Corporation Competition Strategy for Export-oriented Labor Intensive SMEs in China
With Financial crisis sweeping the globe, it is unexpected that financial risks have serious damage the real economy. Within the foreseeable, states would adopt a conservative trade policy, so that is undoubtedly doomed to fail for export-oriented labor intensive SMEs in China, if they still stubborn insist in Previous competition strategies.
The rest of the paper is organized as follows. Section 2, definite SMEs in China according to Chinese laws. Section 3, introduce two types of the current mainstream theory of Corporation Competition Strategies, including internationalization strategy and innovation strategy. Section 4, collect SMEs' cases about changing competition strategies in many countries, and present some details of corporation strategy.
2 Definitions of SMEs
The concept of SME itself is quite problematic. As Storey (1994, p.8) deems that ‘‘there is no single, uniformly acceptable, definition of a small firm. There are differences as to size, shape and capital employed. In the USA there is no standard definition of small business. Even a firm employing up to 1500 employees is considered as small by American Small Business Administration. The concept in USA is industry-specific; mostly income and persons employed will determine whether a firm falls in the category of small business or not.'' The European Commission classifies firms according to the number of employees as: micro (0-9), small (10-99) and medium (100-499). In China, it includes companies employing less than 200 persons; and in Japan those employing less than 300 persons are considered to be SMEs (Srivastava, 2005). The definition of SMEs sometimes also depends on the stage of national economic development and the broad policy purposes for which it is needed. Whatever may be the definitional problems, SMEs occupy an important place in the economy of most countries; especially they are favored for developing countries due to their employment potential.
The latest standards of the enterprise size issued by the following (State Economic and Trade Commission, SETC, 2000):
Table 1. Chinese Enterprise Size Standard (unit: RMB)
Less than 50 million
Less than 50 million
50 million -500 million
50 million -500 million
500 million -5 billion
500 million -5 billion
More than 5 billion
More than 5 billion
3 Corporation Competition Strategies
The most important strategy for corporation competition is Internationalization, which has been given a new meaning in the latest literatures-Born Global, is defined as “organizations that from inception seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries” (Oviatt and McDougall, 1994).
Although many researchers have adopted the concept “Born Global”, other appellations have also been used (Ganitsky, 1989; Oviatt and McDougall, 1994, 1997; Mamis, 1989; Oviatt and McDougall, 1995; Jolly et al., 1992; Autio et al., 1997; McAuley, 1999). Despite the variety and number of names, all of the concepts focus on the same centre: the rapid and intensive internationalization of SMEs.
In fact, a Born Global (BG) can be defined as an enterprise that has at least 25% foreign sales after having started export activities within three years of its initiation (Knight and Cavusgil, 1996). Thus, the higher speed and larger scope of international operations are the decisive characteristics distinguishing BGs from other enterprises. The other characteristics specific to BGs include small size and young age. In addition, their internationalization is typically characterized by niche-oriented products and services directed to world market (Bell et al., 2001). It is also often assumed that rapid internationalization requires “a global mindset” of the managers (Nummela et al., 2004).
Early stage, these BGs has been exception to the rule (Welch and Luostarinen, 1988), but lately a number of BGs has been appeared (Rialp et al., 2005). It caused by three interrelated factors: (1) new market conditions (the rise of niche-markets, and global sourcing); (2) technological innovation in various areas; (3) the increased capacity in human resources (Madsen and Servais, 1997). BGs are not only to be found in a few countries, they also represent a wide range of industries (Oviatt and McDougall, 1994; McAuley, 1999; Knight, 2000).
Andersen (1993) labels many original models “The Uppsala Internationalization Model (U-M)” (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977) and “The Innovation- Related Internationalization Models (I-M)” (Bilkey and Tesar, 1977; Cavusgil, 1980). Both streams of research contend that firms become international in a slow and incremental manner which may be due to lack of knowledge about foreign markets, high risk aversion, high perceived uncertainty, or similar factors. The U-M sees internationalization processes as involving time consuming organizational learning processes; the I-M tends to analyze the process as an innovative course of action and hence a question of adoption of new ways of doing business.
McDougall et al. (1994) as well as Knight and Cavusgil (1996) refer to abundant of empirical studies which appear to disprove the stages theory of internationalization. In a same vein, Welch and Luostarinen (1988) concentrate on small English, Australian and Swedish enterprises that skipped different stages and who unexpectedly fast had foreign direct investments. Ganitsky (1989) investigated a sample of 18 Israeli exporters, who served foreign markets well. Brush (1992) found in a nationwide study of small US manufacturers that 13% of the sample had started international activities during the first year of operations. McKinsey and Co. (1993) identified many BGs whose management viewed the world as its marketplace right from the birth of the company in an Australian study. Holstein (1992) reports similar findings among small US firms. Knight and Cavusgil (1996) even show that studies from the late 1970s have documented examples of internationalization patterns similar to such BGs in different countries.
Table 2. Earlier researches on BGs
Hedlund & Kverneland(1985)
Globalization is a part of corporation strategy
Only in high-tech enterprises
18 Israeli exporters
BGs Highly depend on overseas markets to adjust its strategy
Jolly et al.(1992)
4 High-tech small enterprises
Started export activities of its initiation
Mckinsey & Co.(1993)
310 Enterprises have export business
Exports to total sales averages 75%
McDougall et al.(1994)
Started export activities of its initiation
Small is beautiful
Oviatt & McDougall(1994)
BGs have clear competitive advantages in multi-national sales-network and resources
Small software enterprises
BGs became more popular
Bloodgood et al.(1996)
Gigantic potential enterprises
Most of the US SMEs are BGs
Knight & cavusgil(1996)
Three interrelated factors cause BGs
Madsen & Servais(1997)
SMEs in Denmark
Internationalization of SMEs with the globalization of markets
High-tech SMEs in England
BGs possess multi-national sales-network
With the popularization of network technology, such as innovation-oriented network models, including open innovation (Chesbrough, 2003) and networked R&D (Blomqvist et al., 2004), have arisen as an alternative mode of organizing for conditions where hierarchies and markets fail, and more flexibility, fast access to information and responsiveness within a dynamic environment are needed. Previous research on BGs has well described personal networks, partnerships, and strategic alliances as important enablers of the early and rapid internationalization of the firm. However, the advantages that collaboration may offer at its best do not come without challenges. For instance, valuable technological knowledge is often tacit, which means that it is difficult to replicate and that its transfer is slow and costly (Martin and Salomon, 2003).
The success of BGs depends on their collaborative capabilities, which allow them to translate their technological knowledge into commercially successful innovations. This capability is related to another challenge present in co-operative activities: negotiations for collaboration demand open communication and evidence of technological knowledge, yet at the same time there is a major risk of losing strategic knowledge. Indeed, the problem of disclosing critical knowledge between partners has not been explicitly discussed in the literature on BGs(Blackburn, 2003).
Nevertheless, given their special background, labor-intensive BGs face a huge challenge as Low-tech or Low added-value (Knight and Cavusgil, 1996; Chetty and Campbell-Hunt, 2004). It lacks adaptability and speed (Powell, 1990) that the nature of innovation demands. Additionally, because of time constraints, organic, incremental growth is not always possible, and rapid internationalization thus requires the acquisition of relevant resources in a significantly shorter time. However, the limited resources set constraints. Because of their short history, BGs often have not been able to build up any assets that could be used as financing collateral, for instance.
Another important strategy for corporation competition is Innovation. Because the business environment is becoming increasingly dynamic, complex and unpredictable environment (Coopers and Lybrand, 1997), where technology, globalization, knowledge and changing competitive approaches impact on overall performance (Hitt et al., 2001; Scott, 2000).
Stopford (2001) suggests that this change is the reason why many firms are seeking new ways of conducting business to create wealth. Arguably, change need not be detrimental; it can also bring opportunities that firms should seek to exploit (Shane and Venkatraman, 2000). Barnett and Hansen (1996) suggest that it is the rate of innovation a firm has, compared with its rivals, that matters.It is also the effectiveness of that innovation that is crucial to its success. Nevertheless, there is no doubt that innovation is needed to combat the shortening of product life cycles, and to take advantage of new opportunities (Pisano and Wheelwright, 1995; Barkema et al., 2002).
However, achieving effective innovation is a complex and formidable task. Many SMEs have some difficulties converting research and development into effective innovation. Many of these difficulties are organization specific. For example, Christensen (1997) suggests that “there is something about the way that decisions get made in successful organizations that sows the seeds of eventual failure”. Ahuja and Katila (2001) look at this contention from a more positive viewpoint and state that “a long tradition of research in technology suggest that new innovative outputs are often the result of combining existing elements of knowledge into new syntheses”. This suggests that organizational behavior is an important driver of innovation.
Innovation is a key driver of sustainable competitive advantage and one of the key challenges for SMEs. The literature suggests that ignoring innovative and creative changes can only lead to failure in the medium to long term. Barkema et al. (2002) point out:
Globalization is reshaping the competitive landscape. It is sparking new technologies, markets, industries and criteria for competitive success and survival. It is speeding up industry life cycles by accelerating the pace and rhythm at which firms must develop new technologies and produce and roll out new products and services on a global scale to stay competitive.
The failure of many SMEs to successfully convert research and development into innovation indicates that there are many hurdles to be overcome in the innovation process. For example, Kim and Mauborgne (2000) suggest that such hurdles “make or break the commercial viability of even the most powerful innovative ideas”. What can SMEs managers do about these hurdles, and what determines the level and effectiveness of the innovation strategies adopted? Despite the obvious importance of SMEs (SGS, 2002), there is a paucity of research and consequently a lack of understanding on SME needs and requirements. To date, most SME research focuses on factors that contribute to their survival such as financing, rather than a greater understanding of the growth process and the achievement of sustainable competitive advantage (Storey, 1994).
Rogers (1995, p.11) defines innovation as “any idea practice or object that is perceived to be new by an individual or other unit of adoption”. Innovation involves the adoption of new products and processes to increase competitiveness and overall profitability. It involves new ways of identifying the needs of new and existing clients. Innovation is one of the principal challenges to the management of SMEs.
Hitt et al. (2001, p.484) state that innovation is critical to enable SMEs to compete in domestic and global markets. The importance of innovation for SMEs and start-up firms is encapsulated by Lee et al. (2001) when they state that “head-to-head competition with established players is bound to result in failure due to resource shortcomings, scale diseconomies, and questionable reputation”. They prove that innovation is the key to competition as “competitors cannot easily mimic innovativeness. Since it depends on quality and quantity of R&D personnel and the complex social relationships”. Innovation is increasingly seen as a contributory factor to higher performance in a growing number of industries (Zahra et al., 1999) and in particular, strengthening the firm's competitive advantage (Mone et al., 1998). Kanter (1999) states that “Winning in business today demands innovation. Companies that innovate reap all the benefits of a first mover”. Yet the literature indicates that many firms still believe that their existing ways and processes are sufficient for the next decade: “a pattern emphasized is the degree to which powerful competitors not only resist innovative threats, but actually resist all efforts to understand them, preferring to further entrench their positions in the older products” (Utterback, 1994).
SMEs are renowned for their creativity and new product development. This applies in particular to SMEs that have the ability to innovate effectively and develop new products more rapidly than larger firms (Vossen, 1998; Storey, 1994). Indeed, Harrison and Watson (1998) contend that there is little doubt that SMEs are capable of effective innovation. However, many SMEs still fail to see the opportunities and advantages that are open to them, such as the flexibility of customizing products to the requirements of the consumer, an advantage adopted by larger firms. Their failure to take such opportunities is paraphrased in Peters (1997, p.91) as “you miss 100% of the shots you do not take”. Clearly, the capability to innovate quickly is a key factor in the sustainable competitive advantage of any firm.
The importance of innovation as a driver of sustainable competitive advantage is well documented (Shoham and Fieganbaum, 2002). Existing studies on innovation relate to creativity (Amabile et al., 1996), resource availability (Dougherty and Hardy, 1996), managerial control and strategic focus mergers, acquisitions, divestitures, downsizing, and cost reduction (Hitt et al., 1996). Previous research shows that innovation impacts on performance (Roberts, 1999), and firm survival (Banbury and Mitchell, 1995).
However, despite the numerous articles and theoretical discussions, there is no conclusive theoretical perspective on innovation (Drazin and Schoonhoven, 1996). In a review of previous research on innovation, Shoham and Fieganbaum (2002) suggest the need for additional theoretical integration to link organizational context with industry level dynamics.
4 Corporation Strategy Details
4.1 SMEs' human resource management
Scholars consider Human Resource Management to be a phenomenon related to large organizations (Wilkinson, 1999; ISED, 2005) and workers in SMEs have been described as “the invisible workforce” (Curran, 1986). Indeed working in SMEs does not involve much paper work, policies, systems, procedures, rules and strategies, and even the presence of an HR officer is missing. Not surprisingly then HR issues are not considered to be critical for their growth and survival, and accordingly very less is invested in employee training and development (Stewart & Beaver, 2003).
SMEs are generally started by a single entrepreneur or a small group of people, and are often managed by owner-managers (Ritchie, 1993). Their organization structure is mostly flat. SMEs do not have many layers (mainly due to small number of both employees/supervisors and specializations) because the owner is mostly at the helm of affairs (which still keeps them bureaucratic as most of the times employees do not dare to challenge the supervisors or owners). Nevertheless, it adds to their flexibility (Scott et al., 1989). Many researchers argue that entrepreneurs seek to derive several advantages by undertaking operations at a smaller level in terms of flexibility, informality, sustainability, and structural adaptability.
On the contrary, larger firms find it difficult to derive such benefits from their operations (Gibbs, 1997; Hendrickson & Psarouthakis, 1998; Matlay, 2000). SMEs are known to focus more on the operational aspects and neglect people-management issues.
Technological advancements have contributed to significant changes to the nature of present production systems. This has also impacted the nature of work, workers and the skills involved. While small entrepreneurs do imbibe these advancements in their operations, they do not recognize the critical role of effective HR policies for their success. Nevertheless, the need for a skilled workforce in SMEs certainly emerges during periods of such technological changes. In particular, SMEs have to undergo some change when they compete with global companies and other large buyers, as they are dependent on supply contracts from the same. This puts considerable pressure on SMEs to control both their costs and quality and meet the different legal requirements. This is a serious challenge for SMEs, especially for those operating in developing countries with labor-intensive technologies, where labor cost is a major concern (Stewart & Beaver, 2003). Many of them resort to questionable practices, such as employment of child labor to reduce labor costs and violation of labor standards including denial of minimum wage, and other minimum-work conditions. Most of them also lack access to relevant data and information about new markets, legal provisions regulating their working, and product innovations, which hinders their survival. Their accessibility to professional management tools is almost absent.
4.2 SMEs' sales network innovation (Evidence from Italy)
In the past 20 years, research on Italian industrial districts carried out by scholars both in Italy and abroad has stressed the twofold role of such forms of organization in the economic scenario. On the one hand, local systems of small and medium enterprises (SMEs) represent the specific Italian model for economic development, which distinguishes Italy from other countries and organizational forms such as large firms (Becattini, 1979; Goodman et al., 1989; Porter, 1990). On the other hand, scholars have considered industrial districts in a more general perspective, as evidence of the role that territory can play in the division of labor with respect to specific manufacturing products (Piore and Sabel, 1984; Bagnasco and Sabel, 1995).
In particular, researchers have recognized the relevant advantages arising from agglomerations of firms within a local context, in terms of economic externalities.
Firstly, physical proximity allows for reductions in transportation costs and costs related sharing resources (local labor market, common infrastructures). Secondly, SMEs gain from technological externalities in cases where knowledge sharing and innovation diffusion are based on face-to-face interaction that reduces transaction costs (Bellandi, 1996; Antonelli, 2000). In addition, SMEs embedded in industrial districts benefit from a strong overlapping among the economic, social and institutional systems, where reputation and trust facilitate exchanges, while personal and firm interests are safeguarded by collective institutions and local policy (Dei Ottati, 1994; Lazerson, 1995). Broadly speaking, industrial districts have become a general model of industrial organization, where the territory influences with its social and cultural features the economic dynamics as well as firms' competitive advantages (Porter, 1998; Becattini, 1991). Localization of business is important both in terms of policies favoring economic development and the creation of clusters of innovative firms (Feldman, 1994; Saxenian, 1994).
Recently, many studies have stressed firms' opportunities to redesign processes and business organizations through electronic networks on a world-wide scale (Scott Morton, 1991; Tapscott, 1996). By focusing on the gains in efficiency stemming from the electronic management of business processes, scholars provided evidence that physical proximity and localization have become less important. Virtual companies and electronic markets were proposed as new models
of organization and transaction governance, where ICT is considered as the driver of firm's competitiveness (Kelly, 1998; Malone and Laubacher, 1998; Hagel and Singer, 1999).
One of the issues not yet explored is how SMEs embedded in local manufacturing systems can exploit information and communication technologies (ICT) to enhance their competitive positions. Broadly speaking, the evolutionary paths of the district model in the emerging scenario of network technologies are not yet completely clear. The problem can be stated as follows.
Industrial districts have built their competitiveness on largely informal local network relationships and division of labor (Pyke et al., 1990). Despite the benefits deriving from agglomeration, SMEs generally find it more difficult to establish business relationships with new non-district players, which require codification of technical languages and procedures or more formalized mechanisms of interaction (Storper, 1993; Grandinetti and Rullani, 1994).
In recent times, thanks to the evolution of network technologies and the decrease in transaction costs due to ICT (Malone et al., 1987), technology providers have developed innovative solutions for SMEs as regards communication and the management of business processes outside the district. The euphoria for the new economy provided new opportunities for small businesses to widen their scope and carry out exchanges world-wide, thanks to lower transaction costs (Tapscott, 1996; Kelly, 1998). From this perspective, SMEs in local networks could refer to a completely different way of doing their businesses, where the advantages of the local embeddings such as informal exchanges could be overcome by the benefits of electronic marketplaces (Rayport and Sviokla, 1994). More specifically, the network-based characteristics of industrial districts supposed an easy process of matching with the potentialities of network technologies. SMEs and industrial districts represented the way Italy recovered from the downturn that hit the mass production system during the 1970s (Piore and Sabel, 1984; Sengenberger et al., 1990; Pyke et al., 1990; Becattini, 1991). SMEs' competitiveness based on a high level of specialization, flexibility, and informal management of business relations, led to the success of Italian products throughout the world. Specifically, scholars have stressed the role played by the territory in building firm relations and networks, as well as in sustaining innovation processes (Camagni, 1993), through the exploitation of shared values and reputation (behavior), common language and institutional support (Dei Ottati, 1994).
In recent times, local SME networks have faced a different scenario, where increasing competition and the massive introduction of network technologies require a deep modification of their business ideas. While, in the early stages of ICT, most attention has been given to the relationship between technologies and organizations mainly from the perspective of large firms, however, the rapid evolution of network technologies open new opportunities also for SMEs organized in local networks. Nonetheless, despite the good results obtained by industrial districts, it is still not clear what the implications of ICT will be.
Since the beginning of the technological revolution, scholars' interests mainly addressed the effects of ICT on the evolution of big corporations (Scott Morton, 1991). Under the label of business process reengineering (BPR), the top management of big companies defined a new organizational structure based on processes instead of functions and specialization, where the new value to achieve came from an integrated perspective of internal activities (Davenport, 1993; Hammer and Champy, 1994).
Specifically, large firms exploited the opportunities offered by ICT and redesigned their organizational models around technologies. On the one hand, those firms have been able to achieve efficiency through applications aimed at increasing process integration and automation (enterprise resource planning), which are important goals for large companies (Venkatraman, 1994; Bradley et al., 1993). On the other hand, technology has improved internal co-ordination among scattered employees and teams through electronic infrastructures for communication, document sharing and co-operative work (work flow management) (Sproull and Kiesler, 1991; Fulk and Steinfeld, 1990).To put it briefly, big corporations have taken advantage of network technologies to support their communication and manufacturing processes and also to increasethe value of their internal knowledge and competencies (Davenport and Prusak, 1998; Scott Morton, 1991).
While technological products and services have been traditionally focused on large companies, in particular to satisfy big firms' needs in terms of coordination, flexibility and process efficiency (Ciborra, 1996), from the 1990s new solutions built around the Internet network have been tailored specifically to small businesses. In particular, researchers and analysts have emphasized the opportunities for firms to manage transactions directly through electronic commerce, by enhancing the reach and richness of firm's connections with the market (Kalakota et al., 1999; Bakos and Brynjolfsson, 2000; Evans and Wurster, 2000). From this point of view, electronic networks have been able to considerably reduce transaction costs and give birth to new more efficient forms of governance, such as electronic markets (Malone et al., 1989; Bakos, 1998). Through these specialized marketplaces, neutral market makers have promised firms a significant decrease in transaction costs by reducing information asymmetries, by certifying on line customizable content as well as by supporting direct interaction among players in the electronic market (Bakos, 1997,1998; Hawkins et al., 1999; Kaplan and Sawhney, 2000).
Innovative services and solutions for SMEs have focused specifically on supporting on line transactions through new electronic channels and portals. Small businesses could benefit from an electronic hub where suppliers and buyers are able to meet no matter what their location on a potentially global scale. Electronic networks could allow SMEs to overcome advantages mainly based on physical proximity and extend their business networks through the search for new customers in the on line markets (Benjamin and Wigand, 1995).
Specifically, technology solutions have been considered as being a powerful tool to enhance local innovation processes towards global networks. Electronic networks can increase the value of a firms' capacity to maintain and to nurture a high level of local expertise and specialized knowledge by enlarging its domains of exploitation onto a world-wide scale, on the basis of codification processes (Ahuja, 2000). On the one hand, in fact, industrial districts could face problems related to the management of knowledge exchange from the inside of the local manufacturing systems towards the outside (and vice versa) (Grandinetti and Rullani, 1994; Uzzi, 1997). On the other hand, however, interesting evolutionary opportunities for industrial districts may arise from a wider system of knowledge production and sharing that embraces local networks as well as global business relationships (Cossentino et al., 1996; Cor'o and Grandinetti, 1999).
4.3 SMEs' implement of supply chain management and information systems
Spurred by intensifying competition in global markets, most companies have been increasingly implementing supply chain management (SCM) and information systems (IS) practices. Lean practices have long dominated companies to accomplish excellence in their business operations. Information systems facilitated by technological advancements attempt to integrate many business processes for fast, accurate and on-line access to data. With the increasing use of integrated information systems and enabling technologies, it has now become possible to create seam less supply chains linking suppliers to customers in order to eliminate the poor performance of the suppliers, unpredictable customer demands, and uncertain business environment. An integrated supply chain has a clear advantage on the competitiveness of the individual firms. As a result, the chain-chain competition has started to take over the enterprise-enterprise competition, although many enterprise-enterprise competitions do exist particularly in the less developed economies (Koh et. al., 2006). The forward-looking enterprises today are dynamic; they collaborate with suppliers, customers and even with competitors; share information and knowledge aiming to create a collaborative supply chain that is capable of competing if not leading a particular industry.
Hence, gaining competitive edge through effective use of SCM and IS practices in a highly competitive environment becomes increasingly difficult and crucial in order to optimize the firm's operational performance, if not impossible. Such increased competition has even greater effect on small and medium size enterprises (SMEs) due to the possible external pressure from large size customers and also internal pressure of resource limitations of most SMEs. Without an adequate understanding of the SCM and IS related enabling and inhibiting factors, it is unlikely to accurately evaluate the effect of the SCM and IS practices on operational performance of manufacturing SMEs. Although the needs and operating environment of SMEs are very different from those of large firms, the question still remains open on how well the use of SCM and IS practices fits with SMEs. Despite their widely accepted benefits, there is a dearth of literature regarding the use of SCM practices and their effects on the performance of SMEs particularly in emerging countries such as Turkey. The use of IS in large firms provide major opportunities for acquiring added value with the exploitation of the information resource and also serves a major driver of strategic change (Levy et al., 2002).
There is, however, less evidence of SMEs investing in IS to capture similar benefits. SMEs have significant impact on supply chain performance, where they may serve the roles of suppliers, distributors, producers and customers (Hong and Jeong, 2006; Koh et al., 2007). In several emerging countries, SMEs form the largest group of manufacturing firms which essentially provide specialty manufacturing and support services to large firms (Huin et al., 2002). SMEs also play a very crucial role to the economies of most developing countries from the view point of generating employment and economic growth (Demirbag et al., 2006). They account for more than half of the employment and value added in most countries (UNCTAD, 1993). Similar trend is also observed in Turkey where SMEs constitute 99.5% of all business establishments and employ 61.1% of the workforce (Yilmaz, 2004).
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