3 a Comparison Study of Manufacturing Industry in Taiwan and China Manager's Perceptions of...

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A Comparison Study of Manufacturing Industryin Taiwan and China: Manager's Perceptions ofEnvironment, Capability, Strategy and PerformanceWEN-SHINN LOW a & SOO MAY CHENG ba Ching Yun University, Department of Business Administration , Taiwanb University of Macau, Faculty of Business Administration , Macau, ChinaPublished online: 10 Jan 2007.

To cite this article: WEN-SHINN LOW & SOO MAY CHENG (2006) A Comparison Study of Manufacturing Industry in Taiwan andChina: Manager's Perceptions of Environment, Capability, Strategy and Performance, Asia Pacific Business Review, 12:1, 19-38,DOI: 10.1080/13602380500336996

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A Comparison Study of ManufacturingIndustry in Taiwan and China:Manager’s Perceptions of Environment,Capability, Strategy and Performance

WEN-SHINN LOW* & SOO MAY CHENG***Department of Business Administration, Ching Yun University, Taiwan, **Faculty of Business

Administration, University of Macau, Macau, China

ABSTRACT This article compares managers’ perceptions of environment, capability, strategy andbusiness performance in Taiwan and China. Based on an analysis of survey data collected from thefastener industry, results show that the industrial environment and network capability aresignificantly associated with performance in China, but not in Taiwan. The findings highlight thedifference between actual and perceived situations which results from what specific context decisionmakers find themselves in and how they allocate attention to specific issues. In addition, pathanalysis reveals that both organizational and network capability of Chinese firms are significantlyassociated with strategy and performance. This demonstrates that the strategy selected by theChinese firms as a mediator influences their performance. Implications of these findings arediscussed.

KEY WORDS: Environment, strategy, network capability, performance

Introduction

Contingency theory has acknowledged the appropriateness of various strategicorientations in a variety of environmental conditions, arguing that no one strategycan be appropriate in all situations; effective strategies are dependent on thespecific environmental conditions (Lawrence & Lorsch, 1967; Miller & Friesen,1983; Miller, 1988; Wright et al., 1995). Organizational ecology from a broad andlong-term view postulates that organizations must either fit their environmentalniches or fail; their survival is a result of environmental evolution (Wholey &Brittain, 1979; Ulrich, 1987). The r-selection and K-selection put forth byMacArthur and Wilson (1967) represent two types of biological proliferationin different climates: rigorously seasonal and uniformly benign. On the basisof this, Brittain and Freeman (1980) developed r-strategy and K-strategy.The r-strategists are organizations that move quickly to exploit resources andfocus on activities that require low levels of capital investment and simple

1360-2381 Print/1743-792X Online/06/010019-20 q 2006 Taylor & FrancisDOI: 10.1080/13602380500336996

Correspondence Address: Soo May Cheng, Faculty of Business Administration, University of Macau, Av. Padre

Tomais Pereira, Taipa, Macau SAR, China. Email: [email protected]

Asia Pacific Business Review,Vol. 12, No. 1, 19–38, January 2006

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structures, because their success depends heavily on first-mover advantages. Suchorganizations persist only where the pattern of resource availability is highlyuncertain and resources are dispersed over time or space. The K-strategists, on theother hand, are organizations that are structured to compete successfully in adensely settled environment. They expand more slowly into new resources thanthe r-strategists because the structures generating competitive efficiencyfrequently preclude the rapid adjustments necessary to capture first-moveradvantages (Brittain & Freeman, 1980: 312). Both contingent and ecologicalperspectives underline the congruence between organizations and their externalenvironments.The external environment of a firm comprises the whole range of economic,

social, political, technological and industrial factors. However, measures betweenthe actual and perceived characteristics of the environment are not highlycorrelated (Downey et al., 1975). ‘What you see depends on where you sit! It ismanagers’ perceptions, not reality, that lead to decisions’ (Robbins, 1990: 208).This notion highlights the limits of human rationality in explaining how firmsmake decisions. From an attention-based view, Ocasio (1997: 187) indicates that

what decision-makers do depends on what issues and answers theyfocus their attention on. What issues and answers they focus ondepends on the specific situation and on how the firm’s rule, resourcesand relationships distribute various issues, answers and decision-makers into specific communications and procedures.

The perceived environment and distributed attention might differ in formulatingstrategy and further influencing performance in small and medium-sizedenterprise (SME) dominated countries (for example, Taiwan) and in transitionalcountries (for example, China). The study seeks to understand the relativeimportance of strategy and environment perceived by opposite sides of the TaiwanStrait (cross-strait) managers in influencing the level of performance.In addition, the resource-based viewpoints to the firm’s resources and

capabilities as the basis for formulating its strategy and the primary source of itsprofitability (Rumelt, 1984, 1991; Barney, 1991; Peteraf, 1993; Hamel &Prahalad, 1994). From a network perspective, the utilization of network resourcesand the leveraging of interfirm relationships may differentiate interfirmperformance stemming from the participation of firms in the networks (Gulati,1999; Lipparini & Fratocchi, 1999; Lorenzoni & Lipparini, 1999). Theseperspectives underscore the importance of a firm’s organizational capability(Grant, 1998) and network capability (Chen, 1999). Most research has focused oneither organizational capability or network capability; however less attention hasbeen paid to both capabilities which may influence performance. Meanwhile,firms might have recognized the importance of strategies, such as developing newproducts, entering new markets and shaping high quality images. Nonetheless, arethey armed with the capabilities to formulate and implement those strategies? It isanticipated that strategy will mediate to impact on firm performance.The objectives of this article are: (1) to examine the relationships between

environment and performance in China and Taiwan; (2) to examine the relationships

20 W.-S. Low & S.M. Cheng

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between capability and performance in China and Taiwan; (3) to determine whetherstrategies selectedbycross-straitmanagers indifferent environmentsmediate to impactperformance; (4) to determine whether strategies selected by cross-strait managerswith different capabilities mediate to impact performance. The results are based on theanalysis of a survey of top managers in the fastener industry of China and Taiwan.The article begins with an overview of the research background and industry in Chinaand Taiwan. A literature review is presented, with this discussion leading to a seriesof hypotheses. The methodology used to test these hypotheses is next, followedby a presentation of the research findings. The essay concludes with a summaryand implications, including the limitations of this study and some suggestions forfurther research.

Research Background

The Chinese economy has shown dramatic growth in recent years. In the first halfof 2001, the economic growth rate in China jumped by 7.9 per cent from theprevious year despite the slow-down of the world economies (Business Times,2001). In contrast, economic growth in Taiwan revealed minus 0.73 per centgrowth in the first half of this year, according to the Directorate-General ofBudget, Accounting and Statistics of Taiwan. It was the first minus growth inTaiwan since 1975. Prior to Chinese industrial development, Taiwan had laiddown solid economic foundations and featured excellent manufacturingcapabilities, but the worsening environment in the last ten years, such as soaringproduction costs and environmental awareness, has decimated previouscompetitive advantages. Since May 2000, a minority of the governing party hascaused further unrest for the Taiwanese government. In facing differentenvironments, the cross-strait managers would have different perceptions aboutenvironmental and strategic orientations. Although the management of Chinesefirms has received increased scholarly attention, few scholars have rigorouslyexamined the issue either empirically and theoretically (Nee, 1992; Luo, 1999).A review of the literature also shows that most studies about environment-strategyalignment focus on the firms within specific districts (Kean et al., 1998;Luo, 1999), international business (Carpano, et al., 1994; Francis & Collins-Dodd,2000) and small business (Lang et al., 1997; Beal, 2000). Limited research hasbeen carried out on a specific industry and was studied whether strategy mediatesto impact on performance.The fastener industry was chosen as the research subject for this study due to its

export significance to Taiwan. Taiwan has been acclaimed as the ‘kingdom offasteners’ due to its fastener export volume remaining the world’s number one formany years. The achievement is particularly salient as many traditional industries,such as shoes, umbrellas, bicycles, toys and so forth, have diminished productionscales in Taiwan on the one hand and relocated factories in China on the other.The fastener industry of Taiwan is characterized by: (1) the domination of smalland medium-sized enterprises; (2) complete industrial systems from up, middleto down stream; (3) high export-orientation and; (4) export market concentration(Metal Industry Research and Development Center, 1998). According to statisticsof the Taiwan Institute of Fastener Industry, the number of fastener firms totalled

A Comparison Study of Manufacturing Industry in Taiwan and China 21

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1,185 in 2001, mainly located in the south of Taiwan with capital of less thanNT$10 million (about US$300 thousand).The development of the Chinese fastener industry has taken more than 30 years

since the establishment of the first fastener manufacturer in 1953. The industryfeatures (1) small factories with average 3–5 workers; (2) standardized and lowvalue-added products; (3) incomplete up stream and poor quality materials; and(4) sales divided equally between national and international markets (MetalIndustry Research and Development Center, 1998). The Chinese fastener factoriesnumbered about 8,000 in 2000. Large-scale fastener manufacturers numberedabout 300, employing more than 220,000 people. Factories are mainly located ineast China.

Theory and Hypotheses

Environment and strategy have been empirically demonstrated to have significantinfluence on performance (Miles & Snow, 1978; Porter, 1980; Scherer, 1990).The structure-conduct-performance paradigm proposed by Scherer (1990)suggests that organizational performance is determined by strategies, such aslow price and differentiation. Several different conceptualizations of environmenthave been adopted to test the environment-strategy linkage, includingenvironmental dynamism (Miller & Toulouse, 1986; Tan & Li, 1996);environmental uncertainty (Miller, 1988); environmental munificence (Dess &Beard, 1984; Venkatraman, 1989; Yasai-Ardekani, 1989). These studies furtherdemonstrate that the environment-strategy configuration lead to superiorperformance. Some scholars focus on the activities of environmental scanning,such as frequency and scope, to examine the effect of successful congruencebetween environment and organizations. They emphasize that effective scanningof the environment allows firms to learn about opportunities and threats, thusenabling the firms to choose appropriate strategies congruent with environmentalconditions (Bourgeois, 1980; Jennings & Lumpkin, 1992; Lang et al., 1997; Wuet al., 1998; Beal, 2000). Specifically, Jennings and Lumpkin (1992) found thatfirms following a low cost leadership will focus on the scanning of environmentalopportunities; while firms following a differentiation strategy will look forscanning environmental threats. Beal (2000) concludes that firms pursuing acombination of low cost leadership and differentiation in mature industries shouldmonitor and analyse information regarding their own resources and capabilities.These findings imply that the environmental scanning follows strategy, suggestingthat firms in a given strategy need to be conscious of the significant trends in arapidly changing and/or competitive environment. These findings also adequatelyreflect the central argument of the attention-based view which postulates that firmbehaviour is the result of how firms distribute their attention.Organizations must adapt by changing as environmental conditions change.

By steering ongoing adaptation, organizational theorists note a paradox betweenadaptation and inertia (Miles & Snow, 1978; Morison, 1989) because adaptationmight preclude adaptability (Weick, 1979). An organization’s capacity to learn andadapt may be reduced as a consequence of internal congruence and past success.As a result, today’s success may sow the seeds of tomorrow’s crisis when


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environmental conditions change. An important managerial task is thus to buildorganizations that retain their ability to learn and unlearn as environmentalconditions change (Tushman et al., 1989; Hamel & Prahalad, 1994). More than adecade ago, scholars with an organizational learning point of view have articulatedthat the ultimate source of competitive advantage is learning at the individual andorganizational level (de Gues, 1988; Stata, 1989; Senge, 1990; Dodgson, 1993) andthrough a learning organization, firms are able to quickly reconfigure to focus on anemergent opportunity or threat. Sadler-Smith and Badger’s (1998) review onperception and its impact upon innovation and organizational learning affirmed thatmanagers’ perception is one of the crucial factors in organizational learning andchange, and it may further influence innovation and organizational performance.The external environment of a firm is comprised of a complex combination of

factors. Each of these factors tends to influence organizations in its own way.Hodge, Anthong and Gales (1996) argue that different industries have differentinfluential levels by environmental factors. Robbins (1990) differentiates generalenvironment from specific environment. The general environment encompassesconditions that may influence organizations but their relevance is not overly clear.The specific environment is that part of the environment that is directly relevant tothe organizations, including customers, suppliers, competitors, governmentregulatory agencies, labour unions, trade associations and so on. Similarenvironmental subcategories are described by other scholars, such as macro andmicro environment (Kotler & Armstrong, 1999); general and competitiveenvironment (Miller, 1998); remote, industry and operating environment (Pearce& Robinson, 2000) and general and task environment (Barney & Griffin, 1992).Based on these reviews, this study divides the environmental factors into twoconstructs: general environment (for example, political, legal, infrastructure andeconomic dimensions) and industrial environment (for example, competitors,suppliers, customers and production conditions).In 2000, Taiwan experienced the first change of party in government; however,

since then the executive departments of the government have often been boycottedby the majority of the opposition parties. Such disturbances have causedinstability of the political environment and negatively influence economic growth.In addition, the slow-down of the US economy and industrial relocations to Chinahave worsened the economy of Taiwan. In contrast, the Chinese economy hasenjoyed high growth due to the huge domestic markets and the opening policieswhich have drawn much capital from foreign investors. These environmentaldifferences perceived by cross-strait managers may have an impact on firms’performance. Based on this, the hypotheses of this study are:

H1: In Taiwan, perceived environment is positively associated withperformance.H1a: In Taiwan, perceived general environment is positively

associated with performance.H1b: In Taiwan, perceived industrial environment is positively

associated with performance.H2: In China, perceived environment is positively associated with

performance.


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H2a: In China, perceived general environment is positively associatedwith performance.

H2b: In China, perceived industrial environment is positivelyassociated with performance.

Emphasis on the external environment has been the dominant theme instrategic management since the 1980s. The industry structure view associatedwith Porter (1980) suggests that supernormal returns are primarily a function ofa firm’s membership in an industry with favourable structural characteristics,for example, bargaining power, barriers to entry and so on. Most strategicanalyses thus concentrated on the industry environment of the firm and itspositioning against competitors. By contrast, the resource-based view arguesthat differential firm performance is not rooted in industry structure, but isfundamentally due to firm heterogeneity (Barney, 1991). Empirical investi-gations have approved that organizational performance is often influenced bythe possession of unique capability or distinctive competence (Hitt & Ireland,1985; Neil, 1986; Miller et al., 1997). The search for competitive advantageshas focused on those resources and capabilities that are housed within a singlefirm, that is, its organizational capability termed by Grant (1998: 118).However, a firm’s critical resource may extend beyond firm boundaries (seeGulati et al., (2000) for a review). Recently, there has been increased attentionon interfirm networks which provide resources for various types of input thatare complementary or substitutable (Hamel, 1991; Shan et al., 1994; Dyer &Singh, 1998). Empirical studies also confirmed that investment in relation-specific assets is often correlated with superior performance (Parkhe, 1993;Dyer, 1996). Chen (1999) further reports that organizational and networkcapability are of paramount importance for the industrial upgrading in Taiwan.Thus, capability in this study is conceptualized by both organizationalcapability and network capability.Taiwanese fastener firms are mostly small in scale, with fewer than 50

employees. Small and medium-sized enterprise (SMEs) armed with fewerresources than those of large companies rely more on external resources providedby the networks in which they are situated (Malecki & Tootle, 1996).The Taiwanese machine tool case study illustrated by Liu and Brookfield (2000)has showed the distinctive network capability of the industry. In contrast, Chinesefastener firms are much larger than Taiwanese firms in production scales andnumbers of employees. They are more likely to rely on organizational capability.In light of the above, performance is likely to be positively related to the firms’organizational and network capability. Based on this consideration, the followingrelationships are hypothesized:

H3: In Taiwan, capability is positively associated with performance.H3a: In Taiwan, organizational capability is positively associated

with performance.H3b: In Taiwan, network capability is positively associated with

performance.


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H4: In China, capability is positively associated with performance.H4a: In China, organizational capability is positively associated

with performance.H4b: In China, network capability is positively associated with

performance.

Strategies must be consistent with environmental conditions. Specifically, theymust take advantage of existing or projecting opportunities and minimize theimpact of major threats. Scholars have different points of view in classifyingstrategies. Ansoff’s (1988) strategic portfolio, namely market penetration,production development, market development and diversification, is character-ized by the thrust of the firm’s strategic development. Kotler (1994) hascategorized strategy by intensive, integrative and diversification strategy.In coping with five competitive forces, Porter (1980) suggests three genericstrategic approaches for firms to outperform competitors in the industry: overallcost leadership, differentiation and focus. Based on a firm’s response toenvironmental changes, Miles and Snow (1978) categorized firms as prospectors,analysers, defenders and reactors. The prospector seeks for new products andmarket opportunities, taking proactive steps to precipitate change in its product-market domains. The analyser is always ready to move quickly into newproducts and markets that have recently gained some degree of acceptance.The defender focuses on narrow product-market domains, devotes energy toimprove the efficiency of existing operations, but does not tend to search outsidefor new opportunities. The reactor perceives change and uncertainty in theenvironment but is unable to respond effectively.The typology of Miles and Snow (1978) and Porter’s (1980) generic strategy

have been discussed in strategic literature. The view of Miles and Snowunderscored the opinion that different strategies may not be employed by firms atthe same time. However, the cost leadership and differentiation strategy suggestedby Porter could be adopted simultaneously (Hill & Gareth, 1988). As a matureindustry, price competition in the fastener industry is inevitable. Some firms areseeking operational improvement, however operational effectiveness is necessarybut not sufficient (Porter, 1996). Instead, the firms should undertake aggressiveactivities to develop new products and markets to cope with the changingenvironment. Combining the generic strategy of Porter and the typology of Milesand Snow, this study conceptualizes strategy as proactiveness and conservative-ness. The proactive strategy refers to the firm that seeks for new product-marketdomains and aggressively differentiates from competitors. Thus the firm isconceived as following the prospector and analyser. The conservative strategy, onthe other hand, is the firm that concentrates on narrowly defined product-marketdomains and engages in continuous and intense efforts to become the mostefficient operator. It is therefore viewed as following the defender and reactor. Afirm with a proactive strategy may lead to better performance if it is closelyaligned to the demands of its external environment. Hence, the hypotheses ofenvironment-strategy alignment are:

H5: In Taiwan, perceived environment is positively associated withperformance indirectly through proactive strategy.


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H5a: In Taiwan, perceived general environment is positivelyassociated with performance indirectly through proactivestrategy.

H5b: In Taiwan, perceived industrial environment is positivelyassociated with performance indirectly through proactivestrategy.

H6: In China, perceived environment is positively associated withperformance indirectly through proactive strategy.

H6a: In China, perceived general environment is positivelyassociated with performance indirectly through proactivestrategy.

H6b: In China, perceived industrial environment is positivelyassociated with performance indirectly through proactivestrategy.

A firm’s pursuit of market opportunities must be based not only on theexistence of external opportunities but also on competitive advantages thatarise from the firm’s key resources (Pearce & Robinson, 2000). The task ofbusiness strategy is to determine how the firm will deploy its resources withinits environment, to satisfy its long-term goals and to organize itself toimplement that strategy (Grant, 1998). From a resource input view, strategydetermines the allocation of a firm’s resources, providing a logical basis for thedistribution of organizational resources (Viljoen, 1991). If the proactivestrategy is desirable, it should be implemented by the firms which have well-developed organizational and network capability. For example, to develop newproducts, a firm should have excellent manufacturing and R & D capabilityand direct its human resources to the new initiative. To explore new markets, afirm should feature complete distribution channels and maintain goodrelationships with its distributors. Therefore, the following relationships arepredicted:

H7: In Taiwan, capability is positively associated with performanceindirectly through proactive strategy.

H7a: In Taiwan, organizational capability is positively associatedwith performance indirectly through proactive strategy.

H7b: In Taiwan, network capability is positively associated withperformance indirectly through proactive strategy.

H8: In China, capability is positively associated with performanceindirectly through proactive strategy.H8a: In China, organizational capability is positively associated

with performance indirectly through proactive strategy.H8b: In China, network capability is positively associated with

performance indirectly through proactive strategy.


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A framework of the study is shown in Figure 1 as follows:

Methodology

Sample

The data was collected through a mail survey to 900 fastener firms in China and800 fastener firms in Taiwan. The firms’ chief exxcutive officers (CEOs) ormanagers were invited to participate in a pre-coded, self-reporting questionnaire.In China, the target firms were the subscribers to Fastener World, advertisementmagazine published every two months in English and Chinese, specifically aboutthe fastener industry. In Taiwan, the selected firms were the advertisers andsubscribers to Fastener World (it only accepts advertisements from Taiwanesefirms). Before sending out the final version, the questionnaire was pilot-tested byfive Taiwanese fastener managers for language suitability, understanding andunnecessary repetition.One month later, a follow-up reminder was mailed to China and Taiwan for

those whose responses had not been received. Due to the lower response rate fromChina, a third follow-up reminder was sent. As a result, 81 usable responses weregathered from China, representing a return rate of 9 per cent. This response rate isacceptable because questionnaire research is relatively new in China and mailresponse rates have proved to be very low (for example, Siu, 1992; Siu & Kirby,1995). A total of 101 usable surveys were received from Taiwanese firms, whichprovided a response rate of 12.5 per cent. The comparative samples show that theaverage number of employees in the Chinese firms is far more than those in theTaiwanese firms.

Measurement

Environment was measured using a two-dimensional construct: general andindustrial environments. Multiple items for measuring general environment werebased on the work of Robbins (1990), Miller (1998) and Barney & Griffin (1992);items for measuring industrial environment were based on Barney & Griffin(1992) and Porter (1980, 1990). Minor changes were made for the use in thisstudy. For example, threat of substitutes was neglected in that fasteners cannotbe replaced so far. One item, ‘good economic prospects of trading partners’was added since the export rates of fasteners in both Taiwan and China are high.

H5 & H6

H7 & H8

Environment

General EnvironmentIndustrial Environment

Capability

Organizational CapabilityNetwork Capability

StrategyProactiveness

Conservativeness

PerformanceFinancial PerformanceOperational PerformanceOrganizational Performance

H3 & H4

H1 & H2

Figure 1. Framework and hypotheses of the study


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For the general environment, respondents were asked for their perceptions of thelevel of economic, political, financial, infrastructure and exporting segments intheir countries. For the industrial environment, respondents were asked for theirperceptions of the level of competition, supply, customer demands and productionconditions in their countries. These questions were measured by using a balanced5-point Likert scale. Each respondent was asked to indicate the extent to whichthey disagreed or agreed with the given statement, such as 1 ¼ Strongly Disagreeand 5 ¼ Strongly Agree.Strategic orientation was measured along a proactive/conservative continuum,

based on the operationalization by Beal (2000), Miller (1988) and Porter’s (1980)generic strategies. The approach was defined by asking respondents questionsabout their emphases on developing new products and markets, creating a highquality image, establishing distribution channels and increasing advertisementexpenditure. These questions used a 5-point Likert scale.Firm capability was suggested by Chen (1999) as a two-dimensional construct:

organizational and network capability. Organizational capability was measuredusing an adaptation of existing instruments (Grant, 1998; Lin, 1999). Networkcapability was based on the work of Lin (1998) and Lin (1999). Respondents wereasked whether their companies were characterized by the organizationalcapability (for example, manufacturing, R & D, marketing, management, financeand distribution channels) and network capability (for example, relationships withsuppliers, distributors, associates, R & D organizations and financial institutions).A 5-point Likert scale was used to measure these scales, such as 1 ¼ Very Lowand 5 ¼ Very High.In addition, a set of questions was included in the survey to measure the

subjective evaluation of performance. In such studies, because most of theobjective data are confidential for the enterprises, the information is difficultfor researchers to access. Instead, scholars use a subjective way to evaluateperformance, including financial, management and technical performance (Grant,1990; Boardman & Shapirot, 1997; Reuer & Miller, 1997). Although these dataare subjective, according to Grant’s research findings (1990), the results of thesubjective method are very close to those of an objective method. Chandler andHanks (1993) also contended that the subjective, self-reporting approach wasappropriate as these measures of organizational environment and performancehave been validated and shown to correlate with objective measures with a highdegree of reliability. This study adopted Venkatraman and Ramanujam’s (1986)constructs, that is, financial, operational and organizational dimensions tomeasure performance for they have broader domains to examine an industryin different environmental contexts. Financial performance was measured by themean of the response scales for sales growth and profitability. Operationalperformance was defined as the mean of the response scales for qualityimprovement, market share enlargement and customer satisfaction. Organiz-ational performance was then measured by the mean of the response scales forworking satisfaction and productivity of employees.Reliability was assessed using Cronbach’s coefficient. Generally a value around

0.7 is considered adequate to conclude internal consistency (Nunnally, 1978).The results of the reliability coefficients ranged from 0.672 to 0.805, suggesting


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an acceptable degree of internal reliability. Research hypotheses were tested bymultiple regressions for environment-performance relation and capability-performance relation. In addition, path analysis was used in order to access themultivariate effect of the environment-strategy-performance relation and thecapability-strategy-performance relation.

Results

As shown in Table 1, multiple regression analysis suggests that the generalenvironment is not significantly related to performance in both China and Taiwan.The industrial environment, however, has a moderate impact on performance. So,only H2b is supported.With regard to capability and performance, Table 2 shows that organizational

capability is significantly and positively associated with performance in China andTaiwan. Network capability has some impact on performance in China,

Table 2. Capability-Performance relation: results of multiple regression

Dependent Variable (Performance)

China Taiwan

Independent Variables b t b t

Organizational Capability 0.478 4.286*** 0.533 5.010***Network Capability 0.243 2.176* 0.057 0.532

R square 0.438 0.325

F 30.348 23.615

Df 80 100

* p , 0.05

** p , 0.01

*** p , 0.001b: standardized coefficient.

Table 1. Environment-Performance relation: results of multiple regression

Dependent Variable (Performance)

China Taiwan

Independent Variables b t b t

General Environment 0.079 0.712 0.126 1.111

Industrial Environment 0.286 2.572* 2 0.109 2 0.963

R square 0.100 0.015

F 4.345 0.743

Df 80 100

* p , 0.05

** p , 0.01

*** p , 0.001b: standardized coefficient.


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confirming the impression that guanxi or relationships are important for business.However, network capability is not significantly related with performance inTaiwan. Hence, H3a is supported, but H3b is not.Path analyses in Figures 2 and 3 show the possible role of strategy in

influencing performance, when environment does not. It was expected that thesuccess of the manufacturing industries could have been due to proactivestrategizing which transcended the environment. But path analysis revealedotherwise. Strategy does not mediate between environment and performance inChina or Taiwan. Therefore, both H5 and H6 are not supported.In Figure 4, organizational and network capability are not significantly related

to strategy and performance in Taiwan. On the contrary, both organizational andnetwork capability are significantly and positively related to strategy andperformance in China. Thus, H8 is supported.

Discussion

The result that general environment is not significantly related to performanceconfirms Grant’s (1998) argument that for most strategy decisions, the core of thefirm’s external environment is its industry which is defined by the firm’srelationships with customers, competitors and suppliers. In this light, politicalunrest and economic conditions in Taiwan have little impact on performance.In addition, the industrial environment is significantly associated withperformance in China. The finding reflects Deng and Dart’s (1999) empiricalstudy, stating that market orientation in Chinese enterprises varies across company

Figure 2. Environment-Strategy-Performance relation: path analysis (Taiwan)

.442***

.421***.138

(*): p<0.05; (**): p<0.01; (***): p<0.001; value: standardized coefficient

GeneralEnvironment

PerformanceStrategy

IndustrialEnvironment

Figure 3. Environment-Strategy-Performance relation: path analysis (China)


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location, ownership type, governmental control and company size. In other words,as the industrial environment in China has changed dramatically in recent years,Chinese firms which are sensitively aware of the changes in the industrialenvironment may yield superior performance. Conversely, the industrialenvironment is not significantly linked with performance in Taiwan. This maybe attributed to the fact that disadvantageous factors that have existed within anindustrial environment for several years have little influence on performancebecause firms have found the solutions to these disadvantages. For example,Taiwanese fastener firms have developed high-speed, multi-station formingmachines to cope with soaring labour costs; therefore this disadvantage does notpose a threat.The result that network capability does not impact firm performance is contrary

to the understanding that Taiwanese industries are characterized by close networkrelationships. This might be explained by the specific situation the cross-straitmanagers are located in and the distribution and allocation of their attention intospecific activities, communications and procedures. In field experimentsinvestigating individual decisions about littering, Cialdini et al., (1990, 1991)found that individuals litter less in litter-free environments than in littered ones;individuals litter more in ‘litter-around’ environments because they feel furtherlitter would not make any difference. Taiwanese fastener firms are clustered insouth Taiwan, especially in the Tainan area. Businessmen can meet readily withtheir suppliers, customers and associates in the neighbourhood, thus diminishingthe strategic importance of their relationships. On the other hand, an industrialforum is held twice a year in Shanghai; attending Chinese fastener firms would

.055

.173


Organizational Capability

PerformanceStrategy

Network Capability

Figure 4. Capability-Strategy-Performance relation: path analysis (Taiwan)

.270**

.268**


OrganizationalCapability

PerformanceStrategy

Network Capability

Figure 5. Capability-Strategy-Performance relation: path analysis (China)


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regard this gathering as beneficial to their relationships with suppliers, customersand associates. The difference in the perception actually results from the specificcontext decision makers find themselves in. This is consistent with one writer’sobservation that,

what the particular context decision-makers find themselves in, andhow they attend to it, depends on how the firm’s rules, resources andrelationships regulate and control the distribution and allocation ofissues, answers and decision-makers into specific activities,communications and procedures. (Ocasio, 1997: 188)

Therefore, decision makers selectively restrict their attention to a limited set ofissues while ignoring others. Marketing personnel, for example, might ignore R &D related information even though they have many opportunities to contactassociates. Compared with organizational capability, Taiwanese fastener firmsmight give little attention to shaping network advantages. In this sense, anadvantageous environment (for example, industrial cluster) might not become anopportunity and influence performance.The findings shown in Figures 2 and 3 support Lee’s study (2000) of the

Chinese medicine industry in Taiwan which involved participation of firms onboth sides of the China Straits, and concluded that environment was notsignificantly associated with strategy and performance whatever kinds of businessstyles were adopted. These findings appear to imply that cross-strait firms do notisolate those environmental elements which are relevant to organizationalactivities, nor identify an appropriate niche to position themselves in. There arethree plausible explanations for these results. First, decision making mainly relieson CEOs’ subjective judgement, experience and conduct in Taiwanese (Lin,1998; Zhu & Warner, 2001) and Chinese private enterprises (Schlevogt, 2001).When the dominance of the CEO approaches autocracy, the effectiveness of thefirm’s strategic planning and formulating are likely to be diminished (Pearce &Robinson, 2000: 9). Secondly, as Ansoff (1988) indicates, organizationsgenerally lack information about themselves and their environment which isneeded for effective strategic planning; or do not have the managerial talentscapable of formulating and implementing strategy. Thirdly, cross-strait CEOsmay be so concerned with daily operations that they fail to monitorenvironmental changes and to recognize and act on more important broaderissues of strategy. Strategy as a result does not play a mediating role betweenenvironment and performance.The result that neither type of capability relates significantly to strategy in

Taiwan reveals that Taiwanese firms might be narrowly focused, paying attentionto operational improvement rather than broader strategy. As a result, strategy isunable to direct resources as a mediator to influence performance. Comparatively,the stronger results for China demonstrate that the Chinese firms which have betterorganizational and network capability, will adopt a proactive strategy and performbetter than those which do not. In other words, strategy selected by the Chinesefirms provides a logical basis for the distribution of organizational resources andinfluences performance.


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Theoretical Implications

Based on the analysis of survey data collected from the fastener industry, thisstudy provides detailed and insightful information relating to managers’perceptions of environment, capability, strategy and performance in China andTaiwan. Several theoretical implications are summarized. Firstly, the articlecontributes to the literature by focusing on a specific industry, excluding thevariable of different industrial contexts because the same environment can havedifferent effects on different industries (Miller, 1998). Secondly, the studyinvestigated not only organizational capability but also network capability whichhas been ignored in previous research. Combining both organizational andnetwork capability to examine empirically their influence on organizationalperformance, this essay provides a direction that may be useful for furtherresearch. Thirdly, the study deepens understanding of strategy by examiningwhether strategy mediates the relation between environment and performanceas well as between capability and performance. Thus a formulating process ofstrategy can be clearly mapped out, showing how firms identify niches anddistribute organizational resources.

Practical Implications

The findings of this study suggest a number of implications for managers inTaiwan and China. Firstly, the alignment between industrial environment andperformance in China suggests that not only Chinese firms but also foreigninvestors in China should be aggressive in pursuit of emerging marketopportunities. Secondly, organizational capability has a strong impact onperformance in both China and Taiwan, regardless of the perceived difficulties orease of environmental factors. Thirdly, from the environment-strategy-performance relationship, the findings of this study imply that both Chinese andTaiwanese fastener firms are not strategy oriented. Therefore, it is easy for theindustry to become embroiled in price competition. Instead of being involved indaily operations or administrative detail, managers should concern themselveswith broader issues of strategy. Fourthly, the performance of the Chinese firms isrelated to network capability. This finding might suggest that the culturalpreference for personal rather than contractual relations, the much discussedguanxi, remains an important factor in doing business in China (Leung & Yeung,1995). Further research may be worthwhile to incorporate this issue.

Research Limitations and Future Research

This study has two limitations. First, it focused only on the business people inChina and Taiwan. Given this its limited scope, caution must be exercised whengeneralizing its findings to the contexts of different countries. Further researchcould test the models of congruence in various economic contexts (for example,China and Western countries). Secondly, as a cross-sectional approach, this studydoes not capture the incremental process of strategic formulation andimplementation or the achievement of external and internal alignment over


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time. Longitudinal studies would be worthwhile to trace the strategic actionstaken by the firms and environmental factors prevailing over the most recentperiods.

Conclusions

Environmental analysis is widely viewed as the first step in formulating businessstrategies. Most models of environmental analysis are based on rational choice,for example, strengths, weaknesses, opportunities and threats (SWOT) and theFive Forces model (Porter, 1980). However, the actual and perceivedcharacteristics of environment and capability may vary because of decisionmakers’ perceptions and priorities. This study investigated the relativeimportance of environment and strategy perceived by the managers in Taiwanand China. Its findings indicate that the general environment does not influencefirm performance, meaning that the concern of the managers is not with thegeneral environment, but with getting their organizational competences right.Hence the industrial environment was seen to have minimal impact on firmperformance in Taiwan. This reflects that when advantageous or disadvantageousfactors have existed in an industry for several years, their importance may belessened. Therefore, to understand the influential levels of a changingenvironment, it would be better for researchers to conduct investigations withinthe initial periods after the change. For example, as China and Taiwan wereapproved to enter the World Trade Organization (WTO) in 2002, research intothe effects of their entry should be conducted during the first few years afterentry.In addition, previous research has focused on either organizational capability

or network capability but ignored the combination of the two capabilities(Gulati et al., 2000). This study redresses this deficiency. The results show that theorganizational capability does impact on firm performance in both Taiwan andChina, appearing consistent with the resource-based perspective. However,networking has little influence on firm performance in Taiwan. The result againcontradicts previous understandings of the networking characteristics ofTaiwanese industries and highlights the limits of rationality in managers’perceptions on network capability as mentioned before.The environment-strategy-performance relationship is not supported in both

Taiwan and China. This result might relate to the fact that the fastener industry ismostly mass production orientated. Managers are keen on the improvement ofoperational efficiency to the extent of ignoring strategic issues. Besides, decisionmaking in Taiwanese SMEs and Chinese enterprises may be dominated byCEOs’ subjective judgement based on their past experience rather than on rationalstrategy formulation. The ability of a firm to sustain its competitiveness beyondthe tenure of the CEO is therefore questionable. As Pearce and Robinson(2000) indicate, CEOs and senior managers should encourage employeeparticipation in making strategic decisions because strategy concerns wholeorganizations. Employees who are consulted in the decision-making processare likely to feel they ‘own’ a part of that decision and have an obligation tomake it work.


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