Executive summary and implications for managers and executives

Citation

(2007), "Executive summary and implications for managers and executives", Journal of Business & Industrial Marketing, Vol. 22 No. 2. https://doi.org/10.1108/jbim.2007.08022baf.001

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:

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 underlying message of the latter point being that highly-competitive 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 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:

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 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 firm-specific 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 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 semi-capitalist 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 long-term 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:

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.

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.

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:

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  recognition as a good corporate citizen;

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  possible access to privileged information, including timing and awarding of licenses;

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  preferences and incentives in setting up local research and development alliances; and

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  award of local manufacturing licenses.

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.

While establishing and maintaining networks in government-controlled 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.

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 state-funded 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 third-party individuals or “introducers”. One manager said:

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:

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 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 better-designed 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:

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.

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 “Business-to-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 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 product-related 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.

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