How family-owned businesses can survive in competitive environment in China?

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How family-owned businesses can survive in competitive environment in China?

Abstract

Family owned firms continue to be an important source of wealth creation in Chinese economy. However, over the past decade, family owned firm have seen radical transformation in their business environment.  Apart from facing unending challenges such as nepotism and succession, today’s family owned firms in China must deal with increased competition arising from globalization and free market economy policies that the Chinese government has undertaken.  This research study has been undertaken to explore how Chinese family owned firms can survive this high competition. The study has established that to gain competitive advantage, an organization needs to implement cost leadership and differentiation competitive strategies as proposed by Porters in his book Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press (1980). In addition, family owned firms must implement human resource management practices that will create a human resource that is competitive. Due to the unique attributes of Chinese family-owned firms, present an interesting background to examine the way business strategy relates to business performance in this competitive environment.

Chapter 1

1.0  Introduction

China, the number of family owned business has been on the rise. According to data from China.org, the numbers of business which have a family stake of over 50% were about 85% in 2010. This is an increased of more than 30% considering that in 1990; only 20% of businesses were family owned.  Among the 762 private listed companies, 40% were family owned (Xi, 2011). The increase in the number of family businesses and other non-family businesses has increased the competition for the market share.

The increased competition and existing market imperfection means that business that can exploit this imperfectness can create a competitive advantage. Indeed, family owned businesses in China are facing both institutional and business environments that are undergoing rapid changes and transformations making it hard for them to gain the necessary resources required to compete within the market. However, based on resource-based theory, it states that a business can create a competitive advantage from its competency to exploit certain resource, which cannot be imitated (Timmons & Spinelli, 2003).

This research paper therefore, examines the competitive strategies that family-owned firms should develop and implement in order to remain competitive in the present highly competitive environment.  Due to the unique attributes of Chinese family-owned firms, they present an interesting background to examine the way business strategy relates to business performance. As observed by Anderson and Reeb (2003) a family-owned business strong sense of loyalty, integrity, dedication, distinctive social system and “familiness”, can greatly affect the type of business strategies they develop. Family-owned firms in China operate in a collective society , therefore, personal as well as social relationships, which form the social system may impact the effectiveness of business strategies implemented (Walter, 2001).

  • Background to the research problem

Family-owned business is one of the oldest forms of business organisation. It comprises over 95% of all business establishments worldwide (Litz, 1995, p. 71). According to Nancy Bowman: There are about 90% of American businesses are family owned or controlled. Therefore, family-owned business can recognize as an important and distinct organization in the world economy. As the rapidly economy development in China, there is about 70% of businesses are family owned and controlled. It’s no doubt that family-owned businesses make great contribution to Chinese economy. Family-owned businesses operate as special business entities which due to their concern for the long-term over generations. In addition, family-owned businesses are more complex than other business entities as they not only have unique family involvement (Chua et al., 2003), but also with ownership control of the business. As the global competition increase rapidly now, family-owned business have to modify business strategies to meet this challenge. In order to survival in this competitive environment, family-owned firms need to have a sense of loyalty to business success, long-term strategic commitment and corporate independence (Poutziouris, 2001; Westhead & Cowling, 1995). Moreover, there are many issues for family-run businesses have to concern with. First of all, the conflict interest of family members and non-family members in the business, which will increase the risk for business to run successfully. Secondly, there is a secession problem of family companies, as it is key icon for family firm to continually run and manage over generations. Thirdly, leadership and human resources management problems derive from the previous issues.

Therefore, in this paper, it is necessary to explore that how to overcome these issues with successful strategies to gain competitive advantage for family-owned business in order to survival in the market

  • Rationale of the study

The main rationale of this study is to establish how family-owned businesses can survive in competitive environment in China? Family owned firms contribute a lot to the Chinese economy. However, the Chinese business environment has become highly competitive. This has been brought about by globalization and China membership into the World Trade Organization (WTO) in 2001, which has opened up China allowing big multinational companies to enter the Chinese market and compete with local companies.  Therefore, Chinese firms, particularly those family owned have to re-engineer to face the challenges from foreign companies, for them to retain or even increase their market share. They need to adopt competitive strategies that can give them some form of competitive advantage. As noted by Porter (1980) a company can create competitive advantage through adopting cost leadership and differentiation strategies. In addition, it has been found that human resource can be used to create a competitive advantage. Thus, this paper seeks to understand how family-owned businesses can use the above strategies to survive in competitive environment in China?

  • Research Problem

The research problem to be investigated by this study is “How family-owned businesses can survive in competitive environment in China? The study will focus on competitive strategies that Chinese family owned firms should implement to remain competitive in the current business environment that has become very competitive. According to Murray (1998) many Chinese family owned business are unable to survive beyond third generations and with increased competition they many will collapse before even the second generation. The important question is; what are the competitive strategies that this family owned firms should undertake.

  • Research questions

The main research question for this dissertation is: How family-owned businesses can survive in competitive environment in China?

The following sub questions will as well be used in this present research

  1. Does cost leadership strategy create a competitiveness of Chinese family-owned firms?
  2. Does differentiation strategy create a competitiveness of Chinese family-owned firms?
  • Does effective human resource management create a competitiveness of Chinese family-owned firms?
    1. Aims of the study

The main of this study is to establish strategies that a family owned firm can apply to compete favourable in this current highly competitive business environment.

  1. Structure of the dissertation

The dissertation is arranged in 5 chapters as underlined below

  1. Chapter 1: Introduction:  this chapter opens the with research paper by providing the background information of the dissertation, outlining the research problem, hypothesis, the rationale, and aim of the study.
  2. Chapter 2: the literature review: this reviews the past literature on competitive strategies and human resource management in Chinese family owned firms.
  3. Chapter 3: methodology: this chapter describes the research methodology, instruments and techniques adopted by this dissertation to gather and analyze the data.
  4. Chapter 4: data analysis:   Describes both qualitative and quantitative techniques to be used in presenting and interpretation of the data in graphical forms and explains the findings.
  5. Chapter 5: Conclusions, Recommendations:  This is the final chapter, it summarizes the findings in each of the chapters as a conclusion, and offers recommendation based on teh findings of the present research.

 Chapter 2

2.0 Literature review

2.1 What is family owned business?

There is a general understanding of the idea of a family business. Family business entails a family member running or involved in anyway with a family business. According to Longenecker et al (2000) the family business is an important and common type business operation. Longenecker et al (2000) therefore, define a family-owned business as a business where family member/s takes part in the operation of the business. In addition, a business is viewed as family business if it is passed form one family generation the next.

2.2 Chinese Family owned business

In China, the family is the main foundation of Chinese organizations, and businesses are not left behind. Whereas in western culture, people normally refer to “family businesses”, in Chinese, it may be more appropriate to refer to “business families”, because family comes first before the business (Tony, 2001). Instead of viewing family business as means of profiting making, Chinese seem to see their family businesses as a duty towards their families. The main four attributes of families are, family controlled, have a central family head, they are family funded and family accountable, they have enduring duties and family responsibility.

2.2 .1 Family –controlled operation

As a family controlled/directed, a traditional Chinese family owned business is headed by a patriarchal figure, usually the founder of the business (Tsang, 2001). Other family members are given top positions. An extended family could have its individual businesses connected together to create a complex network. In some cases, there is cross holdings, though this is not a common aspect.

Even in cases where the business is a public company, it’s usually headed by the family. The family members usually adopt a hands-on approach in the running of the business. As noted by Carney (2005) decision making is informal and usually taken at family gatherings such as during dinner time. The organizational structure does not essentially present information regarding who real has the authority, usually manager with powerful –sounding title may be just ceremonial. Business transactions may be done on the based on family issues, which at times may result in rejection of lucrative deals.

2.2 .2 A central family head

Generally, Chinese family owned businesses are managed by a dominant family head makes the final decision (Tsang, 2001). This individual may appoint his/her advisors who are usually family members or close associate. Such advisors have more power in decision making compared to some top managers in the business. Usually, lower ranked managers will goes directly to the head of the business without following through the chain of leadership.

2.2 .3 Family funded and family accountable

Formal financial accounting in Chinese family owned businesses seem to be meant for tax purposes, while the accounts books are kept by the head of the family (Murray,1996). Employees are evaluated in their performance informally. Similarly, personal reputation is given more consideration than work achievements. When it comes to decision making, they are made quickly, usually on the basis of personal recommendations given.

2.2 .4 Enduring duties and family responsibility

In Chinese family owned business, the head of the business is normally succeeded by a family member who is expected to maintain the business traditions. Even in cases where there is no qualified family member to head the business, the preference is given to family members rather than professional non-family members (Tsang, 2001).

The table below compares some main differences between Chinese business aspects and western business aspects.

  How it is done
Business aspect Western Chinese
Main Company Purpose Maximize shareholder value Serve family interests
Financial Openness Public financial reports Financial information is kept secret
Financing Sources Public sale of securities Family and friends of family
Transfer of Ownership Mergers & unfriendly acquisitions Companies are not sold due to family commitments
Advertising Brand is promoted by advertising Without advertising, sales are made via the family network

Management

Management Professional management, recruited on qualifications Senior managers are recruited from within the family
Time Horizon

 

Short-term emphasis on bottom-line profits and shareholder value Long-term family prestige is emphasized

Source: http://www.quickmba.com/mgmt/intl/china/

  1. 3 Networking (Guanxi)

While western business culture is based on business deals or transactions, Chinese business is based on relationships (Tsang, 2001). Thus, in the western countries a successful business person is said to be rich, but in Chinese successful person is said to be well-connected. The term “guanxi” is used to mean “connections”, though it means more than that (connection with shared responsibility and good will). Guannxi connections are important in providing information that official sources cannot provide. In China, where laws are not enforced equally, guanxi networks assist in completing businesses deals.

The immediate family members offer the closest and strongest relationships. They are then followed by extended family members and close friends (Carney, 2005). Those next in this relationship are people who have shared similar experiences for example, former school mates. The last level in this relationship is that of strangers, these are treated with suspicion for some time. However, it is possible to cut business deals even if a person is not in this network. This can be done better through those persons close in the network.

Since Chinese business focus so much on relationships, they can strive to maintain these networks and how these relationships will be impacted is considered before reaching a business decision.

2.4 The Chinese family owned business in Transition

Though the traditional attributes of Chinese family owned business still exist today, globalization of the Chinese market is making the traditional concept to change. Family owned businesses are starting to implement business practices and concepts that are similar to those in other companies across the world. For instance, besides personal attributes, managers are being examined on other aspects like industry knowledge.

In past, passing a family business to the subsequent generation was a way of keeping family legacy. Presently, it is starting to be viewed as a chance for reorganization of the business. Many present-generation family members are educated in the west and start to adopt western style of management and do away with family networks and traditions.

In spite of these transformations, the family obligation is still likely to come first, and business second. A trend expected to continue.

2.5 Family-owned business and competitive business strategy

Family-owned firms’ researchers outline a number of unique attributes of family businesses that enable them to strategically manage their business operations efficiently and effectively. As noted by Westhead and Cowling (1998) the unique attribute that differentiates a family-owned business from other businesses is the control of the family over the business. He further explains that this control is exhibited in the following aspects. First, family-owned businesses have paternalistic relationship between the owned and the workers.  There is also cohesive family culture which is followed when hiring employees and is treated well. Second, family-owned firms have unique competencies which engender dedication, trust, motivation and inspiration among the employees. In addition, they have a strong aspiration to develop good customer relationships and are flexible in decision making (Westhead and Cowling, 1998). Third, the image of family-owned firms is more trustworthy and exhibit a lower general transaction cost (Bjornberg and Nicholson, 2007). Tsang (2001) point out that family-owned firms are suited to create social relationships and networks, and  most of them have high level of integrity and are committed to keeping the existing  relationships (Tsang, 2001). Lastly, families may opt to control their firms by appointing family members to top management as well as other sensitive positions within the company, and are as well selective when hiring other people (Barney, 1991).

This enables family-owned firms to reduce their costs on human resources, and therefore, be more efficient compared on other firms (Barney, 1991). These attributes result in a unique and flexible work environment that motivates employees, and enhances their commitment and loyalty. Employees in these firms can thus focus on satisfying customers, allowing the business to adopt an efficient business strategy.

 

2.6 Chinese family owned business can apply Cost leadership strategy to gain competitiveness

With more family business being succeed by family members educated in the west, adopting western way of doing business, the management and operations approach are changing. One way that this change can be brought about is through reducing cost and improving efficiency. As explained by Porter (1980), companies that undertake organization-wide effectiveness create a cost leadership strategy.

In China, cost leadership strategy is mainly implemented by manufacturing companies. In deed, Chinese companies are known world over for their high level of cost leadership that allows them to offer products at very low prices (Tsang, 2001).  Family-owned businesses attributes of paternalistic association with workers, long-term recruitment strategy, trustworthiness, stability and secure tenure of family top managers, and commitment for long-term social relations, are key aspects in facilitating and creation of efficient use of resources and competencies. Barney (1991)  notes that these unique attributes can as well help the firm in cost reduction related to human resources, thereby offering a consistent access to cost- effective raw materials, distribution channels, and financial resources for continued capital investments. Therefore, Chinese family-owned business, need to implement organization-wide effectiveness to remain or gain competitive advantage in this competitive environment.

2.7 Chinese family owned business can apply Differentiation strategy to gain competitiveness

One way of improving business competitiveness is by adopting various attributes such like innovation, product quality, firm image, durability, reliability, customer service and brand name, which are difficult for competitors to copy (Carney, 2005). All these attributes are geared towards satisfying changing consumer demands and improving the profitability of a business, and they can be done through offering quality products, marketing and promotion strategies.

With high economic growth rate that China has continued to experience, more and more consumers are demanding for high quality and branded products because of the increased income they presently earn (Walter, 2001). This makes differentiation strategy to be attractive and viable.

The unique attributes of Chinese family-owned business that include paternalistic association with workers, long-term recruitment strategy, trustworthiness, stability and secure tenure of family top managers, and commitment for long-term social relations, would enable them to create customer loyalty needed for the successfully application of differentiation strategy Walter, 2001). In addition, the flexibility of managers running family-owned firms demonstrates that they have more power and discretion in the manner they employ human, financial and other resources and competencies of the firm.  Thus, Chinese family-owned firms can easily adopt innovative ways to enhance the quality and reliability of their products or services. In addition, they can be more aggressive and decisive when they enter new product markets or when they develop new products (Tsang, 2001). Similarly, the committed and motivated employees working in the family-owned firms can as well act as scarce, unique and valuable resource that can help these firms to implement differentiation strategy (Tony, 2001).In deed, it has been established that family-owned firms in China seem to value innovation and focus more on investing in research and development.

2.8 Human resource management in family owned business

Past studies show that human resource management in family-owned companies appears to be different as opposed to non-family companies. According to Barney (1991) there are a number of issues that brings about this difference, they include the competencies of the management team, salary and other benefits, stock options, attractiveness  of  company , decision making processes, hiring and succession plan,  access to information, among other aspects.

Chinese family owned firms general have centralized decision making, paternalistic and autocratic management style.  These firms rarely employ professional managers, because Chinese have no faith in outsiders. As mentioned by Tsang (2001) Chinese family owned firms have an internal system that is very much personalised with tight control particularly on financial and production aspects.  Possibly, the most unique aspect of Chinese family owned firms is the Chinese management approach.

Tony (2001) established three main attributes of Chinese family owned firms. One; an attribute which promotes the authority of the father-figure as the common owner of family asset, possessions are usually viewed as belonging to the family. A Chinese family owned firm applies filial piety (high respect for parents), face, duty and moral to uphold family expectations as well as family training to make sure that its family members adhere to the objective of the family business.  Two; Chinese family owned firms are managed through paternalism. Tony (2001) explains that paternalism entails owners of a family business viewing themselves as patriarchal organization leaders who offer their employees some form of benefits.  Family owned firms show a strong sense of duty towards their employees that is both moral and economical (Chan and Chiang, 1994). Employees in turn offer their loyalty to the family business as a way of giving back.

Three, Chinese family owned business engages expansively in business networking and nepotism. Chen (1995) states that, the use of Chinese business networks is part of the Chinese family culture. The Chinese family owned businesses ensures that these networks functions reliably by paying much attention and trust to business dealing carried out. It is essential to transact with trustworthy people. For these family owned firms, “the person who know is of higher importance than what the business knows”.  Accordingly, Chinese family owned firms do not depend on family agreements; rather, trust is the main aspect for financial contacts and other agreements. It is interesting to note that decisions founded on common trust have lower business transaction costs compared to those founded on mistrust (Tsang, 2001).  Nepotism, which results from the family business organizational structure, is viewed as a way of dealing with issues of trust. As pointed out by Chan and Chiang (1994) Chinese fully trust their families, however, they trust their friends and business acquaintances merely to the level that mutual dependence has been founded and trust build.

In regard to attributes of Chinese family owned firms, Redding (1990) outlines some attributes these firms that he suggests are “logical standard”. These attributes are discussed in brief:

Small scale:  many of the Chinese family owned firms are small and medium sized with a relatively basic organizational structure. Since Chinese family owned firms are generally centred on a family patriarch, these firms seem to be as well simple, structured in a way that allows maximum efficiency of the business. In many cases, Chinese family owned firms’ structure is founded on production or sales.

Centre of product or market: according to Redding (1990), Chinese family owned firms usually centre on the product or market in.............


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