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August 20, 2012

Thesis paper on Competitive Strategy and Business Environment in China

After the Third plenum of the 11th Central Committee of the Chinese Communist Party in December 1978, the government started to provide guidelines for reform and development of the agricultural economic system, which led to the legalization of small market-oriented businesses in the rural areas (Leo, 1999). SMEs flourished in the market-oriented economy as the government gradually relaxed restrictions on the development of small enterprises.
 The SMEs have grown to be an important force in promoting the development of Chinese economy. They accounted for 99 percent of the total number of firms, 69.7 percent of overall employment, and 65.6 percent of China’s gross output value of industry (National Bureau of Statistics of China, 2006). It is therefore necessary to enhance the management system by expanding the operations of the business and strengthening strategic management. 
As most early studies in small business have focused on the context of advanced market economy, small  business development in transitional economy remains by and large an unexplored and important agenda (Tang et al. 2007). Moreover, Chinese SMEs face a dynamic and competitive environment in the China’s post-WTO era. Little research has been undertaken to systemically analyze the challenge and opportunity posed by such situation, which would give rise to an effective and integrative strategy for SMEs to compete in the Chinese market. The current study represents a first step towards bridging the research gap. It synthesizes and integrates the strategic choice approach and the environmental management perspective to build an expanded notion of competitive advantage for SMEs in China.
Literature review 
In the study of the competitive advantages developed  by small businesses in operations, researchers have acknowledged that generic competitive strategy and external conditions have their impact on Chinese SMEs’ performance. The outstanding performance and development of SMEs can be attributed to business environment change in China. With the reforms taking effect in 1980s, small enterprises were provided with the opportunity to retain profits, which brought the first stage of an  incentive structure (Sun 2000). Luo (1999) investigated environmental factors, such as complexity, dynamism and munificence, influencing small firms’ performance.
Based on an analysis of survey data collected from SMEs, Luo confirmed that  environmental characteristics have a significant influence on SMEs’ strategic orientations. Tan (2001) proposed that the environmental turbulence brought about the rapid rise in entrepreneurship in China. Entrepreneurial firms, being small and faster than stated-owned enterprises (SOEs), adopt strategies that distinguish them from their lagers to achieve their success.
The SME’s competitive advantage is not only affected by the environment, but also depends on strategy it involved. Chew  et al. (2004) built up a conceptual framework for the competitive strategies for
Chinese SMEs, which includes strategic alliances, innovation and differentiation. The framework was also illustrated by a case study of a prominent Chinese SME. Tang et al. (2007) examined the association between marketing strategy and business performance of small firms in China. Based on data collected from SMEs in China, they suggest small Chinese firms would adopt a long-term differentiation strategy, focusing on R&D and new product development. 
3. Research hypotheses
Competitive advantage of the firm is a function of industry analysis, organizational governance and firm effects in the form of resource advantages and strategies (Mahoney and Pandian, 1992). From an environmental management perspective, environmental factors are important predictors to the organization’s performance. The environmental factors are mainly in regard to economic and competitive conditions, including market turbulence, government interference and competitive intensity (Dalgic, 1998) .The strategic choice approach is embedded in strategic management literature and focuses on the central role of strategy as a determinant of firms’ performance.
According to strategic choice approach, firms are assumed to be open systems that confront and respond to challenges and opportunities in their environment (Child, 1997). The research aims to integrate these two dominant perspectives based on frameworks that were proposed or adopted in previous studies (Luo, 1999; Chew  et al., 2004; Tang  et al., 2007). The conceptual framework in this study proposes Chinese SMEs’ performance is critically dependent on two levels of factors: competitive strategy and business environment.
3.1 Competitive strategy and SME’s performance
The competition strategy is the strategic choice that can influence SMEs’ performance. In analyzing the strategies of firms, the Porter’s framework has been the dominant tool for the past two decades. Greenfield (1989) suggested the use of Porter's (1980) three generic strategies by SMEs in competing for markets. Sandlberg (1986) found that business strategies have direct influence on growth performance of SMEs. In addition, such factors as strategic types, the adoption of new technologies, quality products and other organizational strategy related factors are also revealed to have important influence on superior performance of SMEs. Tang et al. (2007) stated that market differentiation strategy  through ancillary intangibles might prove effective to achieve success for small firms. Chandler and Hanks (1994) suggested that small firms should use innovation strategy to obtain competitive advantage in rapidly changing environment. Chew  et al. (2008) further proposed that the SME should form a strategic alliance with other firms to pre-empt such aggressive actions by the bigger firms. As such, Chinese SMEs should rely heavily on developing competitive strategy in order to be sustainable in the industry. Based on these considerations, the hypotheses of this study are: Hypothesis 1: Cost strategy is positively related to Chinese SMEs’ performance.  Hypothesis 2: Differentiation strategy is positively related to Chinese SMEs’ performance.  Hypothesis 3: Innovation strategy is positively related to Chinese SMEs’ performance.
Hypothesis 4: Strategy alliance is positively related to Chinese SMEs’ performance.
3.2 Business environment and SME’s performance
The complex industry environment is seen as multidimensional, with numerous and differentiated effects on various organizational characteristics and processes (Keats and Hitt, 1988). Business environment provides a window to market opportunities and threats, and SMEs are a deliberate response to those dynamics. During economic transition, the business environment in China has revealed several characteristics. First, growth in sales and profitability varies markedly due to the industrial policy that allows only some sectors to be privatized and also to the deep-rooted imperfections in industry structure (Sun, 2000). Second, government regulations frequently changed due to idiosyncratic paths of decentralization and government needs for controlling strategically vital industries. Third, competitive pressure varies by the level of equilibrium between market demand and market supply. These characteristics of the environment have a direct impact on the nature of competition and the competitive strategy available to Chinese SMEs. Drawing on the literature, business environment would appear to have a strong effect on the SMEs’ performance. In light of the above, the following relationships are predicted:
Hypothesis 5: Environmental dynamism is positively related to Chinese SMEs’ performance. 
Hypothesis 6: Competition pressure is negatively related to Chinese SMEs’ performance.
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