weaker influence on the financial performance of firms operating in China. When

markets are less concentrated (and, therefore, more competitive), all firmsexperience intense pressure and face strong product and technological competition.

Therefore, firms that adopt a cost-based marketing strategy must pursue internal

efficiency by increasing the efficiency and productivity of their internal operations. A

cost-leadership strategy has a weaker influence on financial performance when the

level of market concentration is low rather than high. A differentiation strategy has a

stronger influence on financial performance when the level of market concentration is

low rather than high, because customers in markets with low concentration (and

intensive competition) have many choices, firms must prevent them from switching to

rivals to maintain their superior performance. In this case, a differentiation strategy,

which introduces and modifies unique products to exceed customers expectations,

can help firms retain customers and achieve superior performance. Furthermore,

when markets are less concentrated with competitors, firms must have a sustainable

advantage to stand out from competitors.

Measures adopted to ensure fairness of the results

The team adapted measures from established studies and employed

professional back translation to ensure conceptual equivalence .We then conducted

a pre-test with 20 senior managers to assess the face validity and clarity of the

measurement items. On the basis of the pre-test responses, the team revisedseveral questionnaire items to enhance their clarity. To reduce the potential for


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common method bias, we collected information about market concentration and firm

performance from secondary data. The market concentration measure uses the

Herfindahl index, which captures the number and market share distribution of firms in

an industry also the team controlled for the effects of firm age, firm size, and industry

type in our analyses because existing studies suggest that these variables influencefirm performance. They measured firm age as the number of years since the firm first

was established. Firm size is the logarithm of the number of employees, they coded

industry type as a dummy variable, where 0 = low-tech firms

Limitations

Although we make some important contributions to research on strategic choices

as determinants of firms financial outcomes inthe emerging economy of China, we

also note some limitations that require additional research. This study focuses on the

moderating effect of two contextual factors, domesticity and market concentration,

but the moderated relationship between market concentration and strategic choices

might be contingent on domesticity Additional investigations should attempt to

uncover the interplay of strategic choices, domesticity, and market concentration or

other structural elements. Furthermore, in our preceding discussion, we suggest that

a dual strategy is less effective for domestic firms because of their poor resource

base and lack of managerial competency. Therefore, a fruitful direction for further

research involves determining which capabilities and resources underlie the

successful implementation of a dual strategy by firms in emerging economies.

Alternatively, researchers could use a longitudinal design to examine the pattern of

strategies adopted and its influence on financial performance to capture thetransitional characteristics of emerging economies. Finally, although China shares

many characteristics with other emerging economies, additional research should

attempt to validate our findings in other emerging economy settings.

Conclusion

Firms operating in emerging economies must choose appropriate marketing

strategies to address the idiosyncratic challenges of rapid changes and institutional

voids. On the one hand, domestic firms need a proper marketing strategy to take

advantage of their local position; on the other hand, foreign firms must adjust the

marketing strategies they traditionally have deployed to confront the environmental

pressures for change. Despite its importance, the question of which marketing

strategy is more appropriate for domestic and foreign firms in the emerging Chinese

market remains largely unanswered. Moreover, debates about the effectiveness of

pure versus dual strategies persist in existing literature. Therefore, to bridge the

research gaps, Li and Li investigate when various types of marketing strategies

might work by examining the effects of both pure and dual strategies on financial

performance for domestic versus foreign firms and across different market

concentration levels in Chinas emerging economy.

The authors conducted a survey in the manufacturing industry in China and obtained


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249 complete questionnaires, of which 97 were from domestic firms and 152 were

from foreign firms. The results show that the effectiveness of a certain marketing

strategy varies depending on domesticity and the level of market concentration. The

impacts of both cost and dual strategies on financial performance are stronger for

foreign firms than for domestic firms. Although cost leadership and dual strategiesare less effective in less concentrated markets than in more concentrated ones, the

effect of a differentiation strategy is stronger when the level of market concentration

is low rather than high.

The findings suggest that managers of domestic Chinese firms should use quality-

and innovation-based differentiation strategies. Foreign firms can leverage their

relative advantages to achieve a low-cost position or a balance between cost and

quality. However, managers should use caution when considering the cost and dual

strategies in less concentrated (more competitive) markets because the fierce

competition among the many competitors dampens their effectiveness in terms of

financial performance.

achieving superior financial performance in china

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